<PAGE>
As filed with the Securities and Exchange Commission on February 18, 1997
Registration No. 33-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-11
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
-----------------
OCWEN ASSET INVESTMENT CORP.
(Exact name of registrant as specified in governing instruments)
1675 Palm Beach Lakes Blvd., Suite 532
West Palm Beach, Florida 33401
(561) 681-8500
(Address of principal executive officer)
William C. Erbey
1675 Palm Beach Lakes Blvd., Suite 532
West Palm Beach, Florida 33401
(Name and address of agent for service)
-----------------
Copies to:
Jack A. Molenkamp, Esq. Lee Meyerson, Esq.
Hunton & Williams Simpson Thacher & Bartlett
Riverfront Plaza 425 Lexington Avenue
951 East Byrd Street New York, New York 10017
Richmond, Virginia 23219 (212) 4551-2000
(804) 768-8200
Approximate date of commencement of the proposed sale of the securities to
the public: As soon as practicable after the effective date of this Registration
Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 463(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earliest effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===================================================================================================
Proposed Maximum Proposed Maximum
Title of Securities Amendment Being Offering Price Per Aggregate Offering Amounts of
Being Registered Registered (1) Share (2) Price (2) Registration Fee
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par
value $0.01 per share 14,375,000 $16 $230,000,000 $69,697
===================================================================================================
</TABLE>
(1) Includes 1,875,000 shares that may be purchased pursuant to an
over-allotment option granted to the Underwriters. (2) Estimated based on a bona
fide estimate of the maximum offering price of $16 solely for the purposes of
calculating the registration fee pursuant to Rule 457(a) of the Securities Act
of 1933.
---------------
This registrant hereby extends this registration statement on such date or
dates as may be necessary to delay its effective date until this registration
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the registration statement
shall become effective on such date as the Commission, acting pursuant to such
Section 8(a), may determine.
================================================================================
<PAGE>
CROSS REFERENCE SHEET
Pursuant to Rule 501(a) of Registration 8-K
Item Number and Caption Heading in Prospectus
- ----------------------- ---------------------
1. Forepart of Registration Statement
and Outside Front Cover Page of
Prospectus........................... Outside Front Cover Page
2. Inside Front and Outside Back
Cover Page of Prospectus............. Inside Cover Page; Outside Back
Cover Page
3. Summary Information, Risk Factors
and Ratio of Earnings to Fixed
Charges.............................. Outside Front Cover Page;
Prospectus Summary; Risk Factors;
The Company
4. Determination of Offering Price...... Outside Front Cover Page;
Underwriting
5. Dilution............................. Not Applicable
6. Selling Security Holders............. Not Applicable
7. Plan of Distribution................. Outside Front Cover Page;
Underwriting
8. Use of Proceeds...................... Use of Proceeds.
9. Selected Financial Data.............. Not Applicable.
10. Management's Discussion and
Analysis of Financial Condition
and Results of Operations............ Not Applicable.
11. General Information as to
Registrant........................... Prospectus Summary; The Company;
Certain Provisions of Virginia Law
and OAIC's Articles of
Incorporation and Bylaws
12. Policy with Respect to Certain
Activities........................... Prospectus Summary; Risk Factors;
Operating Policies and Objectives;
Certain Provisions of Virginia Law
and OAIC's Articles of
Incorporation and Bylaws;
Description of Capital Stock
13. Investment Policies of
Registrant........................... Operating Policies and Objectives;
Prospectus Summary;
14. Description of Real Estate........... Prospectus Summary; Initial
Investments; Appendix A
15. Operating Data....................... Initial Investments; Appendix A
16. Tax Treatment of Registrant and
its Security Holders................. Prospectus Summary; Federal Income
Tax Considerations
17. Market Price of and Dividends on
the Registrant's Common Equity and
Related Shareholder Masters.......... Not Applicable
18. Description of Registrant's
Securities........................... Description of Capital Stock
19. Legal Proceedings.................... Not Applicable
20. Security Ownership of Certain
Beneficial Owners and Management..... Prospectus Summary
21. Directors and Executive Officers..... The Company
<PAGE>
Item Number and Caption Heading in Prospectus
- ----------------------- ---------------------
22. Executive Compensation............... The Company
23. Certain Relationships and Related
Transactions......................... Prospectus Summary; Risk Factors;
Initial Investments
24. Selection Management and Custody
of Registrant's Investments.......... Outside Front Cover Page;
Prospectus Summary; Operating
Policies and Objectives; Management
of Operations
25. Policies With Respect to Certain
Transactions......................... Risk Factors; Operating Policies
and Objectives; Management of
Operations
26. Limitations of Liability............. Management of Operations; The
Company
27. Financial Statements and
Information.......................... Financial Statements
28. Interests of Named Experts and
Counsel.............................. Legal Matters; Experts
29. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities...................... The Company
<PAGE>
PRELIMINARY
PROSPECTUS
12,500,000 Shares
OCWEN ASSET LOGO
INVESTMENT CORP.
Common Stock
Ocwen Asset Investment Corp. ("OAIC" and, together with its subsidiaries
on a consolidated basis, the "Company") is a newly organized Virginia
corporation that intends to generate income for distribution to its stockholders
primarily from the net cash flows on its assets as described herein. OAIC will
elect to be taxed as a real estate investment trust ("REIT") under the Internal
Revenue Code of 1986. Ocwen Management Corp. (the "Manager"), a wholly-owned
subsidiary of Ocwen Financial Corporation ("Ocwen Financial"), will manage the
day-to-day operations of the Company, subject to the supervision of OAIC's
Board of Directors.
All of the 12,500,000 shares of Common Stock offered pursuant to this
Prospectus are being offered by the Company. In addition, 1,875,000 shares of
Common Stock will be sold by the Company to Ocwen Financial, upon the closing of
this offering, at the initial public offering price. No underwriting discounts
or commissions will be applied to the shares of Common Stock issued to Ocwen
Financial. After such sale Ocwen Financial will own approximately 15% of the
Common Stock of the Company, assuming that the Underwriters do not exercise
their over-allotment option.
It is currently anticipated that the initial public offering price for
shares of Common Stock will be $16 per share. Prior to this offering, there has
been no market for the shares of Common Stock of the Company. The public
offering price has been determined by negotiation between the Company and the
Underwriters. See "Underwriting." The Company intends to apply to have the
Common Stock listed on The Nasdaq Stock Market under the symbol "OAIC."
See "Risk Factors" beginning on page 11 for certain factors relevant to an
investment in the Common Stock including, among others:
o The sensitivity of the Company's investments (particularly those in
non-investment grade mortgage-backed securities) to changes in prevailing
interest rates and to events of loss, such as credit losses due to
borrower default, hazard losses and state law enforceability issues;
o The acquisition of large amounts of multifamily and commercial real
estate, including distressed real estate, that entail significant risks,
such as the risk that such real estate will not generate sufficient
revenue to generate a return after meeting operating expenses and debt
service;
o Limitations on ownership of Common Stock by any stockholder other than
Ocwen Financial to 8.7% of the outstanding Common Stock, which may deter
third parties from seeking to control or acquire the Company;
o Taxation of OAIC as a corporation if it fails to qualify as a REIT; and
o Conflicts of interest relating to the formation of the Company and the
operation of its business.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
Price to Underwriting Proceeds to
Public Discount(1) Company(2)
- --------------------------------------------------------------------------------
Per Share.................. $[16] $[ ] $[ ]
Total (3)(4)............... $[ ] $[ ] $[ ]
================================================================================
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting".
(2) Net of expenses in connection with the offering, estimated at $[ ], which
will be payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to
purchase up to 1,875,000 additional shares of Common Stock to cover
over-allotments. If all such shares of Common Stock are purchased, the
total Price to Public, Underwriting Discount and Proceeds to Company,
before expenses of this Offering, will be $[ ], $[ ] and $[ ]. See
"Underwriting."
(4) The total Price to Public and the total Proceeds to Company reflect the
sale of 1,875,000 shares of Common Stock to Ocwen Financial net of the
Underwriting Discounts and Commissions.
The shares of Common Stock are offered by the Underwriters subject to
receipt and acceptance by the Underwriters, approval of certain legal matters by
counsel for the Underwriters and certain other conditions. The Underwriters
reserve the right to withdraw, cancel or modify such offers and to reject orders
in whole or in part. It is expected that delivery of the shares of Common Stock
will be made in New York, New York on or about ________ __, 1997.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
The date of this Prospectus is ________ __, 1997
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ STOCK MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
CAUTIONARY STATEMENT
INFORMATION CONTAINED IN THIS PROSPECTUS CONTAINS "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995, WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH
AS "MAY," "WILL," "SHOULD," "EXPECT," "ANTICIPATE," "ESTIMATE" OR "CONTINUE" OR
THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. THE
CAUTIONARY STATEMENTS SET FORTH UNDER THE CAPTION "RISK FACTORS" AND ELSEWHERE
IN THE PROSPECTUS IDENTIFY IMPORTANT FACTORS WITH RESPECT TO SUCH
FORWARD-LOOKING STATEMENTS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES, THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH
FORWARD-LOOKING STATEMENTS.
<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information included elsewhere in this Prospectus. Unless otherwise indicated,
the information contained in this Prospectus assumes that (i) the transactions
relating to the formation of the Company (the "Formation Transactions") are
consummated, (ii) the Underwriters' overallotment option is not exercised and
(iii) the offering price (the "Offering Price") is $16 per share. Unless the
context otherwise requires, all references in this Prospectus to the (i)
"Company" shall mean Ocwen Asset Investment Corp. ("OAIC") and its subsidiaries,
including (a) Ocwen General, Inc. (the "General Partner"), (b) Ocwen Limited,
Inc. (the "Initial Limited Partner"), and (c) Ocwen Partnership, L.P. (the
"Operating Partnership"); and (ii) "Common Stock" shall mean OAIC's common
shares, par value $.01 per share. Capitalized terms used but not defined herein
shall have the meanings set forth in the Glossary.
The Company
OAIC is a newly organized Virginia corporation that will elect to be taxed
as a REIT under the Code. The Company will be externally managed and advised.
See "Management of Operations." The Company intends to enhance the value of its
Common Stock by pursuing advantageous investments that capitalize on
inefficiencies in the real estate and mortgage markets. The Company's
investments will include several categories of real estate and real estate
related assets.
Subordinated Interests and Distressed Real Property. The Company intends
to generate income for distribution to its stockholders primarily through
investments in (i) subordinated interests ("Subordinated Interests") in
collateralized mortgage obligations and other mortgage-backed securities
(collectively, "MBS"), and (ii) commercial and multifamily real property ("Real
Property"), including properties acquired by a mortgage lender at foreclosure
(or by deed in lieu of foreclosure) ("REO Property") and other underperforming
or otherwise distressed real property (together with REO Property, "Distressed
Real Property"). The Company believes that the combination of these investment
activities should prove beneficial from both a cash flow and a tax planning
perspective. No assurances can be made, however, that the Company's investment
strategy will be successful.
Other Real Estate Related Assets. The Company may invest, by way of
purchase or origination, in commercial, multifamily and single family
residential mortgage loans ("Mortgage Loans"), including both (i) Mortgage Loans
that are current as to payments of principal and interest, including
construction and rehabilitation loans and mezzanine loans ("Performing Mortgage
Loans"), and (ii) Mortgage Loans that are in default ("Non Performing Mortgage
Loans"), or for which default is likely or imminent or for which the borrower is
currently making monthly payments in accordance with a forbearance plan
("Sub-Performing Mortgage Loans" and, together with Nonperforming Mortgage
Loans, "Distressed Mortgage Loans"). The Company also may invest in various
classes of MBS, including interest only classes ("IOs") and inverse floating
rate interest only classes ("Inverse IOs"). In addition, the Company may also
acquire Mortgage Loans secured by Real Property or Real Property that is (i)
environmentally distressed or (ii) located outside the United States, and in
other real property interests.
In order to invest the net proceeds of the Offering as quickly as is
appropriate and to provide current returns, the Company expects initially to
emphasize investments in the assets described in the preceding paragraph
(collectively,"Other Real Estate Related Assets"). Although the Company does not
expect to emphasize the acquisition of such assets as a long-term investment
strategy, the Company will take an opportunistic approach to its investments
and, accordingly, the Company may invest in Other Real Estate Related Assets at
any time.
The Manager
The business and investment affairs of the Company will be managed by
Ocwen Management Corp. (the "Manager"), a Florida corporation wholly-owned by
Ocwen Financial Corporation ("Ocwen Financial"), a publicly owned Florida
corporation. Ocwen Financial and its wholly-owned subsidiary, Ocwen Federal Bank
FSB, a federally-chartered savings bank, have substantial experience in the
acquisition and resolution of troubled loans and the management of diverse real
estate related assets.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Ocwen Financial, acting through a former subsidiary, entered the loan
resolution business in 1986, by providing private mortgage insurance for
residential loans. Since 1991, Ocwen Financial through its subsidiaries has
acquired over $3.7 billion of distressed loans, including $1.7 billion of
distressed commercial mortgage loans, which have been secured by apartments,
shopping centers, office buildings, hotels, and industrial properties located
throughout the United States. To date, Ocwen Financial has owned 607
commercial REO properties, which it acquired by purchasing and foreclosing on
distressed mortgage loans. As of the date of sale or the most recent
appraisal, these REO properties had a market value of approximately $298
million. Of those properties, 353 properties have been sold at an aggregate
disposition price of approximately $166 million. As a result of this
experience, Ocwen Financial has developed the procedures, facilities and
systems that it considers necessary to evaluate, acquire and manage
distressed loans appropriately and to resolve such loans in a timely and
profitable manner. Furthermore, Ocwen Financial has experience in the
acquisition and management of MBS, including over $300 million of
subordinated securities, the majority of which have been sold. Since 1993,
Ocwen Financial has also acquired or originated $1.1 billion of multifamily
residential and commercial mortgage loans. Ocwen Financial also has
significant experience in value added financing, including construction and
rehabilitation loans, with respect to which Ocwen Financial expects to
realize an attractive risk-adjusted return from sharing in net operating
income or gross revenues from the property and increases in value of the
property.
Ocwen Financial has invested in a computer infrastructure that includes
significant capacity for expansion or upgrade. The Company believes that Ocwen
Financial's systems and procedures have substantial applicability to the
Company's lines of business, and that the Company's access, through the
Management Agreement, to Ocwen Financial's information technology will be a key
factor in the Company's ability to compete. In addition to its standard industry
software applications, Ocwen Financial has internally developed fully integrated
applications designed to provide acquisition pricing, decision support,
automation of decision execution and tracking and exception reporting. Ocwen
Financial has implemented a data warehouse strategy which provides corporate
data on a centralized basis for decision support. The Company believes these
resources will be valuable in the management of the Company's investments.
Although many of the Company's prospective competitors may have access to
greater capital and have other advantages, the Company believes that it has a
competitive advantage relative to many of its competitors as a result of the
experience of Ocwen Financial in acquiring and managing MBS and in acquiring,
managing and resolving distressed mortgage loans, Ocwen Financial's substantial
investment in the computer systems, technology and other resources that it
believes are necessary to conduct this business and strategic relationships and
contacts that Ocwen Financial has developed in connection with these activities.
Management Agreement
The Company will enter into an agreement or agreements (collectively, the
"Management Agreement") with the Manager pursuant to which the Manager, subject
to the supervision of OAIC's Board of Directors, will formulate operating
strategies for the Company, conduct due diligence on potential assets for the
Company, arrange for the acquisition of assets by the Company, arrange for
various types of financing for the Company, including reverse repurchase
agreements, secured lines of credit, mortgage loans and the issuance of
collateralized mortgage obligations, monitor the performance of the Company's
assets and provide certain administrative and managerial services in connection
with the operation of the Company. For performing these services, the Manager
will receive (i) a quarterly base management fee in an amount equal to 1% per
annum of the Average Invested Assets of the Company, which is intended to cover
the Manager's costs of providing management services to the Company, and (ii) a
quarterly incentive fee in an amount equal to the product of (A) 25% of the
dollar amount by which (1)(a) Funds From Operations (before the incentive fee)
of the Company per weighted average number of shares of Common Stock outstanding
plus (b) gains (or minus losses) from debt restructuring or sales of property
per weighted average number of shares of Common Stock, exceed (2) an amount
equal to (a) the weighted average of the price per share at initial offering and
the prices per share at any secondary offerings by the Company multiplied by (b)
the Ten-Year U.S. Treasury Rate plus five percent multiplied by (B) the weighted
average number of shares of Common Stock outstanding. The Board of Directors of
the Company may adjust the base management fee in the future if necessary to
align the fee more closely with the actual costs of such services.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
In addition, because the Manager's employees will perform certain due
diligence tasks that outside consultants otherwise would perform, the Manager
will be reimbursed for its costs for performing such due diligence on assets
purchased by the Company or considered for purchase by the Company. Finally, the
Manager also will be reimbursed for out of pocket expenses incurred on behalf of
the Company. See "Management of Operations."
Ocwen Financial will purchase 1,875,000 shares of Common Stock on the
Closing Date at the initial public offering price net of underwriting discounts
and commissions, after which Ocwen Financial will own approximately 15% of the
Common Stock of the Company assuming that the Underwriters do not exercise their
over-allotment option. To provide an incentive for the Manager to enhance the
value of the Common Stock, the Company will grant the Manager options to
purchase 1,437,500 units of limited partnership interest in the Operating
Partnership ("Units") (1,625,000 Units if the Underwriters exercise their
over-allotment option)or, at the option of the Company, shares of Common
Stock, at a price per Unit or share equal to the offering price of the Common
Stock. The Manager may redeem such Units in exchange for shares of Common
Stock on a one-for-one basis, or at the election of the Company, for an
equivalent amount of cash. See "Operating Partnership Agreement--Redemption
Rights." One quarter of the Manager's options will be exercisable on each of
the first four anniversaries of the Closing Date. Unexercised options will
terminate on the tenth anniversary of the Closing Date. See "Management of
Operations--Incentive Options."
Operating Policies and Strategies
The Company intends to pursue policies and strategies for investment in
Subordinated Interests, Distressed Real Properties and Other Real Estate Related
Assets designed to enable it to maximize income for distribution to its
stockholders, consistent with acceptable levels of risk. The Company's operating
income will result primarily from the excess of (i) the sum of the Company's
cash flows on the assets of the Company, reinvestment income thereon and related
income, over (ii) the sum of the Company's obligations with respect to its
assets, borrowings and operating expenses. The Company's objective will be to
build a diverse portfolio of assets that will provide a high risk-adjusted rate
of return to its stockholders. The Company's strategies to achieve this
objective will include the use of appropriate amounts of borrowings and other
forms of leverage. There can be no assurance, however, that this objective can
be met.
The Company intends to invest in Subordinated Interests and Distressed
Real Property when opportunities that the Company considers advantageous become
available. To invest in appropriate assets quickly during approximately the
first year following Closing, and from time to time thereafter, the Company
intends to also invest in Other Real Estate Related Assets, including Mortgage
Loans, MBS and other real property interests. Until appropriate real estate
related acquisitions are made, however, the net proceeds of the Common Stock
offering may be invested in readily marketable securities, consistent with
maintaining the Company's REIT qualification, or in interest bearing deposit
accounts. Investors should be aware that it may take considerable time for the
Company to find appropriate investments, during which time the Company's assets
will be invested in relatively low yield instruments.
One of the Company's primary investment focuses will be purchasing
Subordinated Interests of securitizations, which carry significant credit risk.
Certain types of securitization transactions provide credit enhancement through
a "senior-subordinated" structure, in which subordinated classes (or tranches)
provide credit protection to the senior classes (customarily rated investment
grade) by absorbing any losses from loan defaults or foreclosures before such
losses are allocated to senior classes. Moreover, typically, as long as the more
senior tranches of securities are outstanding, all principal prepayments on the
mortgage loans generally are paid to those senior tranches, at least until the
end of a lock-out period, which typically is five years or more. In some
instances, particularly with respect to Subordinated Interests in commercial
securitizations, the holders of Subordinated Interests are not entitled to
receive scheduled payments of principal until the more senior tranches are paid
in full or until the end of a lock-out period.
Subordinated Interests offer the potential of a higher yield than the more
senior classes, but carry greater credit risk. Such classes are subject to
special risks, including a substantially greater risk of loss of principal and
non-payment of interest than rated classes. See "Risk Factors--Investment
Activity Risks--Risk from Ownership
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
of Subordinated Interests in Pools of Commercial and Residential Mortgage
Loans." In connection with its acquisition of Subordinated Interests, the
Company will attempt, where appropriate, to mitigate these risks by obtaining
"Special Servicing" rights with respect to the underlying mortgage loans.
The Company also may invest in Subordinated Interests that are structured
as IOs ("Sub IOs"). A Sub IO is entitled to no (or to only nominal) payments of
principal; moreover, interest amounts otherwise allocable to a Sub IO are either
used to make principal payments on more senior tranches of securities or
deposited in a reserve fund and used to cover any shortfalls in the cash flow
needed to make required payments of principal and interest on the more senior
tranches. Once the overcollateralization or the balance in the reserve fund
reaches a certain level, interest amounts allocable to the Sub IO are paid to
the holders of the Sub IO. Sub IOs not only are subject to credit risks, but
also are extremely sensitive to changes in prevailing interest rates, which may
result in acceleration of prepayments. A decline in interest rates (or other
factors) may lead to prepayments on the mortgage loans, which would reduce or
substantially eliminate the yield on the Sub IOs because interest is paid only
as long as the underlying mortgage loans are outstanding. See "Risk
Factors--Investment Activity Risks--Risk from Ownership of Sub IOs."
The Company's other main investment focus will be distressed commercial
and multifamily real estate, including real estate acquired by mortgage lenders
in connection with foreclosures or by deed in lieu of foreclosure of mortgage
loans (collectively, "Distressed Real Properties"). Distressed Real Properties
can be risky investments because they generally do not generate sufficient cash
flow to provide a current cash return on the investment after meeting operating
expenses and debt service. The Company believes, however, that there are
significant opportunities to purchase Distressed Real Properties at attractive
prices. After purchasing Distressed Real Properties at attractive prices, the
Company intends to capitalize, through the Management Agreement, on Ocwen
Financial's ability to manage distressed assets.
The Company's general goal with respect to each Distressed Real Property
will be to purchase it at a favorably low price, to reposition or convert the
use of the property, if required, to improve its cash flow by proper management,
to enjoy the increased cash flow from the asset for a time, and then, at an
opportune time, to sell the property at a profit. Although the time during which
the Company will hold Distressed Real Properties will vary, the Company
anticipates holding most Distressed Real Properties for more than four years and
less than ten years.
The Company believes that its long-term strategy of investing primarily in
a combination of Subordinated Interests and Distressed Real Property will be
beneficial for several reasons. First, the combination is designed to provide
both long-term capital gains and current income for distribution to
stockholders. The Company does not expect its investments in Distressed Real
Properties to produce income in excess of operating expenses and interest
expense at the time of acquisition. Instead, the Company will rely upon the
ability of Ocwen Financial to improve the cash flow from and value of Distressed
Real Properties through intensive marketing, asset and property management and
thereafter to sell or refinance the property at an opportune time at a profit.
By contrast, the Company expects that its investments in Subordinated Interests
will produce monthly income, primarily in the form of interest distributions,
which can be used to meet the Company's expenses and to pay dividends to
shareholders.
Second, the Company believes that the combination should prove
beneficial to the Company from a tax planning perspective. Subordinated
Interests are typically deemed to have original issue discount ("OID") for
federal income tax purposes. The income generated by Subordinated Interests
for federal income tax purposes will consist of amortization of the OID and
the coupon interest associated with the instruments. The Company will be
required to recognize a portion of the OID as income, which will increase the
REIT distribution requirement in the year in which it accrues, although there
may be no contemporaneous corresponding receipt of cash by the Company.
Depreciation deductions associated with the Company's investments in
Distressed Real Estate, however, should help offset the adverse tax effects
of the OID generated by the Company's Subordinated Interests. See "Risk
Factors--Legal and Tax Risks--Tax Risks."
The Manager and Ocwen Financial have agreed that as long as the Management
Agreement has not been terminated, the Company will have an exclusive right to
invest in Subordinated Interests and Distressed Real
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
Properties that become available to the Manager or to Ocwen Financial, subject
to certain exceptions and conditions. See "Management of Operations--Certain
Relationships; Conflicts of Interest."
The Company also may invest in a variety of Other Real Estate Related
Assets and will emphasize the purchase of Other Real Estate Related Assets
during the first year of operations so as to invest its funds fully in a timely
manner. The Company also may originate or acquire Performing Mortgage Loans that
are well-suited for financing through the issuance of collateralized mortgage
obligations. As a result of such transactions, the Company will retain an equity
ownership interest in the Performing Mortgage Loans that has economic
characteristics similar to those of a Subordinated Interest.
In addition, the Company may take advantage of opportunities to provide
construction or rehabilitation financing on commercial property, lending
generally 85% to 90% of total project costs, and taking a first lien mortgage to
secure the debt ("Construction Loans"). The Company also may invest in loans
that are subordinate to first lien mortgage loans on commercial real estate
("Mezzanine Loans"). For example, on a commercial property subject to a first
lien mortgage loan with a principal balance equal to 70% of the value of the
property, the Company could lend the owner of the property (typically a
partnership) an additional 15% to 20% of the value of the property. Typically
the owner would pledge to the Company, as security for its debt to the Company,
either the property subject to the first lien (giving the Company a second lien
position) or a partnership interest in the owner. If a partnership interest is
pledged, then the Company would be in a position to make decisions with respect
to the operation of the property in the event of a default on the loan. These
Construction and Mezzanine Loans generally would provide the Company the right
to receive a stated interest rate on the loan balance plus a percentage of net
operating income or gross revenues from the property, payable to the Company
on an ongoing basis, and a percentage of any increase in value of the
property, payable upon maturity or refinancing of the loan, or otherwise
would allow the Company to charge an interest rate that would provide an
attractive risk-adjusted return. Alternatively, the Mezzanine Loans could
take the form of a non-voting preferred equity investment in a single purpose
entity borrower with the terms of the preferred equity substantially the same
as described above. Loans with these cash flow participation and shared
appreciation provisions are commonly referred to as acquisition, development
and construction loans or "ADC Loans."
The Company may invest in other classes of MBS, including IOs and Inverse
IOs. The Company will invest in MBS both as a short term liquidity tool and as a
longer term investment strategy. Although these investments can present
increased risks, the Company believes that a managed portfolio of both IOs and
Inverse IOs can produce attractive returns in a variety of interest rate
environments. See "Risk Factors -- Risk from Ownership of IOs, Inverse IOs and
Sub IOs."
The Company may invest in Nonperforming Mortgage Loans from time to time.
In addition to its domestic activities, the Company may acquire or originate
Mortgage Loans secured by real estate located outside the United States or
purchase such real estate. Investing in real estate located in foreign countries
creates risks associated with the uncertainty of foreign laws and markets and
currency conversion risks. See "Risk Factors--Investment Activity Risks--Risks
from Ownership of Foreign Real Properties." Moreover, the Company may invest in
real estate or Mortgage Loans secured by real estate with known material
environmental problems. If so, the Company will take certain steps to limit its
liability for such environmental problems, but there are risks associated with
such an investment. See "Risk Factors--Investment Activity Risks-Risks from
Ownership of Real Properties with Known Environmental Problems." Although Ocwen
Financial has no experience in investing in foreign real estate and only limited
experience in investing in real estate with known environmental risks, the
Company believes that Ocwen Financial's experience with distressed assets
generally will be helpful to the management of such assets.
The Company will leverage its assets when there is an expectation that it
will benefit the Company. The use of leverage creates certain risks for the
Company. See "Risk Factors--Economic and Business Risks--Risks from Use of
Leverage." The Company may also engage in a variety of interest rate risk
management techniques for the purpose of managing the effective maturity or
interest rate of its assets. These techniques also may be used to attempt to
protect against declines in the market value of the Company's assets resulting
from general trends. Any such transaction is subject to risks or to limiting the
potential earnings from the Company's investments.
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
The Company has organized Ocwen Partnership, L.P., a Virginia limited
partnership (the "Operating Partnership"), in order to provide potential sellers
of assets the opportunity to transfer those assets to the Operating Partnership
in a tax-deferred exchange. Such sellers would receive units of limited
partnership interest ("Units") in the Operating Partnership that would be
convertible (in a taxable transaction) into shares of Common Stock on a
one-for-one basis or, at the Company's option, an equivalent amount of cash. The
Company believes that the partnership structure provides it with an advantageous
alternative for sellers of appreciated assets. Through its subsidiaries, OAIC
currently owns 100% of the partnership interests in the Operating Partnership.
The Offering
Shares offered to the public(1)(2).................................. 12,500,000
Shares to be outstanding after offering(1)(2)....................... 14,375,000
- ----------
(1) Assumes that the Underwriters' option to purchase up to an additional
1,875,000 shares to cover over-allotments is not exercised.
(2) See "Description of Capital Stock" and "Capitalization."
Use of Proceeds
The Company has contracted with affiliates of the Manager to purchase
certain assets prior to or upon completion of this Offering for a purchase price
of approximately $25,691,024, which is equal to approximately [ ]% of the
expected net proceeds of this Offering. These Initial Investments will consist
of certain Subordinated Interests and IOs, described herein.
The Company intends temporarily to invest the balance of the net proceeds
of this Offering in readily marketable, interest-bearing securities until the
Company finds appropriate Subordinated Interests, Distressed Real Properties and
Other Real Estate Related Assets in which to invest. In order fully and quickly
to invest its assets in real estate related assets, the Company expects
initially to emphasize investments in Other Real Estate Related Assets. Once a
substantial portion of the Company's assets are invested, the Company intends to
focus primarily on acquiring appropriate Subordinated Interests and Distressed
Real Property. See "Operating Policies and Strategies."
Distribution Policy
OAIC intends to make distributions to its stockholders of all or
substantially all of its net taxable income each year (subject to certain
adjustments) so as to qualify for the tax benefits accorded to REITs under the
Code. OAIC intends to make distributions at least quarterly. It is anticipated
that the first distribution to stockholders will be made promptly after the
first full calendar quarter following the Closing Date.
Tax Status of the Company
OAIC intends to qualify and will elect to be taxed as a REIT under
sections 856 through 860 of the Code, commencing with its short taxable year
ending December 31, 1997. If OAIC qualifies for taxation as a REIT, OAIC
generally will not be subject to federal corporate income tax on its taxable
income that is distributed to its stockholders. A REIT is subject to a number of
organizational and operational requirements, including a requirement that it
currently distribute at least 95% of its annual taxable income. Although OAIC
does not intend to request a ruling from the Internal Revenue Service (the
"Service") as to its REIT status, OAIC will receive at the closing of the
Offering an opinion of its legal counsel that OAIC qualifies as a REIT, which
opinion will be based on certain assumptions and representations about OAIC's
ongoing businesses and investment activities and other matters. No complete
assurance can be given that OAIC will be able to comply with such assumptions
and representations in the future. Furthermore, such opinion will not be binding
on the Service or on any court. Failure to qualify as a REIT would render OAIC
subject to federal income tax (including any applicable alternative minimum tax)
on its taxable income at regular corporate rates and distributions to OAIC's
stockholders would not be deductible. Even if OAIC qualifies for taxation as a
REIT, the Company may be subject to certain federal, state
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
and local taxes on its income and property. OAIC will adopt the calendar year as
its taxable year. In connection with OAIC's election to be taxed as a REIT,
OAIC's Articles of Incorporation impose restrictions on the transfer of the
Common Stock. See "Risk Factors--Legal Risks--Tax Risks" and "Federal Income Tax
Considerations--Taxation of the Company."
- --------------------------------------------------------------------------------
7
<PAGE>
- --------------------------------------------------------------------------------
RISK FACTORS
An investment in the Common Stock involves various risks, and prospective
investors should consider carefully the matters discussed under "Risk Factors"
prior to an investment in the Company. Such risks include, among others:
o real estate investment considerations, such as the effect of
economic and other conditions on cash flows and values, the need to
allocate significant management resources and the illiquidity of
certain real estate investments, all of which may affect adversely
the value of such investments, and thus the Company's ability to
make distributions to its stockholders;
o risks attendant to the acquisition of significant amounts of
non-investment grade mortgage-backed securities, which investments
may be subject to special leveraged loss risks, including a greater
risk of loss of principal and non-payment of interest than
investments in whole mortgage loans or senior, investment grade
rated securities;
o risks relating to the ability of the Company's Distressed Real
Properties (which may have significant amounts of unleased space) to
generate sufficient revenue to provide a return on the investment
after meeting operating expenses and interest expense;
o risks of losses related to the ownership of Mortgage Loans and MBS,
including borrower default, hazard losses and state or foreign law
enforceability issues;
o heightened risks of investing in commercial, multifamily residential
and construction loans, as compared to single-family residential
loans, due to generally larger loan balances, dependency on the
successful completion or operation of the project for repayment,
difficulties in estimating costs and loan terms that require little
or no amortization of the loan over its term (typically, five
years), but instead provide for a balloon payment at stated
maturity;
o interest rate risks, including the risk that in periods of declining
interest rates, prepayments on mortgage loans and MBS generally
increase and the Company likely will have to reinvest such funds in
lower-yielding investments, and the risk that in periods of rising
interest rates, prepayments on mortgage loans and MBS generally
decrease and the value of fixed-rate investments generally declines;
o risks associated with the ownership of IOs and Inverse IOs,
including the risks that IOs and Inverse IOs will be negatively
affected by faster than anticipated prepayment rates, which are
generally associated with a declining interest rate environment; and
the risk to investors in Inverse IOs, which have interest rates that
vary inversely with changes to an index, of higher than anticipated
levels of the index;
o risks of OAIC, a company with no operating history and minimal
Initial Investments, investing in highly competitive business,
albeit with the assistance of a manager that has substantial
experience investing in similar assets;
o risks resulting from applying leverage to the Company's assets,
which can compound losses;
o taxation of OAIC as a corporation if it fails to qualify as a REIT;
o maintenance of the Company's exemption from regulation under the
Investment Company Act, which requires, among other things, that the
Company invest 55% of its assets in Qualifying Interests and an
additional 25% in Qualifying Interests or other real estate-related
assets within one year of Closing;
- --------------------------------------------------------------------------------
8
<PAGE>
- --------------------------------------------------------------------------------
o conflicts of interests between the Company and Ocwen Financial in
relation to the Formation Transactions and business decisions
regarding the Company, which conflicts of interest could result in
decisions that do not fully reflect the interests of all of OAIC's
stockholders;
o risks related to the Company's reliance on the Manager's experience,
including the risk that the Independent Directors must rely on
information provided by the Manager to review transactions of the
Company with Ocwen Financial and its affiliates; and
o other calls on the time of the directors and officers of the
Company.
- --------------------------------------------------------------------------------
9
<PAGE>
ORGANIZATION AND RELATIONSHIPS
The Company intends to generate income for distributions to its stockholders
primarily from cash flow on Subordinated Interests and Distressed Real
Properties. The Manager will manage the day-to-day operations of the Company,
subject to the supervision of OAIC's Board of Directors. The relationship among
OAIC, its affiliates and the Manager is depicted in the picture shown below.
[GRAPHIC SHOWING RELATIONSHIP AMONG OCWEN ASSET INVESTMENT CORP., OCWEN GENERAL,
INC., OCWEN LIMITED, INC. OCWEN PARTNERSHIP, L.P. (COLLECTIVELY, THE "COMPANY")
AND OCWEN FINANCIAL CORP., OCWEN MANAGEMENT CORP. AND OCWEN FEDERAL BANK FSB.]
(1) OAIC, a Virginia corporation taxable as a REIT, will issue approximately
15% of its common stock to Ocwen Financial and approximately 85% of its
common stock to public investors.
(2) OAIC will incorporate and capitalize two qualified REIT subsidiaries,
Ocwen General, Inc. ("General Partner") and Ocwen Limited, Inc. ("Limited
Partner").
(3) Limited Partner and General Partner will organize and capitalize Ocwen
Partnership, L.P. (the "Operating Partnership"), with the Limited Partner
to hold a 99% limited partnership interest in the Operating Partnership,
and the General Partner to hold a 1% general partnership interest in the
Operating Partnership.
(4) Ocwen Financial will sell the Initial Investments to the Operating
Partnership for cash.
(5) The Operating Partnership will undertake the business of OAIC, including
the acquisition of Subordinated Interests, Distressed Real Properties and
other assets.
(6) The Operating Partnership will assign to Ocwen Federal Bank FSB (the
"Bank") any Special Servicing rights and obligations (other than the right
to direct foreclosure) received in connection with mortgage-backed
securities acquisitions. The Bank is a wholly-owned subsidiary of Ocwen
Financial.
(7) Ocwen Financial will incorporate and capitalize Ocwen Management Corp.
(the "Manager").
(8) The Manager will enter into a Management Agreement with OAIC and the
Operating Partnership, pursuant to which the Manager will formulate
operating strategies and provide certain managerial and administrative
functions for the entities shown within the box on the chart
(collectively, the "Company"), subject to the supervision of OAIC's Board
of Directors.
10
<PAGE>
RISK FACTORS
An investment in the Common Stock involves various risks. Before
purchasing shares of Common Stock offered hereby, prospective investors should
give special consideration to the information set forth below, in addition to
the information set forth elsewhere in this Prospectus.
Investment Activity Risks
Risk from Ownership of Subordinated Interests in Pools of Commercial and
Residential Mortgage Loans. The Company intends to acquire a significant amount
of Subordinated Interests, including "first loss" unrated, credit support
Subordinated Interests. A first loss security is the most subordinated class of
a multi-class issuance of pass-through or debt securities and is the first to
bear the loss upon a default on the underlying collateral. Such classes are
subject to special risks, including a substantially greater risk of loss of
principal and non-payment of interest than more senior, rated classes. While the
market values of most Subordinated Interest classes tend to react less to
fluctuations in interest rate levels than more senior, rated classes, the market
values of Subordinated Interests classes tend to be more sensitive to changes in
economic conditions than more senior, rated classes. The ratings assigned to
securities by a nationally-recognized rating agency reflect such agency's
assessment of ability of the issuer to make timely payments of principal and
interest and the nature and quality of the collateral underlying the
obligations. As a result of these and other factors, Subordinated Interests
generally are not actively traded and may not provide holders thereof with
liquidity of investment.
The yield to maturity on Subordinated Interests of the type the Company
intends to acquire will be extremely sensitive to the default and loss
experience of the underlying mortgage loans and the timing of any such defaults
or losses. Because the Subordinated Interests of the type the Company intends to
acquire generally have no credit support, to the extent there are realized
losses on the mortgage loans comprising the mortgage collateral for such
classes, the Company may not recover the full amount or, indeed, any of its
initial investment in such Subordinated Interests.
When the Company acquires a Subordinated Interest, it may not acquire the
right to service the underlying mortgage loans, even those that become
defaulted, although the Company generally will seek to obtain Special Servicing
Rights with respect to such loans. The servicer of the mortgage loans is
responsible to holders of the senior classes of MBS, whose interests may not be
the same as those of the holder of the Subordinated Interest. Accordingly, the
underlying mortgage loans may not be serviced in the same manner as they would
be serviced by the Company or in a manner that is most advantageous to the
Company as the holder of the Subordinated Interest.
The subordination of Subordinated Interests to more senior classes may
affect adversely the yield on the Subordinated Interests even if realized losses
are not ultimately allocated to such classes. On any payment date, interest and
principal are paid on the more senior classes before interest and principal are
paid with respect to the unrated or non-investment grade credit support classes.
Typically, interest deferred on these credit support classes is payable on
subsequent payment dates to the extent funds are available, but such deferral
may not itself bear interest. Such deferral of interest will affect adversely
the yield on the Subordinated Interests.
The yield of the Subordinated Interests also will be affected by the rate
and timing of payments of principal (including prepayments, repurchase, defaults
and liquidations) on the mortgage loans underlying a series of MBS. The rate of
principal payments may vary significantly over time depending on a variety of
factors such as the level of prevailing mortgage loan interest rates and
economic, demographic, tax, legal and other factors. Prepayments on the mortgage
loans underlying a series of MBS are generally allocated to the more senior
classes of MBS until those classes are paid in full or until the end of a
lock-out period, typically of five years or more. Generally, prepayments of
principal from the mortgage loans are not received by the Subordinated Interest
holders for a period of at least five years. As a result, the weighted-average
lives of the Subordinated Interests may be longer than
11
<PAGE>
would otherwise be the case. To the extent that the holder of Subordinated
Interests is not paid compensating interest on interest shortfalls due to
prepayments, liquidations or otherwise, the yield on the Subordinated Interests
may be affected adversely.
General Risks of Investing in Real Estate. The Company expects to invest
in Distressed Real Properties, which are subject to varying degrees of risk
generally incident to the ownership of real property. The underlying value of
the Distressed Real Properties and the Company's income and ability to make
distributions to its stockholders are dependent upon the ability of the Manager
to operate the Distressed Real Properties in a manner sufficient to maintain or
increase revenues in excess of operating expenses and debt service or, in the
case of real property leased to a single lessee, the ability of the lessee to
make rent payments. Revenues may be adversely affected by adverse changes in
national economic conditions, adverse changes in local market conditions due to
changes in general or local economic conditions and neighborhood
characteristics, competition from other properties offering the same or similar
services, changes in interest rates and in the availability, cost and terms of
mortgage funds, the impact of present or future environmental legislation and
compliance with environmental laws, the ongoing need for capital improvements
(particularly in older structures), changes in real estate tax rates and other
operating expenses, adverse changes in governmental rules and fiscal policies,
civil unrest, acts of God, including earthquakes, hurricanes and other natural
disasters (which may result in uninsured losses), acts of war, adverse changes
in zoning laws, and other factors which are beyond the control of the Company.
Risks of Investing in Distressed Real Properties. The Company intends to
invest in Distressed Real Properties, which may have significant amounts of
unleased space. The Company is subject to the risk that a property cannot be
leased to the extent necessary to produce sufficient revenue both to meet
operating expenses and debt service and to provide a return on the investment.
Illiquidity of Real Estate. Real estate investments are relatively
illiquid. The ability of the Company to vary its portfolio in response to
changes in economic and other conditions will be limited. No assurances can be
given that the fair market value of any of the Distressed Real Properties will
not decrease in the future.
Uninsured and Underinsured Losses. The Company intends to maintain
comprehensive insurance on each of the Distressed Real Properties, including
liability and fire and extended coverage, in amounts sufficient to permit the
replacement of the properties in the event of a total loss, subject to
applicable deductibles. The Company will endeavor to obtain coverage of the type
and in the amount customarily obtained by owners of properties similar to the
Distressed Real Properties. There are certain types of losses, however,
generally of a catastrophic nature, such as earthquakes, floods and hurricanes,
that may be uninsurable or not economically insurable. Inflation, changes in
building codes and ordinances, environmental considerations, and other factors
also might make it infeasible to use insurance proceeds to replace a property if
it is damaged or destroyed. Under such circumstances, the insurance proceeds
received by the Company might not be adequate to restore its economic position
with respect to the affected Distressed Real Property.
Property Taxes. Each Distressed Real Property will be subject to real and,
in some instances, personal property taxes. The real and personal property taxes
on properties in which the Company invests may increase or decrease as property
tax rates change and as the properties are assessed or reassessed by taxing
authorities. If property taxes increase, the Company's ability to make expected
distributions to its stockholders could be adversely affected.
Compliance with Americans with Disabilities Act and other Changes in
Governmental Rules and Regulations. Under the Americans with Disabilities Act of
1990 (the "ADA"), all public properties are required to meet certain federal
requirements related to access and use by disabled persons. Distressed Real
Properties acquired by the Company may not be in compliance with the ADA. If a
property is not, the Company will be required to make modifications to such
property to bring it in compliance, or face the possibility of an imposition
12
<PAGE>
of fines or an award of damages to private litigants. In addition, changes in
governmental rules and regulations or enforcement policies affecting the use and
operation of the Distressed Real Properties, including changes to building codes
and fire and life-safety codes, may occur. If the Company were required to make
substantial modifications at the Distressed Real Properties to comply with the
ADA or other changes in governmental rules and regulations, the Company's
ability to make expected distributions to its stockholders could be adversely
affected.
Environmental Matters. Operating costs and the value of the Distressed
Real Property may be affected by the obligation to pay for the cost of complying
with existing environmental laws, ordinances and regulations, as well as the
cost of future legislation. Under various federal, state and local environmental
laws, ordinances and regulations, a current or previous owner or operator of
real property may be liable for the costs of removal or remediation of hazardous
or toxic substances on, under or in such property. Such laws often impose
liability whether or not the owner or operator knew of, or was responsible for,
the presence of such hazardous or toxic substances. Therefore, an environmental
liability could have a material adverse effect on the underlying value of the
Distressed Real Property, the Company's income and cash available for
distribution to Stockholders.
The Company intends to obtain Phase I environmental assessments on all
Distressed Real Properties prior to their acquisition by the Company. The
purpose of Phase I environmental assessments is to identify potential
environmental contamination that is made apparent from historical reviews of the
properties, reviews of certain public records, preliminary investigations of the
sites and surrounding properties, and screening for the presence of hazardous
substances, toxic substances and underground storage tanks. It is possible,
however, that these reports will not reveal all environmental liabilities or
that there are material environmental liabilities of which the Company is
unaware.
Risk from Ownership of Real Properties with Known Environmental Problems.
The Company may invest in real estate, or mortgage loans secured by real estate,
with known environmental problems that materially impair the value of the real
estate. If so, the Company will take certain steps to limit its liability for
such environmental problems, such as creating a special purpose entity to own
such real estate. Despite these steps, there are risks associated with such an
investment. Ocwen Financial has only limited experience in investing in real
estate with known environmental risks, but the Company believes that Ocwen
Financial's experience in managing Distressed Real Properties will assist the
Company in managing real estate with environmental problems. The Company intends
to limit its investments in environmentally distressed real property to no more
than 10% of the Company's portfolio.
Risk from Ownership of Foreign Real Properties. In addition to purchasing
Distressed Real Properties, the Company may invest in real estate, or mortgage
loans secured by real estate, located outside the United States. Investing in
real estate located in foreign countries creates risks associated with the
uncertainty of foreign laws and markets. Moreover, investments in foreign assets
are subject to currency conversion risks. Although Ocwen Financial has no
experience in investing in foreign real estate, the Company believes that Ocwen
Financial's experience with distressed assets will be helpful to the management
of such assets. The Company intends to limit its investments in foreign real
estate to no more than 25% of the Company's portfolio.
Risk from Multifamily Residential, Commercial and Construction Lending
Activities. The Company may originate or acquire loans secured by existing
commercial real estate or multifamily residential real estate, including loans
that are subordinate to first liens on such real estate. Loans that are
subordinate to first liens on real estate are subject to greater risks of loss
than first lien mortgage loans. An overall decline in the real estate market
could adversely affect the value of the property securing the loans such that
the aggregate outstanding balance of the loan made by the Company and the
balance of the more senior loan on the property exceed the value of the
property. The Company may, in some cases, address this risk by providing a
Mezzanine Loan to the partnership that owns property, secured by a partnership
interest in such owner, so that, in the event of a default, the Company can take
over the management of the property and seek to reduce the amount of losses.
There can be no assurance, however,
13
<PAGE>
that it will be able to do so. Alternatively, the Mezzanine Loans could take the
form of a non-voting preferred equity investment in a single purpose entity with
terms substantially the same as described above.
The Company also may originate loans for the construction or
rehabilitation of commercial and multifamily residential real estate.
Multifamily residential and commercial real estate lending, particularly
construction and rehabilitation lending is considered to involve a higher degree
of risk than single family residential lending because of a variety of factors,
including generally larger loan balances, dependency on successful completion or
operation of the project for repayment, difficulties in estimating construction
costs and loan terms that often require little to no amortization of the loan
over its term (typically five years) and, instead, provide for a balloon payment
at stated maturity. Furthermore, the Mezzanine Loans and Construction Loans
generally will have higher loan to value ratios than conventional loans because
of the shared appreciation provisions. Although the borrower will have equity
investment of 10% to 15% of total project costs, such equity may not be
sufficient to protect the Company's investment.
Risk from Ownership of IOs, Inverse IOs and Sub IOs. The Company may
acquire classes of MBS that are entitled to no (or only nominal) payments of
principal, but only to payments of interest ("IOs"). The yield to maturity of
IOs is very sensitive to changes in the weighted average life of such
securities, which in turn is dictated by the rate of prepayments on the
underlying mortgage loans. In periods of declining interest rates, rates of
prepayments on mortgage loans generally increase, and if the rate of prepayments
is faster than anticipated, then the yield on IOs will be negatively affected.
Some IOs bear interest at a floating rate that varies inversely with (and often
at a multiple of) changes in a specified index ("Inverse IOs"). The Company may
invest in Inverse IOs for the purpose of hedging its portfolio of IOs. The yield
to maturity of an Inverse IO is extremely sensitive to changes in the related
index. The Company also expects to invest in Sub IOs. Interest amounts otherwise
allocable to Sub IOs generally are used to make payments on more senior classes
or to fund a reserve account for the protection of senior classes until
overcollateralization or the balance in the reserve account reaches a specified
level. The yield to maturity of a Sub IO is very sensitive not only to default
losses but also to the rate and timing of prepayments on the underlying loans.
See "Operating Policies and Objectives--Yield Considerations Related to the
Company's Investments in MBS--IOs and Inverse IOs."
Risk from Ownership of REMIC Residual Interests. The Company also may
invest in certain classes of MBS that are designated as the residual interest in
the related REMIC (a "REMIC Residual Interest") and that receive principal and
interest payments in excess of amounts needed to make payments on other classes
of securities or to fund a reserve account. Like interest otherwise allocable to
Sub IOs, principal and interest amounts otherwise allocable to such REMIC
Residual Interests are used to protect the senior classes of securities from
credit losses on the underlying Mortgage Loans. Moreover, in any given year, the
taxable income produced by a REMIC Residual Interest may exceed its cash flow.
See "-- Legal and Tax Risks."
Available Investments. The results of the Company's operations are
dependent upon the availability of opportunities for the acquisition of assets.
The Initial Investments of the Company will be small relative to the Common
Stock outstanding, and it may take considerable time for the Company to find
appropriate additional investments. In general, the results of the Company's
operations will be affected by the level and volatility of interest rates, by
conditions in the housing and financial markets, and general economic
conditions. No assurances can be given that the Company will be successful in
acquiring economically desirable assets or that the assets, once acquired, will
maintain their economic desirability. To the extent that the Company acquires
assets other than those detailed herein, such other acquisitions may pose risks
to the Company and to the Company's stockholders that are different from or in
addition to the risks enumerated herein.
Risks Associated with Use of Proceeds. A substantial portion of the net
proceeds of the sale of the Common Stock will be producing little income
immediately after the Closing. The Company intends temporarily to invest the net
proceeds of this offering (other than those used to purchase the Initial
Investments) in readily marketable,
14
<PAGE>
interest-bearing securities until the Company finds appropriate Subordinated
Interests, Distressed Real Property and Other Real Estate Related Assets in
which to invest. In order fully and quickly to invest its assets in real estate
related assets, the Company expects initially to emphasize investments in Other
Real Estate Related Assets, particularly Mortgage Loans. Once a substantial
portion of the Company's assets are invested, the Company intends to focus
primarily on acquiring appropriate Subordinated Interests and Distressed Real
Property, although the Company may invest in Other Real Estate Related Assets as
opportunities arise. There can be no assurance, however, that the Company will
identify Distressed Real Properties, Subordinated Interests or other appropriate
assets that meet its investment criteria or that any such assets will produce a
return on the Company's investment.
Economic and Business Risks
Interest Rate Risk. The value of MBS is affected substantially by
prepayment rates on the mortgage loans comprising the mortgage collateral for
such securities. Prepayment rates on MBS are influenced by changes in current
interest rates and a variety of economic, geographic and other factors and
cannot be predicted with certainty. In periods of declining mortgage interest
rates, prepayments on MBS generally increase. If general interest rates also
decline, the amounts available for reinvestment by the Company during such
periods are likely to be reinvested at lower interest rates than the Company was
earning on the MBS that were prepaid. MBS may decrease in value as a result of
increases in interest rates and may benefit less than other fixed-income
securities from declining interest rates because of the risk of prepayment. In
general, changes in both prepayment rates and interest rates will change the
total return on MBS, which in turn will affect the amount available for
distribution to stockholders. This volatility may be greater with certain MBS,
such as IOs and Inverse IOs, that the Company intends to acquire. The value of
adjustable rate mortgage loans and MBS paying adjustable coupon rates, which the
Company may acquire in the future, generally will vary inversely with changes in
prevailing interest rates. Under certain interest rate or prepayment rate
scenarios, the Company may fail to recoup fully its cost of acquisition of such
investments.
The Company's operating results depend in part on the difference between
the interest income earned on interest-earning assets and the interest expense
incurred in connection with its interest-bearing liabilities. Changes in the
general level of interest rates can affect the Company's income by affecting the
spread between the Company's interest-earning assets and interest-bearing
liabilities, as well as, among other things, the value of the Company's
interest-earning assets and its ability to realize gains from the sale of assets
and the average life of the Company's interest earning assets.
Interest rates are highly sensitive to many factors, including
governmental monetary and tax policies, domestic and international economic and
political considerations, and other factors beyond the control of the Company.
The Company may employ a hedging strategy to limit the effects of changes in
interest rates on its operations, including engaging in interest rate swaps,
caps, floors and other interest rate exchange contracts. If the Company
anticipates that the income from any such hedging transaction will not be
qualifying income for REIT income test purposes, the Company may conduct part or
all of its hedging activities through a to be formed corporate subsidiary that
is fully subject to federal corporate income taxation. See "Federal Income Tax
Considerations--Requirements for Qualification--Income Tests." There can be no
assurance that the profitability of the Company will not be adversely affected
during any period as a result of changing interest rates.
Risks from Use of Leverage. After the initial "start-up" period, the
Company intends to leverage its portfolio through borrowings, generally through
the use of reverse repurchase agreements, bank credit facilities, warehouse
lines of credit on pools of real estate and mortgage loans, mortgage loans on
real estate and other borrowings. The percentage of leverage used will vary
depending on the Company's estimate of the stability of the portfolio's cash
flow. To the extent that changes in market conditions cause the cost of such
financing to increase relative to the income that can be derived from the assets
acquired, the Company may reduce the amount of leverage it utilizes.
15
<PAGE>
Leverage creates an opportunity for increased net income, but at the same
time creates risks. For example, leverage can reduce the net income available
for distributions to stockholders. The Company will leverage assets only when
there is an expectation that it will enhance returns, although there can be no
assurance that the Company's use of leverage will prove to be beneficial.
Moreover, there can be no assurance that the Company will be able to meet its
debt service obligations and, to the extent that it cannot, the Company risks
the loss of some or all of its assets.
General Economic Conditions. The Company's success is dependent upon the
general economic conditions in the geographic areas in which a substantial
number of its investments are located. Adverse changes in national economic
conditions or in the economic conditions of the regions in which the Company
conducts substantial business likely would have an adverse effect on real estate
values, interest rates and, accordingly, the Company's business.
Competition. The Company intends to engage in a highly competitive
business. The acquisition of Subordinated Interests and Distressed Real
Properties is often based on competitive bidding. In addition, the Company's
competitors may seek to establish relationships with the financial institutions
and other firms from whom the Company intends to purchase such assets. Many of
the Company's anticipated competitors are significantly larger than the Company,
have established operating histories and procedures, may have access to greater
capital and other resources, and may have other advantages over the Company in
conducting certain businesses and providing certain services.
Legal and Tax Risks
Tax Risks. OAIC intends to operate in a manner so as to qualify as a REIT
for federal income tax purposes. Although OAIC does not intend to request a
ruling from the Service as to its REIT status, OAIC will receive at the closing
of the Offering an opinion of its legal counsel that, based on certain
assumptions and representations, it so qualifies. Investors should be aware,
however, that opinions of counsel are not binding on the Service or any court.
The REIT qualification opinion only represents the view of counsel to OAIC based
on counsel's review and analysis of existing law, which includes no controlling
precedent. Furthermore, both the validity of the opinion and the continued
qualification of OAIC as a REIT will depend on OAIC's satisfaction of certain
asset, income, organizational, distribution and stockholder ownership
requirements on a continuing basis. If OAIC were to fail to qualify as a REIT in
any taxable year, OAIC would be subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
rates, and distributions to stockholders would not be deductible by OAIC in
computing its taxable income. Any such corporate tax liability could be
substantial and would reduce the amount of cash available for distribution to
stockholders, which in turn could have an adverse impact on the value of, and
trading prices for, the Common Stock. Unless entitled to relief under certain
Code provisions, OAIC also would be disqualified from taxation as a REIT for the
four taxable years following the year during which OAIC ceased to qualify as a
REIT.
OAIC must distribute annually at least 95% of its net taxable income
(excluding any net capital gain) in order to avoid corporate income taxation of
the earnings that it distributes. In addition, OAIC will be subject to a 4%
nondeductible excise tax on the amount, if any, by which certain distributions
paid by it with respect to any calendar year are less than the sum of (i) 85% of
its ordinary income for that year, (ii) 95% of its capital gain net income for
that year, and (iii) 100% of its undistributed taxable income from prior years.
OAIC intends to make distributions to its stockholders to comply with the
95% distribution requirement and to avoid the nondeductible excise tax. However,
differences in timing between the recognition of taxable income and the actual
receipt of cash could require the Company to borrow funds on a short-term basis
to meet the 95% distribution requirement and to avoid the nondeductible excise
tax. The requirement to distribute a substantial portion of OAIC's net taxable
income could cause OAIC to distribute amounts that would otherwise be spent on
16
<PAGE>
future acquisitions, unanticipated capital expenditures, or repayment of debt,
which would require OAIC to borrow or sell assets to fund the costs of such
items.
The Company expects to acquire Subordinated Interests and other debt
obligations that are deemed to have OID for federal income tax purposes, which
is generally equal to the difference between an obligation's issue price and its
redemption price. The income generated by such instruments for federal income
tax purposes will consist of amortization of the OID and the coupon interest
associated with the instruments. OAIC will be required to recognize as income
each year the portion of the OID that accrues during that year, which will
increase the REIT distribution requirement for that year, notwithstanding the
fact that there may be no corresponding contemporaneous receipt of cash by OAIC.
REMIC Residual Interests also may generate taxable income in excess of cash flow
or economic income in any year. In addition, certain taxable income produced by
a REMIC Residual Interest ("Excess Inclusion") may cause OAIC's stockholders to
suffer certain adverse tax consequences. See "Federal Income Tax
Considerations." Consequently, an acquisition by OAIC of Subordinated Interests,
other debt obligations that are deemed to have OID, or REMIC Residual Interests
could have the effect of requiring OAIC to incur borrowings or to liquidate a
portion of its portfolio at rates or times that OAIC regards as unfavorable to
meet the REIT distribution requirement. The Company does intend to invest in
Distressed Real Property, however, and depreciation deductions associated with
those investments should help offset the adverse tax effects of the OID
generated by the Company's other holdings.
Ownership Limitation. In order for the Company to maintain its
qualification as a REIT, not more than 50% in value of its outstanding shares of
capital stock may be owned, directly or indirectly, by five or fewer individuals
(as defined in the Code to include certain entities). For the purpose of
preserving the Company's REIT qualification, the Articles of Incorporation
generally prohibit direct or indirect ownership of more than (i) 8.7% (or, with
respect to Ocwen Financial, 15%) of the number of outstanding shares of Common
Stock, or (ii) 9.9% of the number of outstanding shares of any series of
Preferred Stock (the "Ownership Limitation"). The Ownership Limitation could
have the effect of discouraging a takeover or other transaction in which holders
of some, or a majority, of the shares of Common Stock might receive a premium
for their shares of Common Stock over the then prevailing market price or which
such holders might believe to be otherwise in their best interests. See
"Description of Capital Stock - Restrictions on Transfer" and "Federal Income
Tax Considerations - Requirements for Qualification."
ERISA Risks. The Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and section 4975 of the Code prohibit certain transactions
that involve (i) certain pension, profit-sharing, employee benefit, or
retirement plans or individual retirement accounts (each a "Plan") and (ii) the
assets of a Plan. A "party in interest" or "disqualified person" with respect to
a Plan will be subject to (x) an initial 5% excise tax on the amount involved in
any prohibited transaction involving the assets of the Plan and (y) an excise
tax equal to 100% of the amount involved if any prohibited transaction is not
corrected. Consequently, the fiduciary of a Plan contemplating an investment in
the Common Stock should consider whether the Company, any other person
associated with the issuance of the Common Stock, or any affiliate of the
foregoing is or might become a "party in interest" or "disqualified person" with
respect to the Plan. In such a case, the acquisition or holding of Common Stock
by or on behalf of the Plan could be considered to give rise to a prohibited
transaction under ERISA and the Code. See "ERISA Considerations--Employee
Benefit Plans, Tax Qualified Retirement Plans, and IRAs."
Authority to Issue Preferred Stock. The Articles of Incorporation
authorize the Board of Directors to issue up to 25 million shares of preferred
stock and to establish the preferences and rights of any shares of preferred
stock issued. Although the Company has no current intention to issue any series
of preferred stock in the foreseeable future, the issuance of any series of
preferred stock could have the effect of delaying or preventing a change in
control of the Company even if a change in control were in the interests of the
Common stockholders. See "Description of Capital Stock - Preferred Stock."
17
<PAGE>
Virginia Anti-Takeover Statutes. As a Virginia corporation, the Company is
subject to various provisions of the Virginia Stock Corporation Act, which
impose certain restrictions and require certain procedures with respect to
certain takeover offers and business combinations, including, but not limited
to, combinations with interested holders and share repurchases from certain
holders. See "Certain Provisions of Virginia Law and the Company's Articles of
Incorporation and Bylaws - Business Combinations" and "- Control Share
Acquisitions."
Ability of Board of Directors to Change Certain Policies. The major
policies of the Company, including its investment policy and other policies with
respect to acquisitions, financing, growth, operations, debt and distributions,
are determined by its Board of Directors. The Board of Directors may amend or
revise these and other policies from time to time without a vote of the Common
Stockholders. The effect of any such changes may be positive or negative. The
Company cannot change its policy of seeking to maintain its qualification as a
REIT without the approval of the holders of two-thirds of the outstanding shares
of Common Stock. See "Policies and Objectives with Respect to Certain
Activities" and "Certain Provisions of Virginia Law and of the Company's
Articles of Incorporation and Bylaws."
Investment Company Act Exemption. The Company believes that it will not
be, and intends to conduct its operations so as not to become, regulated as an
investment company under the Investment Company Act. The Investment Company Act
exempts entities that, directly or through majority-owned subsidiaries, are
"primarily engaged in the business of purchasing or otherwise acquiring
mortgages and other liens on and interests in real estate" ("Qualifying
Interests"). Under current interpretations by the Staff of the Securities and
Exchange Commission (the "Commission"), in order to qualify for this exemption,
the Company, among other things, must maintain at least 55% of its assets in
Qualifying Interests and also may be required to maintain an additional 25% in
Qualifying Interests or other real estate-related securities. The assets which
the Company may acquire therefore may be limited by the provisions of the
Investment Company Act. In connection with its acquisition of Subordinated
Interests, the Company intends, where appropriate, to obtain foreclosure rights,
by obtaining the Special Servicing, with respect to the underlying mortgage
loans, although there can be no assurance that it will be able to do so on
acceptable terms. As a result of obtaining such rights, the Company believes
that the related Subordinated Interests will constitute Qualifying Interests for
the purpose of the Investment Company Act. The Company does not intend, however,
to seek an exemptive order, no-action letter or other form of interpretive
guidance from the Commission or its Staff on this position. If the Commission or
its staff were to take a different position with respect to whether such
Subordinated Interests constitute Qualified Interests, the Company could, among
other things, be required either (a) to change the manner in which it conducts
its operations to avoid being required to register as an investment company or
(b) to register as an investment company, either of which could have an adverse
effect on the Company and the market price for the shares.
Limitation on Liability of Manager and Officers and Directors of the
Company. The Articles of Incorporation of the Company contain a provision which,
subject to certain exceptions, eliminates the liability of a director or officer
to the Company or its stockholders for monetary damages for any breach of duty
as a director or officer. This provision does not eliminate such liability to
the extent that it is proved that the director or officer engaged in willful
misconduct or a knowing violation of criminal law or of any federal or state
securities law.
The Company will indemnify the Manager and its officers and directors from
any action or claim brought or asserted by any party by reason of any allegation
that the Manager for one or more of its officers or directors is otherwise
accountable or liable for the debts or obligations of the Company or its
affiliates. In addition, the Manager and its officers and directors will not be
liable to the Company, and the Company will indemnify the Manager and its
officers and directors for acts performed pursuant to the Management Agreement,
except for claims arising from acts constituting bad faith, willful misconduct,
gross negligence or reckless disregard of their duties under the Management
Agreement. See "Management of Operations-Limits of Responsibility."
18
<PAGE>
Other Risks
Conflicts of Interest in the Business of the Company. The Company will be
subject to various potential conflicts of interest arising from its relationship
with the Manager and its affiliates. With a view toward protecting the interests
of the Company's stockholders, the Articles of Incorporation of the Company
provide that a majority of the Board of Directors (and a majority of each
committee of the Board of Directors) must not be affiliates of the Manager (the
"Independent Directors").
The execution of the Management Agreement will be approved by a majority
of Independent Directors. Moreover, the renewal of the Management Agreement
after the initial two-year term will require the affirmative vote of a majority
of the Independent Directors, and a majority of the Independent Directors may
terminate the Management Agreement at any time upon 60 days' notice and payment
of a termination fee. See "Management of Operations-The Management Agreement."
The Company believes that the compensation provisions of the Management
Agreement will provide an incentive for the Manager and its personnel to seek to
maximize stockholders value, by tying the Manager's incentive compensation to
increases in Funds From Operations per share.
Although the Independent Directors will approve the Management Agreement,
daily operations between the Company and the Manager and its affiliates will not
be required to be approved by a majority of the Company's Independent Directors.
Instead, the majority of the Independent Directors will establish general
guidelines ("Guidelines") for the Company's investments, borrowings and
operations. On a quarterly basis, the Independent Directors will review
transactions engaged in by the Company to monitor compliance with the
Guidelines. Moreover, the Independent Directors will review the Guidelines, and
the Company's investment policies, annually.
Although the Independent Directors will review the Guidelines periodically
and will monitor compliance with those Guidelines, investors should be aware
that, in conducting this review, the Independent Directors will rely primarily
on information provided to them by the Manager. The Manager will obtain opinions
concerning the price for Subordinated Interests and other classes of MBS ("Third
Party Fairness Opinions") and appraisals for Distressed Real Properties
purchased from the Manager or its affiliates. Third Party Fairness Opinions
typically will be issued by the underwriter or placement agent of the MBS. The
Independent Directors are likely to rely substantially on information and
analysis provided by the Manager to evaluate the Company's Guidelines,
compliance therewith and other matters relating to the Company's investments.
The Company has contracted with Ocwen Financial to purchase Subordinated
Interests and IOs (the "Initial Investments") soon after the Closing for an
aggregate purchase price of $25,691,024. Ocwen Financial will realize a gain,
including hedging gains, of $512,177 as a result of this sale. Although a
Third Party Fairness Opinion will be obtained, the Independent Directors will
not be asked to approve this transaction.
The Management Agreement does not limit or restrict the right of the
Manager or any of its officers, directors, employees or affiliates from engaging
in any business or rendering services of any kind to any other person, including
the purchase of or rendering advice to others purchasing real estate assets that
meet the Company's policies and criteria. The Manager and Ocwen Financial have
agreed, however, that if either learns of any opportunity to invest in
Distressed Real Property, the Company will have an exclusive right to that
investment, unless (i) the investment is not well-suited for the Company, (ii)
the Company is unable financially to take advantage of the opportunity, or (iii)
the Distressed Real Property is part of a pool of both real estate and loans.
From time to time, mortgage lenders offer for sale large pools of mortgage
loans and REO Properties pursuant to a competitive bidding process. In such a
case, Ocwen Financial may, but is not required to, invite the Company to submit
a joint bid for such pool. In the alternative, Ocwen Financial may choose an
unaffiliated entity with which to submit a joint bid for the pool, as long as
Ocwen Financial takes title only to the mortgage loans and not to the real
estate.
19
<PAGE>
The Manager and Ocwen Financial also have agreed to give the Company an
exclusive right to purchase Subordinated Interests that become available unless
(i) the investment is not well-suited for the Company, (ii) the Company is
unable financially to take advantage of the opportunity, or (iii) the mortgage
loans collateralizing the MBS were owned by an affiliate of Ocwen Financial, in
which case Ocwen Financial or one of its affiliates may choose to retain the
Subordinated Interest. See "Management of Operations--Certain Relationships;
Conflicts of Interest." Ocwen Financial has no obligation to reveal to the
Company any business opportunities to invest in Other Real Estate Related
Assets.
Marketability of Shares of Common Stock. Prior to this offering, there has
not been a public market for the shares of Common Stock offered hereby. The
initial public offering price will be determined by the Company and
representatives of the Underwriters. There can be no assurance that the price at
which the shares of Common Stock will sell in the public market after the
offering will not be lower than the price at which they are sold by the
Underwriter. While there can be no assurance that a market for the Company's
Common Stock will develop, the Company has applied for quotation of the Common
Stock through The Nasdaq Stock Market.
Newly Organized Corporation; Dependence on Manager. The Company has no
operating history, and its operating policies and strategies are untried. The
Company will be dependent upon the experience and expertise of the Manager in
administering its day-to-day operations. Certain officers, directors and
employees of the Manager and its affiliates have significant experience in
managing distressed real estate assets and MBS, including Subordinated
Interests. However, such officers, directors and employees have never managed a
REIT. There can be no assurance that the Manager will be able to implement
successfully the strategies that the Company intends to pursue.
The Manager is a wholly-owned subsidiary of Ocwen Financial, a
registered savings and loan holding company that conducts most of its
operations through Ocwen Federal Bank FSB (the "Bank"), a federally-chartered
savings bank. Both Ocwen Financial and the Bank are subject to extensive
government supervision and regulation, intended primarily for the protection
of depositors. In addition, each of Ocwen Financial and the Bank are subject
to changes in federal and state laws, including changes in tax laws that
could materially affect the real estate industry, as well as changes in
regulations, governmental policies and accounting principles. Such changes
may increase Ocwen Financial's and the Bank's costs of doing business and
assist their competitors. Any such added burdens may adversely affect the
Manager's ability to carry out its management functions or the Bank to
provide mortgage loan servicing and Special Servicing for the Company or may
have an effect on the ability of the Manager and its affiliates to enter into
other arrangements with the Company.
OPERATING POLICIES AND OBJECTIVES
General. The Company will seek to generate cash flow primarily from
investments in (i) Subordinated Interests in commercial and multifamily mortgage
backed securitizations ("CMBS"); (ii) Subordinated Interests in one- to
four-family residential mortgage backed securitizations ("RMBS"); and (iii)
distressed commercial and multifamily real estate ("Distressed Real Property"),
including real estate acquired in connection with foreclosure on non-performing
loans ("REO Property"). There can be no assurances that the Company will be able
to acquire such assets, that the terms or results of such acquisitions will be
beneficial to the Company, or that the Company will achieve its objectives. See
"Risk Factors."
Although the Company expects that its primary emphasis will be on the
acquisition of Subordinated Interests and Distressed Real Properties, future
acquisitions may include, Other Real Estate Related Assets. Moreover, to invest
the net proceeds of the Offering quickly in appropriate real estate assets, the
Company expects to acquire or originate single family residential, multifamily
residential and commercial Performing Mortgage Loans to be used as collateral
for CMOs, with the Company retaining an equity ownership interest in such
Mortgage Loans. In addition, particularly during this initial period, the
Company may originate or acquire Mezzanine Loans on commercial or multifamily
residential properties, secured by non-voting preferred stock of a single
purpose entity, or make Construction Loans to facilitate construction or
rehabilitation of commercial or multifamily residential real estate. The Company
may decide in the future to pursue other available acquisition opportunities it
deems suitable for the Company's portfolio. It will seek to maximize yield by
managing the credit risk through credit underwriting, although there can be no
assurances that the Company will be successful in this regard.
The Company will have no predetermined limitations or targets for
concentration of property type or geographic location. Instead, the Company
plans to make acquisition decisions through asset and collateral analysis,
evaluating investment risks on a case-by-case basis. To the extent that the
Company's assets become concentrated
20
<PAGE>
in a few states or a particular region, the return on an investment in the
Common Stock will become more dependent on the economy of such states or region.
The Company intends to seek to maximize yield through the use of leverage,
consistent with maintaining an acceptable level of risk, although there are
limits to the leverage that can be applied to certain of the Company's
investments.
Ocwen Financial's Experience. Ocwen Financial has substantial experience
in the acquisition, management and disposition of distressed commercial,
multifamily and single family mortgage loans and the resultant REO Properties,
and the management of diverse real estate assets. This experience, together with
Ocwen Financial's personnel, systems and operating policies, will be made
available to the Company through the Management Agreement. The Company believes
that the availability of Ocwen Financial's resources will allow the Company
effectively to manage Distressed Real Property and also will have substantial
applications in the investment in Subordinated Interests in CMBS and RMBS, and
in exercising Special Servicing rights with respect to the mortgage loans
underlying such Subordinated Interests.
Ocwen Financial, acting through a former subsidiary, entered the loan
resolution business in 1986, by providing private mortgage insurance for
residential loans. Since 1991, Ocwen Financial has acquired over $3.7 billion of
distressed loans, including $1.7 billion of distressed commercial mortgage loans
secured by apartments, shopping centers, office buildings, hotels, and
industrial properties located throughout the United States. To date, Ocwen
Financial has owned 607 commercial REO properties, which it acquired by
purchasing and foreclosing on distressed mortgage loans. As of the date of sale
or the most recent appraisal, these REO properties had a market value of
approximately $298 million. In the early years of the program, Ocwen Financial
acquired distressed mortgage loans primarily from the FDIC and the Resolution
Trust Corporation, primarily in auctions of pools of loans acquired from the
large number of financial institutions that failed during the late 1980s and
early 1990s. Although governmental agencies, such as the FDIC and HUD, continue
to be potential sources of distressed mortgage loans, in recent years Ocwen
Financial has obtained Distressed Mortgage Loans primarily from various private
sector sellers, such as banks, savings institutions, mortgage companies and
insurance companies. As a result of this substantial experience, Ocwen Financial
has developed the procedures, facilities and systems that it believes are
necessary to identify, evaluate, acquire and manage distressed loans
appropriately and to resolve such loans in a timely and profitable manner.
Furthermore, Ocwen Financial has significant experience in the acquisition
and management of MBS, including over $300 million of subordinated securities,
the majority of which have been sold. The Company believes that this experience
will enable the Manager appropriately to identify, evaluate, price and manage
Subordinated Interests and other classes of MBS for the Company.
Since 1993, Ocwen Financial has acquired or originated $1.1 billion of
performing multifamily residential and commercial mortgage loans. Ocwen
Financial has experience in value added financing, including Construction
Loans, with respect to which Ocwen Financial expects to realize an attractive
risk-adjusted return from sharing in net operating income or gross revenues
from the property and any increase in value of the property.
Ocwen Financial has invested in a computer infrastructure that includes
significant capacity for expansion and upgrade. The Company believes that Ocwen
Financial's systems and procedures have substantial applicability to the
Company's lines of business, and that the Company's access, through the
Management Agreement, to Ocwen Financial's information technology will be a key
factor in the Company's ability to compete. In addition to its standard industry
software applications, Ocwen Financial has internally developed fully integrated
applications designed to provide acquisition pricing, decision support,
automation of decision execution and tracking and exception reporting. Ocwen
Financial has implemented a data warehouse system which provides corporate data
on
21
<PAGE>
a centralized basis for decision support. The Company believes these resources
will be key to achieving a competitive advantage in the Company's business.
However, there can be no assurance of the Company's success.
Although many of the Company's prospective competitors may have access to
greater capital and have other advantages, the Company believes that it has a
competitive advantage relative to many of its competitors as a result of the
experience of Ocwen Financial in managing and resolving Distressed Mortgage
Loans, Ocwen Financial's large investment in the computer systems, technology
and other resources that are necessary to conduct this business, and Ocwen
Financial's national reputation and the strategic relationships and contacts
which it has developed in connection with these activities.
Ocwen Financial files reports and other information with the Commission
pursuant to the Securities Exchange Act of 1934. Additional information about
Ocwen Financial, therefore, may be inspected or copied at the public reference
facilities maintained by the Commission.
The Company's Assets
The discussion below describes the principal categories of assets that the
Company intends to acquire.
Subordinated Interests. The Company intends to acquire Subordinated
Interests in CMBS and RMBS. Mortgage-backed securities ("MBS") typically are
divided into two or more classes, sometimes called "tranches." The senior
classes are higher "rated" securities, which would be rated from low investment
grade "BBB" to higher investment grade "AA" or "AAA." The junior, subordinated
classes typically would include a lower rated, non-investment grade "BB" and "B"
class, and an unrated, higher-yielding, credit support class (which generally is
required to absorb the first losses on the underlying mortgage loans).
MBS generally are issued either as collateralized mortgage obligations
("CMOs" or "CMO Bonds") or pass-through certificates ("Pass-Through
Certificates"). CMO Bonds are debt obligations of special purpose corporations,
owner trusts or other special purpose entities secured by commercial mortgage
loans or MBS. Pass-Through Certificates evidence interests in trusts, the
primary assets of which are mortgage loans. CMO Bonds and Pass-Through
Certificates may be issued or sponsored by private originators of, or investors
in, mortgage loans, including savings and loan associations, mortgage bankers,
commercial banks, investment banks and other entities. MBS are not guaranteed by
an entity having the credit status of a governmental agency or instrumentality
and generally are structured with one or more of the types of credit enhancement
described below. In addition, MBS may be illiquid. See "Risk Factors--Investment
Activity Risks--Risk From Ownership of Subordinated Interests in Pools of
Commercial and Residential Mortgage Loans."
In most mortgage loan securitizations, a series of MBS is issued in
multiple classes in order to obtain investment-grade ratings for the senior
classes and thus increase their marketability. Each class of MBS may be issued
with a specific fixed or variable coupon rate and has a stated maturity or final
scheduled distribution date. Principal prepayments on the mortgage loans
comprising the Mortgage Collateral may cause the MBS to be retired substantially
earlier than their stated maturities or final scheduled distribution dates,
although, with respect to commercial mortgage loans, there generally are
penalties for or limitations on the ability of the borrower to prepay the loan.
Interest is paid or accrued on MBS on a periodic basis, typically monthly.
The credit quality of MBS depends on the credit quality of the underlying
Mortgage Collateral. Among the factors determining the credit quality of the
underlying mortgage loans will be the ratio of the mortgage loan balances to the
value of the properties securing the mortgage loans, the purpose of the mortgage
loans (e.g., refinancing or new purchase), the amount of the mortgage loans,
their terms and the geographic diversification of the location of the
properties, and, in the case of commercial mortgage loans, the credit-worthiness
of tenants.
22
<PAGE>
Moreover, the principal of and interest on the underlying mortgage loans
may be allocated among the several classes of a MBS in many ways, and the credit
quality of a particular class results primarily from the order and timing of the
receipt of cash flow generated from the underlying mortgage loans. Subordinated
Interests carry significant credit risks. Typically, in a "senior-subordinated"
structure, the Subordinated Interests provide credit protection to the senior
classes by absorbing losses from loan defaults or foreclosures before such
losses are allocated to senior classes. Moreover, typically, as long as the more
senior tranches of securities are outstanding, all prepayments on the mortgage
loans generally are paid to those senior tranches, at least until the end of a
lock-out period, which typically is five years or more. In some instances,
particularly with respect to Subordinated Interests in commercial
securitizations, the holders of Subordinated Interests are not entitled to
receive scheduled payments of principal until the more senior tranches are paid
in full or until the end of a lock-out period. Because of this structuring of
the cash flows from the underlying mortgage loans, Subordinated Interests in a
typical securitization are subject to a substantially greater risk of
non-payment than are those more senior tranches. Accordingly, the Subordinated
Interests are assigned lower credit ratings, or no ratings at all. Neither the
Subordinated Interests nor the underlying mortgage loans are guaranteed by
agencies or instrumentalities of the U.S. government or by other governmental
entities and accordingly are subject, among other things, to credit risks. See
"Risk Factors--Investment Activity Risks--Risk From Ownership of Subordinated
Interests in Pools of Commercial and Residential Mortgage Loans."
The Company may acquire IOs that have characteristics of Subordinated
Interests, known as Sub IOs. A Sub IO is entitled to no payments of principal;
moreover, interest on a Sub IO often is withheld in a reserve fund or spread
account and is used to fund required payments of principal and interest on the
more senior tranches. Once the balance in the spread account reaches a certain
level, interest on the Sub IO is paid to the holders of the Sub IO. These Sub
IOs provide credit support to the senior classes, and thus bear substantial
credit risks. Moreover, because a Sub IO receives only interest payments, its
yield is extremely sensitive to changes in the weighted average life of the
class, which in turn is dictated by the rate of prepayments on the underlying
loans. See "Risk Factors-Investment Activity Risks--Risk from Ownership of IOs,
Inverse IOs and Sub IOs." Some Sub IOs are designated as REMIC Residual
Interests. Such a Sub IO typically generates Excess Inclusion or other forms of
"phantom income."
Before acquiring Subordinated Interests, the Company intends to perform
certain credit underwriting and stress testing to attempt to evaluate future
performance of the Mortgage Collateral supporting such MBS, which may include
(i) a review of the underwriting criteria used in making mortgage loans
comprising the Mortgage Collateral for the MBS, (ii) a review of the relative
principal amounts of the loans, their loan-to-value ratios as well as the
mortgage loans' purpose and documentation, (iii) where available, a review of
the historical performance of the loans originated by the particular originator
and (iv) in the case of CMBS, some level of reunderwriting the underlying
mortgage loans, as well as selected site visits.
The Company also intends in many instances to acquire Special Servicing
rights with respect to the mortgage loans underlying MBS in which the Company
owns a Subordinated Interest. Such Special Servicing rights will give the
Company, for example, some control over the timing of foreclosures on such
mortgage loans and, thus, may enable the Company to reduce losses on such
mortgage loans. No assurances can be made, however, that the Company will be
able to acquire such Special Servicing rights or that losses on the mortgage
loans will not exceed the Company's expectations. Although the Company's
strategy is to purchase Subordinated Interests at a price designed to return the
Company's investment and generate a profit thereon, there can be no assurance
that such goal will be met or, indeed, that the Company's investment in a
Subordinated Interest will be returned in full or at all. See "Risk
Factors--Investment Activity Risks" and "--Economic and Business Risks."
Moreover, many of the Subordinated Interests to be acquired by the Company
will not have been registered under the Securities Act, but instead initially
were sold in private placements. Because Subordinated Interests acquired in
private placements have not been registered under the Securities Act, they will
be subject to certain restrictions on resale and, accordingly, will have more
limited marketability and liquidity.
23
<PAGE>
Although there are some exceptions, most issuers of multi-class MBS elect
to be treated, for federal income tax purposes, as REMICs. The Company intends
to acquire not only Subordinated Interests that are treated as regular interests
in REMICs, but also those that are designated as REMIC Residual Interests.
Unlike regular interests in REMICs, REMIC Residual Interests typically generate
Excess Inclusion or other forms of "phantom income" that bear no relationship to
the actual economic income that is generated by a REMIC. Consequently, if a
Subordinated Interest that is designated as a REMIC Residual Interest generates
a significant amount of phantom income in any taxable year, the Company could be
required to borrow funds or to liquidate assets in order to meet the REIT
distribution requirement for such taxable year.
Subordinated Interests (other than REMIC Residual Interests) generally are
issued at a significant discount to their outstanding principal balance, which
gives rise to OID for federal income tax purposes. The Company will be required
to accrue the OID as taxable income over the life of the related Subordinated
Interest on a level-yield method in advance of the receipt of the related cash
flow. The OID income attributable to a Subordinated Interest generally will
increase the Company's REIT distribution requirement in the early years of the
Company's ownership of the Subordinated Interest even though the Company may not
receive the related cash flow from the Subordinated Interest until a later
taxable year. As a result, the Company could be required to borrow funds or to
liquidate assets in order to satisfy the REIT distribution requirement for any
taxable year. See "Risk Factors--Legal Risks--Tax Risks." There can be no
assurance that the Company's strategy for investing in Subordinated Interests
will be successful.
Commercial Mortgage-Backed Securities. It is expected that many of the
Subordinated Interests acquired by the Company will be Subordinated Interests in
CMBS. The Mortgage Collateral supporting CMBS may be mortgage pass-through
securities (discussed below) or pools of whole loans. Of the interests in CMBS
that the Company acquires, most will be Subordinated Interests, but the Company
also may purchase more senior tranches or combined tranches of first-loss and
more senior CMBS.
Unlike RMBS, which typically are backed by thousands of single family
mortgage loans, CMBS are backed generally by a more limited number of commercial
or multifamily mortgage loans with larger principal balances than those of
single family mortgage loans. As a result, a loss on a single mortgage loan
underlying a CMBS will have a greater negative effect on the yield of such CMBS,
especially the Subordinated Interests in such CMBS.
The Company believes that there will be significant opportunities to
invest in Subordinated Interests in CMBS. Increasingly, owners of commercial
mortgage loans are choosing to securitize their portfolios. However, no
assurances can be made that appropriate opportunities for investment in CMBS
will continue to be available.
Residential Mortgage-Backed Securities. The Company intends to acquire
Subordinated Interests in RMBS backed by "non-conforming" mortgage loans, that
is, one- to four-family mortgage loans that do not qualify for sale to FHLMC or
FNMA. Typically, non-conforming mortgage loans do not meet agency guarantee
criteria because their principal balance exceeds agency limits (e.g., $214,600
is the current single-family mortgage loan limit of both FNMA and FHLMC).
Sometimes the mortgage loans or the borrower does not meet other agency credit
underwriting standards.
The process of a single-family mortgage loan securitization is similar to
the process of a commercial mortgage loan securitization. As in CMBS, a typical
RMBS series allocates the cash flow on the underlying mortgage loans so that the
Subordinated Interests shield the more senior classes from losses due to
defaults on the underlying residential mortgage loans, resulting in
substantially greater credit risk to the Subordinated Interests.
In addition to creating credit support for the more senior classes,
another general goal in allocating cash flows from the mortgage loans to the
various classes of a securitization, particularly an RMBS issuance, is to create
certain tranches on which the expected cash flows have a higher degree of
predictability than the cash flow on the
24
<PAGE>
underlying mortgage loans. As a general matter, the more predictable the cash
flow is on a particular RMBS tranche, the lower the anticipated yield will be on
that tranche at the time of issuance relative to prevailing market yields on
certain other RMBS. As part of the process of creating more predictable cash
flows on certain tranches of a non-conforming mortgage loan securitization, one
or more tranches generally must be created that absorb most of the changes in
the cash flows from the Mortgage Collateral. The yields on these tranches
generally are higher than prevailing market yields on mortgage-backed securities
with similar expected average lives. Because of the uncertainty of the cash
flows on these tranches, the market prices of, and yields on, these tranches are
more volatile.
Although Subordinated Interests in RMBS bear substantial credit risk,
because of the "shifting interest" structure typically provided, such
Subordinated Interests (other than Sub IOs) tend to be less subject to a
substantial prepayment risk. A shifting interest structure shifts all
prepayments of principal to the more senior, generally investment-grade, RMBS
classes (for at least five years for fixed-rate mortgage loans and ten years for
adjustable-rate mortgage loans) in order to increase the outstanding percentage
of subordination. After this initial period during which prepayments are shifted
to the more senior RMBS classes, prepayments then are made pro rata or more
likely phased in over a five-year period until all classes are receiving their
pro rata share. The net effect on the subordinated classes is a degree of call
protection because the principal amounts of the subordinated classes are not
reduced by prepayments of the mortgage loans, generally for at least five years.
The "shifting interest" mechanism creates a Subordinated Interest in RMBS with a
longer but more predictable average life.
The Company may acquire Subordinated Interests in RMBS secured by lower
credit quality mortgage loans known as "B," "C" and "D" mortgage loans. B, C and
D mortgage loans are loans made to borrowers who have credit histories of a
lower overall quality than "A" borrowers. These credit histories generally
result from previous repayment difficulties, brief job histories, previous
bankruptcies or other causes. The loan-to-value ratio for a B, C and D mortgage
loan is typically significantly lower than the loan-to-value ratio of an "A"
mortgage loan, and the pass-through coupon of a B, C and D mortgage loan is
typically higher than the coupon on an A mortgage loan. The Company also expects
to obtain a higher yield on RMBS secured by B, C and D mortgage loans. As a
result of the typically lower loan-to-value ratios and higher yields on B, C and
D mortgage loans, the Company believes these RMBS with B, C and D mortgage loan
collateral may justify accepting the higher credit risk associated with such
borrowers.
Although the RMBS market has matured, the Company believes that attractive
acquisition opportunities continue to be available in Subordinated Interests in
RMBS. The Company believes that the acquisition of Subordinated Interests in
RMBS presents the opportunity to obtain a higher yield compared to similar
corporate securities (e.g., similar maturity and risk) and also may present
opportunities for capital appreciation. The Company will seek, among other
things, to maximize yield by managing the credit risks associated with making
this type of investment through certain credit underwriting procedures (that is,
a review of the expected economic performance of, and risks associated with,
such interests) and through leverage. No assurance can be given that any of the
foregoing developments actually will occur.
Special Servicing. Unlike the owner of mortgage loans, the owner of
Subordinated Interests in RMBS or CMBS ordinarily cannot control the servicing
of the underlying mortgage loans. The Company intends, however, generally to
acquire Special Servicing rights with respect to the mortgage loans underlying
Subordinated Interests it purchases. Acquiring these rights will give the
Company control of the underlying mortgage loans within certain parameters.
The terms of Special Servicing agreements vary considerably, and the
Company cannot predict with certainty the precise terms of the Special Servicing
agreements into which it will enter. In general, however, the Company will
attempt to negotiate Special Servicing agreements that will permit the Company
to service, or to direct the servicing of, mortgage loans that are more than
90-days delinquent. At that point, the Company would have the right (and the
obligation) to decide whether to begin foreclosure proceedings or to seek
alternatives to
25
<PAGE>
foreclosure, such as forbearance agreements, partial payment forgiveness,
repayment plans, loan modification plans, loan sales and loan assumption plans.
Thus, the Company will have within its control, subject to obligations to the
related senior classes, some ability to minimize losses on mortgage loans
underlying Subordinated Interests owned by the Company.
Because the Operating Partnership generally will be the entity that
acquires the Subordinated Interests, it also will acquire the related Special
Servicing rights. The Operating Partnership intends to assign to Ocwen Federal
Bank FSB (formerly Berkeley Federal Bank & Trust FSB), a federally-chartered
stock savings bank (the "Bank"), all of its Special Servicing rights and
obligations (other than the right to direct foreclosure). It is expected that
most or all of the Special Servicing compensation will be paid to the Bank, and
thus the Company will benefit from the Special Servicing rights primarily from
enhanced value of the related Subordinated Interests due to better Special
Servicing of the loans, and not from receipt of material amounts of Special
Servicing fees.
The Bank, a wholly-owned subsidiary of Ocwen Financial, has considerable
experience in servicing distressed loans, has been approved as a servicer by
HUD, FHLMC and FNMA and has been rated in the second highest applicable
category, "above average," by Fitch Investors Service, Inc. ("Fitch"), as a
special servicer of commercial mortgage loans. Moreover, Standard & Poor's and
Moody's have rated the Bank as a servicer of single family residential loans.
Because the acquisition and Special Servicing of distressed real estate is
one of the Bank's business focuses, the Bank has an established network of real
estate professionals throughout the United States to assist its asset management
activities. The Bank maintains working relationships with approved engineers,
environmental consultants and real estate brokers nationwide, and calls upon
these local advisors for assistance when appropriate.
The legal aspects of the mortgage loans that underlie the Subordinated
Interests owned and to be acquired by the Company affect the value of those
assets. For a discussion of certain legal aspects of mortgage loans, see
"Certain Legal Aspects of Mortgage Loans and Real Property."
Distressed Real Properties. The Company believes that under appropriate
circumstances the acquisition of commercial and multifamily real estate acquired
by a mortgage lender at foreclosure, or receipt of a deed in lieu of foreclosure
("REO Properties") and other underperforming and otherwise distressed commercial
and multifamily real estate (together with REO Properties, "Distressed Real
Properties") offers significant opportunities to the Company.
The Company expects to acquire Distressed Real Properties solely for its
own portfolio. From time to time, however, the Company and a co-investor may
submit a joint bid to acquire a pool of Distressed Real Property in order to
enhance the prospects of submitting a successful bid. If successful, the Company
and the co-investor generally would split up the acquired assets in an
agreed-upon manner, although in certain instances the Company and the
co-investor may continue to have a joint interest in the acquired assets.
The Company's policy will be to conduct an investigation and evaluation of
the properties in a portfolio of Distressed Real Property before purchasing such
a portfolio. Evaluations of potential properties will be conducted primarily by
the Manager's employees who specialize in the analysis of distressed assets,
often with further specialization based on geographic or collateral-specific
factors. It is expected that the Manager's employees will use third parties,
such as brokers who are familiar with the property's type and location, to
assist them in conducting an evaluation of the value of the property, and
depending on the circumstances, may use subcontractors, such as local counsel
and engineering and environmental experts, to assist in the evaluation and
verification of information and the gathering of other information not
previously made available by the potential seller. The amount offered by the
Company generally will be the price that the Manager estimates is sufficient to
generate an acceptable risk-adjusted return on the Company's investment.
26
<PAGE>
After the Company acquires Distressed Real Property, the Company's goal
will be to improve management of the property so as to increase the cash flow
from the property. After the Company maximizes the value of a Distressed Real
Property in its portfolio, it will enjoy the improved cash flow on the property
and begin to seek an opportunity to sell the property. Although the period
during which the Company will hold Distressed Real Properties will vary
considerably from asset to asset, the Company believes that most such properties
will be held in its portfolio more than four years and generally fewer than ten
years.
If the Company is offered the opportunity to purchase a Distressed Real
Property that is likely to be held for fewer than four years, the Company
intends to establish a corporation in which the Operating Partnership will hold
a 95% non-voting ownership interest to make the purchase. Such a corporation
will not be eligible for taxation as a qualified REIT subsidiary, and any
profits that it earns on its activities will be subject to federal corporate
income tax before they are distributable to the Company. If the Company
purchases a Distressed Real Property with the intent to hold it in the Operating
Partnership for more than four years, but an opportunity arises to sell the
property sooner, the Company will consider certain strategies, such as a
like-kind exchange, to reduce any negative tax consequences relating to the
sale.
Although the Company believes that a permanent market for the acquisition
of Distressed Real Property has emerged in recent years within the private
sector, there can be no assurance that the Company will be able to acquire the
desired amount and type of Distressed Real Property in future periods or that
there will not be significant inter-period variations in the amount of such
acquisitions. See "Risk Factors--Investment Activity Risks--Available
Investments." Moreover, there can be no assurance that the Company will be
effective in making any asset acquired more valuable than the price paid to
acquire it. See "Risk Factors--Investment Activity Risks."
Performing Mortgage Loans for Securitization. The Company intends to
purchase single family residential, multifamily residential and commercial
Performing Mortgage Loans, to pool such loans in a special purpose entity, and
to issue CMOs secured by such mortgage loans. The Company would retain the
equity ownership interest in the Mortgage Loans, subject to the CMO debt,
thereby creating the economic equivalent of a Subordinated Interest.
Construction Financing and Loans Subject to Prior Liens . The Company
may take advantage of opportunities to provide construction or rehabilitation
financing on commercial property, lending generally 85% to 90% of total
project costs, and taking a first lien mortgage to secure the debt
("Construction Loans"). The Company also may invest in loans that are
subordinate to first lien mortgage loans on commercial real estate
("Mezzanine Loans"). For example, on a commercial property subject to a first
lien mortgage loan with a principal balance equal to 70% of the value of the
property, the Company could lend the owner of the property (typically a
partnership) an additional 15% to 20% of the value of the property. Typically
the owner would pledge to the Company, as security for its debt to the
Company, either the property subject to the first lien (giving the Company a
second lien position) or a partnership interest in the owner. If the
partnership interest is pledged, then the Company would be in a position to
take over the operation of the property in the event of a default by the
owner. These Construction and Mezzanine Loans generally would provide the
Company with the right to receive a stated interest rate on the loan balance
plus a percentage of net operating income or gross revenues from the
property, payable to the Company on an ongoing basis, and a percentage of any
increase in value of the property, payable upon maturity or refinancing of
the loan, or otherwise would allow the Company to charge an interest rate
that would provide an attractive risk-adjusted return.
Other MBS. The Company may invest not only in classes of Subordinated
Interests but also in other classes of MBS such as IOs and Inverse IOs. See
"Risk Factors -- Investment Activity Risks -- Risks from Ownership of IOs,
Inverse IOs and Sub IOs."
Foreign Real Properties. In addition to purchasing Distressed Real
Properties, the Company may acquire or originate Mortgage Loans secured by real
estate located outside the United States or purchase such real estate, but the
Company does not intend to invest more than 25% of the portfolio in foreign real
estate. Investing in real
27
<PAGE>
estate located in foreign countries creates risks associated with the
uncertainty of foreign laws and markets and risks related to currency
conversion. Although Ocwen Financial has no experience in investing in foreign
real estate, the Company believes that Ocwen Financial's experience with
distressed assets will be helpful in the management of such assets. The Company
may be subject to foreign income tax with respect to its investments in foreign
real estate. However, any foreign tax credit that otherwise would be available
to the Company for U.S. federal income tax purposes will not flow through to the
Company's stockholders.
Real Property with Known Environmental Problems. The Company may acquire
or originate mortgage loans secured by real estate with known environmental
problems that materially impair the value of the property, or purchase such real
estate. If so, the Company will take certain steps to limit its liability for
such environmental problems, but there are risks associated with such an
investment. Although Ocwen Financial has little experience in investing in real
estate with known environmental risks, the Company believes that Ocwen
Financial's experience with distressed assets will be helpful to the management
of such assets. The Company does not intend to invest more than 10% of its
portfolio in environmentally distressed real estate.
Portfolio Management
The following describes some of the investment management practices that
the Company may employ from time to time to earn income, facilitate portfolio
management (including managing the effect of maturity or interest rate
sensitivity) and mitigate risk (such as the risk of changes in interest rates).
There can be no assurance that the Company will not amend or deviate from these
policies or adopt other policies in the future.
Leverage and Borrowing. The Company intends to leverage its assets through
the use of reverse repurchase agreements, bank credit facilities, mortgage loans
on real estate and other borrowings, when there is an expectation that such
leverage will benefit the Company. However, the Company does not intend to
borrow funds from the Manager or its affiliates. If changes in market conditions
cause the cost of such financing to increase relative to the income that can be
derived from securities purchased with the proceeds thereof, the Company may
reduce the amount of leverage it utilizes.
Leverage creates an opportunity for increased income but, at the same
time, creates special risks. For example, leveraging magnifies changes in the
net worth of the Company and affects the amounts available for distribution to
stockholders. Although the amount owed will be fixed, the Company's assets may
change in value during the time the debt is outstanding. Leverage will create
interest expenses for the Company which can exceed the revenues from the assets
retained.
To the extent the revenues derived from assets acquired with borrowed
funds exceed the interest expense the Company will have to pay, the Company's
net income will be greater than if borrowing had not been used. Conversely, if
the revenues from the assets acquired with borrowed funds are not sufficient to
cover the cost of borrowing, the net income of the Company will be less than if
borrowing had not been used, and therefore the amount available for distribution
to stockholders will be reduced. See "Risk Factors--Economic and Business
Risks--Risks From Use of Leverage."
Under certain circumstances, and notwithstanding adverse interest rate or
market conditions, the Company may use leverage to obtain sufficient cash to
make required distributions of dividends or to fund share repurchases and tender
offers when such leveraging is deemed to be in the best interests of
stockholders. Such situations may arise if OAIC's status as a REIT or its
ability to maintain minimum liquidity levels is endangered.
Reverse Repurchase Agreements. The Company intends to enter into reverse
repurchase agreements, which are agreements under which the Company would sell
assets to a third party with the commitment that the Company repurchase such
assets from the purchaser at a fixed price on an agreed date. Reverse repurchase
agreements may
28
<PAGE>
be characterized as loans to the Company from the other party that are secured
by the underlying assets. The repurchase price reflects the purchase price plus
an agreed market rate of interest.
Bank Credit Facilities. The Company intends to borrow money through
various bank credit facilities, which will have varying interest rates, which
may be fixed or adjustable, and varying maturities.
Mortgage Loans on Real Estate Owned by the Company. The Company expects to
borrow funds secured by mortgages on the Company's real estate, including any
Distressed Real Properties owned by the Company.
CMOs and Warehouse Lines of Credit. The Company intends to originate or
purchase Performing Mortgage Loans and to issue CMOs collateralized by such
loans. Moreover, the Company may issue CMOs collateralized by previously issued
CMOs or MBS in transactions known as "resecuritizations." During the period in
which the Company is acquiring mortgage loans for securitization, the Company is
likely to borrow funds secured by such loans pursuant to warehouse lines of
credit.
Interest Rate Management Techniques. The Company may engage in a variety
of interest rate management techniques for the purpose of managing the effective
maturity or interest rate of its assets. These techniques also may be used to
attempt to protect against declines in the market value of the Company's assets
resulting from general trends in debt markets. Any such transaction is subject
to risks, and may limit the potential earnings on the Company's investment in
real estate related assets. Such techniques may include puts and calls on
securities or indices of securities, Eurodollar futures contracts and options on
such contracts, interest rate swaps (the exchange of fixed-rate payments for
floating-rate payments), or other such transactions. Applicable REIT
qualification rules may limit the Company's ability to use these techniques,
except through a corporate subsidiary that is fully subject to corporate income
taxation. See "Federal Income Tax Considerations--Requirements for
Qualification--Income Tests."
YIELD CONSIDERATIONS RELATED TO THE COMPANY'S INVESTMENTS
Before purchasing any Real Estate Related Asset, the Company, with the
assistance of the Manager, will consider the expected yield of the asset and the
factors that may influence the yield actually obtained on such asset. These
considerations will affect the Company's decision whether to purchase such asset
and the price offered for such asset. Despite the Manager's substantial
experience in evaluating potential yields on Real Estate Related Assets, no
assurances can be given that the Company can make an accurate assessment of the
yield to be produced by an asset. Many factors beyond the control of the Company
are likely to influence the yield on the Company's investments.
Subordinated Interests
The yield to maturity on any class of Subordinated Interests will depend
upon, among other things, the price at which such class is purchased, the
interest rate for such class and the timing and aggregate amount of
distributions on the securities of such class, which in turn will depend
primarily on (i) whether there are any losses on the underlying loans allocated
to such class and (ii) whether and when there are any prepayments of the related
Mortgage Loans (which include both voluntary prepayments by the obligors on the
Mortgage Loans and prepayments resulting from liquidations due to defaults and
foreclosures).
The yield on the Subordinated Interests acquired by the Company will be
extremely sensitive to defaults on the mortgage loans comprising the Mortgage
Collateral for such securities and the severity of losses resulting from such
defaults, as well as the timing of such defaults and actual losses. The
Company's right as a holder of
29
<PAGE>
Subordinated Interests to distributions of principal and interest will be
subordinated to all of the more senior classes of securities. Actual losses on
the Mortgage Collateral (after default, where the proceeds from the foreclosure
sale of the real estate securing the loan are less than the unpaid balance of
the mortgage loan plus interest thereon and disposition costs) will be allocated
first to the Subordinated Interests prior to being allocated to the more senior
securities. The Subordinated Interests the Company intends to acquire with the
proceeds from this offering are subject to special risks, including a
substantially greater risk of loss of principal and non-payment of interest than
the more senior securities of such series.
If the Company acquires Subordinated Interests with an anticipated yield
as of the acquisition date based on an assumed rate of default and severity of
loss on the mortgage loans comprising the Mortgage Collateral that is lower than
the actual default rate and severity of loss, its yield will be lower than the
Company initially anticipated. In the event of substantial losses, the
Company may not recover the full amount (or, indeed, any) of its acquisition
cost. The timing of actual losses also will affect the Company's yield, even if
the rate of default and severity of loss are consistent with the Company's
anticipation. In general, the earlier a loss occurs, the greater the adverse
effect on the Company's yield. Additionally, the yield on CMBS and RMBS
collateralized by adjustable rate mortgage loans will vary depending on the
amount of and caps on the adjustments to the interest rates of such mortgage
loans. There can be no assurance as to the rate of delinquency, severity of loss
or the timing of any such losses on mortgage loans underlying Subordinated
Interests and thus as to the actual yield received by the Company.
The aggregate amount of distributions on the Company's Subordinated
Interests and their yield also will be affected by the amount and timing of
principal prepayments on the mortgage loans comprising the Mortgage Collateral.
To the extent that more senior tranches of Subordinated Interests are
outstanding, all prepayments of principal on the underlying mortgage loans
typically will be paid to the holders of more senior classes, and typically none
(or very little) will be paid to the Company during the first five years, and in
some cases a longer period, after the original issue date of the related
Subordinated Interests. This subordination of the Subordinated Interests to more
senior classes may affect adversely the yield on the Subordinated Interests
acquired by the Company. Even if there are no actual losses on the mortgage
loans, interest and principal payments are made on the more senior classes
before interest and principal are paid with respect to the Subordinated
Interests. Typically, interest deferred on Subordinated Interests is payable on
subsequent payment dates to the extent funds are available, but such deferral
does not itself bear interest. Such deferral of interest will reduce the actual
yield on the Company's Subordinated Interests.
Because the Company will acquire Subordinated Interests at a significant
discount from their outstanding principal balance, if the Company estimates the
yield on a security based on a faster rate of payment of principal than actually
occurs, the Company's yield on that security will be lower than the Company
anticipated. Whether and when there are any principal prepayments on the
Mortgage Loans will be affected by a variety of factors, including, without
limitation, the terms of the Mortgage Loans, the level of prevailing interest
rates, the availability of mortgage credit and economic, tax, legal and other
factors. Principal prepayments on Mortgage Loans secured by multifamily
residential and commercial properties are likely to be affected by lock-out
periods and prepayment premium provisions applicable to each of the Mortgage
Loans, and by the extent to which the Servicer is able to enforce such
prepayment premium provisions. Moreover, the yield to maturity on such
Subordinated Interests may also be affected by any extension of the scheduled
maturity dates of the Mortgage Loans as a result of modifications of the
Mortgage Loans by the Servicer, if permitted.
The timing of any prepayments on the mortgage loans underlying MBS owned
by the Company may significantly affect the Company's yield to maturity, even if
the average rate of principal payments is consistent with the Company's
expectation. In general, the earlier a prepayment of principal of the mortgage
loans, the greater the effect on an investor's yield. The effect on the
Company's yield of principal payments occurring at a rate higher
30
<PAGE>
(or lower) than the rate anticipated by the Company during any particular period
may not be fully offset by a subsequent like decrease (or increase) in the rate
of principal payments.
Because the rate and timing of principal payments on the underlying
mortgage loans will depend on future events and on a variety of factors, no
assurances can be given as to such rate or the timing of principal payments on
the Subordinated Interests the Company owns or acquires.
For a discussion of yield considerations relating to the Initial
Subordinated Interests, see Appendix B.
Distressed Real Properties.
The yield on the Company's investments in Real Properties, including
Distressed Real Properties, will depend upon the price that the Company pays for
such investments, the costs of capital improvements and other costs of managing
the properties, the level of rents and other income generated by the properties,
the length of time between acquisition and disposition and the price at which
the Company ultimately disposes of such properties. Although the Manager's
skills in managing a Distressed Real Property will be a primary influence on the
yield of such an investment, the yield may be adversely affected by factors
beyond the Company's control, such as adverse changes in economic conditions,
neighborhood characteristics and competition from other properties offering the
same or similar services. See "Risk Factors--Investment Activity Risks--General
Risks of Investing in Real Properties." The Company will rely on the substantial
experience of Ocwen Financial, made available to the Company through the
Management Agreement, in acquiring, managing and disposing of Distressed Real
Property, and in predicting and managing problems that arise. See "Management of
Operations." No assurances can be given, however, that the Company will be
successful in this endeavor.
Mortgage Loans
The yield to maturity on the Company's investment in Mortgage Loans will
depend, among other things, upon (i) whether there are any losses on such
Mortgage Loans and (ii) whether and when there are any prepayments of such
Mortgage Loans.
The yield to maturity on all Mortgage Loans will be sensitive to defaults
by the borrower and the severity of the losses that might result from such
defaults. Construction and Mezzanine Loans will be particularly sensitive to
defaults because they generally have higher loan to value ratios than
traditional mortgage loans. The borrower generally will have an equity
investment of 10% to 15% of total project costs, but if the borrower defaults
there can be no assurance that losses will not exceed such amount. Because the
borrower's equity may not be adequate to protect the Company's investment, the
Company's yield on such loans is particularly sensitive to defaults.
If the Company acquires a Mortgage Loan at a significant discount from
its outstanding principal balance and the Company estimates the yield on the
Mortgage Loan based on a faster rate of payment of principal than actually
occurs, the Company's yield on that Mortgage Loan will be lower than the
Company anticipated. Conversely, if the Company acquires a Mortgage Loan at a
significant premium to its outstanding principal balance, estimating the
yield on such Mortgage Loan based on a slower rate of payment of principal
than actually occurs, the Company's yield on that Mortgage Loan will be lower
than anticipated.
Whether and when there are any principal prepayments on the Mortgage Loans
will be affected by a variety of factors, including, without limitation, the
terms of the Mortgage Loans, the level of prevailing interest rates, the
availability of mortgage credit and economic, tax, legal and other factors.
Principal prepayments on Mortgage Loans secured by multifamily residential and
commercial properties are likely to be affected by lock-out periods and
prepayment premium provisions applicable to each of the Mortgage Loans, and by
the extent to which the Servicer is able to enforce such prepayment premium
provisions. Moreover, the yield to maturity on Mortgage
31
<PAGE>
Loans may also be affected by any extension of the scheduled maturity dates of
the Mortgage Loans as a result of modifications of the Mortgage Loans by the
servicer, if permitted.
IOs and Inverse IOs.
The Company's earnings resulting from its investments in IOs and Inverse
IOs will be extremely sensitive to changes in the prepayment rates on the
underlying mortgage loans, and investments in Inverse IOs will be very sensitive
to changes in the index used to calculate the interest on such classes.
The yield on IOs declines as prepayments on the underlying mortgage loans
increase. As market interest rates decline, prepayments on the underlying loans
typically increase as borrowers refinance their mortgage loans, although
commercial and multifamily loans typically have provisions that prohibit or
provide disincentives for prepayments for specified periods. Prepayment rates on
mortgage loans on which there is no prepayment penalty or prepayment "lock out"
period (as is typical for single-family residential loans) may be particularly
sensitive to changes in interest rates and, therefore, quite volatile. Faster
than anticipated prepayment rates can result in a loss of part or all of the
purchase price for the IO.
The Company intends to invest in Inverse IOs solely for the purpose of
hedging the Company's portfolio of IOs. In general, interest on an Inverse IO is
payable at a floating rate that varies inversely with (and often at a multiple
of) a specified index, such as the prime rate, one-month, three-month or
six-month LIBOR, or a U.S. Treasury rate. Generally, if the index exceeds a
certain level, the Inverse IO receives no payments. Moreover, Inverse IOs
generally have a cap on the interest rate payable on such class.
Investors in Inverse IOs are subject to the risk that higher than
anticipated levels of the index could result in actual yields to investors that
are significantly lower than the anticipated yields, and that the interest rate
on the class will be 0% at or above specified levels of the index. In addition,
the interest rate on an Inverse IO cannot exceed its specified maximum rate,
regardless of the level of the index. Further, high levels of the index
(especially in combination with fast prepayment rates on the Mortgage Loans) may
result in the failure of the Company to recover fully its investments in Inverse
IOs. For example, the holder of an Inverse IO with a per annum interest rate
equal to 8.5% minus one-month LIBOR, subject to a maximum rate of 8.5%, would
receive no interest if one-month LIBOR were to equal or exceed 8.5%. Moreover,
under no circumstance will such Inverse IO accrue interest at a rate greater
than 8.5% per annum.
Changes in the index may not correlate with changes in mortgage interest
rates. It is possible that lower prevailing mortgage interest rates (which would
be expected to result in faster prepayments) could occur concurrently with a
higher level of the index, thereby compounding the negative effects of each
separate factor on the yields to investors in the Inverse IOs. Conversely,
higher prevailing mortgage interest rates (which would be expected to result in
slower prepayments) could occur concurrently with a lower level of the index.
It is highly unlikely that the index will remain constant at any level.
The timing of changes in the level of the index may affect the actual yield to
the Company, even if the average level is consistent with the Company's
expectation. In general, the earlier a change in the level of the index, the
greater the effect on the Company's yield. As a result, the effect on the
Company's yield of the index level that is higher (or lower) than the rate
anticipated by the Company during earlier periods is not likely to be offset by
a later equivalent reduction (or increase).
For a discussion of yield considerations relating to the Initial IOs, see
Appendix B.
32
<PAGE>
INITIAL INVESTMENTS
General
The Company has contracted with Ocwen Financial to purchase the
Subordinated Interests and other classes of MBS described below (the "Initial
Investments") for an aggregate cash price equal to approximately $25,691,024
(___% of the expected net proceeds of this offering).
The purchase price for the Initial Investments was derived by considering
a number of factors, including the amount and timing of potential net cash flows
on the Initial Investments, the range of possible returns on such purchases and
the risks associated with such purchases, including the risk that the ultimate
return will be significantly affected by losses, if any, realized on the
underlying mortgage loans and other factors such as prepayment experience on the
underlying mortgage loans, that are not controlled by the Company. These factors
may result in a below market rate of return or a loss on the purchase price in
certain situations. See "Risk Factors--Risks from Ownership of Subordinated
Interests in Pools of Commercial and Residential Mortgage Loans."
Ocwen Financial acquired the Initial Investments in the fall of 1996 for
an aggregate purchase price of $25,542,988. Ocwen Financial will transfer the
Initial Investments to the Company for $25,691,024 and will realize a gain,
including hedging gains, of approximately $512,177 on the sale thereof to the
Company. The sale of the Initial Investments to the Company was not approved by
the Independent Directors, although the Company has obtained a Third Party
Fairness Opinion concerning the price of the Initial Investments.
RMSC, Series 1993-M1, Classes C, D, E, F, X-1, X-2 and X-3.
The Initial Investments include Ryland Mortgage Securities Corporation,
Multifamily Mortgage Participation Securities, Series 1993-M1, Class C, Class D,
Class E and Class F (the "RMSC Subordinated Interests"), and Classes X-1, X-2
and X-3 (the "RMSC IOs," and, together with the RMSC Subordinated Interests, the
"RMSC Investments"), which were issued on April 8, 1993. The securities to be
purchased represent 100% of the outstanding principal balance (or notional
balance) of each class purchased. The RMSC Investments were acquired by Ocwen
Financial on November 13, 1996 for a purchase price of $13,377,678 and will be
acquired by the Company for $13,202,045.
The RMSC Subordinated Interests are subordinated in right of payments of
principal and interest and protect the Class A and Class B Securities of such
series from losses on the related mortgage loans (the "RMSC Mortgage Loans").
The RMSC IOs are not entitled to payments of principal, but are entitled to
interest payments on their notional principal balances. The mortgage loans
underlying the RMSC Investments (the "RMSC Mortgage Loans"), are monthly-pay,
fixed rate, balloon mortgage loans secured by multifamily residential
properties. The RMSC Mortgage Loans had an initial aggregate principal balance
of $73,580,750 and an aggregate principal balance as of January 1, 1997, of
$22,958,439.
Until six months before the maturity of an RMSC Mortgage Loan, the loan
can be prepaid only upon payment of a prepayment premium, unless the prepayment
is made in connection with a condemnation or casualty. This requirement creates
an economic disincentive for the borrower to prepay a loan. Any prepayment
premiums will be distributed generally as excess interest to the more senior
classes of MBS, and not to the RMSC Subordinated Interests.
Additional information relating to the RMSC Investments and the RMSC
Mortgage Loans is set forth in Appendix A. A discussion of the yield
considerations relating to the RMSC Investments is set forth in Appendix B.
33
<PAGE>
DLJMAC, Series 1993-MF17, Classes B-2, B-3 and C-1, S-1, S-2
The Initial Investments also include DLJ Mortgage Acceptance Corporation,
Multi-family Mortgage Pass-Through Certificates, Series 1993-MF17, Class B-2,
Class B-3 and Class C-1 (the "DLJ Subordinated Interests"), and Class S-1 and
Class S-2 (the "DLJ IOs," and, together with the DLJ Subordinated Interests, the
"DLJ Investments,"), which were issued on November 12, 1993. The securities to
be purchased represent 100% of the outstanding principal balance (or notional
balance) of each class purchased, except that the Company is purchasing
$8,500,000 in principal balance of Class B-2, which represents approximately
64.8% of such class. The DLJ Investments were acquired by Ocwen Financial in
October and November of 1996 for a purchase price of $12,165,309 and will be
acquired by the Company for $12,488,978.
Each of the DLJ Subordinated Interests is subordinated in right of
payments of principal and interest and protects the more senior classes from
losses on the related mortgage loans (the "DLJ Mortgage Loans"). The DLJ IOs are
not entitled to payments of principal, but are entitled to interest payments on
their notional balances. The DLJ Mortgage Loans are monthly-pay, fixed rate,
balloon mortgage loans secured by multifamily residential properties. The DLJ
Mortgage Loans had an initial aggregate principal balance of $139,183,000 and an
aggregate principal balance as of January 1, 1997, of $125,910,832.
The terms of the DLJ Mortgage Loans prohibit voluntary prepayment during
the first five years after origination. Thereafter, the DLJ Mortgage Loans can
be prepaid in whole or in part, provided that prepayments during the sixth and
seventh years must be accompanied by a yield maintenance premium. After the
seventh year following origination, the DLJ Mortgage Loans can be prepaid in
whole or in part without any penalty or prepayment premium. The yield
maintenance premium requirement creates an economic disincentive for the
borrower to prepay a loan. Any prepayment premiums will be distributed generally
as excess interest to the more senior classes of MBS, and not to the DLJ
Subordinated Interests.
Additional information relating to the DLJ Investments and the DLJ
Mortgage Loans is set forth in Appendix A. A discussion of the yield
considerations relating to the DLJ Investments is set forth in Appendix B.
MANAGEMENT OF OPERATIONS
Ocwen Financial Corporation
Ocwen Financial is a diversified financial services company that is
primarily engaged in the acquisition and resolution of troubled loans and in
diverse mortgage lending activities. The activities of Ocwen Financial are
primarily conducted through Ocwen Federal Bank FSB (the "Bank"), formerly known
as "Berkeley Federal Bank & Trust FSB," a federally-chartered savings bank and a
wholly-owned subsidiary of Ocwen Financial. At December 31, 1996, Ocwen
Financial had $2.48 billion of total assets and stockholders' equity of $203.6
million.
Ocwen Financial is a Florida corporation, organized in February 1988 in
connection with its acquisition of the Bank. During the early 1990s, Ocwen
Financial sought to take advantage of the general decline in asset quality of
financial institutions in many areas of the country and the large number of
failed savings institutions during this period by establishing its distressed
loan acquisition and resolution program. This program commenced with the
acquisition of distressed single-family residential loans in 1991 and was
expanded to cover the acquisition and resolution of distressed multi-family
residential and commercial real estate loans in 1994.
Ocwen Financial is a registered savings and loan holding company subject
to regulation by the OTS. The Bank is subject to regulation by the OTS, as its
chartering authority, and by the FDIC as a result of its membership in the SAIF,
which insures the Bank's deposits up to the maximum extent permitted by law. The
Bank also is
34
<PAGE>
subject to certain regulation by the Federal Reserve Board and currently is a
member of the FHLB of New York, one of the 12 regional banks which comprise the
FHLB System.
Ocwen Financial's executive offices are located at 1675 Palm Beach Lakes
Boulevard, West Palm Beach, Florida 33401, and the telephone number of its
executive offices is (561) 681-8000.
The Manager
The Manager is a wholly-owned subsidiary of Ocwen Financial. The following
tables set forth certain information about the directors and executive officers
of the Manager. Each of the directors of the Manager is also a director of the
Company. Other than William C. Erbey and John R. Erbey, who are brothers, no
director or executive officer is related by blood, marriage or adoption to any
other director or executive officer of the Company or the Manager or any of
their respective affiliates.
Directors of the Manager
Name Age Position(s) Held
---- --- ----------------
William C. Erbey 47 Chairman, President and Chief Executive Officer
John R. Erbey 55 Managing Director and Secretary
Christine A. Reich 35 Managing Director and Chief Financial Officer
Executive Officers Who Are Not Directors
Name Age Position(s) Held
---- --- ----------------
John R. Barnes 54 Senior Vice President
Robert F. Koe 51 Managing Director
Stephen C. Wilhoit 35 Senior Vice President
The principal occupation for the last five years of each director of the
Manager, as well as some other information, is set forth below.
Mr. William C. Erbey has served as President and Chief Executive Officer
of Ocwen Financial since January 1988, and became Chairman of the Board in
September 1996. Mr. Erbey has served as Chairman of the Board of the Bank since
February 1988 and as President and Chief Executive Officer of the Bank since
June 1990. From 1983 to 1995, Mr. Erbey served as a Managing General Partner of
The Oxford Financial Group ("Oxford"), a private investment company, in charge
of merchant banking. From 1975 to 1983, he served at General Electric Credit
Corporation ("GECC") in various capacities, most recently as President and Chief
Operating Officer of General Electric Mortgage Insurance Corporation, a
subsidiary of General Electric Company engaged in the mortgage insurance
business. Mr. Erbey also served as Program General Manager of GECC's Commercial
Financial Services Department and its subsidiary Acquisition Funding
Corporation. He received a Bachelor of Arts in Economics from Allegheny College
and a Master of Business Administration from the Harvard Graduate School of
Business Administration.
Mr. John R. Erbey has served as a Managing Director of Ocwen Financial
since January 1993, and as Secretary of Ocwen Financial since June 1989, and
served as Senior Vice President of Ocwen Financial from June 1989 until January
1993. Mr. Erbey has served as a director of the Bank since 1990, as a Managing
Director of the Bank since May 1993 and as Secretary of the Bank since July
1989. Previously, he served as Senior Vice President of the Bank from June 1989
until May 1993. From 1971 to 1989, he was a member of the Law Department of
Westinghouse Electric Corporation and held various management positions,
including Associate
35
<PAGE>
General Counsel and Assistant Secretary from 1984 to 1989. Previously, he held
the positions of Assistant General Counsel of the Industries and International
Group and Assistant General Counsel of the Power Systems Group of Westinghouse.
Mr. Erbey is a graduate of Allegheny College and Vanderbilt University School of
Law.
Ms. Reich has served as a Managing Director of Ocwen Financial since June
1994 and as Chief Financial Officer of Ocwen Financial since January 1990. Ms.
Reich served as Senior Vice President of Ocwen Financial from January 1993 until
June 1994 and as Vice President from January 1990 until January 1993. Ms. Reich
has served as a director of the Bank since 1993, as a Managing Director of the
Bank since June 1994 and as Chief Financial Officer of the Bank since May 1990.
Ms. Reich served as Senior Vice President of the Bank from May 1993 to June 1994
and Vice President of the Bank from January 1990 to May 1993. From 1987 to 1990,
Ms. Reich served as an officer of another subsidiary of Ocwen Financial. Prior
to 1987, Ms. Reich was employed by KPMG Peat Marwick LLP, most recently in the
position of Manager. She is a graduate of the University of Southern California.
The background for the last five years of each executive officer of the
Company who is not a director is set forth below.
Mr. Barnes has served as Senior Vice President of Ocwen Financial and the
Bank since May 1994 and served as Vice President of the same from October 1989
to May 1994. Mr. Barnes was a Tax Partner in the firm of Deloitte Haskins &
Sells from 1986 to 1989 and in the firm of Arthur Young & Co. from 1979 to 1986.
Mr. Barnes was the Partner in Charge of the Cleveland Office Tax Department of
Arthur Young & Co. from 1979 to 1984. Mr. Barnes is a graduate of Ohio State
University.
Mr. Koe was elected a Managing Director of Ocwen Financial and the Bank on
July 1, 1996. Mr. Koe has served as a director of the Bank since 1994. Mr. Koe
was formerly Chairman, President and Chief Executive Officer of United States
Leather, Inc. ("USL"), which includes Pfister & Vogel Leather, Lackawanna
Leather, A.L. Gebhardt and Caldwell/Moser Leather. Prior to joining USL in 1990,
he was Vice Chairman of Heller Financial Inc., and served as a member of the
board of its parent company, Heller International Corp. ("Heller"), as well as
Heller Overseas Corp. Mr. Koe came to Heller in 1984 from General Electric
Capital Corp. ("GECC"), where he held positions which included Vice President
and General Manager of both Commercial Equipment Financing and Commercial
Financial Services, and President of Acquisition Funding Corp. Before joining
GECC, Mr. Koe held various responsibilities with its parent, the General
Electric Company, from 1967 to 1975. Mr. Koe is a graduate of Kenyon College.
Mr. Wilhoit has served as Senior Vice President of Ocwen Financial and the
Bank since May 1994. He served as Vice President of Ocwen Financial from May
1990 to May 1994 and served as Vice President of the Bank from May 1992 to May
1994. From 1986 to 1990, he was an attorney with the Atlanta law firm of Trotter
Smith & Jacobs. Mr. Wilhoit is a graduate of the University of Virginia and Wake
Forest University School of Law.
Officers, directors and other personnel have significant experience in
mortgage finance and the operation of commercial real estate; however, none has
previously managed a REIT. See "Risk Factors-Newly Organized Corporation."
The Management Agreement
The Company will enter into the Management Agreement with the Manager for
an initial term expiring on December 31, 1998. Thereafter, successive
extensions, each for a period not to exceed one year, may be made by agreement
between the Company and the Manager, subject to the affirmative vote of a
majority of the Independent Directors. The Company may terminate, or decline to
extend the term of, the Management Agreement without cause at any time upon 60
days written notice by a majority vote of the Independent Directors or by a vote
of the holders of a majority of the outstanding shares of Common Stock;
provided, that a termination fee, equal to
36
<PAGE>
the sum of the base management fee and incentive management fee earned during
the twelve months preceding such termination, will be due. In addition, the
Company has the right to terminate the Management Agreement upon the occurrence
of certain specified events, including a material breach by the Manager of any
provision contained in the Management Agreement, without the payment of any
termination fee. If the Management Agreement is terminated for any reason, Ocwen
Financial will have registration rights with respect to its Common Stock.
The Manager at all times will be subject to the supervision of the
Company's Board of Directors and will have only such functions and authority as
the Company may delegate to it. The Manager will be responsible for the
day-to-day operations of the Company and will perform such services and
activities relating to the assets and operations of the Company as may be
appropriate, including (or cause to be performed):
(i) serving as the Company's consultant with respect to formulation
of investment criteria and preparation of policy Guidelines by the Board
of Directors;
(ii) representing the Company in connection with the purchase and
commitment to purchase assets, the sale and commitment to sell assets, and
the maintenance and administration of its portfolio of assets;
(iii) furnishing reports and statistical and economic research to
the Company regarding the Company's activities and the services performed
for the Company by the Manager;
(iv) monitoring and providing to the Board of Directors on an
ongoing basis price information and other data, obtained from certain
nationally recognized dealers that maintain markets in assets identified
by the Board of Directors from time to time, and providing data and advice
to the Board of Directors in connection with the identification of such
dealers;
(v) providing the executive and administrative personnel office
space and services required in rendering services to the Company;
(vi) administering the day-to-day operations of the Company and
performing and supervising the performance of such other administrative
functions necessary in the management of the Company as may be agreed upon
by the Manager and the Board of Directors, including the collection of
revenues and the payment of the Company's debts and obligations and
maintenance of appropriate computer services to perform such
administrative functions;
(vii) communicating on behalf of the Company with the holders of any
equity or debt securities of the Company as required to satisfy the
reporting and other requirements of any governmental bodies or agencies
and to maintain effective relations with such holders;
(viii) to the extent not otherwise subject to an agreement executed
by the Company, designating a servicer for mortgage loans sold to the
Company and arranging for the monitoring and administering of such
servicers;
(ix) counseling the Company in connection with policy decisions to
be made by the Board of Directors;
(x) engaging in hedging activities on behalf of the Company,
consistent with the Company's status as a REIT and with the Guidelines;
(xi) upon request by and in accordance with the directions of the
Board of Directors, investing or reinvesting any money of the Company; and
37
<PAGE>
(xii) providing accounting, tax and REIT compliance services for the
Company.
Portfolio Management. The Manager will perform portfolio management
services on behalf of OAIC and the Operating Partnership pursuant to the
Management Agreement with respect to the Company's investments. Such services
will include, but not be limited to, consulting the Company on purchase and sale
opportunities, collection of information and submission of reports pertaining to
the Company's assets, interest rates, and general economic conditions, periodic
review and evaluation of the performance of the Company's portfolio of assets,
acting as liaison between the Company and banking, mortgage banking, investment
banking and other parties with respect to the purchase and disposition of
assets, and other customary functions related to portfolio management. The
Manager may enter into subcontracts with other parties, including its
affiliates, to provide any such services to the Company.
Monitoring Servicing. The Manager will perform monitoring services on
behalf of the Company pursuant to the Management Agreement with respect to the
Company's portfolio of Special Servicing rights. Such monitoring services will
include, but not be limited to, the following activities: negotiating Special
Servicing agreements; serving as the Company's consultant with respect to the
Special Servicing of mortgage loans; collection of information and submission of
reports pertaining to the mortgage loans and to moneys remitted to the Manager
or the Company; acting as a liaison between the servicers of the mortgage loans
and the Company and working with servicers to the extent necessary to improve
their servicing performance; with respect to mortgage loans for which the
Company is Special Servicer, periodic review and evaluation of the performance
of each servicer to determine its compliance with the terms and conditions of
the related servicing agreement; review of and recommendations as to fire
losses, easement problems and condemnation, delinquency and foreclosure
procedures with regard to mortgage loans; review of servicers' delinquency,
foreclosures and other reports on mortgage loans; supervising claims filed under
any mortgage insurance policies; and enforcing the obligation of any servicer to
repurchase mortgage loans. The Manager may enter into subcontracts with other
parties, including its affiliates, to provide any such services for the Manager.
Management Fees
The Manager will receive a quarterly base management fee equal to 1% of
the Average Invested Assets of the Company for such quarter. The term "Average
Invested Assets" for any period means the average of the aggregate book value of
the assets of the Company, including the assets of all of its direct and
indirect subsidiaries, before reserves for depreciation or bad debts or other
similar noncash reserves, computed by taking the daily average of such values
during such period. The Manager will not receive any management fee for the
period prior to the sale of the shares of Common Stock offered hereby. The base
management fee is intended to compensate the Manager for its costs in providing
management services to the Company. The Board of Directors of the Company may
adjust the base management fee in the future if necessary to align the fee more
closely with the actual costs of such services.
The Manager shall be entitled to receive incentive compensation for each
fiscal quarter in an amount equal to the product of (A) 25% of the dollar amount
by which (1)(a) Funds from Operations (before the incentive fee) of the Company
per weighted average number of shares of Common Stock outstanding plus (b) gains
(or minus losses) from debt restructuring and sales of property per weighted
average number of shares of Common Stock, exceed (2) an amount equal to (a) the
weighted average of the price per share at the initial offering and the prices
per share at any secondary offerings by the Company multiplied by (b) the
Ten-Year U.S. Treasury Rate plus five percent multiplied by (B) the weighted
average number of shares of Common Stock outstanding during such period. "Funds
from Operations" as defined by the National Association of Real Estate
Investment Trusts ("NAREIT") means net income (computed in accordance with GAAP)
excluding gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization on real estate assets, and after adjustments for
unconsolidated partnerships and joint ventures. Funds from Operations does not
represent cash generated from operating activities in accordance with GAAP and
should not be considered as an alternative to net income as an indication of the
38
<PAGE>
Company's performance or to cash flows as a measure of liquidity or ability to
make distributions. As used in calculating the Manager's compensation, the term
"Ten Year U.S. Treasury Rate" means the arithmetic average of the weekly average
yield to maturity for actively traded current coupon U.S. Treasury fixed
interest rate securities (adjusted to constant maturities of ten years)
published by the Federal Reserve Board during a quarter, or, if such rate is not
published by the Federal Reserve Board, any Federal Reserve Bank or agency or
department of the federal government selected by the Company. If the Company
determines in good faith that the Ten Year U.S. Treasury Rate cannot be
calculated as provided above, then the rate shall be the arithmetic average of
the per annum average yields to maturities, based upon closing asked prices on
each business day during a quarter, for each actively traded marketable U.S.
Treasury fixed interest rate security with a final maturity date not less than
eight nor more than twelve years from the date of the closing asked prices as
chosen and quoted for each business day in each such quarter in New York City by
at least three recognized dealers in U.S. government securities selected by the
Company.
The ability of the Company to generate Funds from Operations in excess of
the Ten Year U.S. Treasury Rate, and of the Manager to earn the incentive
compensation described in the preceding paragraph, is dependent upon the level
and volatility of interest rates, the Company's ability to react to changes in
interest rates and to utilize successfully the operating strategies described
herein, and other factors, many of which are not within the Company's control.
Because the Manager's employees will perform certain due diligence tasks
that purchasers of real estate (including managers of REITs) typically hire
outside consultants to perform, the Manager will be reimbursed for (or charge
the Company directly for) the Manager's out of pocket costs in performing such
due diligence on assets purchased or considered for purchase by the Company.
Moreover, the Manager will track the time its employees spend in performing such
due diligence tasks and will be entitled to reimbursement for the allocated
portion of the salary and benefits of such employees.
Expenses. The Company does not expect to maintain an office or to employ
full-time personnel. Instead it expects to rely on the facilities and resources
of the Manager to conduct its operations, and it will be required to pay
expenses of the Manager attributable to the operations of the Company. Expense
reimbursement will be made quarterly.
Payment of Fees and Expenses. The management fees are payable in arrears.
The Manager's base and incentive fees and due diligence and other expenses shall
be calculated by the Manager within 45 days after the end of each quarter, and
such calculation shall be promptly delivered to the Company. The Company is
obligated to pay such fees and expenses within 60 days after the end of each
fiscal quarter.
Incentive Options
The Company has adopted an incentive option plan (the "Option Plan"),
which provides for options to purchase limited partnership interests ("Units")
in the Operating Partnership (or, at the election of the Company, shares of
Common Stock). Once the options are exercised, the Units may be exchanged on a
one-for-one basis for shares of Common Stock (or, at the election of the
Company, for an equivalent amount of cash). See "Operating
Partnership--Redemption Rights." The purpose of the Option Plan is to provide a
means of performance-based compensation in order to provide incentive for the
Manager to enhance the value of OAIC's stock.
As of the date of this Prospectus, the Company has granted to the
Manager all of the options under the Option Plan, representing the right to
acquire 1,437,500 Units (1,625,000 assuming the Underwriters exercise their
over-allotment option), at an exercise price per Unit equal to the initial
offering price of the Common Stock. If the options could be exercised
immediately and converted into shares of Common Stock, they would represent
10% of the number of shares outstanding after completion of this offering.
However, the options cannot be exercised
39
<PAGE>
immediately. One quarter of the Manager's options are exercisable on each of the
first four anniversaries of the Closing Date. The options terminate on the tenth
anniversary of the Closing Date.
The Board of Directors may amend the Option Plan any time, except that
approval by OAIC's stockholders is required for any amendment that increases the
aggregate number of Units that may be issued pursuant to the Option Plan,
increases the maximum number of Units that may be issued to any person, changes
the class of persons eligible to receive such options, modifies the period
within which the options may be granted, modifies the period within which the
options may be exercised or the terms upon which options may be exercised, or
increases the material benefits accruing to the participants under the plan.
Unless previously terminated by the Board of Directors, the Option Plan will
terminate ten years from the Closing Date.
Limits of Responsibility
Pursuant to the Management Agreement, the Manager will not assume any
responsibility other than to render the services called for thereunder and will
not be responsible for any action of the Company's Board of Directors in
following or declining to follow its advice or recommendations. The Manager, its
directors and its officers will not be liable to the Company, any subsidiary of
the Company, the Independent Directors, OAIC's stockholders or any subsidiary's
stockholders for acts performed in accordance with and pursuant to the
Management Agreement, except by reason of acts constituting bad faith, willful
misconduct, gross negligence or reckless disregard of their duties under the
Management Agreement. The Company has agreed to indemnify the Manager, its
directors and its officers with respect to all expenses, losses, damages,
liabilities, demands, charges and claims arising from acts of the Manager not
constituting bad faith, willful misconduct, gross negligence or reckless
disregard of duties, performed in good faith in accordance with and pursuant to
the Management Agreement.
The Management Agreement does not limit or restrict the right of the
Manager or any of its officers, directors, employees or Affiliates from engaging
in any business or rendering services of any kind to any other person, including
the purchase of, or rendering advice to others purchasing, assets that meet the
Company's policies and criteria. The Manager has agreed, however, to give the
Company an exclusive right to invest in Subordinated Interests and Distressed
Real Properties, subject to certain exceptions. See "Risk Factors--Potential
Conflicts of Interest" and "--Certain Relationships; Conflicts of Interest."
Certain Relationships; Conflicts of Interest
The Company, on the one hand, and the Manager and its affiliates, on the
other, will enter into a number of relationships other than those governed by
the Management Agreement, some of which may give rise to conflicts of interest.
Moreover, two of the members of the Board of Directors of the Company and all of
its officers are also employed by the Manager or its affiliates.
The relationships between the Company, on the one hand, and the Manager
and its affiliates, on the other, will be governed by policy Guidelines to be
approved by a majority of the Independent Directors. The Guidelines establish
certain parameters for the operations of the Company, including quantitative and
qualitative limitations on the Company's assets that may be acquired. The
Guidelines are to assist and instruct the Manager and to establish restrictions
applicable to transactions with affiliates of the Manager. Transactions with
affiliates of the Manager that fall within the provisions of the Guidelines need
not be specifically approved by a majority of the Independent Directors. The
Independent Directors will, however, review the Company's transactions on a
quarterly basis to ensure compliance with the Guidelines.
Although the Independent Directors will review the Guidelines periodically
and will monitor compliance with those Guidelines, investors should be aware
that, in conducting this review, the Independent Directors will rely primarily
on information provided to them by the Manager. The Manager will obtain Third
Party Fairness Opinions concerning the price for Subordinated Interests and
appraisals for Distressed Real Properties purchased from the
40
<PAGE>
Manager or its affiliates, but the Independent Directors are likely to rely
substantially on information and analysis provided by the Manager to evaluate
the Company's Guidelines, compliance therewith and other matters relating to the
Company's investments.
The Management Agreement does not limit or restrict the right of the
Manager or any of its officers, directors, employees or affiliates from engaging
in any business or rendering services of any kind to any other person, including
the purchase of or rendering advice to others purchasing real estate related
assets that meet the Company's policies and criteria. The Manager and Ocwen
Financial have agreed, however, that if either learns of any opportunity to
invest in Distressed Real Property, the Company will have an exclusive right to
that investment, unless (i) the investment is not well-suited for the Company,
(ii) the Company is unable financially to take advantage of the opportunity, or
(iii) the Distressed Real Property is part of a pool of real estate and loans.
From time to time, mortgage lenders offer for sale large pools of mortgage
loans and REO Properties pursuant to a competitive bidding process. In such a
case, Ocwen Financial may, but is not required to, invite the Company to submit
a joint bid for such pool. In the alternative, Ocwen Financial may choose an
unaffiliated entity with which to submit a joint bid for the pool, but Ocwen
Financial would take title only to the mortgage loans and not the real estate.
The Manager and Ocwen Financial also have agreed to give the Company an
exclusive right to purchase Subordinated Interests that become available unless
(i) the investment is not well-suited for the Company, (ii) the Company is
unable financially to take advantage of the opportunity, or (iii) the mortgage
loans collateralizing the MBS were owned by an affiliate of Ocwen Financial, in
which case an affiliate of Ocwen Financial may choose to retain the Subordinated
Interest.
Ocwen Financial has no obligation to reveal to the Company any business
opportunities to invest in Distressed Mortgage Loans or other real estate
related assets (other than Distressed Real Properties and Subordinated
Interests).
The Company will purchase the Initial Investments from Ocwen Financial
for an aggregate purchase price of approximately $25,691,024 which will
result in a gain, including hedging gains, to Ocwen Financial of
approximately $512,177. This transaction will not be approved by the
Company's Independent Directors, but a Third Party Fairness Opinion regarding
the purchase price for the assets will be obtained.
The Company may purchase additional assets from the Manager and its
Affiliates in the future. Any such purchases will be in accordance with the
Guidelines to be approved by a majority of the Company's Independent Directors.
The terms of a particular transaction, however, will not be approved in advance
by the Company's Board of Directors. The Independent Directors will review any
such transactions quarterly to ensure compliance with the Guidelines, but in
doing so they, by necessity, will rely primarily on information and analysis
provided to them by the Manager.
Ocwen Financial will purchase 1,875,000 shares of Common Stock on the
Closing Date at a price equal to the public offering price. No underwriting
discounts or commissions will be charged to Ocwen Financial. This purchase will
result in Ocwen Financial's ownership of approximately 15% of the total shares
offered hereby, exclusive of the Underwriters' over-allotment option. The
Manager also has received stock options pursuant to the Company's Option Plan.
See "Management of Operations-Incentive Options."
Ocwen Financial will retain its shares of the Company for at least two
years after the Company's initial public offering of shares of Common Stock, but
may dispose of its Shares any time thereafter in accordance with the provisions
of Rule 144 of the Securities Act of 1933. Notwithstanding the foregoing, if the
Company terminates the Management Agreement, Ocwen Financial may require the
Company to register the Manager's shares of Common Stock with the Commission
(and under applicable state law).
41
<PAGE>
The market in which the Company expects to purchase assets is
characterized by rapid evolution of products and services and, thus, there may
in the future be relationships between the Company, the Manager, and affiliates
of the Manager in addition to those described herein.
THE COMPANY
OAIC was incorporated in the Commonwealth of Virginia in January 1997 and
will elect to be taxed as a REIT under the Code. The principal executive offices
of the Company are located at 1675 Palm Beach Lakes Boulevard, West Palm Beach,
Florida 33401. The Company's telephone number is (561) 681-8000.
Directors and Executive Officers
The following tables set forth certain information about the directors and
executive officers of OAIC.
Directors of OAIC
Name Age Position(s) Held
---- --- ----------------
William C. Erbey 47 Chairman and Chief Executive Officer
Christine A. Reich 35 President and Chief Financial Officer
[Add Independent Directors]
Executive Officers Who Are Not Directors
John R. Barnes 54 Senior Vice President
John R. Erbey 55 Managing Director and Secretary
Robert F. Koe 51 Managing Director
Stephen C. Wilhoit 35 Senior Vice President
The principal occupation for the last five years of each Independent
Director of the Company, as well as some other information, is set forth below.
[Insert Information on Independent Directors]
For biographical information on Messrs. William C. Erbey, Barnes, John R.
Erbey, Koe, and Wilhoit and Ms. Reich, see "Management of Operations-The
Manager."
42
<PAGE>
All directors will be elected at each annual meeting of OAIC's
stockholders for a term of one year, and hold office until their successors are
elected and qualified. All officers serve at the discretion of the Board of
Directors. Although the Company may have salaried employees, it currently does
not have employees and does not expect to employ anyone as long as the
Management Agreement is in force. The Company will pay an annual director's fee
to each Independent Director equal to $20,000, with no additional fee to be paid
for the first four meetings of the Board of Directors. Each Independent Director
will be paid a fee of $1,000 for each additional meeting of the Board of
Directors attended in person by each Independent Director. All Directors will be
reimbursed for their costs and expenses in attending all meetings of the Board
of Directors. Affiliated directors will not be separately compensated by the
Company.
Directors and executive officers of OAIC will be required to devote only
so much of their time to the Company's affairs as is necessary or required for
the effective conduct and operation of the Company's business. Because the
Management Agreement provides that the Manager will assume principal
responsibility for managing the affairs of the Company, the officers of the
Company, in their capacities as such, are not expected to devote substantial
portions of their time to the affairs of the Company. However, in their
capacities as officers or employees of the Manager, or its affiliates, they will
devote such portion of their time to the affairs of the Manager as is required
for the performance of the duties of the Manager under the Management Agreement.
The Bylaws of OAIC will provide that, except in the case of a vacancy, the
majority of the members of the Board of Directors and of any committee of the
Board of Directors will at all times after the issuance of the shares offered
hereby be Independent Directors. Vacancies occurring on the Board of Directors
among the Independent Directors will be filled by the vote of a majority of the
directors, including a majority of the Independent Directors.
The Articles of Incorporation of OAIC provide for the indemnification of
the directors and officers of OAIC to the fullest extent permitted by Virginia
law. Virginia law generally permits indemnification of directors and officers
against certain costs, liabilities and expenses that any such person may incur
by reason of serving in such positions as long as such person acts in good faith
and in a manner reasonably believed by him (i) to be in the best interests of
the Company, when acting in his official capacity, and (ii) not opposed to the
best interests of the Company in all other cases. Moreover, in the case of any
criminal proceedings, such person must have had no reasonable cause to believe
the conduct was unlawful. Virginia law also generally permits a corporation to
limit or eliminate the damages that may be assessed against a director or
officer of a Virginia corporation in an action by, or in the right of, the
corporation or its stockholders. OAIC has included provisions in its Articles of
Incorporation that eliminate the liabilities of directors and officers in
certain actions brought by or on behalf of stockholders. See "Description of
Common Stock-Certain Charter Provisions." Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers or persons controlling the Company pursuant to the foregoing
provisions, the Company has been informed that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is therefore unenforceable.
DISTRIBUTION POLICY
In order to avoid corporate income taxation on the earnings that it
distributes, OAIC must distribute to its stockholders an amount at least equal
to (i) 95% of its REIT taxable income (determined before the deduction for
dividends paid and excluding any net capital gain) plus (ii) 95% of the excess
of its net income from foreclosure property over the tax imposed on such income
by the Code less (iii) any excess noncash income (as determined under the Code).
See "Federal Income Tax Considerations." The actual amount and timing of
distributions, however, will be at the discretion of the Board of Directors and
will depend upon the financial condition of OAIC
43
<PAGE>
in addition to the requirements of the Code. It is anticipated that the first
distribution will be made after the first full fiscal quarter following the
completion of this offering.
Subject to the distribution requirements referred to in the immediately
preceding paragraph, OAIC intends, to the extent practicable, to invest
substantially all of the principal from repayments, sales and refinancings of
the Company's assets in Distressed Real Property and Subordinated Interests.
OAIC may, however, under certain circumstances, make a distribution of
principal. Such distributions, if any, will be made at the discretion of OAIC's
Board of Directors.
It is anticipated that distributions generally will be taxable as ordinary
income to non-exempt stockholders of OAIC, although a portion of such
distributions may be designated by OAIC as long-term capital gain or may
constitute a return of capital. OAIC will furnish annually to each of its
stockholders a statement setting forth distributions paid during the preceding
year and their federal income tax status. For a discussion of the federal income
tax treatment of distributions by OAIC and certain adverse tax consequences for
stockholders associated with REMIC Residual Interests held by the Company, see
"Federal Income Tax Considerations-Taxation of the Company" and "-Taxation of
Taxable U.S. Stockholders."
CAPITALIZATION
The capitalization of the Company, as of February 12, 1997, and as
adjusted to reflect the sale of the shares of Common Stock offered hereby, is as
follows:
As
Actual Adjusted(1)
------ -----------
Common Stock, par value $.01 $ 1 $
Authorized- 200,000,000 shares
Outstanding-100 shares, 14,375,000 shares, as adjusted
Additional Paid-in Capital 1,599
------ ------
Total $1,600 $
====== ======
- ----------
(1) Includes 1,875,000 shares of Common Stock to be purchased by Ocwen Financial
after deducting offering and organizational expenses estimated to be $__________
payable by the Company, and assuming no exercise of the Underwriters'
over-allotment option to purchase up to an additional 1,875,000 shares of Common
Stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF LIQUIDITY AND CAPITAL RESOURCES
OAIC has been organized and will elect to qualify as a REIT under the Code
and, as such, anticipates distributing annually at least 95% of its taxable
income, subject to certain adjustments. Cash for such distributions is expected
to be generated from the Company's operations, although the Company also may
borrow funds to make distributions. The Company's revenues will be derived from
(i) ownership of Distressed Real Properties; (ii) ownership of Subordinated
Interests; (iii) ownership of Other Real Estate Related Assets; and (iv)
interest and revenues from other (generally short-term) investments. See
"Distribution Policy" and "Federal Income Tax Considerations."
The principal sources of the Company's funds will be the proceeds of the
offering made by this Prospectus, borrowings under lines of credit to be
arranged on behalf of the Company, additional bank borrowings, commercial
44
<PAGE>
paper borrowings, mortgage loans on the Company's real estate and future equity
offerings. Management believes that the net proceeds of this offering, combined
with the cash flow from operations and borrowings, will be sufficient to enable
the Company to meet its anticipated liquidity and capital requirements. See
"Operating Policies and Strategies" and "Use of Proceeds."
DESCRIPTION OF CAPITAL STOCK
General
The Articles of Incorporation provide that OAIC may issue up to
225,000,000 shares of capital stock, consisting of 200,000,000 shares of Common
Stock, $0.01 par value per share, and 25,000,000 shares of preferred stock,
$0.01 par value per share ("Preferred Stock"). Upon completion of this offering,
14,375,000 shares of Common Stock will be issued and outstanding, 1,437,500
shares of Common Stock will be reserved for issuance upon redemption of Units
and no Preferred Stock will be issued and outstanding.
Common Stock
All shares of Common Stock will be duly authorized, fully paid and
nonassessable upon the Closing. Subject to the preferential rights of any other
shares or series of shares of capital stock, holders of Common Stock are
entitled to receive dividends if and when authorized and declared by the Board
of Directors of OAIC out of assets legally available therefor and to share
ratably in the assets of OAIC legally available for distribution to its
stockholders in the event of its liquidation, dissolution or winding-up after
payment of, or adequate provision for, all known debts and liabilities of OAIC.
OAIC intends to pay quarterly dividends.
Each outstanding share of Common Stock entitles the holder to one vote on
all matters submitted to a vote of stockholders, including the election of
directors, and, except as otherwise required by law or except as provided with
respect to any other class or series of shares of capital stock, the holders
Common Stock will possess the exclusive voting power. There is no cumulative
voting in the election of directors, which means in all elections of directors,
each holder of Common Stock has the right to cast one vote for each share of
stock for each candidate.
Preferred Stock
Preferred Stock may be issued from time to time, in one or more series, as
authorized by the Board of Directors. Because the Board of Directors has the
power to establish the preferences and rights of each class or series of
Preferred Stock, the Board of Directors may afford the holders of any series or
class of Preferred Stock preferences, powers and rights, voting or otherwise,
senior to the rights of the holders of Common Stock. The Board could authorize
the issuance of Preferred Stock with terms and conditions which could have the
effect of discouraging a takeover or other transaction which holders of some, or
a majority, of the shares of Common Stock might believe to be in their best
interests or in which holders of some, or a majority, of the shares of Common
Stock might receive a premium for their shares of Common Stock over the then
market price of such shares of Common Stock. As of the date hereof, no shares of
Preferred Stock are outstanding.
Restrictions on Transfer
For OAIC to qualify as a REIT under the Code, it must meet certain
requirements concerning the ownership of its outstanding shares of capital
stock. Specifically, not more than 50% in value of OAIC's outstanding capital
stock may be owned, directly or indirectly, by five or fewer individuals (as
defined in the Code to include certain entities) during the last half of a
taxable year, and OAIC must be beneficially owned by 100 or
45
<PAGE>
more persons during at least 335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year. See "Federal Income Tax
Considerations - Requirements for Qualification."
Because the Board of Directors believes it is essential for OAIC to
continue to qualify as a REIT, the Articles of Incorporation, subject to certain
exceptions and waivers described below, provide that no person may own, or be
deemed to own by virtue of the attribution provisions of the Code, more than (i)
8.7% (or, with respect to Ocwen Financial, 15%) of the number of outstanding
shares of Common Stock, or (ii) 9.9% of the number of outstanding shares of any
series of Preferred Stock (the "Ownership Limitation").
Subject to certain exceptions described below, any purported transfer of
shares of Common Stock or Preferred Stock that would (i) result in any person
owning, directly or indirectly, shares of Common Stock or Preferred Stock in
excess of the Ownership Limitation, (ii) result in the shares of Common Stock
and Preferred Stock, collectively, being owned by fewer than 100 persons
(determined without reference to any rules of attribution), (iii) result in OAIC
being "closely held" within the meaning of section 856(h) of the Code, or (iv)
cause OAIC to own, actually or constructively, 10% or more of the ownership
interests in a tenant of the Company's real property, within the meaning of
section 856(d)(2)(B) of the Code, will be designated as "Shares-in-Trust" and
transferred automatically to a trust (the "Trust") effective on the day before
the purported transfer of such shares of Common Stock or Preferred Stock. The
record holder of the shares of Common Stock or Preferred Stock that are
designated as Shares-in-Trust (the "Prohibited Owner") will be required to
submit such number of shares of Common Stock or Preferred Stock to OAIC for
registration in the name of the Trust. The trustee of the Trust (the "Trustee")
will be designated by OAIC, but will not be affiliated with OAIC. The
beneficiary of the Trust (the "Beneficiary") will be one or more charitable
organizations that are named by OAIC.
Shares-in-Trust will remain issued and outstanding shares of Common Stock
or Preferred Stock and will be entitled to the same rights and privileges as all
other shares of the same class or series. The Trustee will receive all dividends
and distributions on the Shares-in-Trust and will hold such dividends or
distributions in trust for the benefit of the Beneficiary. The Trustee will vote
all Shares-in-Trust. The Trustee will designate a permitted transferee of the
Shares-in-Trust, provided that the permitted transferee (i) purchases such
Shares-in-Trust for valuable consideration and (ii) acquires such
Shares-in-Trust without such acquisition resulting in a transfer to another
Trust.
The Prohibited Owner with respect to Shares-in-Trust will be required to
repay to the Trustee the amount of any dividends or distributions received by
the Prohibited Owner (i) that are attributable to any Shares-in-Trust and (ii)
the record date of which was on or after the date that such shares became
Shares-in-Trust. The Prohibited Owner generally will receive from the Trustee
the lesser of (i) the price per share such Prohibited Owner paid for the shares
of Common Stock or Preferred Stock that were designated as Shares-in-Trust (or,
in the case of a gift or devise, the Market Price (as defined below) per share
on the date of such transfer) or (ii) the price per share received by the
Trustee from the sale of such Shares-in-Trust. Any amounts received by the
Trustee in excess of the amounts to be paid to the Prohibited Owner will be
distributed to the Beneficiary.
The Shares-in-Trust will be deemed to have been offered for sale to OAIC,
or its designee, at a price per share equal to the lesser of (i) the price per
share in the transaction that created such Shares-in-Trust (or, in the case of a
gift or devise, the Market Price per share on the date of such transfer) or (ii)
the Market Price per share on the date that OAIC, or its designee, accepts such
offer. OAIC will have the right to accept such offer for a period of ninety days
after the later of (i) the date of the purported transfer which resulted in such
Shares-in-Trust or (ii) the date OAIC determines in good faith that a transfer
resulting in such Shares-in-Trust occurred.
"Market Price" on any date shall mean the average of the Closing Price (as
defined below) for the five consecutive Trading Days (as defined below) ending
on such date. The "Closing Price" on any date shall mean the average of the high
bid and low asked prices in the over-the-counter market, as reported by The
Nasdaq Stock
46
<PAGE>
Market. "Trading Day" shall mean any day other than a Saturday, a Sunday or a
day on which banking institutions in the State of New York are authorized or
obligated by law or executive order to close.
Any person who acquires or attempts to acquire shares of Common Stock or
Preferred Stock in violation of the foregoing restrictions, or any person who
owned shares of Common Stock or Preferred Stock that were transferred to a
Trust, will be required (i) to give immediately written notice to OAIC of such
event and (ii) to provide to OAIC such other information as it may request in
order to determine the effect, if any, of such transfer on OAIC's status as a
REIT.
All persons who own, directly or indirectly, more than 5% (or such lower
percentages as required pursuant to regulations under the Code) of the
outstanding shares of Common Stock and Preferred Stock must, within 30 days
after January 1 of each year, provide to OAIC a written statement or affidavit
stating the name and address of such direct or indirect owner, the number of
shares of Common Stock and Preferred Stock owned directly or indirectly, and a
description of how such shares are held. In addition, each direct or indirect
stockholder shall provide to OAIC such additional information as OAIC may
request in order to determine the effect, if any, of such ownership on OAIC's
status as a REIT and to ensure compliance with the Ownership Limitation.
The Ownership Limitation generally will not apply to the acquisition of
shares of Common Stock or Preferred Stock by an underwriter that participates in
a public offering of such shares. In addition, the Board of Directors, upon
receipt of a ruling from the Service or an opinion of counsel and upon such
other conditions as the Board of Directors may direct, may exempt a person from
the Ownership Limitation under certain circumstances. The foregoing restrictions
will not be removed until (i) the Board of Directors determines that it is no
longer in the best interests of OAIC to attempt to qualify, or to continue to
qualify, as a REIT and (ii) there is an affirmative vote of two-thirds of the
number of shares of Common Stock and Preferred Stock entitled to vote on such
matter at a regular or special meeting of the stockholders of OAIC.
All certificates representing shares of Common Stock or Preferred Stock
will bear a legend referring to the restrictions described above.
The Ownership Limitation could have the effect of discouraging a takeover
or other transaction in which holders of some, or a majority, of shares of
Common Stock might receive a premium for their shares of Common Stock over the
then prevailing market price or which such holders might believe to be otherwise
in their best interest.
Dividend Reinvestment Plan
OAIC may implement a dividend reinvestment plan whereby stockholders may
automatically reinvest their dividends in OAIC's Common Stock. Details about any
such plan would be sent to OAIC's stockholders following adoption thereof by the
Board of Directors.
Reports to Stockholders
OAIC will furnish its stockholders with annual reports containing audited
financial statements certified by independent public accountants and distribute
quarterly reports containing unaudited financial information for each of the
first three quarters of the year.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock will be determined
by the Board of Directors.
47
<PAGE>
CERTAIN PROVISIONS OF VIRGINIA LAW AND
OF OAIC'S ARTICLES OF INCORPORATION AND BYLAWS
The following summary of certain provisions of Virginia law and of the
Articles of Incorporation and Bylaws of OAIC does not purport to be complete and
is subject to and qualified in its entirety by reference to Virginia law and the
Articles of Incorporation and Bylaws of OAIC. Certain provisions of Virginia law
and the Articles of Incorporation and Bylaws are described elsewhere in this
Prospectus.
Board of Directors
The Bylaws provide that the number of Directors of OAIC may be established
by the Board of Directors but may not be fewer than three nor more than nine.
Any vacancy will be filled, at any regular meeting or at any special meeting
called for that purpose, by a majority of the remaining Directors, except that a
vacancy resulting from an increase in the number of Directors must be filled by
a majority of the entire Board of Directors.
OAIC's Bylaws also provide that a Director may be removed with or without
cause with the affirmative vote of at least two-thirds of the votes entitled to
be cast in the election of Directors. This provision, when coupled with the
provisions of the Bylaws authorizing the Board of Directors to fill vacant
directorships, precludes OAIC's stockholders from removing incumbent directors
and filling the vacancies created by such removal with their own nominees except
upon the existence of a substantial affirmative vote.
Amendment
The Articles of Incorporation may be amended by the affirmative vote of
the holders of a majority of the outstanding shares of Common Stock (and
majority of the outstanding shares of Preferred Stock, if any, to the extent
that such amendment would affect the holders of the Preferred Stock), with the
stockholders voting as a class with one vote per share; provided, that the
Articles of Incorporation provision relating to OAIC's election to be taxed as a
REIT shall not be amended, altered, changed or repealed without the affirmative
vote of at least 80% of the members of the Board of Directors or the affirmative
vote of holders of two-thirds of the outstanding shares of Common Stock and any
other shares of capital stock entitled to vote generally in the election of
directors voting as a class. OAIC's Bylaws may be amended by the Board of
Directors or by vote of the holders of a majority of the outstanding shares of
Common Stock, provided that provisions with respect to removal of directors,
quorum requirements and approval of certain matters by a majority of the
Directors, cannot be amended without the affirmative vote of 80% of the members
of the entire Board of Directors, including a majority of the Independent
Directors, or the holders of two-thirds of the outstanding shares of Common
Stock and any other class of shares of capital stock entitled to vote generally
in the election of directors.
Business Combinations
The Virginia Stock Corporation Act contains provisions restricting
"Affiliated Transactions." These provisions, with several exceptions discussed
below, require approval of material acquisition transactions between a Virginia
corporation having more than 300 stockholders of record and any holder of more
than 10% of any class of its outstanding voting shares (an "Interested
Stockholder") by the holders of at least two-thirds of the remaining voting
shares. Affiliated Transactions subject to this approval requirement include
mergers, share exchanges, material dispositions of corporate assets not in the
ordinary course of business, any dissolution of the corporation proposed by or
on behalf of an Interested Stockholder, or any reclassification, including a
reverse stock split, a recapitalization or a merger of the corporation with its
subsidiaries that increases the percentage of voting shares owned beneficially
by an Interested Stockholder by more than 5%.
48
<PAGE>
For three years following the time that an Interested Stockholder becomes
an owner of 10% of the outstanding voting shares, a Virginia corporation cannot
engage in an Affiliated Transaction with such Interested Stockholder without
approval of two-thirds of the voting shares other than those shares beneficially
owned by the Interested Stockholder, and majority approval of the "Unaffiliated
Directors." An Unaffiliated Director, for this purpose, means, with respect to a
particular Interested Stockholder, a member of OAIC's Board of Directors who was
(i) a member on the date on which an Interested Stockholder became an Interested
Stockholder and (ii) recommended for election by, or was elected to fill a
vacancy and received the affirmative vote of, a majority of the Unaffiliated
Directors then on the Board. At the expiration of the three year period, the
statute requires approval of Affiliated Transactions by two-thirds of the voting
shares other than those beneficially owned by the Interested Stockholder.
The principal exceptions to the special voting requirement apply to
transactions proposed after the three year period has expired and require either
that the transaction be approved by a majority of the corporation's Unaffiliated
Directors or that the transaction satisfy the fair-price requirements of the
statute. In general, the fair-price requirement provides that in a two-step
acquisition transaction, the Interested Stockholder must pay the stockholders in
the second step either the same amount of cash or the same amount and type of
consideration paid to acquire the Virginia corporation's shares in the first
step.
None of the foregoing limitations and special voting requirements applies
to a transaction with an Interested Stockholder whose acquisition of shares
making such person an Interested Stockholder was approved by a majority of the
Virginia corporation's Unaffiliated Directors. The Company's Unaffiliated
Directors have approved Ocwen Financial's acquisition of more than 10% of shares
in the Common Stock.
These provisions were designed to deter certain takeovers of Virginia
corporations. In addition, the statute provides that, by affirmative vote of a
majority of the voting shares other than shares owned by any Interested
Stockholder, a corporation can adopt an amendment to its Articles of
Incorporation or Bylaws providing that the Affiliated Transactions provisions
shall not apply to the corporation. OAIC has not "opted out" of the Affiliated
Transactions provisions.
Control Share Acquisitions
The Virginia Stock Corporation Act also contains provisions regulating
certain "Control Share Acquisitions," which are transactions causing the voting
strength of any person acquiring beneficial ownership of shares of a public
corporation in Virginia to meet or exceed certain threshold percentages (20%,
33 1/3% or 50%) of the total votes entitled to be cast for the election of
directors. Shares acquired in a control share acquisition have no voting rights
unless: (i) the voting rights are granted by a majority vote of all outstanding
shares other than those held by the acquiring person or any officer or employee
Director of the corporation, or (ii) the Articles of Incorporation or Bylaws of
the corporation provide that these Virginia law provisions do not apply to
acquisitions of its shares. The acquiring person may require that a special
meeting of the stockholders be held to consider the grant of voting rights to
the shares acquired in the control share acquisition. These provisions were
designed to deter certain takeovers of Virginia public corporations. Under
Virginia law, a corporation may "opt out" of the Control Share Acquisitions
provisions in its Articles of Incorporation or Bylaws. OAIC has not "opted out"
of the Control Share Acquisitions provisions.
Operations
The Company is generally prohibited from engaging in certain activities
and acquiring or holding property or engaging in any activity that would cause
the Company to fail to qualify as a REIT.
49
<PAGE>
Advance Notice of Director Nominations and New Business
The Bylaws of the Company provide (a) with respect to an annual meeting of
stockholders, nominations of persons for election to the Board of Directors and
the proposal of business to be considered by such stockholders may be made only
(i) pursuant to the Company's notice of the meeting, (ii) by the Board of
Directors or (iii) by a stockholder who is entitled to vote at the meeting and
has complied with the advance notice procedures set forth in the Bylaws and (b)
with respect to special meetings of stockholders, nominations of persons for
election to the Board of Directors may be made only (i) pursuant to the
Company's notice of meeting, (ii) by the Board of Directors or (iii) provided
that the Board of Directors has determined that directors shall be elected at
such meeting, by a stockholder who is entitled to vote at the meeting and has
complied with the advance notice provisions set forth in the Bylaws.
COMMON STOCK AVAILABLE FOR FUTURE SALE
Upon the closing of the Offering, OAIC will have outstanding (or reserved
for issuance upon redemption of Units) 15,812,500 shares of Common Stock. The
Common Stock issued in the Offering will be freely tradeable by persons other
than "Affiliates" of the Company without restriction under the Securities Act of
1933, as amended (the "Securities Act"), subject to certain limitations on
ownership set forth in the Articles of Incorporation. See "Description of
Capital Stock--Restrictions on Transfer."
Shares of Common Stock issued to holders of Units upon exercise of the
Redemption Rights will be "restricted" securities under the meaning of Rule 144
promulgated under the Securities Act ("Rule 144") and may not be sold in the
absence of registration under the Securities Act unless an exemption from
registration is available, including exemptions contained in Rule 144. See
"Operating Partnership--Redemption Rights." As described below, OAIC has granted
certain holders registration rights with respect to their Common Stock.
In general, under Rule 144 as currently in effect, if two years have
elapsed since the later of the date of acquisition of restricted shares from the
Company or any "Affiliate" of the Company, as that term is defined under the
Securities Act, the acquiror or subsequent holder thereof is entitled to sell
within any three-month period a number of shares that does not exceed the
greater of 1% of the then outstanding Common Stock or the average weekly trading
volume of the Common Stock during the four calendar weeks preceding the date on
which notice of the sale is filed with the Commission. Sales under Rule 144 also
are subject to certain manner of sale provisions, notice requirements and the
availability of current public information about the Company. If three years
have elapsed since the date of acquisition of restricted shares from the Company
or from any Affiliate of the Company, and the acquiror or subsequent holder
thereof is deemed not to have been an Affiliate of the Company at any time
during the three months preceding a sale, such person would be entitled to sell
such shares in the public market under Rule 144(k) without regard to the volume
limitations, manner of sale provisions, public information requirements or
notice requirements.
No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price prevailing from time to time. Sales of substantial amounts of Common
Stock, or the perception that such sales could occur, may affect adversely
prevailing market prices of the Common Stock.
50
<PAGE>
OPERATING PARTNERSHIP AGREEMENT
The Operating Partnership has been organized as a Virginia limited
partnership, the general partner of which is Ocwen General, Inc., a wholly-owned
subsidiary of OAIC, and the initial limited partner of which is Ocwen Limited
Inc., a wholly-owned subsidiary of OAIC (the "Initial Limited Partner"). Because
OAIC indirectly owns 100% of the partnership interests in the Operating
Partnership, the Operating Partnership will be disregarded as a separate entity
from OAIC for federal income tax purposes until a third party is admitted as a
partner of the Operating Partnership. The Company organized the Operating
Partnership in order to provide future sellers of assets with the opportunity to
transfer those assets to the Company in a tax-deferred exchange. The Operating
Partnership Agreement currently does not contain many of the provisions
described below. Instead, the following summary of the Operating Partnership
Agreement, and the descriptions of certain provisions thereof set forth
elsewhere in this Prospectus, describe certain provisions that likely will
appear in the Operating Partnership Agreement when the Manager or third-party
sellers of assets who wish to achieve tax deferral are admitted as partners of
the Operating Partnership. The provisions described in this summary, however,
may not appear in the Operating Partnership Agreement that ultimately is
executed in the form described herein.
General
Pursuant to the Operating Partnership Agreement, the General Partner, as
the sole general partner of the Operating Partnership, will have full, exclusive
and complete responsibility and discretion in the management and control of the
Operating Partnership. The limited partners of the operating partnership (the
"Limited Partners") will have no authority in their capacity as Limited Partners
to transact business for, or participate in the management activities or
decisions of, the Operating Partnership except as required by applicable law.
Consequently, OAIC, by virtue of its ownership of the General Partner, will
control the assets and business of the Operating Partnership. However, it is
anticipated that any amendment to the Operating Partnership Agreement that would
(i) affect the Redemption Rights (as defined below), (ii) adversely affect the
Limited Partners' rights to receive cash distributions, (iii) alter the
Operating Partnership's allocations of income or loss, or (iv) impose on the
Limited Partners any obligations to make additional contributions to the capital
of the Operating Partnership, will require the consent of Limited Partners
(other than the Initial Limited Partner) holding more than two-thirds of the
partnership interests ("Units") held by such partners.
General Partner Not to Withdraw
It is anticipated that the General Partner will not be able to voluntarily
withdraw from the Operating Partnership or transfer or assign its interest in
the Operating Partnership unless the transaction in which such withdrawal or
transfer occurs results in the Limited Partners receiving property in an amount
equal to the amount they would have received had they exercised the Redemption
Rights immediately prior to such transaction, or unless the successor to the
General Partner contributes substantially all of its assets to the Operating
Partnership in return for an interest in the Operating Partnership.
Capital Contribution
OAIC will contribute, through the General Partner and the Initial Limited
Partner, approximately ______% of the net proceeds of the Offering to the
Operating Partnership. The General Partner will hold a 1% general partnership
interest in the Operating Partnership, and the Initial Limited Partner will hold
a 99% limited partnership interest in the Operating Partnership.
After the completion of the Offering, OAIC will have issued a total of
14,375,000 shares of Common Stock and will own, through the General Partner and
the Initial Limited Partner, 100% of the partnership interests in the Operating
Partnership. Although the Operating Partnership will receive the net proceeds of
the Offering, the Initial
51
<PAGE>
Limited Partner and the General Partner will be deemed to have made a capital
contribution to the Operating Partnership in the aggregate amount of the gross
proceeds of the Offering and the Operating Partnership will be deemed
simultaneously to have paid the underwriter's discount and other expenses paid
or incurred in connection with the Offering.
It is anticipated that the Operating Partnership Agreement will provide
that if the Operating Partnership requires additional funds at any time or from
time to time in excess of funds available to the Operating Partnership from
borrowing or capital contributions, the General Partner may borrow such funds
from a financial institution or other lender and lend such funds to the
Operating Partnership on the same terms and conditions as are applicable to the
General Partner's borrowing of such funds. Moreover, it is anticipated that the
General Partner will be authorized to cause the Operating Partnership to issue
partnership interests for less than fair market value if the Company (i) has
concluded in good faith that such issuance is in the best interest of the
Company and the Operating Partnership and (ii) the General Partner makes a
capital contribution in an amount equal to the proceeds of such issuance. Under
the Operating Partnership Agreement, each of the General Partner and the Initial
Limited Partner is obligated to contribute the proceeds of any future share
offering by OAIC as additional capital to the Operating Partnership in exchange
for an additional partnership interest. Upon such contribution, the General
Partner's and the Initial Limited Partner's percentage interests in the
Operating Partnership would be increased on a proportionate basis based upon the
amount of such additional capital contributions. The percentage interests of the
Limited Partners (other than the Initial Limited Partner) would be decreased on
a proportionate basis in the event of additional capital contributions by the
General Partner and the Initial Limited Partner. In addition, if the General
Partner and the Initial Limited Partner were to contribute additional capital to
the Operating Partnership, the General Partner would revalue the property of the
Operating Partnership to its fair market value (as determined by the General
Partner) and the capital accounts of the partners would be adjusted to reflect
the manner in which the unrealized gain or loss inherent in such property (that
has not been reflected in the capital accounts previously) would be allocated
among the partners under the terms of the Operating Partnership Agreement as if
there were a taxable disposition of such property for such fair market value on
the date of the revaluation.
Redemption Rights
It is anticipated that pursuant to the Operating Partnership Agreement,
the Limited Partners (other than the Initial Limited Partner) will have the
right (the "Redemption Rights") to cause the Operating Partnership to redeem
their Units for shares of Common Stock on a one-for-one basis or, at the option
of the Company, an equivalent amount of cash. It is anticipated that the
redemption price will be paid in cash in the discretion of the Company or in the
event that the issuance of shares of Common Stock to the redeeming Limited
Partner would (i) result in any person owning, directly or indirectly, shares of
Common Stock in excess of the Ownership Limitation, (ii) result in shares of
capital stock of the Company being owned by fewer than 100 persons (determined
without reference to any rules of attribution), (iii) result in the Company
being "closely held" within the meaning of section 856(h) of the Code, (iv)
cause the Company to own, actually or constructively, 10% or more of the
ownership interests in a tenant of the Company's or the Operating Partnership's
real property, within the meaning of section 856(d)(2)(B) of the Code, or (v)
cause the acquisition of shares of Common Stock by such redeeming Limited
Partner to be "integrated" with any other distribution of shares of Common Stock
for purposes of complying with the Securities Act. The Manager holds options to
acquire Units (or, at the option of the Company, shares of Common Stock), none
of which is exercisable until the first anniversary of the Closing Date. Upon an
acquisition of Units, the Manager may immediately exercise its Redemption
Rights. It is anticipated that the Redemption Rights will be exercisable at any
time after the expiration of two years after the issuance of the related Units.
Operations
The Operating Partnership Agreement requires that the Operating
Partnership be operated in a manner that will enable OAIC to satisfy the
requirements for being classified as a REIT for federal tax purposes, to avoid
any
52
<PAGE>
federal income or excise tax liability imposed by the Code, and to ensure that
the Operating Partnership will not be classified as a "publicly traded
partnership" for purposes of section 7704 of the Code.
In addition to the administrative and operating costs and expenses
incurred by the Operating Partnership, it is anticipated that the Operating
Partnership will pay all administrative costs and expenses of the Company and
the General Partner (collectively, the "Company Expenses") and the Company
Expenses will be treated as expenses of the Operating Partnership. The Company
Expenses generally will include (i) all expenses relating to the formation and
continuity of existence of the Company and the General Partner, (ii) all
expenses relating to the public offering and registration of securities by the
Company, (iii) all expenses associated with the preparation and filing of any
periodic reports by the Company under federal, state or local laws or
regulations, (iv) all expenses associated with compliance by the Company and the
General Partner with laws, rules and regulations promulgated by any regulatory
body and (v) all other operating or administrative costs of the General Partner
incurred in the ordinary course of its business on behalf of the Operating
Partnership.
Distributions
It is anticipated that the Operating Partnership Agreement will provide
that the Operating Partnership shall distribute cash from operations (including
net sale or refinancing proceeds, but excluding net proceeds from the sale of
the Operating Partnership's property in connection with the liquidation of the
Operating Partnership) on a quarterly (or, at the election of the General
Partner, more frequent) basis, in amounts determined by the General Partner in
its sole discretion, to the partners in accordance with their respective
percentage interests in the Operating Partnership. Upon liquidation of the
Operating Partnership, after payment of, or adequate provision for, debts and
obligations of the Operating Partnership, including any partner loans, it is
anticipated that any remaining assets of the Operating Partnership will be
distributed to all partners with positive capital accounts in accordance with
their respective positive capital account balances. If the General Partner has a
negative balance in its capital account following a liquidation of the Operating
Partnership, it will be obligated to contribute cash to the Operating
Partnership equal to the negative balance in its capital account.
Allocations
It is anticipated that income, gain and loss of the Operating Partnership
for each fiscal year generally will be allocated among the partners in
accordance with their respective interests in the Operating Partnership, subject
to compliance with the provisions of Code sections 704(b) and 704(c) and
Treasury regulations ("Treasury Regulations") promulgated thereunder.
Term
The Operating Partnership shall continue until December 31, 2050, or until
sooner dissolved upon agreement of the partners.
Tax Matters
Pursuant to the Operating Partnership Agreement, the General Partner is
the tax matters partner of the Operating Partnership and, as such, has authority
to handle tax audits and to make tax elections under the Code on behalf of the
Operating Partnership.
53
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of material federal income tax considerations
that may be relevant to a prospective holder of Common Stock in OAIC. Hunton &
Williams has acted as counsel to OAIC and has reviewed this summary and is of
the opinion that it fairly summarizes the federal income tax considerations that
will be material to a holder of the Common Stock. The discussion contained
herein does not address all aspects of taxation that may be relevant to
particular stockholders in light of their personal investment or tax
circumstances, or to certain types of stockholders (including insurance
companies, tax-exempt organizations, financial institutions or broker-dealers,
foreign corporations, and persons who are not citizens or residents of the
United States) subject to special treatment under the federal income tax laws.
The statements in this discussion and the opinion of Hunton & Williams are
based on current provisions of the Code, existing, temporary, and currently
proposed Treasury Regulations promulgated under the Code, the legislative
history of the Code, existing administrative rulings and practices of the
Service, and judicial decisions. No assurance can be given that future
legislative, judicial, or administrative actions or decisions, which may be
retroactive in effect, will not affect the accuracy of any statements in this
Prospectus with respect to the transactions entered into or contemplated prior
to the effective date of such changes.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP, AND
SALE OF THE COMMON STOCK AND OF OAIC'S ELECTION TO BE TAXED AS A REIT, INCLUDING
THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE,
OWNERSHIP, SALE, AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
Taxation of the Company
OAIC currently has in effect an election to be taxed as a pass-through
entity under subchapter S of the Code, but intends to revoke its S election on
the day prior to the completion of the Offering. OAIC plans to make an election
to be taxed as a REIT under sections 856 through 860 of the Code, commencing
with its short taxable year beginning on the day prior to the Closing and ending
on December 31, 1997. OAIC believes that, commencing with such taxable year, it
will be organized and will operate in such a manner as to qualify for taxation
as a REIT under the Code, and OAIC intends to continue to operate in such a
manner, but no assurance can be given that OAIC will operate in a manner so as
to qualify or remain qualified as a REIT.
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its stockholders. The discussion is qualified in its
entirety by the applicable Code provisions, Treasury Regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all of
which are subject to change prospectively or retroactively.
Hunton & Williams has acted as counsel to OAIC in connection with the
Offering and OAIC's election to be taxed as a REIT. In the opinion of Hunton &
Williams, assuming that the elections and other procedural steps described in
this discussion of "Federal Income Tax Considerations" are completed by OAIC in
a timely fashion, OAIC's organization and proposed method of operation will
enable it to qualify to be taxed as a REIT under the Code commencing with OAIC's
short taxable year beginning the day prior to the closing of the Offering and
ending December 31, 1997, and for its future taxable years. Investors should be
aware, however, that opinions of counsel are not binding upon the Service or any
court. It must be emphasized that Hunton & Williams' opinion is based on various
assumptions and is conditioned upon certain representations made by OAIC as to
factual matters,
54
<PAGE>
including representations regarding the nature of OAIC's properties and the
future conduct of its business. Such factual assumptions and representations are
described below in this discussion of "Federal Income Tax Considerations" and
are set out in the federal income tax opinion that will be delivered by Hunton &
Williams at the closing of the Offering. Moreover, such qualification and
taxation as a REIT depends upon OAIC's ability to meet on a continuing basis,
through actual annual operating results, distribution levels, and stock
ownership, the various qualification tests imposed under the Code discussed
below. Hunton & Williams will not review OAIC's compliance with those tests on a
continuing basis. Accordingly, no assurance can be given that the actual results
of OAIC's operations for any particular taxable year will satisfy such
requirements. For a discussion of the tax consequences of failure to qualify as
a REIT, see "Federal Income Tax Considerations - Failure to Qualify."
If OAIC qualifies for taxation as a REIT, it generally will not be subject
to federal corporate income tax on its net income that is distributed currently
to its stockholders. That treatment substantially eliminates the "double
taxation" (i.e., taxation at both the corporate and stockholder levels) that
generally results from an investment in a corporation. However, OAIC will be
subject to federal income tax in the following circumstances. First, OAIC will
be taxed at regular corporate rates on any undistributed REIT taxable income,
including undistributed net capital gains. Second, under certain circumstances,
OAIC may be subject to the "alternative minimum tax" on its undistributed items
of tax preference, if any. Third, if OAIC has (i) net income from the sale or
other disposition of "foreclosure property" that is held primarily for sale to
customers in the ordinary course of business or (ii) other nonqualifying income
from foreclosure property, it will be subject to tax at the highest corporate
rate on such income. Fourth, if OAIC has net income from prohibited transactions
(which are, in general, certain sales or other dispositions of property (other
than foreclosure property) held primarily for sale to customers in the ordinary
course of business), such income will be subject to a 100% tax. Fifth, if OAIC
should fail to satisfy the 75% gross income test or the 95% gross income test
(as discussed below), and nonetheless has maintained its qualification as a REIT
because certain other requirements have been met, it will be subject to a 100%
tax on the net income attributable to the greater of the amount by which OAIC
fails the 75% or 95% gross income test. Sixth, if OAIC should fail to distribute
during each calendar year at least the sum of (i) 85% of its REIT ordinary
income for such year, (ii) 95% of its REIT capital gain net income for such
year, and (iii) any undistributed taxable income from prior periods, OAIC would
be subject to a 4% excise tax on the excess of such required distribution over
the amounts actually distributed. Seventh, if OAIC acquires any asset from a C
corporation (i.e., a corporation generally subject to full corporate-level tax)
in a transaction in which the basis of the asset in OAIC's hands is determined
by reference to the basis of the asset (or any other asset) in the hands of the
C corporation and OAIC recognizes gain on the disposition of such asset during
the 10-year period beginning on the date on which such asset was acquired by
OAIC, then to the extent of such asset's "built-in-gain" (i.e., the excess of
the fair market value of such asset at the time of acquisition by OAIC over the
adjusted basis in such asset at such time), such gain will be subject to tax at
the highest regular corporate rate applicable (as provided in Treasury
Regulations that have not yet been promulgated). The results described above
with respect to the recognition of "built-in-gain" assume that OAIC will make an
election pursuant to IRS Notice 88-19 if it were to make any such acquisition.
Finally, OAIC will be subject to tax at the highest marginal corporate rate on
the portion of any Excess Inclusion derived by OAIC from REMIC Residual
Interests that is allocable to stock of OAIC held by the United States, any
state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing, any other tax-exempt organization (other than a farmer's cooperative
described in section 521 of the Code) that is exempt from taxation under the
unrelated business taxable income provisions of the Code, or any rural
electrical or telephone cooperative (each, a "Disqualified Organization"). Any
such tax on the portion of any Excess Inclusion allocable to stock of OAIC held
by a Disqualified Organization will reduce the cash available for distribution
from OAIC to all stockholders.
Requirements for Qualification
The Code defines a REIT as a corporation, trust, or association (i) that
is managed by one or more trustees or directors; (ii) the beneficial ownership
of which is evidenced by transferable shares, or by transferable certificates
55
<PAGE>
of beneficial interest; (iii) that would be taxable as a domestic corporation,
but for sections 856 through 860 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons; (vi) not
more than 50% in value of the outstanding shares of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of each taxable year (the "5/50 Rule");
(vii) that makes an election to be a REIT (or has made such election for a
previous taxable year) and satisfies all relevant filing and other
administrative requirements established by the Service that must be met in order
to elect and maintain REIT status; (viii) that uses a calendar year for federal
income tax purposes and complies with the recordkeeping requirements of the Code
and Treasury Regulations promulgated thereunder; and (ix) that meets certain
other tests, described below, regarding the nature of its income and assets. The
Code provides that conditions (i) to (iv), inclusive, must be met during the
entire taxable year and that condition (v) must be met during at least 335 days
of a taxable year of 12 months, or during a proportionate part of a taxable year
of less than 12 months. Conditions (v) and (vi) will not apply until after the
first taxable year for which an election is made by OAIC to be taxed as a REIT.
For purposes of determining stock ownership under the 5/50 Rule, a supplemental
unemployment compensation benefits plan, a private foundation, or a portion of a
trust permanently set aside or used exclusively for charitable purposes
generally is considered an individual. A trust that is a qualified trust under
Code section 401(a), however, generally is not considered an individual and
beneficiaries of such trust are treated as holding shares of a REIT in
proportion to their actuarial interests in such trust for purposes of the 5/50
Rule.
Prior to the consummation of the Offering, OAIC did not satisfy conditions
(v) and (vi) in the preceding paragraph. OAIC anticipates issuing sufficient
Common Stock with sufficient diversity of ownership pursuant to the Offering to
allow it to satisfy requirements (v) and (vi). In addition, OAIC's Articles of
Incorporation provide for restrictions regarding the transfer of the Common
Stock that are intended to assist OAIC in continuing to satisfy the share
ownership requirements described in clauses (v) and (vi) above. Such transfer
restrictions are described in "Description of Common Stock--Restrictions on
Transfer."
OAIC currently has two subsidiaries, the General Partner and the Limited
Partner, and may have additional subsidiaries in the future. Code section 856(i)
provides that a corporation that is a "qualified REIT subsidiary" shall not be
treated as a separate corporation, and all assets, liabilities, and items of
income, deduction, and credit of a "qualified REIT subsidiary" shall be treated
as assets, liabilities, and items of income, deduction, and credit of the REIT.
A "qualified REIT subsidiary" is a corporation, all of the capital stock of
which has been held by the REIT at all times during the period such corporation
was in existence. Thus, in applying the requirements described herein, any
"qualified REIT subsidiaries" of OAIC will be ignored, and all assets,
liabilities, and items of income, deduction, and credit of such subsidiaries
will be treated as assets, liabilities, and items of income, deduction, and
credit of OAIC. The General Partner and the Limited Partner are "qualified REIT
subsidiaries." Accordingly, neither the General Partner nor the Limited Partner
will be subject to federal corporate income taxation, although each may be
subject to state and local taxation.
Pursuant to Treasury Regulations effective January 1, 1997 relating to
entity classification, an unincorporated entity that has a single owner is
disregarded as an entity separate from its owner. Because OAIC indirectly owns
100% of the partnership interests in the Operating Partnership, the Operating
Partnership will be disregarded as an entity separate from OAIC for federal
income tax purposes.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the gross
income of the partnership attributable to such share. In addition, the assets
and gross income of the partnership will retain the same character in the hands
of the REIT for purposes of section 856 of the Code, including satisfying the
gross income and asset tests described below. When the Operating Partnership
admits a partner other than OAIC or a qualified REIT subsidiary of OAIC, OAIC's
proportionate share of the assets and gross income of the Operating Partnership
will be treated as assets and gross income of OAIC for purposes of applying the
requirements described herein.
56
<PAGE>
Income Tests
In order for OAIC to qualify and to maintain its qualification as a REIT,
three requirements relating to OAIC's gross income must be satisfied annually.
First, at least 75% of OAIC's gross income (excluding gross income from
prohibited transactions) for each taxable year must consist of defined types of
income derived directly or indirectly from investments relating to real property
or mortgages on real property (including "rents from real property" and interest
on obligations secured by mortgages on real property or on interests in real
property) or temporary investment income. Second, at least 95% of OAIC's gross
income (excluding gross income from prohibited transactions) for each taxable
year must be derived from such real property, mortgages on real property, or
temporary investments, and from dividends, other types of interest, and gain
from the sale or disposition of stock or securities, or from any combination of
the foregoing. Third, not more than 30% of OAIC's gross income (including gross
income from prohibited transactions) for each taxable year may be gain from the
sale or other disposition of (i) stock or securities held for less than one
year, (ii) dealer property that is not foreclosure property, and (iii) certain
real property held for less than four years (apart from involuntary conversions
and sales of foreclosure property). The specific application of these tests to
OAIC is discussed below.
The term "interest," as defined for purposes of the 75% and 95% gross
income tests, generally does not include any amount received or accrued
(directly or indirectly) if the determination of such amount depends in whole or
in part on the income or profits of any person. However, an amount received or
accrued generally will not be excluded from the term "interest" solely by reason
of being based on a fixed percentage or percentages of receipts or sales.
Furthermore, to the extent that interest from a loan that is based on the cash
proceeds from the sale of the property securing the loan constitutes a "shared
appreciation provision" (as defined in the Code), income attributable to such
participation feature will be treated as gain from the sale of the secured
property, which generally is qualifying income for purposes of the 75% and 95%
gross income tests.
Interest on obligations secured by mortgages on real property or on
interests in real property is qualifying income for purposes of the 75% gross
income test. Any amount includible in gross income with respect to a regular or
residual interest in a REMIC, generally is treated as interest on an obligation
secured by a mortgage on real property. If, however, less than 95% of the assets
of a REMIC consists of real estate assets (determined as if OAIC held such
assets), OAIC will be treated as receiving directly its proportionate share of
the income of the REMIC. In addition, if OAIC receives interest income with
respect to a mortgage loan that is secured by both real property and other
property and the highest principal amount of the loan outstanding during a
taxable year exceeds the fair market value of the real property on the date OAIC
purchased the mortgage loan, the interest income will be apportioned between the
real property and the other property, which apportionment may cause OAIC to
recognize income that is not qualifying income for purposes of the 75% gross
income test.
OAIC anticipates that the interest, original issue discount, and market
discount income that it derives from its investments in Subordinated Interests,
IOs, and Inverse IOs generally will be qualifying interest income for purposes
of both the 75% and the 95% gross income tests, except to the extent that less
than 95% of the assets of a REMIC in which OAIC holds an interest consists of
real estate assets (determined as if OAIC held such assets), and OAIC's
proportionate share of the income of the REMIC includes income that is not
qualifying income for purposes of the 75% and 95% gross income tests. OAIC also
expects that most of the income that it recognizes with respect to its
investments in Distressed Mortgage Loans and Performing Mortgage Loans will be
qualifying income for purposes of both gross income tests. In some cases,
however, the loan amount of a Distressed Mortgage Loan or Performing Mortgage
Loan may exceed the value of the real property securing the loan, which will
result in a portion of the income from the loan being classified as qualifying
income for purposes of the 95% gross income test, but not for purposes of the
75% gross income test. It is also possible that, in some instances, the interest
income from a Distressed Mortgage Loan may be based in part on the borrower's
profits or net income, which generally will disqualify the income from the loan
for purposes of both the 75% and the 95% gross income tests. Finally, OAIC may
originate or acquire Construction or Mezzanine Loans that have shared
appreciation provisions.
57
<PAGE>
If income under a shared appreciation provision is triggered by the borrower,
OAIC may recognize nonqualifying income for purposes of the 30% gross income
test. In addition, OAIC may be required to recognize income from a shared
appreciation provision over the term of the related loan using the constant
yield method pursuant to certain Treasury Regulations.
OAIC may receive income not described above that is not qualifying income
for purposes of the 75% and 95% gross income tests. For example, any Special
Servicing fees received by the Operating Partnership will not be qualifying
income for purposes of the gross income tests. It is not anticipated that the
Operating Partnership will receive a significant amount of such fees. In
addition, OAIC will monitor the amount of nonqualifying income produced by its
assets and has represented that it will manage its portfolio in order to comply
at all times with the three gross income tests.
The rent received by OAIC from the tenants of its Real Property ("Rent")
will qualify as "rents from real property" in satisfying the gross income tests
for a REIT described above only if several conditions are met. First, the amount
of Rent must not be based, in whole or in part, on the income or profits of any
person. However, an amount received or accrued generally will not be excluded
from the term "rents from real property" solely by reason of being based on a
fixed percentage or percentages of receipts or sales. Second, the Code provides
that the Rent received from a tenant will not qualify as "rents from real
property" in satisfying the gross income tests if OAIC, or a direct or indirect
owner of 10% or more of OAIC, owns 10% or more of such tenant, taking into
account both direct and constructive ownership (a "Related Party Tenant").
Third, if Rent attributable to personal property, leased in connection with a
lease of Real Property, is greater than 15% of the total Rent received under the
lease, then the portion of Rent attributable to such personal property will not
qualify as "rents from real property." Finally, for the Rent to qualify as
"rents from real property," OAIC generally must not operate or manage the Real
Property or furnish or render services to the tenants of such Real Property,
other than through an "independent contractor" who is adequately compensated and
from whom OAIC derives no revenue. The "independent contractor" requirement,
however, does not apply to the extent the services provided by OAIC are "usually
or customarily rendered" in connection with the rental of space for occupancy
only and are not otherwise considered "rendered to the occupant."
OAIC has represented that it will not charge Rent for any portion of any
Real Property that is based, in whole or in part, on the income or profits of
any person (except by reason of being based on a fixed percentage or percentages
of receipts of sales, as described above) to the extent that the receipt of such
Rent would jeopardize OAIC's status as a REIT. In addition, OAIC has represented
that, to the extent that it receives Rent from a Related Party Tenant, such Rent
will not cause OAIC to fail to satisfy either the 75% or 95% gross income test.
OAIC also has represented that it will not allow the Rent attributable to
personal property leased in connection with any lease of Real Property to exceed
15% of the total Rent received under the lease, if the receipt of such Rent
would cause OAIC to fail to satisfy either the 75% or 95% gross income test.
Finally, OAIC has represented that it will not operate or manage its Real
Property or furnish or render noncustomary services to the tenants of its Real
Property other than through an "independent contractor," to the extent that such
operation or the provision of such services would jeopardize OAIC's status as a
REIT.
REITs generally are subject to tax at the maximum corporate rate on any
income from foreclosure property (other than income that would be qualifying
income for purposes of the 75% gross income test), less expenses directly
connected with the production of such income. "Foreclosure property" is defined
as any real property (including interests in real property) and any personal
property incident to such real property (i) that is acquired by a REIT as the
result of such REIT having bid in such property at foreclosure, or having
otherwise reduced such property to ownership or possession by agreement or
process of law, after there was a default (or default was imminent) on a lease
of such property or on an indebtedness owed to the REIT that such property
secured, (ii) for which the related loan was acquired by the REIT at a time when
default was not imminent or anticipated, and (iii) for which such REIT makes a
proper election to treat such property as foreclosure property. OAIC does not
anticipate that it will receive any income from foreclosure property that is not
qualifying income for purposes of
58
<PAGE>
the 75% gross income test, but, if OAIC does receive any such income, OAIC will
make an election to treat the related property as foreclosure property.
If property is not eligible for the election to be treated as foreclosure
property ("Ineligible Property") because the related loan was acquired by the
REIT at a time when default was imminent or anticipated, income received with
respect to such Ineligible Property may not be qualifying income for purposes of
the 75% or 95% gross income test. In addition, if a REIT disposes of Ineligible
Property at a gain within four years of acquiring such property, such gain will
be nonqualifying income for purposes of the 30% income test. OAIC anticipates
that any income it receives with respect to Ineligible Property will be
qualifying income for purposes of the 75% and 95% gross income tests and that
any disposition of Ineligible Property within four years of acquiring such
property will not cause OAIC to fail to satisfy the 30% income test.
OAIC has represented that it will manage its assets so that it does not
violate the 30% income test in any taxable year. Any gross income derived from a
prohibited transaction is not taken into account in applying the 30% income test
necessary to qualify as a REIT (but the net income from such a transaction is
subject to a 100% tax). The term "prohibited transaction" generally includes a
sale or other disposition of property (other than foreclosure property) that is
held primarily for sale to customers in the ordinary course of a trade or
business. The Company believes that no asset owned by OAIC or the Operating
Partnership will be held for sale to customers and that a sale of any such asset
will not be in the ordinary course of OAIC's or the Operating Partnership's
business. Whether property is held "primarily for sale to customers in the
ordinary course of a trade or business" depends, however, on the facts and
circumstances in effect from time to time, including those related to a
particular property. Nevertheless, OAIC will attempt to comply with the terms of
safe-harbor provisions in the Code prescribing when asset sales will not be
characterized as prohibited transactions. Complete assurance cannot be given,
however, that OAIC can comply with the safe-harbor provisions of the Code or
avoid owning property that may be characterized as property held "primarily for
sale to customers in the ordinary course of a trade or business."
It is possible that, from time to time, OAIC will enter into hedging
transactions with respect to one or more of its assets or liabilities. Any such
hedging transactions could take a variety of forms, including interest rate swap
contracts, interest rate cap or floor contracts, futures or forward contracts,
and options. To the extent that OAIC enters into an interest rate swap or cap
contract to hedge any variable rate indebtedness incurred to acquire or carry
real estate assets, any periodic income or gain from the disposition of such
contract should be qualifying income for purposes of the 95% gross income test,
but not the 75% gross income test. Furthermore, any such contract would be
considered a "security" for purposes of applying the 30% gross income test. To
the extent that OAIC hedges with other types of financial instruments or in
other situations, it may not be entirely clear how the income from those
transactions will be treated for purposes of the various income tests that apply
to REITs under the Code. OAIC intends to structure any hedging transactions in a
manner that does not jeopardize its status as a REIT. Accordingly, OAIC may
conduct some or all of its hedging activities through a corporate subsidiary
that is fully subject to federal corporate income tax.
If OAIC fails to satisfy one or both of the 75% and 95% gross income tests
for any taxable year, it nevertheless may qualify as a REIT for such year if it
is entitled to relief under certain provisions of the Code. Those relief
provisions generally will be available if OAIC's failure to meet such tests is
due to reasonable cause and not due to willful neglect, OAIC attaches a schedule
of the sources of its income to its return, and any incorrect information on the
schedule was not due to fraud with intent to evade tax. It is not possible,
however, to state whether in all circumstances OAIC would be entitled to the
benefit of those relief provisions. As discussed above in "Federal Income Tax
Considerations--Taxation of the Company," even if those relief provisions apply,
a 100% tax would be imposed on the net income attributable to the greater of the
amount by which OAIC fails the 75% or 95% gross income test. No such relief is
available for violations of the 30% income test.
59
<PAGE>
Asset Tests
OAIC, at the close of each quarter of each taxable year, also must satisfy
two tests relating to the nature of its assets. First, at least 75% of the value
of OAIC's total assets must be represented by cash or cash items (including
certain receivables), government securities, "real estate assets," or, in cases
where OAIC raises new capital through stock or long-term (at least five-year)
debt offerings, temporary investments in stock or debt instruments during the
one-year period following OAIC's receipt of such capital. The term "real estate
assets" includes interests in real property, interests in mortgages on real
property to the extent the principal balance of a mortgage does not exceed the
fair market value of the associated real property, regular or residual interests
in a REMIC (except that, if less than 95% of the assets of a REMIC consists of
"real estate assets" (determined as if OAIC held such assets), OAIC will be
treated as holding directly its proportionate share of the assets of such
REMIC), and shares of other REITs. For purposes of the 75% asset test, the term
"interest in real property" includes an interest in mortgage loans or land and
improvements thereon, such as buildings or other inherently permanent structures
(including items that are structural components of such buildings or
structures), a leasehold of real property, and an option to acquire real
property (or a leasehold of real property). An "interest" in real property also
includes an interest in mortgage loans secured by partnership interests in
partnerships that own real property, to the extent that the principal balance of
the mortgage does not exceed the fair market value of the associated real
property. Second, of the investments not included in the 75% asset class, the
value of any one issuer's securities owned by OAIC may not exceed 5% of the
value of OAIC's total assets, and OAIC may not own more than 10% of any one
issuer's outstanding voting securities (except for its interests in the
Operating Partnership, the General Partner, the Limited Partner, and any other
qualified REIT subsidiary).
OAIC expects that any Distressed Real Properties, Subordinated Interests,
IOs, Inverse IOs, and temporary investments that it acquires generally will be
qualifying assets for purposes of the 75% asset test, except to the extent that
less than 95% of the assets of a REMIC in which OAIC owns an interest consists
of "real estate assets" and OAIC's proportionate share of those assets includes
assets that are nonqualifying assets for purposes of the 75% asset test.
Distressed Mortgage Loans, Performing Mortgage Loans, Construction Loans and
Mezzanine Loans also will be qualifying assets for purposes of the 75% asset
test to the extent that the principal balance of each mortgage loan does not
exceed the value of the associated real property. OAIC will monitor the status
of the assets that it acquires for purposes of the various asset tests and has
represented that it will manage its portfolio in order to comply at all times
with such tests.
If OAIC should fail to satisfy the asset tests at the end of a calendar
quarter, such a failure would not cause it to lose its REIT status if (i) it
satisfied the asset tests at the close of the preceding calendar quarter and
(ii) the discrepancy between the value of OAIC's assets and the asset test
requirements arose from changes in the market values of its assets and was not
wholly or partly caused by the acquisition of one or more non-qualifying assets.
If the condition described in clause (ii) of the preceding sentence were not
satisfied, OAIC still could avoid disqualification by eliminating any
discrepancy within 30 days after the close of the calendar quarter in which it
arose.
Distribution Requirements
OAIC, in order to avoid corporate income taxation of the earnings that it
distributes, is required to distribute with respect to each taxable year
dividends (other than capital gain dividends) to its stockholders in an
aggregate amount at least equal to (i) the sum of (A) 95% of its "REIT taxable
income" (computed without regard to the dividends paid deduction and its net
capital gain) and (B) 95% of the net income (after tax), if any, from
foreclosure property, minus (ii) the sum of certain items of noncash income.
Such distributions must be paid in the taxable year to which they relate, or in
the following taxable year if declared before OAIC timely files its federal
income tax return for such year and if paid on or before the first regular
dividend payment date after such declaration. To the extent that OAIC does not
distribute all of its net capital gain or distributes at least 95%, but
60
<PAGE>
less than 100%, of its "REIT taxable income," as adjusted, it will be subject to
tax thereon at regular ordinary and capital gains corporate tax rates.
Furthermore, if OAIC should fail to distribute during each calendar year (or, in
the case of distributions with declaration and record dates falling in the last
three months of the calendar year, by the end of the January immediately
following such year) at least the sum of (i) 85% of its REIT ordinary income for
such year, (ii) 95% of its REIT capital gain income for such year, and (iii) any
undistributed taxable income from prior periods, OAIC would be subject to a 4%
nondeductible excise tax on the excess of such required distribution over the
amounts actually distributed. OAIC intends to make timely distributions
sufficient to satisfy the annual distribution requirements.
It is possible that, from time to time, OAIC may experience timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of that income and deduction of such
expenses in arriving at its REIT taxable income. For example, OAIC will
recognize taxable income in excess of its cash receipts when, as generally
happens, OID accrues with respect to its Subordinated Interests. Furthermore,
some Distressed Mortgage Loans, IOs and Inverse IOs may be deemed to have OID,
in which case OAIC will be required to recognize taxable income in advance of
the related cash flow. OID generally will be accrued using a methodology that
does not allow credit losses to be reflected until they are actually incurred.
In addition, OAIC may recognize taxable market discount income upon the receipt
of proceeds from the disposition of, or principal payments on, Subordinated
Interests and Distressed Mortgage Loans that are "market discount bonds" (i.e.,
obligations with a stated redemption price at maturity that is greater than
OAIC's tax basis in such obligations), although such proceeds often will be used
to make non-deductible principal payments on related borrowings. OAIC also may
recognize Excess Inclusion or other "phantom" taxable income from REMIC Residual
Interests. It also is possible that, from time to time, OAIC may recognize net
capital gain attributable to the sale of depreciated property that exceeds its
cash receipts from the sale. In addition, pursuant to certain Treasury
Regulations, OAIC may be required to recognize the amount of any payment to be
made pursuant to a shared appreciation provision over the term of the related
loan using the constant yield method. Finally, OAIC may recognize taxable income
without receiving a corresponding cash distribution if it forecloses on or makes
a "significant modification" (as defined in Regulations section 1.1001-3(e)) to
a loan, to the extent that the fair market value of the underlying property or
the principal amount of the modified loan, as applicable, exceeds OAIC's basis
in the original loan. Therefore, OAIC may have less cash than is necessary to
meet its annual 95% distribution requirement or to avoid corporate income tax or
the excise tax imposed on certain undistributed income. In such a situation,
OAIC may find it necessary to arrange for short-term (or possibly long-term)
borrowings or to raise funds through the issuance of Preferred Stock or
additional Common Stock.
Under certain circumstances, OAIC may be able to rectify a failure to meet
the distribution requirements for a year by paying "deficiency dividends" to its
stockholders in a later year, which may be included in OAIC's deduction for
dividends paid for the earlier year. Although OAIC may be able to avoid being
taxed on amounts distributed as deficiency dividends, it will be required to pay
to the Service interest based upon the amount of any deduction taken for
deficiency dividends.
Recordkeeping Requirements
Pursuant to applicable Treasury Regulations, in order to be able to elect
to be taxed as a REIT, OAIC must maintain certain records and request on an
annual basis certain information from its stockholders designed to disclose the
actual ownership of its outstanding stock. OAIC intends to comply with such
requirements.
61
<PAGE>
Failure to Qualify
If OAIC fails to qualify for taxation as a REIT in any taxable year, and
the relief provisions do not apply, OAIC will be subject to tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
rates. Distributions to OAIC's stockholders in any year in which OAIC fails to
qualify will not be deductible by OAIC nor will they be required to be made. In
such event, to the extent of OAIC's current and accumulated earnings and
profits, all distributions to stockholders will be taxable as ordinary income
and, subject to certain limitations of the Code, corporate distributees may be
eligible for the dividends received deduction. Unless entitled to relief under
specific statutory provisions, OAIC also will be disqualified from taxation as a
REIT for the four taxable years following the year during which OAIC ceased to
qualify as a REIT. It is not possible to state whether in all circumstances OAIC
would be entitled to such statutory relief.
Taxation of Taxable U.S. Stockholders
As long as OAIC qualifies as a REIT, distributions made to OAIC's taxable
U.S. stockholders out of current or accumulated earnings and profits (and not
designated as capital gain dividends) will be taken into account by such U.S.
stockholders as ordinary income and will not be eligible for the dividends
received deduction generally available to corporations. As used herein, the term
"U.S. stockholder" means a holder of Common Stock that for U.S. federal income
tax purposes is (i) a citizen or resident of the U.S., (ii) a corporation,
partnership, or other entity created or organized in or under the laws of the
U.S. or of any political subdivision thereof, (iii) an estate whose income from
sources without the United States is includible in gross income for U.S. federal
income tax purposes regardless of its connection with the conduct of a trade or
business within the United States, or (iv) any trust with respect to which (A) a
U.S. court is able to exercise primary supervision over the administration of
such trust and (B) one or more U.S. fiduciaries have the authority to control
all substantial decisions of the trust. Distributions that are designated as
capital gain dividends will be taxed as long-term capital gains (to the extent
they do not exceed OAIC's actual net capital gain for the taxable year) without
regard to the period for which the stockholder has held his Common Stock.
However, corporate stockholders may be required to treat up to 20% of certain
capital gain dividends as ordinary income. Distributions in excess of current
and accumulated earnings and profits will not be taxable to a stockholder to the
extent that they do not exceed the adjusted basis of the stockholder's Common
Stock, but rather will reduce the adjusted basis of such stock. To the extent
that such distributions in excess of current and accumulated earnings and
profits exceed the adjusted basis of a stockholder's Common Stock, such
distributions will be included in income as long-term capital gain (or
short-term capital gain if the Common Stock had been held for one year or less),
assuming the Common Stock is a capital asset in the hands of the stockholder. In
addition, any distribution declared by OAIC in October, November, or December of
any year and payable to a stockholder of record on a specified date in any such
month shall be treated as both paid by OAIC and received by the stockholder on
December 31 of such year, provided that the distribution is actually paid by
OAIC during January of the following calendar year.
Stockholders may not include in their individual income tax returns any
net operating losses or capital losses of OAIC. Instead, such losses would be
carried over by OAIC for potential offset against its future income (subject to
certain limitations). Taxable distributions from OAIC and gain from the
disposition of the Common Stock will not be treated as passive activity income
and, therefore, stockholders generally will not be able to apply any "passive
activity losses" (such as losses from certain types of limited partnerships in
which a stockholder is a limited partner) against such income. In addition,
taxable distributions from OAIC generally will be treated as investment income
for purposes of the investment interest limitations. Capital gains from the
disposition of Common Stock (or distributions treated as such), however, will be
treated as investment income only if the stockholder so elects, in which case
such capital gains will be taxed at ordinary income rates. OAIC will notify
stockholders after the close of OAIC's taxable year as to the portions of the
distributions attributable to that year that constitute ordinary income or
capital gain dividends.
62
<PAGE>
OAIC's investment in Subordinated Interests and certain types of MBS may
cause it under certain circumstances to recognize taxable income in excess of
its economic income ("phantom income") and to experience an offsetting excess of
economic income over its taxable income in later years. As a result,
stockholders may from time to time be required to pay federal income tax on
distributions that economically represent a return of capital, rather than a
dividend. Such distributions would be offset in later years by distributions
representing economic income that would be treated as returns of capital for
federal income tax purposes. Accordingly, if OAIC receives phantom income, its
stockholders may be required to pay federal income tax with respect to such
income on an accelerated basis, i.e., before such income is realized by the
stockholders in an economic sense. Taking into account the time value of money,
such an acceleration of federal income tax liabilities would cause stockholders
to receive an after-tax rate of return on an investment in OAIC that would be
less than the after-tax rate of return on an investment with an identical
before-tax rate of return that did not generate phantom income. For example, if
an investor subject to an effective income tax rate of 30% purchased a bond
(other than a tax-exempt bond) with an annual interest rate of 10% for its face
value, his before-tax return on his investment would be 10%, and his after-tax
return would be 7%. However, if the same investor purchased stock of OAIC at a
time when the before-tax rate of return was 10%, his after-tax rate of return on
his stock might be somewhat less than 7% as a result of OAIC's phantom income.
In general, as the ratio of OAIC's phantom income to its total income increases,
the after-tax rate of return received by a taxable stockholder of OAIC will
decrease. OAIC will consider the potential effects of phantom income on its
taxable stockholders in managing its investments.
Because OAIC expects to own at least some REMIC Residual Interests, it is
likely that stockholders (other than certain thrift institutions) will not be
permitted to offset certain portions of the dividend income they derive from
OAIC with their current deductions or net operating loss carryovers or
carrybacks. The portion of a stockholder's dividends that will be subject to
this limitation will equal his allocable share of any Excess Inclusion income
derived by OAIC with respect to the REMIC Residual Interests. OAIC's Excess
Inclusion income for any calendar quarter will equal the excess of its income
from REMIC Residual Interests over its "daily accruals" with respect to such
REMIC Residual Interests for the calendar quarter. Daily accruals for a calendar
quarter are computed by allocating to each day on which a REMIC Residual
Interest is owned a ratable portion of the product of (i) the "adjusted issue
price" of the REMIC Residual Interest at the beginning of the quarter and (ii)
120% of the long-term federal interest rate (adjusted for quarterly compounding)
on the date of issuance of the REMIC Residual Interest. The adjusted issue price
of a REMIC Residual Interest at the beginning of a calendar quarter equals the
original issue price of the REMIC Residual Interest, increased by the amount of
daily accruals for prior quarters and decreased by all prior distributions to
OAIC with respect to the REMIC Residual Interest. To the extent provided in
future Treasury regulations, the Excess Inclusion income with respect to any
REMIC Residual Interests owned by OAIC that do not have significant value will
equal the entire amount of the income derived from such REMIC Residual
Interests. Furthermore, to the extent that OAIC (or a qualified REIT subsidiary)
acquires or originates mortgage loans and uses those loans to collateralize one
or more multiple-class offerings of MBS for which no REMIC election is made
("Non-REMIC Transactions"), it is possible that, to the extent provided in
future Treasury regulations, stockholders (other than certain thrift
institutions) will not be permitted to offset certain portions of the dividend
income that they derive from OAIC that are attributable to Non-REMIC
Transactions with current deductions or net operating loss carryovers or
carrybacks. Although no applicable Treasury regulations have yet been issued, no
assurance can be provided that such regulations will not be issued in the future
or that, if issued, such regulations will not prevent OAIC's stockholders from
offsetting some portion of their dividend income with deductions or losses from
other sources.
Taxation of Stockholders on the Disposition of the Common Stock
In general, any gain or loss realized upon a taxable disposition of the
Common Stock by a stockholder who is not a dealer in securities will be treated
as long-term capital gain or loss if the Common Stock has been held for more
than one year and otherwise as short-term capital gain or loss. However, any
loss upon a sale or exchange of Common Stock by a stockholder who has held such
shares for six months or less (after applying certain holding period rules) will
be treated as a long-term capital loss to the extent of distributions from OAIC
required to be
63
<PAGE>
treated by such stockholder as long-term capital gain. All or a portion of any
loss realized upon a taxable disposition of the Common Stock may be disallowed
if other shares of Common Stock are purchased within 30 days before or after the
disposition.
Capital Gains and Losses
A capital asset generally must be held for more than one year in order for
gain or loss derived from its sale or exchange to be treated as long-term
capital gain or loss. The highest marginal individual income tax rate is 39.6%,
and the tax rate on long-term capital gains applicable to individuals is 28%.
Thus, the tax rate differential between capital gain and ordinary income for
individuals may be significant. In addition, the characterization of income as
capital gain or ordinary income may affect the deductibility of capital losses.
Capital losses not offset by capital gains may be deducted against an
individual's ordinary income only up to a maximum annual amount of $3,000.
Unused capital losses may be carried forward indefinitely by individuals. All
net capital gain of a corporate taxpayer is subject to tax at ordinary corporate
rates. A corporate taxpayer can deduct capital losses only to the extent of
capital gains, with unused losses being carried back three years and forward
five years.
Information Reporting Requirements and Backup Withholding
OAIC will report to its U.S. stockholders and to the Service the amount of
distributions paid during each calendar year, and the amount of tax withheld, if
any. Under the backup withholding rules, a stockholder may be subject to backup
withholding at the rate of 31% with respect to distributions paid unless such
holder (i) is a corporation or comes within certain other exempt categories and,
when required, demonstrates this fact or (ii) provides a taxpayer identification
number, certifies as to no loss of exemption from backup withholding, and
otherwise complies with the applicable requirements of the backup withholding
rules. A stockholder who does not provide OAIC with his correct taxpayer
identification number also may be subject to penalties imposed by the Service.
Any amount paid as backup withholding will be creditable against the
stockholder's income tax liability. In addition, OAIC may be required to
withhold a portion of capital gain distributions to any stockholders who fail to
certify their nonforeign status to OAIC. The Treasury Department issued proposed
regulations in April 1996 regarding the backup withholding rules as applied to
Non-U.S. Stockholders. The proposed regulations would alter the current system
of backup withholding compliance and are proposed to be effective for
distributions made after December 31, 1997. See "--Taxation of Non-U.S.
Stockholders."
Taxation of Tax-Exempt Stockholders
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts ("Exempt Organizations"),
generally are exempt from federal income taxation. However, they are subject to
taxation on their unrelated business taxable income ("UBTI"). While many
investments in real estate generate UBTI, the Service has issued a published
ruling that dividend distributions from a REIT to an exempt employee pension
trust do not constitute UBTI, provided that the shares of the REIT are not
otherwise used in an unrelated trade or business of the exempt employee pension
trust. Based on that ruling, amounts distributed by OAIC to Exempt Organizations
generally should not constitute UBTI. However, if an Exempt Organization
finances its acquisition of the Common Stock with debt, a portion of its income
from OAIC will constitute UBTI pursuant to the "debt-financed property" rules.
Furthermore, social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts, and qualified group legal services plans that are
exempt from taxation under paragraphs (7), (9), (17), and (20), respectively, of
Code section 501(c) are subject to different UBTI rules, which generally will
require them to characterize distributions from OAIC as UBTI. In addition, in
certain circumstances, a pension trust that owns more than 10% of OAIC's stock
is required to treat a percentage of the dividends from OAIC as UBTI (the "UBTI
Percentage"). The UBTI Percentage is the gross income derived by OAIC from an
unrelated trade or business (determined as if OAIC were a pension trust) divided
by the gross income of OAIC for the year in which the dividends are paid. The
UBTI rule applies to a pension trust holding more than 10% of OAIC's stock only
if (i) the UBTI Percentage is at least 5%, (ii) OAIC qualifies as a REIT by
reason of
64
<PAGE>
the modification of the 5/50 Rule that allows the beneficiaries of the pension
trust to be treated as holding shares of OAIC in proportion to their actuarial
interests in the pension trust, and (iii) either (A) one pension trust owns more
than 25% of the value of OAIC's stock or (B) a group of pension trusts
individually holding more than 10% of the value of OAIC's stock collectively
owns more than 50% of the value of OAIC's stock.
Any dividends received by an Exempt Organization that are allocable to
Excess Inclusion will be treated as UBTI. In addition, OAIC will be subject to
tax at the highest marginal corporate rate on the portion of any Excess
Inclusion income derived by OAIC from REMIC Residual Interests that is allocable
to stock of OAIC held by Disqualified Organizations. Any such tax would be
deductible by OAIC against its income that is not Excess Inclusion income.
If OAIC derives Excess Inclusion income from REMIC Residual Interests, a
tax similar to the tax on OAIC described in the preceding paragraph may be
imposed on stockholders who are (i) pass-through entities (i.e., partnerships,
estates, trusts, regulated investment companies, REITs, common trust funds, and
certain types of cooperatives (including farmers' cooperatives described in
section 521 of the Code)) in which a Disqualified Organization is a record
holder of shares or interests and (ii) nominees who hold Common Stock on behalf
of Disqualified Organizations. Consequently, a brokerage firm that holds shares
of Common Stock in a "street name" account for a Disqualified Organization may
be subject to federal income tax on the Excess Inclusion income derived from
those shares.
The Treasury Department has been authorized to issue regulations regarding
issuances by a REIT of multiple-class mortgage-backed securities for which no
REMIC election is made. If such Treasury regulations are issued in the future
preventing taxable stockholders from offsetting some percentage of the dividends
paid by OAIC with deductions or losses from other sources, that same percentage
of OAIC's dividends would be treated as UBTI for stockholders that are Exempt
Organizations. See "Federal Income Tax Considerations--Taxation of Taxable U.S.
Stockholders."
Taxation of Non-U.S. Stockholders
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
stockholders (collectively, "Non-U.S. Stockholders") are complex and no attempt
will be made herein to provide more than a summary of such rules. PROSPECTIVE
NON-U.S. STOCKHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE
THE IMPACT OF FEDERAL, STATE, AND LOCAL INCOME TAX LAWS WITH REGARD TO AN
INVESTMENT IN THE COMMON STOCK, INCLUDING ANY REPORTING REQUIREMENTS.
Distributions to Non-U.S. Stockholders that are not attributable to gain
from sales or exchanges by OAIC of U.S. real property interests and are not
designated by OAIC as capital gains dividends will be treated as dividends of
ordinary income to the extent that they are made out of current or accumulated
earnings and profits of OAIC. Such distributions ordinarily will be subject to a
withholding tax equal to 30% of the gross amount of the distribution unless an
applicable tax treaty reduces or eliminates that tax. However, if income from
the investment in the Common Stock is treated as effectively connected with the
Non-U.S. Stockholder's conduct of a U.S. trade or business, the Non-U.S.
Stockholder generally will be subject to federal income tax at graduated rates,
in the same manner as U.S. stockholders are taxed with respect to such
distributions (and also may be subject to the 30% branch profits tax in the case
of a Non-U.S. Stockholder that is a non-U.S. corporation). OAIC expects to
withhold U.S. income tax at the rate of 30% on the gross amount of any such
distributions made to a Non-U.S. Stockholder unless (i) a lower treaty rate
applies and any required form evidencing eligibility for that reduced rate is
filed with OAIC or (ii) the Non-U.S. Stockholder files an IRS Form 4224 with
OAIC claiming that the distribution is effectively connected income. The
Treasury Department issued proposed regulations in April 1996 that would modify
the manner in which OAIC complies with the withholding requirements.
65
<PAGE>
If OAIC derives Excess Inclusion income from REMIC Residual Interests, the
portion of the dividends paid to Non-U.S. Stockholders that is treated as Excess
Inclusion income will not be eligible for exemption from the 30% withholding tax
or a reduced treaty rate. In addition, if Treasury regulations are issued in the
future preventing taxable stockholders from offsetting some percentage of the
dividends paid by OAIC with deductions or losses from other sources, that same
percentage of OAIC's dividends would not be eligible for a reduced withholding
tax rate under an otherwise applicable tax treaty. See "-- Taxation of Taxable
U.S. Stockholders."
Distributions in excess of current and accumulated earnings and profits of
OAIC will not be taxable to a stockholder to the extent that such distributions
do not exceed the adjusted basis of the stockholder's Common Stock, but rather
will reduce the adjusted basis of such shares. To the extent that distributions
in excess of current and accumulated earnings and profits exceed the adjusted
basis of a Non-U.S. Stockholder's Common Stock, such distributions will give
rise to tax liability if the Non-U.S. Stockholder would otherwise be subject to
tax on any gain from the sale or disposition of his Common Stock, as described
below. Because it generally cannot be determined at the time a distribution is
made whether or not such distribution will be in excess of current and
accumulated earnings and profits, the entire amount of any distribution normally
will be subject to withholding at the same rate as a dividend. However, amounts
so withheld are refundable to the extent it is determined subsequently that such
distribution was, in fact, in excess of current and accumulated earnings and
profits of OAIC. In August 1996, the U.S. Congress passed the Small Business Job
Protection Act of 1996, which requires OAIC to withhold 10% of any distribution
in excess of OAIC's current and accumulated earnings and profits. Consequently,
although OAIC intends to withhold at a rate of 30% on the entire amount of any
distribution, to the extent that OAIC does not do so, any portion of a
distribution not subject to withholding at a rate of 30% will be subject to
withholding at a rate of 10%.
For any year in which OAIC qualifies as a REIT, distributions that are
attributable to gain from sales or exchanges by OAIC of U.S. real property
interests will be taxed to a Non-U.S. Stockholder under the provisions of the
Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under FIRPTA,
distributions attributable to gain from sales of U.S. real property interests
are taxed to a Non-U.S. Stockholder as if such gain were effectively connected
with a U.S. business. Non-U.S. Stockholders thus would be taxed at the normal
capital gain rates applicable to U.S. stockholders (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals). Distributions subject to FIRPTA also may be
subject to the 30% branch profits tax in the hands of a non-U.S. corporate
stockholder not entitled to treaty relief or exemption. OAIC is required to
withhold 35% of any distribution that is designated by OAIC as a capital gains
dividend. The amount withheld is creditable against the Non-U.S. Stockholder's
FIRPTA tax liability.
Gain recognized by a Non-U.S. Stockholder upon a sale of his Common Stock
generally will not be taxed under FIRPTA if OAIC is a "domestically controlled
REIT," defined generally as a REIT in which at all times during a specified
testing period less than 50% in value of the stock was held directly or
indirectly by non-U.S. persons. It is currently anticipated that OAIC will be a
"domestically controlled REIT" and, therefore, the sale of the Common Stock will
not be subject to taxation under FIRPTA. However, because the Common Stock will
be publicly traded, no assurance can be given that OAIC will be a "domestically
controlled REIT." Furthermore, gain not subject to FIRPTA will be taxable to a
Non-U.S. Stockholder if (i) investment in the Common Stock is effectively
connected with the Non-U.S. Stockholder's U.S. trade or business, in which case
the Non-U.S. Stockholder will be subject to the same treatment as U.S.
stockholders with respect to such gain, or (ii) the Non-U.S. Stockholder is a
nonresident alien individual who was present in the U.S. for 183 days or more
during the taxable year and certain other conditions apply, in which case the
nonresident alien individual will be subject to a 30% tax on the individual's
capital gains. If the gain on the sale of the Common Stock were to be subject to
taxation under FIRPTA, the Non-U.S. Stockholder would be subject to the same
treatment as U.S. stockholders with respect to such gain (subject to applicable
alternative minimum tax, a special alternative minimum tax in the case of
nonresident alien individuals, and the possible application of the 30% branch
profits tax in the case of non-U.S. corporations).
66
<PAGE>
State and Local Taxes
OAIC, the General Partner, the Limited Partner, the Operating Partnership
or OAIC's stockholders may be subject to state and local tax in various states
and localities, including those states and localities in which it or they
transact business, own property, or reside. The state and local tax treatment of
the Company and its stockholders in such jurisdictions may differ from the
federal income tax treatment described above. Consequently, prospective
stockholders should consult their own tax advisors regarding the effect of state
and local tax laws upon an investment in the Common Stock.
Sale of the Company's Property
Any gain realized by OAIC on the sale of any property held as inventory or
other property held primarily for sale to customers in the ordinary course of
its trade or business will be treated as income from a prohibited transaction
that is subject to a 100% penalty tax. Such prohibited transaction income also
may have an adverse effect upon OAIC's ability to satisfy the income tests for
REIT status. See "Federal Income Tax Considerations--Requirements For
Qualification--Income Tests" above. OAIC, however, does not presently intend to
acquire or hold a material amount of property that represents inventory or other
property held primarily for sale to customers in the ordinary course of OAIC's
trade or business.
ERISA CONSIDERATIONS
The following is a summary of material considerations arising under the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the
prohibited transaction provisions of section 4975 of the Code that may be
relevant to a prospective purchaser (including, with respect to the discussion
contained in "--Status of the Company and the Operating Partnership under
ERISA," to a prospective purchaser that is not an employee benefit plan, another
tax-qualified retirement plan, or an individual retirement account ("IRA")). The
discussion does not purport to deal with all aspects of ERISA or section 4975 of
the Code that may be relevant to particular stockholders (including plans
subject to Title I of ERISA, other retirement plans and IRAs subject to the
prohibited transaction provisions of section 4975 of the Code, and governmental
plans or church plans that are exempt from ERISA and section 4975 of the Code
but that may be subject to state law requirements) in light of their particular
circumstances.
The discussion is based on current provisions of ERISA and the Code,
existing and currently proposed regulations under ERISA and the Code, the
legislative history of ERISA and the Code, existing administrative rulings of
the Department of Labor ("DOL") and reported judicial decisions. No assurance
can be given that legislative, judicial, or administrative changes will not
affect the accuracy of any statements herein with respect to transactions
entered into or contemplated prior to the effective date of such changes.
A FIDUCIARY MAKING THE DECISION TO INVEST IN THE COMMON STOCK ON BEHALF OF
A PROSPECTIVE PURCHASER THAT IS AN EMPLOYEE BENEFIT PLAN, A TAX-QUALIFIED
RETIREMENT PLAN, OR AN IRA IS ADVISED TO CONSULT ITS OWN LEGAL ADVISOR REGARDING
THE SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975 OF THE CODE, AND
STATE LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP, OR SALE OF THE COMMON STOCK
BY SUCH PLAN OR IRA.
67
<PAGE>
Employee Benefit Plans, Tax-Qualified Retirement Plans, and IRAs
Each fiduciary of a pension, profit-sharing, or other employee benefit
plan (a "Plan") subject to Title I of ERISA should consider carefully whether an
investment in the Common Stock is consistent with his fiduciary responsibilities
under ERISA. In particular, the fiduciary requirements of Part 4 of Title I of
ERISA require an Plan's investment to be (i) prudent and in the best interests
of the Plan, its participants, and its beneficiaries, (ii) diversified in order
to minimize the risk of large losses, unless it is clearly prudent not to do so,
and (iii) authorized under the terms of the Plan's governing documents (provided
the documents are consistent with ERISA). In determining whether an investment
in the Common Stock is prudent for purposes of ERISA, the appropriate fiduciary
of a Plan should consider all of the facts and circumstances, including whether
the investment is reasonably designed, as a part of the Plan's portfolio for
which the fiduciary has investment responsibility, to meet the objectives of the
Plan, taking into consideration the risk of loss and opportunity for gain (or
other return) from the investment, the diversification, cash flow, and funding
requirements of the Plan's portfolio. A fiduciary also should take into account
the nature of the Company's business, the management of the Company, the length
of the Company's operating history, the fact that certain investment assets may
not have been identified yet, and the possibility of the recognition of UBTI.
The fiduciary of an IRA or of a qualified retirement plan not subject to
Title I of ERISA because it is a governmental or church plan or because it does
not cover common law employees (a "Non-ERISA Plan") should consider that such an
IRA or Non-ERISA Plan may only make investments that are authorized by the
appropriate governing documents and under applicable state law.
Fiduciaries of Plans and persons making the investment decision for an IRA
or other Non-ERISA Plan should consider the application of the prohibited
transaction provisions of ERISA and the Code in making their investment
decision. A "party in interest" or "disqualified person" with respect to an Plan
or with respect to a Plan or IRA subject to Code section 4975 is subject to (i)
an initial 5% excise tax on the amount involved in any prohibited transaction
involving the assets of the plan or IRA and (ii) an excise tax equal to 100% of
the amount involved if any prohibited transaction is not corrected. If the
disqualified person who engages in the transaction is the individual on behalf
of whom an IRA is maintained (or his beneficiary), the IRA will lose its
tax-exempt status and its assets will be deemed to have been distributed to such
individual in a taxable distribution (and no excise tax will be imposed) on
account of the prohibited transaction. In addition, a fiduciary who permits a
Plan to engage in a transaction that the fiduciary knows or should know is a
prohibited transaction may be liable to the Plan for any loss the Plan incurs as
a result of the transaction or for any profits earned by the fiduciary in the
transaction.
Status of OAIC under ERISA
The following section discusses certain principles that apply in
determining whether the fiduciary requirements of ERISA and the prohibited
transaction provisions of ERISA and the Code apply to an entity because one or
more investors in the equity interests in the entity is a Plan or is a Non-ERISA
Plan or IRA subject to section 4975 of the Code. A Plan fiduciary also should
consider the relevance of those principles to ERISA's prohibition on improper
delegation of control over or responsibility for "plan assets" and ERISA's
imposition of co-fiduciary liability on a fiduciary who participates in, permits
(by action or inaction) the occurrence of, or fails to remedy a known breach by
another fiduciary.
If the assets of the Company are deemed to be "plan assets" under ERISA,
(i) the prudence standards and other provisions of Part 4 of Title I of ERISA
would be applicable to any transactions involving the Company's assets, (ii)
persons who exercise any authority over the Company's assets, or who provide
investment advice to the Company, would (for purposes of the fiduciary
responsibility provisions of ERISA) be fiduciaries of each Plan that acquires
Common Stock, and transactions involving the Company's assets undertaken at
their direction or pursuant to their advice might violate their fiduciary
responsibilities under ERISA, especially with regard to conflicts of interest,
(iii) a fiduciary exercising his investment discretion over the assets of a Plan
to cause it to acquire or hold
68
<PAGE>
the Common Stock could be liable under Part 4 of Title I of ERISA for
transactions entered into by the Company that do not conform to ERISA standards
of prudence and fiduciary responsibility, and (iv) certain transactions that the
Company might enter into in the ordinary course of its business and operations
might constitute "prohibited transactions" under ERISA and the Code.
Regulations of the DOL defining "plan assets" (the "Plan Asset
Regulations") generally provide that when a Plan or Non-ERISA Plan or IRA
acquires a security that is an equity interest in an entity and the security is
neither a "publicly-offered security" nor a security issued by an investment
company registered under the Investment Company Act of 1940, the Plan's or
Non-ERISA Plan's or IRA's assets include both the equity interest and an
undivided interest in each of the underlying assets of the issuer of such equity
interest, unless one or more exceptions specified in the Plan Asset Regulations
are satisfied.
The Plan Asset Regulations define a publicly-offered security as a
security that is "widely-held," "freely transferable," and either part of a
class of securities registered under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), or sold pursuant to an effective registration
statement under the Securities Act (provided the securities are registered under
the Exchange Act within 120 days after the end of the fiscal year of the issuer
during which the offering occurred). The Common Stock is being sold in an
offering registered under the Securities Act and will be registered under the
Exchange Act. The Plan Asset Regulations provide that a security is "widely
held" only if it is part of a class of securities that is owned by 100 or more
investors independent of the issuer and of one another. A security will not fail
to be widely held because the number of independent investors falls below 100
subsequent to the initial public offering as a result of events beyond the
issuer's control. The Company anticipates that upon completion of this offering,
the Common Stock will be "widely held."
The Plan Asset Regulations provide that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The Plan Asset Regulations further provide
that where a security is part of an offering in which the minimum investment is
$10,000 or less (as is the case with this offering), certain restrictions
ordinarily will not, alone or in combination, affect a finding that such
securities are freely transferable. The restrictions on transfer enumerated in
the Plan Asset Regulations as not affecting that finding include: (i) any
restriction on or prohibition against any transfer or assignment that would
result in the termination or reclassification of an entity for federal or state
tax purposes, or that otherwise would violate any federal or state law or court
order, (ii) any requirement that advance notice of a transfer or assignment be
given to the issuer, (iii) any administrative procedure that establishes an
effective date, or an event (such as completion of an offering), prior to which
a transfer or assignment will not be effective, and (iv) any limitation or
restriction on transfer or assignment that is not imposed by the issuer or a
person acting on behalf of the issuer. The Company believes that the
restrictions imposed under the Articles of Incorporation on the transfer of the
Company's stock will not result in the failure of the Common Stock to be "freely
transferable." The Company also is not aware of any other facts or circumstances
limiting the transferability of the Common Stock that are not enumerated in the
Plan Asset Regulations as those not affecting free transferability, and no
assurance can be given that the DOL or the Treasury Department will not reach a
contrary conclusion.
Assuming that the Common Stock will be "widely held" and that no other
facts and circumstances other than those referred to in the preceding paragraph
exist that restrict transferability of the Common Stock, the shares of Common
Stock should be publicly offered securities and the assets of the Company should
not be deemed to be "plan assets" of any Plan, IRA, or Non-ERISA Plan that
invests in the Common Stock.
69
<PAGE>
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
AND REAL PROPERTY INVESTMENTS
The following discussion provides general summaries of certain legal
aspects of loans secured by real property and the acquisition of real property.
Because such legal aspects are governed by applicable state law (which laws vary
from state to state), the summaries do not purport to be complete, to reflect
the laws of any particular state, or to encompass the laws of all states.
Accordingly, the summaries are qualified in their entirety by reference to the
applicable laws of the states where the property is located.
General
Each mortgage loan will be evidenced by a note or bond and secured by an
instrument granting a security interest in real property, which may be a
mortgage, deed of trust or a deed to secure debt, depending upon the prevailing
practice and law in the state in which the related Mortgaged Property is
located. Mortgages, deeds of trust and deeds to secure debt are herein
collectively referred to as "mortgages." A mortgage creates a lien upon, or
grants a title interest in, the real property covered thereby, and represents
the security for the repayment of the indebtedness customarily evidenced by a
promissory note. The priority of the lien created or interest granted will
depend on the terms of the mortgage and, in some cases, on the terms of separate
subordination agreements or intercreditor agreements with others that hold
interests in the real property, the knowledge of the parties to the mortgage
and, generally, the order of recordation of the mortgage in the appropriate
public recording office. However, the lien of a recorded mortgage will generally
be subordinate to later-arising liens for real estate taxes and assessments and
other charges imposed under governmental police powers.
Types of Mortgage Instruments
There are two parties to a mortgage: a mortgagor (the borrower and usually
the owner of the subject property) and a mortgagee (the lender). In contrast, a
deed of trust is a three-party instrument, among a trustor (the equivalent of a
borrower), a trustee to whom the real property is conveyed, and a beneficiary
(the lender) for whose benefit the conveyance is made. Under a deed of trust,
the trustor grants the property, irrevocably until the debt is paid, in trust
and generally with a power of sale, to the trustee to secure repayment of the
indebtedness evidenced by the related note. A deed to secure debt typically has
two parties. The grantor (the borrower) conveys title to the real property to
the grantee (the lender), generally with a power of sale, until such time as the
debt is repaid. The mortgagee's authority under a mortgage, the trustee's
authority under a deed of trust and the grantee's authority under a deed to
secure debt are governed by the express provisions of the related instrument,
the law of the state in which the real property is located, certain federal laws
and, in some deed of trust transactions, the directions of the beneficiary.
Leases and Rents
Mortgages that encumber income-producing property often contain an
assignment of rents and leases, pursuant to which the borrower assigns to the
lender the borrower's right, title and interest as landlord under each lease and
the income derived therefrom, while (unless rents are to be paid directly to the
lender) retaining a revocable license to collect the rents for so long as there
is no default. If the borrower defaults, the license terminates and the lender
is entitled to collect the rents. Local law may require that the lender take
possession of the property and/or obtain a court-appointed receiver before
becoming entitled to collect the rents.
The potential payments from a property may be less than the periodic
payments due under the mortgage. For example, the net income that would
otherwise be generated from the property may be less than the amount that would
be needed to service the debt if the leases on the property are at below-market
rents, the market rents have
70
<PAGE>
fallen since the original financing, vacancies have increased, or as a result of
excessive or increased maintenance, repair or other obligations to which a
lender succeeds as landlord.
Condemnation and Insurance
The form of the mortgage or deed of trust used by many lenders confers on
the mortgagee or beneficiary the right both to receive all proceeds collected
under any hazard insurance policy and all awards made in connection with any
condemnation proceedings, and to apply such proceeds and awards to any
indebtedness secured by the mortgage or deed of trust, in such order as the
mortgage or beneficiary may determine. Thus, in the event improvements on the
property are damaged or destroyed by fire or other casualty, or in the event the
property is taken by condemnation, the mortgagee or beneficiary under the senior
mortgage or deed of trust will have the prior right to collect any insurance
proceeds payable under a hazard insurance policy and any award of damages in
connection with the condemnation and to apply the same to the indebtedness
secured by the senior mortgage or deed of trust. Proceeds in excess of the
amount of senior mortgage indebtedness will, in most cases, be applied to the
indebtedness of a junior mortgage or trust deed to the extent the junior
mortgage or deed of trust so provides. The laws of certain states may limit the
ability of mortgagees or beneficiaries to apply the proceeds of hazard insurance
and partial condemnation awards to the secured indebtedness. In such states, the
mortgagor or trustor must be allowed to use the proceeds of hazard insurance to
repair the damage unless the security of the mortgagee or beneficiary has been
impaired. Similarly, in certain states, the mortgagee or beneficiary is entitled
to the award for a partial condemnation of the real property security only to
the extent that its security is impaired.
Foreclosure
General. Foreclosure is a legal procedure that allows the lender to
recover its mortgage debt by enforcing its rights and available legal remedies
under the mortgage. If the borrower defaults in payment or performance of its
obligations under the note or mortgage, the lender has the right to institute
foreclosure proceedings to sell the real property at public auction to satisfy
the indebtedness.
Foreclosure procedures vary from state to state. Two primary methods of
foreclosing a mortgage are judicial foreclosure, involving court proceedings,
and non-judicial foreclosure pursuant to a power of sale granted in the mortgage
instrument. Other foreclosure procedures are available in some states, such as
strict foreclosure, but they are either infrequently used or available only in
limited circumstances.
Judicial Foreclosure. A judicial foreclosure proceeding is conducted in a
court having jurisdiction over the mortgaged property. Generally, the action is
initiated by the service of legal pleadings upon all parties having a
subordinate interest of record in the real property and all parties in
possession of the property, under leases or otherwise, whose interests are
subordinate to the mortgage. A foreclosure action is subject to most of the
delays and expenses of other lawsuits if defenses are raised or counterclaims
are interposed, and sometimes requires several years to complete. When the
lender's right to foreclose is contested, the legal proceedings can be
time-consuming. Upon successful completion of a judicial foreclosure proceeding,
the court generally issues a judgment of foreclosure and appoints a referee or
other officer to conduct a public sale of the mortgaged property, the proceeds
of which are used to satisfy the judgment. Such sales are made in accordance
with procedures that vary from state to state.
Non-Judicial Foreclosure/Power of Sale. Foreclosure of a deed of trust is
generally accomplished by a non-judicial trustee's sale pursuant to a power of
sale typically granted in the deed of trust. A power of sale may also be
contained in any other type of mortgage instrument if applicable law so permits.
A power of sale under a deed of trust allows a non-judicial public sale to be
conducted generally following a request from the beneficiary/lender to the
trustee to sell the property upon default by the borrower and after notice of
sale is given in accordance with the terms of the mortgage and applicable state
law. The borrower or junior lienholder may then have the right, during a
reinstatement period required in some states, to cure the default by paying the
entire actual amount in
71
<PAGE>
arrears (without regard to the acceleration of the indebtedness), plus the
lender's expenses incurred in enforcing the obligation. In other states, the
borrower or the junior lienholder is not provided a period to reinstate the
loan, but has only the right to pay off the entire debt to prevent the
foreclosure sale. Generally, state law governs the procedure for public sale,
the parties entitled to notice, the method of giving notice and the applicable
time periods.
Equitable Limitations on Enforceability of Certain Provisions. United
States courts have traditionally imposed general equitable principles to limit
the remedies available to lenders in foreclosure actions. These principles are
generally designed to relieve borrowers from the effects of mortgage defaults
perceived as harsh or unfair. Relying on such principles, a court may alter the
specific terms of a loan to the extent it considers necessary to prevent or
remedy an injustice, undue oppression or overreaching, or may require the lender
to undertake affirmative actions to determine the cause of the borrower's
default and the likelihood that the borrower will be able to reinstate the loan.
In some cases, courts have substituted their judgment for the lender's and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from a temporary financial disability.
In other cases, courts have limited the right of the lender to foreclose in the
case of a non-monetary default, such as a failure to adequately maintain the
mortgaged property or an impermissible further encumbrance of the mortgaged
property.
Even if the lender is successful in the foreclosure action and is able to
take possession of the property, the costs of operating and maintaining a
commercial or multifamily property may be significant and may be greater than
the income derived from that property. The costs of management and operation of
those mortgaged properties which are hotels, motels, restaurants, nursing homes,
convalescent homes or hospitals may be particularly significant because of the
expertise, knowledge and with respect to nursing or convalescent homes,
regulatory compliance, required to run such operations and the effect which
foreclosure and a change in ownership may have with respect to consent
requirements and on the public's and the industry's (including franchisors')
perception of the quality of such operations. The lender also will commonly
obtain the services of a real estate broker and pay the broker's commission in
connection with the sale or lease of the property. Depending upon market
conditions, the ultimate proceeds of the sale of the property may not equal the
lender's investment in the property. Moreover, because of the expenses
associated with acquiring, owning and selling a mortgaged property, a lender
could realize an overall loss on a mortgage loan even if the mortgaged property
is sold at foreclosure, or resold after it is acquired through foreclosure, for
an amount equal to the full outstanding principal amount of the loan plus
accrued interest.
The holder of a junior mortgage that forecloses on a mortgaged property
does so subject to senior mortgages and any other prior liens, and may be
obliged to keep senior mortgage loans current in order to avoid foreclosure of
its interest in the property. In addition, if the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause contained in a
senior mortgage, the junior mortgagee could be required to pay the full amount
of the senior mortgage indebtedness or face foreclosure.
Post-Sale Redemption. In a majority of states, after sale pursuant to a
deed of trust or foreclosure of a mortgage, the borrower and foreclosed junior
lienors are given a statutory period in which to redeem the property. In some
states, statutory redemption may occur only upon payment of the foreclosure sale
price. In other states, redemption may be permitted if the former borrower pays
only a portion of the sums due. In some states, the borrower retains possession
of the property during the statutory redemption period. The effect of a
statutory right of redemption is to diminish the ability of the lender to sell
the foreclosed property because the exercise of a right of redemption would
defeat the title of any purchaser through a foreclosure. Consequently, the
practical effect of the redemption right is to force the lender to maintain the
property and pay the expenses of ownership until the redemption period has
expired. In some states, a post-sale statutory right of redemption may exist
following a judicial foreclosure, but not following a trustee's sale under a
deed of trust.
Anti-Deficiency Legislation. Any commercial or multi-family residential
mortgage loans acquired by the Company are likely to be nonrecourse loans, as to
which recourse in the case of default will be limited to the
72
<PAGE>
property and such other assets, if any, that were pledged to secure the mortgage
loan. However, even if a mortgage loan by its terms provides for recourse to the
borrower's other assets, a lender's ability to realize upon those assets may be
limited by state law. For example, in some states a lender cannot obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust or by non-judicial means. Other statutes may require the lender to
exhaust the security afforded under a mortgage before bringing a personal action
against the borrower. In certain other states, the lender has the option of
bringing a personal action against the borrower on the debt without first
exhausting such security; however, in some of those states, the lender,
following judgment on such personal action, may be deemed to have elected a
remedy and thus may be precluded from foreclosing upon the security.
Consequently, lenders in those states where such an election of remedy provision
exists may choose to proceed first against the security. Finally, other
statutory provisions, designed to protect borrowers from exposure to large
deficiency judgments that might result from bidding at below-market values at
the foreclosure sale, limit any deficiency judgment to the excess of the
outstanding debt over the fair market value of the property at the time of the
sale.
Cooperatives. Mortgage loans may be secured by a security interest on the
borrower's ownership interest in shares, and the proprietary leases appurtenant
thereto (or cooperative contract rights), allocable to cooperative dwelling
units that may be vacant or occupied by non-owner tenants. Such loans are
subject to certain risks not associated with mortgage loans secured by a lien on
the fee estate of a borrower in real property. Such a loan typically is
subordinate to the mortgage, if any, on the cooperative's building which, if
foreclosed, could extinguish the equity in the building and the proprietary
leases of the dwelling units derived from ownership of the shares of the
cooperative. Further, transfer of shares in a cooperative are subject to various
regulations as well as to restrictions (including transfer restrictions) under
the governing documents of the cooperative, and the shares may be canceled in
the event that associated maintenance charges due under the related proprietary
leases are not paid. Typically, a recognition agreement between the lender and
the cooperative provides, among other things, the lender with an opportunity to
cure a default under a proprietary lease but such recognition agreements may not
have been obtained in the case of all the mortgage loans secured by cooperative
shares (or contract rights).
Under the laws applicable in many states, "foreclosure" on cooperative
shares is accomplished by a sale in accordance with the provisions of Article 9
of the UCC and the security agreement relating to the shares. Article 9 of the
UCC requires that a sale be conducted in a "commercially reasonable" manner,
which may be dependent upon, among other things, the notice given to the debtor
and the method, manner, time, place and terms of the sale. Article 9 of the UCC
provides that the proceeds of the sale will be applied first to pay the costs
and expenses of the sale and then to satisfy the indebtedness secured by the
lender's security interest. A recognition agreement, however, generally provides
that the lender's right to reimbursement is subject to the right of the
cooperative to receive sums due under the proprietary leases.
Bankruptcy Laws
Operation of the Bankruptcy Code and related state laws may interfere with
or affect the ability of a lender to realize upon collateral and/or to enforce a
deficiency judgment. For example, under the Bankruptcy Code, virtually all
actions (including foreclosure actions and deficiency judgment proceedings) to
collect a debt are automatically stayed upon the filing of the bankruptcy
petition and, often, no interest or principal payments are made during the
course of the bankruptcy case. The delay and the consequences thereof caused by
such automatic stay can be significant. Also, under the Bankruptcy Code, the
filing of a petition in bankruptcy by or on behalf of a junior lien or may stay
the senior lender from taking action to foreclose out such junior lien.
Under the Bankruptcy Code, provided certain substantive and procedural
safeguards protective of the lender are met, the amount and terms of a mortgage
loan secured by a lien on property of the debtor may be modified under certain
circumstances. For example, the outstanding amount of the loan may be reduced to
the then-current value of the property (with a corresponding partial reduction
of the amount of lender's security interest) pursuant
73
<PAGE>
to a confirmed plan or lien avoidance proceeding, thus leaving the lender a
general unsecured creditor for the difference between such value and the
outstanding balance of the loan. Other modifications may include the reduction
in the amount of each scheduled payment, by means of a reduction in the rate of
interest and/or an alteration of the repayment schedule (with or without
affecting the unpaid principal balance of the loan), and/or by an extension (or
shortening) of the term to maturity.
Federal bankruptcy law may also have the effect of interfering with or
affecting the ability of the secured lender to enforce the borrower's assignment
of rents and leases related to the mortgaged property. Under section 362 of the
Bankruptcy Code, the lender will be stayed from enforcing the assignment, and
the legal proceedings necessary to resolve the issue could be time-consuming,
with resulting delays in the lender's receipt of the rents. In addition, the
Bankruptcy Code has been amended to provide that a lender's perfected
pre-petition security interest in leases, rents and hotel revenues continues in
the post-petition leases, rents and hotel revenues, unless a bankruptcy court
orders to the contrary "based on the equities of the case."
In a bankruptcy or similar proceeding, action may be taken seeking the
recovery as a preferential transfer of any payments made by the mortgagor under
the related mortgage loan to the owner of such mortgage loan. Payments on
long-term debt may be protected from recovery as preferences if they are
payments in the ordinary course of business made on debts incurred in the
ordinary course of business. Whether any particular payment would be protected
depends upon the facts specific to a particular transaction.
A trustee in bankruptcy, in some cases, may be entitled to collect its
costs and expenses in preserving or selling the mortgaged property ahead of
payment to the lender. In certain circumstances, a debtor in bankruptcy may have
the power to grant liens senior to the lien of a mortgage, and analogous state
statutes and general principles of equity may also provide a mortgagor with
means to halt a foreclosure proceeding or sale and to force a restructuring of a
mortgage loan on terms a lender would not otherwise accept. Moreover, the laws
of certain states also give priority to certain tax liens over the lien of a
mortgage or deed of trust. Under the Bankruptcy Code, if the court finds that
actions of the mortgagee have been unreasonable, the lien of the related
mortgage may be subordinated to the claims of unsecured creditors.
The Company's acquisition of real property, particularly REO Property, may
be affected by many of the considerations applicable to mortgage loan lending.
For example, the Company's acquisition of certain property at foreclosure sale
could be affected by a borrower's post-sale right of redemption. In addition,
the Company's ability to derive income from real property will generally be
dependent on its receipt of rent payments under leases of the related property.
The ability to collect rents may be impaired by the commencement of a bankruptcy
proceeding relating to a lessee under such lease. Under the Bankruptcy Code, the
filing of a petition in bankruptcy by or on behalf of a lessee results in a stay
in bankruptcy against the commencement or continuation of any state court
proceeding for past due rent, for accelerated rent, for damages or for a summary
eviction order with respect to a default under the lease that occurred prior to
the filing of the lessee's petition. In addition, the Bankruptcy Code generally
provides that a trustee or debtor-in-possession may, subject to approval of the
court, (i) assume the lease and retain it or assign it to a third party or (ii)
reject the lease. If the lease is assumed, the trustee or debtor-in-possession
(or assignee, if applicable) must cure any defaults under the lease, compensate
the lessor for its losses and provide the lessor with "adequate assurance" of
future performance. Such remedies may be insufficient, and any assurances
provided to the lessor may, in fact, be inadequate. If the lease is rejected,
the lessor will be treated as an unsecured creditor with respect to its claim
for damages for termination of the lease. The Bankruptcy Code also limits a
lessor's damages for lease rejection to the rent reserved by the lease (without
regard to acceleration) for the greater of one year, or 15%, not to exceed three
years, of the remaining term of the lease.
74
<PAGE>
Default Interest and Limitations on Prepayments
Notes and mortgages may contain provisions that obligate the borrower to
pay a late charge or additional interest if payments are not timely made, and in
some circumstances, may prohibit prepayments for a specified period and/or
condition prepayments upon the borrower's payment of prepayment fees or yield
maintenance penalties. In certain states, there are or may be specific
limitations upon the late charges that a lender may collect from a borrower for
delinquent payments. Certain states also limit the amounts that a lender may
collect from a borrower as an additional charge if the loan is prepaid. In
addition, the enforceability of provisions that provide for prepayment fees or
penalties upon an involuntary prepayment is unclear under the laws of many
states.
Forfeitures in Drug and RICO Proceedings
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property," including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
Environmental Risks
General. The Company will be subject to environmental risks when taking a
security interest in real property, as well as when it acquires any real
property. Of particular concern may be properties that are or have been used for
industrial, manufacturing, military or disposal activity. Such environmental
risks include the risk of the diminution of the value of a contaminated property
or, as discussed below, liability for the costs of compliance with environmental
regulatory requirements or the costs of clean-up or other remedial actions.
These compliance or clean-up costs could exceed the value of the property or the
amount of the lender's loan. In certain circumstances, a lender could determine
to abandon a contaminated mortgaged property as collateral for its loan rather
than foreclose and risk liability for compliance or clean-up costs.
CERCLA. The federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), imposes strict liability on
present and past "owners" and "operators" of contaminated real property for the
costs of clean-up. A secured lender may be liable as an "owner" or "operator" of
a contaminated mortgaged property if agents or employees of the lender have
become sufficiently involved in the management of such mortgaged property or the
operations of the borrower. Such liability may exist even if the lender did not
cause or contribute to the contamination and regardless of whether the lender
has actually taken possession of a mortgaged property through foreclosure, deed
in lieu of foreclosure or otherwise. The magnitude of the CERCLA liability at
any given contaminated site is a function of the actions required to address
adequately the risks to human health and the environment posed by the particular
conditions at the site. As a result, such liability is not constrained by the
value of the property or the amount of the original or unamortized principal
balance of any loans secured by the property. Moreover, under certain
circumstances, liability under CERCLA may be joint and several -- i.e., any
liable party may be obligated to pay the entire cleanup costs regardless of its
relative contribution to the contamination.
75
<PAGE>
The Asset Conservation, Lender Liability and Deposit Insurance Act of 1996
(the "1996 Lender Liability Act") provides for a safe harbor for secured lenders
from CERCLA liability even though the lender forecloses and sells the real
estate securing the loan, provided the secured lender sells "at the earliest
practicable, commercially reasonable time, at commercially reasonable terms,
taking into account market conditions and legal and regulatory requirements."
Although the 1996 Lender Liability Act provides significant protection to
secured lenders, it has not been construed by the courts and there are
circumstances in which actions taken could expose a secured lender to CERCLA
liability. And, the transferee from the secured lender is not entitled to the
protections enjoyed by a secured lender. Hence, the marketability of any
contaminated real estate continues to be suspect.
Certain Other Federal and State Laws. Many states have environmental
clean-up statutes similar to CERCLA, and not all those statutes provide for a
secured creditor exemption. In addition, underground storage tanks are commonly
found on a wide variety of commercial and industrial properties. Federal and
state laws impose liability on the owners and operators of underground storage
tanks for any cleanup that may be required as a result of releases from such
tanks. These laws also impose certain compliance obligations on the tank owners
and operators, such as regular monitoring for leaks and upgrading of older
tanks. The Company may become a tank owner or operator, and subject to
compliance obligations and potential cleanup liabilities, either as a result of
becoming involved in the management of a site at which a tank is located or,
more commonly, by taking title to such a property. Federal and state laws also
obligate property owners and operators to maintain and, under some
circumstances, to remove asbestos-containing building materials and lead-based
paint. As a result, the presence of these materials can increase the cost of
operating a property and thus diminish its value. In a few states, transfers of
some types of properties are conditioned upon cleanup of contamination prior to
transfer. In these cases, a lender that becomes the owner of a property through
foreclosure, deed in lieu of foreclosure or otherwise, may be required to clean
up the contamination before selling or otherwise transferring the property.
Beyond statute-based environmental liability, there exist common law
causes of action (for example, actions based on nuisance or on toxic tort
resulting in death, personal injury or damage to property) related to hazardous
environmental conditions on a property.
Superlien Laws. Under the laws of many states, contamination of a property
may give rise to a lien on the property for clean-up costs. In several states,
such a lien has priority over all existing liens, including those of existing
mortgages. In these states, the lien of a mortgage may lose its priority to such
a "superlien."
Additional Considerations. The cost of remediating environmental
contamination at a property can be substantial. To reduce the likelihood of
exposure to such losses, the Company will not acquire title to a Mortgaged
Property or take over its operation unless, based on an environmental site
assessment prepared by a qualified environmental consultant, it has made the
determination that it is appropriate to do so. The Company expects that it will
organize a special purpose subsidiary to acquire any environmentally
contaminated real property.
Environmental Site Assessments. In addition to possibly allowing a lender
to qualify for the innocent landowner defense (see discussion under
"--Environmental Risks--CERCLA" above), environmental site assessments can be a
valuable tool in anticipating, managing and minimizing environmental risk. They
are commonly performed in many commercial real estate transactions.
Environmental site assessments vary considerably in their content and
quality. Even when adhering to good professional practices, environmental
consultants will sometimes not detect significant environmental problems because
an exhaustive environmental assessment would be far too costly and
time-consuming to be practical. Nevertheless, it is generally helpful in
assessing and addressing environmental risks in connection with commercial real
estate (including multifamily properties) to have an environmental site
assessment of a property because it enables anticipation of environmental
problems and, if agreements are structured appropriately, can allow a party to
decline to go forward with a transaction.
76
<PAGE>
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980 ("Title V") provides that state usury limitations shall not apply to
certain types of residential (including multifamily) first mortgage loans
originated by certain lenders after March 31, 1980. Title V authorized any state
to reimpose interest rate limits by adopting, before April 1, 1983, a law or
constitutional provision that expressly rejects application of the federal law.
In addition, even where Title V is not so rejected, any state is authorized by
the law to adopt a provision limiting discount points or other charges on
mortgage loans covered by Title V. Certain states have taken action to reimpose
interest rate limits and/or to limit discount points or other charges.
Americans With Disabilities Act
Under Title III of the Americans with Disabilities Act of 1990 and rules
promulgated thereunder (collectively, the "ADA"), in order to protect
individuals with disabilities, public accommodations (such as hotels,
restaurants, shopping centers, hospitals, schools and social service center
establishments) must remove architectural and communication barriers that are
structural in nature from existing places of public accommodation to the extent
"readily achievable." In addition, under the ADA, alterations to a place of
public accommodation or a commercial facility are to be made so that, to the
maximum extent feasible, such altered portions are readily accessible to and
usable by disabled individuals. The "readily achievable" standard takes into
account, among other factors, the financial resources of the affected site,
owner, landlord or other applicable person. In addition to imposing a possible
financial burden on the borrower in its capacity as owner or landlord, the ADA
may also impose such requirements on a foreclosing lender who succeeds to the
interest of the borrower as owner or landlord. Furthermore, since the "readily
achievable" standard may vary depending on the financial condition of the owner
or landlord, a foreclosing lender who is financially more capable than the
borrower of complying with the requirements of the ADA may be subject to more
stringent requirements than those to which the borrower is subject.
USE OF PROCEEDS
Approximately $25,691,024 (_____% of the expected net proceeds of this
offering assuming that the Underwriters' over-allotment option is not exercised)
will be used to purchase the Initial Investments. The purchase price for the
Initial Investments purchased from Ocwen Financial was based in large measure on
certain assumptions made with respect to the potential net cash flows to be
generated by the Initial Investments. See "Initial Investments," "Yield
Considerations Regarding the Initial Investments" and "Risk Factor--Other
Risks--Conflicts of Interest in the Business of the Company." Pending
investment, the balance of the net proceeds (approximately $ million) will be
invested in short-term, interest-bearing securities and held in trust by the
Company until used to originate or acquire Subordinated Interests, Distressed
Real Properties and Other Real Estate Related Assets as provided herein. See
"Operating Policies and Strategies."
The Company intends to supplement the proceeds of this offering through
bank borrowings, commercial paper borrowings and the issuance of debt securities
and additional equity securities.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to each of the underwriters named
below (the "Underwriters") and each of the Underwriters, for whom Friedman,
Billings, Ramsey & Co., Inc. is acting as representative, has severally
agreed to purchase, the number of shares of Common Stock offered hereby set
forth below opposite its name.
77
<PAGE>
Underwriter Number of Shares
----------- ----------------
Friedman, Billings, Ramsey & Co., Inc. ..... [12,500,000]
Total ................................ 12,500,000
==========
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to purchase all the shares of Common Stock offered
hereby if any are purchased.
The Underwriters propose initially to offer the shares of Common Stock
directly to the public at the public offering price set forth on the cover page
of this Prospectus and to certain dealers at such offering price less a
concession not to exceed $__________ per share of Common Stock. The Underwriters
may allow and such dealers may reallow a concession not to exceed $__________
per share of Common Stock to certain other dealers. After the shares of Common
Stock are released for sale to the public, the offering price and other selling
terms may be changed by the Underwriters.
The Company has granted to the Underwriters an option exercisable during a
30-day period after the date hereof to purchase, at the initial offering price
less underwriting discounts and commissions, up to an additional 1,875,000
shares of Common Stock for the sole purpose of covering over-allotments, if any.
To the extent that the Underwriters exercise such option, each Underwriter will
be committed, subject to certain conditions, to purchase a number of the
additional shares of Common Stock proportionate to such Underwriter's initial
commitment.
The Company has agreed to indemnify the several Underwriters against
certain civil liabilities under the Securities Act of 1933, or to contribute to
payments the Underwriters may be required to make in respect thereof.
Prior to this offering, there has been no public market for the shares of
Common Stock. The initial public offering price has been determined by
negotiation between the Company and the representative of the Underwriters.
Among the factors considered in making such determination were the history
of, and the prospects for, the industry in which the Company will compete, an
assessment of the skills of the Manager and the Company's prospects for
future earnings, the general conditions of the economy and the securities
market and the prices of offerings by similar issuers. There can,
however, be no assurance that the price at which the shares of Common Stock will
sell in the public market after this offering will not be lower than the price
at which they are sold by the Underwriters.
The representative of the Underwriters has informed the Company that the
Underwriters do not intend to confirm sales of the shares offered hereby to any
accounts over which they exercise discretionary authority.
The Company and the officers and directors of OAIC have agreed not to
offer, sell or contract to sell or otherwise dispose of any Common Stock of OAIC
without the prior consent of the representative for a period of 90 days from the
date of this Prospectus.
OAIC does not intend to apply to have the Common Stock listed on any
stock exchange, but has applied for quotation of the Common Stock on The
Nasdaq Stock Market.
78
<PAGE>
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Hunton &
Williams, Richmond, Virginia, and for the Underwriters by Simpson Thacher &
Bartlett (a partnership which includes professional corporations), New York, New
York. Simpson Thacher & Bartlett may rely as to matters of Virginia law on the
opinion of Hunton & Williams.
EXPERTS
The financial statement of Ocwen Asset Investment Corp. as of February 12,
1997 included in this Prospectus has been so included in reliance on the report
of Price Waterhouse LLP, independent certified public accountants, given on the
authority of said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus forms a part)
under the Securities Act of 1933, as amended, with respect to the Common Stock
offered pursuant to the Prospectus. This Prospectus contains summaries of the
material terms of the documents referred to herein and therein, but does not
contain all of the information set forth in the Registration Statement pursuant
to the rules and regulations of the Commission. For further information,
reference is made to such Registration Statement and the exhibits thereto. Such
Registration Statement and exhibits as well as reports and other information
filed by OAIC can be inspected without charge and copied at prescribed rates at
the public reference facilities maintained by the Commission at the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, and at its Regional Offices located as follows: Chicago Regional Office,
Citicorp Center, Suite 1400, 500 West Madison Street, Chicago, Illinois
60661-2511; and New York Regional Office, Seven World Trade Center, Suite 1300,
New York, New York 10048. The Commission maintains a Web site that contains
reports, proxy, and information statements and other information regarding
registrants that file electronically with the Commission. The Web site is
located at http://www.sec.gov.
Statements contained in this Prospectus as to the contents of any contract
or other document that is filed as an exhibit to the Registration Statement are
not necessarily complete, and each such statement is qualified in its entirety
by reference to the full text of such contract or document.
The Company will be required to file reports and other information with
the Commission pursuant to the Securities Exchange Act of 1934. In addition to
applicable legal requirements, if any, holders of Common Stock will receive
annual reports containing audited financial statements with a report thereon by
the Company's independent certified public accounts, and quarterly reports
containing unaudited financial information for each of the first three quarters
of each fiscal year.
Ocwen Financial
Ocwen Financial files reports and other information with the Commission
pursuant to the Securities Exchange Act of 1934. Additional information about
Ocwen Financial, therefore, may be inspected or copied at the public reference
facilities maintained by the Commission at the locations mentioned above.
79
<PAGE>
GLOSSARY OF TERMS
Except as otherwise specified or as the context may otherwise require, the
following terms used herein shall have the meanings assigned to them below. All
terms in the singular shall have the same meanings when used in the plural and
vice-versa.
"1996 Lender Liability Act" shall mean the Asset Conservation, Lender
Liability and Deposit Insurance Act of 1996.
"ADA" means the Americans with Disabilities Act of 1990, as amended.
"Affiliate" shall mean (i) any person directly or indirectly owning,
controlling, or holding, with power to vote ten percent or more of the
outstanding voting securities of such other person, (ii) any person ten percent
or more of whose outstanding voting securities are directly or indirectly owned,
controlled, or held, with power to vote, by such other person, (iii) any person
directly or indirectly controlling, controlled by, or under common control with
such other person, (iv) any executive officer, director, trustee or general
partner of such other person, and (v) any legal entity for which such person
acts as an executive officer, director, trustee or general partner. The term
"person" means and includes any natural person, corporation, partnership,
association, limited liability company or any other legal entity. An indirect
relationship shall include circumstances in which a person's spouse, children,
parents, siblings or mothers-, fathers-, sisters- or brothers-in-law is or has
been associated with a person.
"Affiliated Transaction" means any material acquisition transaction
between the Company and any Interested Stockholder.
"Articles of Incorporation" means the Articles of Incorporation of the
Company.
"Average Invested Assets" shall mean the average of the aggregate book
value of the assets of the Company (including all of OAIC's direct and indirect
subsidiaries), before reserves for depreciation or bad debts or other similar
noncash reserves, computed by taking the daily average of such values during
such period.
"Bank" shall mean Ocwen Federal Bank FSB.
"Bankruptcy Code" shall mean Title 11 of the United States Code, as
amended.
"Beneficiary" shall mean the beneficiary of the Trust.
"Board of Directors" means the Board of Directors of the Company.
"Bylaws" means the Bylaws of the Company.
"CERCLA" shall mean the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended.
"Closing" means the closing of the Offering.
"Closing Date" shall mean on or about ____________, 1997.
"Closing Price" shall mean the average of the high bid and low asked
prices in the over-the-counter market, as reported by The Nasdaq Stock
Market.
80
<PAGE>
"CMBS" shall mean commercial or multi-family MBS.
"CMO or CMO Bonds" shall mean collateralized mortgage obligations.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Commission" shall mean the Securities and Exchange Commission.
"Common Stock" shall mean the Common Stock, par value $0.01 per share of
OAIC.
"Company" shall mean Ocwen Asset Investment Corp., a Virginia corporation,
together, unless the context indicates otherwise, with its subsidiaries.
"Company Expenses" shall mean all administrative costs and expenses of the
Company and the General Partner.
"Control Share Acquisitions" means transactions causing the voting
strength of any person acquiring beneficial ownership of shares of a public
corporation in Virginia to meet or exceed certain threshold percentages (20%,
33 1/3% or 50%) of the total votes entitled to be cast for the election of
directors.
"Crime Control Act" shall mean the Comprehensive Crime Control Act of
1984.
"Directors" means the members of the Company's Board of Directors.
"Distressed Mortgage Loans" shall mean Sub-Performing Mortgage Loans and
Nonperforming Mortgage Loans.
"Distressed Real Properties" shall mean REO Properties and other
distressed real estate.
"DLJ IOs" shall mean the DLJ Mortgage Acceptance Corporation, Multi-family
Mortgage Pass-Through Certificates, Series 1993-MF17, Class S-1 and Class S-2.
"DLJ Investments" shall mean the DLJ IOs and the DLJ Subordinated
Interests.
"DLJ Mortgage Loans" shall mean the mortgage loans underlying the DLJ
Investments.
"DLJ Subordinated Interests" shall mean the DLJ Mortgage Acceptance
Corporation, Multi-family Mortgage Pass-Through Certificates, Series 1993-MF17,
Class B-2, Class B-3 and Class C-1.
"DOL" shall mean the Department of Labor.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"Excess Inclusion" shall have the meaning specified in section 860E(c) of
the Code.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Exempt Organizations" shall mean tax-exempt entities, including, but not
limited to, charitable organizations, qualified employee pension and profit
sharing trusts and individual retirement accounts.
"FHLB" means the Federal Home Loan Bank.
81
<PAGE>
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980.
"FLHMC" shall mean the Federal Loan Home Mortgage Corporation, a corporate
instrumentality of the United States created and existing under Title III of the
Emergency Home Finance Act of 1970, as amended, or any successor thereto.
"FNMA" shall mean the Federal National Mortgage Association, a federally
chartered and privately owned corporation organized and existing under the
Federal National Mortgage Association Charter Act, or any successor thereto.
"Formation Transactions" shall mean transactions relating to the formation
of the Company.
"Funds From Operations" represents net income (computed in accordance with
GAAP), excluding gains (or losses) from debt restructuring or sales of property,
plus depreciation, and after adjustments for unconsolidated partnerships and
joint ventures.
"GAAP" means generally accepted accounting principles applied on a
consistent basis.
"Garn Act" shall mean the Garn-St Germain Depository Institutions Act of
1982.
"General Partner" shall mean Ocwen General, Inc., as the sole general
partner of the Operating Partnership.
"Guidelines" shall mean guidelines that set forth general parameters for
the Company's investments, borrowings and operations.
"HUD" shall mean the Department of Housing and Urban Development.
"Independent Director" shall mean a director who within the last two
years, has not (i) owned an interest in the Manager or any of the Manager's
Affiliates, (ii) been employed by the Manager or any of its Affiliates, (iii)
been an officer or director of the Manager or any of its Affiliates, (iv)
performed services for the Manager, (iv) had any material business or
professional relationship with the Manager or any of its Affiliates.
"Initial Investments" shall mean the DLJ Investments and the RMSC
Investments, described under "Initial Investments," which are to be acquired on
or soon after the Closing Date.
"Initial Limited Partner" means Ocwen Limited, Inc., as limited partner of
the Operating Partnership.
"Interested Stockholder" means any holder of more than 10% of any class of
outstanding voting shares of the Company.
"Inverse IO" shall mean a class of MBS that is entitled to no (or only
nominal) distributions of principal, but is entitled to interest at a floating
rate that varies inversely with a specified index.
"IO" shall mean a class of MBS that is entitled to no (or only nominal)
distributions of principal.
"IRA" shall mean an individual retirement account.
"Lease" shall mean, with respect to each Mortgaged Property or Real
Property, the agreement pursuant to which the Borrower rents and leases to the
Lessee and the Lessee rents and leases from the Borrower, such Mortgaged
Property or Real Property.
82
<PAGE>
"Limited Partners" shall mean the Initial Limited Partner and any
additional persons admitted as limited partners of the Operating Partnership.
"Management Agreement" shall mean an agreement or agreements between the
Company and the Manager pursuant to which the Manager performs various services
for the Company.
"Manager" shall mean Ocwen Management Corp.
"Market Price" shall mean the average of the Closing Price for the five
consecutive Trading Days ending on such date.
"MBS" shall mean mortgage-backed securities or collateralized mortgage
obligations.
"Mortgage Collateral" shall mean mortgage pass-through securities or pools
of whole loans securing or backing a series of MBS.
"Mortgage Loan" shall mean a mortgage loan underlying a series of MBS or a
Mortgage Loan held by the Company, as the context indicates.
"Mortgaged Property" shall mean the real property securing a mortgage
loan.
"NAREIT" means the National Association of Real Estate Investment Trusts,
Inc.
"Net Income" means the income of the Company as reported for federal
income tax purposes before the Manager's incentive compensation, net operating
loss deductions arising from losses in prior periods and the deduction for
dividends paid, plus the effects of adjustments, if any, necessary to record
hedging and interest transactions in accordance with generally accepted
accounting principles.
"Non-ERISA Plan" shall mean a plan that does not cover common law
employees.
"Nonperforming Mortgage Loans" shall mean commercial and residential
mortgage loans for which the payment of principal and interest is more than 90
days delinquent.
"OAIC" shall mean Ocwen Asset Investment Corp.
"Ocwen Financial" shall mean Ocwen Financial Corporation.
"Offering" means the offering of Common Stock hereby.
"Offering Price" means the offering price of $16 per Common Share offered
hereby.
"OID" means original issue discount.
"Operating Partnership" shall mean Ocwen Partnership, L.P.
"Operating Partnership Agreement" shall mean the partnership agreement of
the Operating Partnership, as amended from time to time.
"Option Plan" shall mean a plan which provides for options to purchase
Units.
83
<PAGE>
"Other Real Estate Related Assets" shall mean real estate related assets
other than Subordinated Interests and Distressed Real Property, including,
without limitation, Mortgage Loans, other classes of MBS and other interests in
real estate.
"OTS" shall mean the Office of Thrift Supervision.
"Ownership Limitation" means the restriction on ownership (or deemed
ownership by virtue of the attribution provisions of the Code) of (a) more than
8.7% of the outstanding shares of Common Stock by any stockholder other than
Ocwen Financial, (b) more than 15% of the outstanding shares of Common Stock by
Ocwen Financial, or (c) more than 9.9% of the shares of any series of Preferred
Stock by any stockholder.
"Pass-Through Certificates" evidence interests in trusts, the assets of
which are primarily mortgage loans.
"Plan" shall mean certain pension, profit-sharing, employee benefit, or
retirement plans or individual retirement accounts.
"Plan Asset Regulations" shall mean regulations of the Department of Labor
that define "plan assets."
"Preferred Stock" means the preferred stock of the Company.
"Prohibited Owner" shall mean the record holder of the shares of Common
Stock or Preferred Stock that are designated as Shares-in-Trust.
"Qualifying Interests" shall mean mortgages and other liens on and
interests in real estate.
"Real Estate Related Assets" shall mean Subordinated Interests and other
classes of CMBS and RMBS, Distressed Mortgage Loans, Performing Mortgage Loans,
Distressed Real Property and other real estate related assets.
"Real Property" shall mean real property owned by the Company.
"Realized Losses" shall mean, generally, the aggregate amount of losses
realized on loans that are liquidated and losses on loans due to fraud,
mortgagor bankruptcy or special hazards.
"Redemption Rights" shall mean the rights that it is anticipated the
Limited Partners (other than the Initial Limited Partner) will have pursuant to
the Operating Partnership Agreement to redeem all or a portion of their
interests in the Operating Partnership for Common Stock on a one-for-one basis
or, at the option of the Company, an equivalent amount of cash.
"REIT" means real estate investment trust, as defined in section 856 of
the Code.
"Related Party Tenant" shall mean a tenant of OAIC or the Operating
Partnership in which OAIC owns 10% or more of the ownership interests, taking
into account both direct ownership and constructive ownership.
"REMIC" shall mean real estate mortgage investment conduit, as defined in
section 860D of the Code.
"REMIC Residual Interest" shall mean a class of MBS that is designated as
the residual interest in one or more REMICs.
"Rent" shall mean rent received by the Company from tenants of Real
Property owned by the Company.
84
<PAGE>
"REO Property" shall mean real property acquired by a mortgage lender at
foreclosure (or by deed in lieu of foreclosure).
"RICO" shall mean the Racketeer Influenced and Corrupt Organizations.
"RMBS" shall mean a series of one- to four-family residential MBS.
"RMSC IOs" shall mean the Ryland Mortgage Securities Corporation,
Multifamily Mortgage Participation Securities, Series 1993-M1, Class X-1, Class
X-2 and Class X-3.
"RMSC Investments" shall mean the RMSC IOs and the RMSC Subordinated
Interests.
"RMSC Mortgage Loans" shall mean the mortgage loans underlying the RMSC
Investments.
"RMSC Subordinated Interests" shall mean the Ryland Mortgage Securities
Corporation, Multifamily Mortgage Participation Securities, Series 1993-M1,
Class C, Class D, Class E and Class F.
"Rule 144" means the rule promulgated under the Securities Act that
permits holders of restricted securities as well as affiliates of an issuer of
the securities, pursuant to certain conditions and subject to certain
restrictions, to sell their securities publicly without registration under the
Securities Act.
"SAIF" shall mean the Savings Association Insurance Fund.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Service" shall mean the Internal Revenue Service.
"Shares-in-Trust" shall mean shares of Common Stock or Preferred Stock the
purported transfer of which would result in a violation of the Ownership
Limitation, result in the stock of OAIC being held by fewer than 100 persons,
result in OAIC being "closely held," or cause OAIC to own 10% or more of the
ownership interests in a tenant of the Company's Real Property.
"Special Servicing" shall mean servicing of defaulted mortgage loans,
including oversight and management of the resolution of such mortgage loans by
modification, foreclosure, deed in lieu of foreclosure or otherwise.
"Sub IO" shall mean an IO with characteristics of a Subordinated Interest.
"Subordinated Interests" shall mean classes of MBS that are subordinated
in right of payments of principal and interest to more senior classes.
"Sub-Performing Mortgage Loans" shall mean loans for which default is
likely or imminent.
"Ten-Year U.S. Treasury Rate" shall mean the arithmetic average of the
weekly average yield to maturity for actively traded current coupon U.S.
Treasury fixed interest rate securities (adjusted to constant maturities of ten
years) published by the Federal Reserve Board during a quarter, or, if such rate
is not published by the Federal Reserve Board, any Federal Reserve Bank or
agency or department of the federal government selected by the Company.
"Third Party Fairness Opinion" shall mean an opinion concerning the price
of a class of MBS, obtained from a Person unaffiliated with the Manager,
typically the underwriter or placement agent of such MBS.
85
<PAGE>
"Title V" shall mean Title V of the Depository Institutions Deregulation
and Monetary Control Act of 1980.
"Trading Day" shall mean any day other than a Saturday, a Sunday or a day
on which banking institutions in the State of New York are authorized or
obligated by law or executive order to close.
"Treasury Regulations" shall mean the income tax regulations promulgated
under the Code.
"Trust" shall mean a trust created in the event of an impermissible
transfer of shares of Common Stock.
"Trustee" shall mean a trustee of the Trust.
"UBTI" means unrelated business taxable income.
"UBTI Percentage" shall mean the gross income derived by the Company from
an unrelated trade or business divided by the gross income of the Company for
the year in which the dividends are paid.
"UCC" shall mean the Uniform Commercial Code.
"Unaffiliated Director" shall mean, with respect to a particular
Interested Stockholder, a member of OAIC's Board of Directors who was (i) a
member on the date on which an Interested Stockholder became an Interested
Stockholder and (ii) recommended for election by, or was elected to fill a
vacancy and received the affirmative vote of, a majority of the Unaffiliated
Directors then on the Board.
"Underwriters" shall mean Friedman, Billings, Ramsey & Co., Inc. and each
of the underwriters for whom Friedman, Billings, Ramsey & Co., Inc. is acting as
representative.
"Underwriting Agreement" shall mean the agreement pursuant to which the
Underwriter will underwrite the Common Stock.
"Units" shall mean units of limited partnership interest in the Operating
Partnership.
86
<PAGE>
APPENDIX A
DESCRIPTION OF INITIAL INVESTMENTS
This Appendix contains summary descriptions of the terms of the RMSC,
Series 1993-M1 and the DLJ, Series 1993-MF17 securities, taken from the
prospectus and prospectus supplement for each such transaction (the "Underlying
Prospectuses"), the servicing reports provided to the Company by the trustees of
such series (the "Reports"), and other information peculiarly within the control
of the trustee, servicers and issuers of such securities. None of the Company,
Ocwen Financial, the Underwriters nor any of their affiliates prepared or
verified the accuracy of the Underlying Prospectuses or the Reports, and none of
the Company, Ocwen Financial, the Underwriters nor any of their affiliates has
made or will make any representation or warranty as to the accuracy or
completeness of the information contained therein.
RMSC, Series 1993-M1,
Classes C, D, E, F, X-1, X-2 and X-3.
The table that follows shows each class in the series ("RMSC 1993-M1"),
with the classes to be purchased by the Company highlighted in bold:
Principal
Initial Balance
Pass-Through Principal as of
Designation Rate Balance February 1, 1997
- ----------- ------------ --------- ----------------
Class A Securities(1) 7.55% $51,506,000 $ 883,689
Class B Securities(1) 8.65% 8,094,000 8,094,000
RMSC Subordinated Interests:
Class C Securities 9.82% 6,622,000 6,622,000
Class D Securities 9.82% 3,679,000 3,679,000
Class E Securities 9.82% 2,208,000 2,208,000
Class F Securities 9.82% 1,471,750 1,471,750
RMSC IOs:
Class X-1 Securities (2) (2) (2)
Class X-2 Securities (3) (3) (3)
Class X-3 Securities (4) (4) (4)
Class R Securities(1) 0 0 0
- ----------
(1) The Class A, B and R Securities are not being sold to the Company.
(2) The Class X-1 Securities accrue interest at 2.27% per annum on the notional
balance of such class, equal to the outstanding principal balance of the Class A
Securities. As of February 1, 1997, the notional balance of the Class X-1
Securities is equal to $883,689.
A-1
<PAGE>
(3) The Class X-2 Securities accrue interest at 1.17% per annum on the notional
balance of such class, equal to the outstanding principal balance of the Class B
Securities. As of February 1, 1997, the notional balance of the Class X-2
Securities is equal to $8,094,000.
(4) The Class X-3 Securities accrue interest at 0.05% per annum on the notional
balance of such class, equal to the aggregate principal balance of the RMSC
Mortgage Loans, net of Realized Losses on the RMSC Mortgage Loans. As of
February 1, 1997, the notional balance of the class X-3 Securities is
$22,958,438.
Structure and Subordination. Each RMSC Subordinated Interest is
subordinated in right of payments of principal and interest and protects the
more senior classes from losses on the related mortgage loans (the "RMSC
Mortgage Loans"). Principal distributions on the securities are applied
sequentially to Class A, Class B, Class C, Class D, Class E and Class F, with no
principal paid to a class until the outstanding principal balances of the more
senior classes are reduced to zero. To date, no principal has been distributed
to any of the RMSC Subordinated Interests.
Moreover, on any distribution date, no interest is distributed to the RMSC
Subordinated Interests until principal and interest allocable to the Class A and
B Securities and interest allocable to the Class X-1, Class X-2 and Class X-3
Securities for that distribution date have been distributed. Thus, if there are
losses on the RMSC Mortgage Loans, interest otherwise distributable on the RMSC
Subordinated Interests will be reduced by the amount of such losses, and that
cash will be used to make principal and interest payments to the more senior
classes. In addition, as losses are incurred on the RMSC Mortgage Loans, the
principal amount of the RMSC Subordinated Interests will be reduced until their
aggregate outstanding principal balance has been reduced to zero.
As of January 1, 1997, there have been no reported realized losses on the
RMSC Mortgage Loans, and no RMSC Mortgage Loans have been reported to Ocwen
Financial as being in default.
RMSC Mortgage Loans. The Mortgage Loans underlying the RMSC 1993-M1
Subordinated Interests are monthly-pay, fixed rate, balloon mortgage loans with
an initial aggregate principal balance of $73,580,750 and an aggregate principal
balance as of January 1, 1997, of $22,958,439. The RMSC Mortgage Loans are
secured by first and second liens on 6 multifamily rental properties (the "RMSC
Mortgaged Properties"). Each RMSC Mortgaged Property constitutes security for
both a first mortgage loan (the "RMSC First Mortgage Loan") and a second
mortgage loan (the "RMSC Second Mortgage Loan" and, together with the RMSC First
Mortgage Loan, the "RMSC Mortgage Loan Pair"). When the RMSC Investments were
originally issued, they were secured by 14 RMSC Mortgage Loan Pairs. However, 8
RMSC Mortgage Loan Pairs have prepaid in full, leaving only 6 RMSC Mortgage Loan
Pairs in the pool.
The following table sets forth certain information, obtained from the
servicer of the RMSC Mortgage Loan Pairs, concerning the RMSC Mortgaged
Properties, as of January 1, 1997, except as otherwise indicated.
<TABLE>
<CAPTION>
Mortgage
Loan Debt Service
Property Principal Occupancy 1994 1995 Coverage
Name Location Balance Rate NOI NOI Ratio
-------- -------- --------- --------- ---- ---- ------------
<S> <C> <C> <C> <C> <C> <C>
Lakeridge Fresno, CA 4,210,138
Sheridan Square Lawton, OK 4,365,454
Summit Ridge Greenville, TX 3,715,862
Sunchase Aurora, CO 3,602,550
Walnut Creek I San Antonio, TX 3,602,550
Woodbridge Temple, TX 3,461,886
</TABLE>
A-2
<PAGE>
Each RMSC First Mortgage Loan provides for monthly payments of interest
and principal, based on a projected amortization schedule of approximately 358
months, with a balloon payment of the entire remaining principal balance due on
May 1, 2000. Each RMSC Second Mortgage Loan provides for monthly payments of
interest but no scheduled amortization prior to the balloon payment due on May
1, 2000, which results in an amortization schedule for each RMSC Mortgage Loan
Pair of 360 months. Because the scheduled principal payments on the RMSC
Mortgage Loan Pairs are based on an amortization schedule substantially longer
than the stated maturity of May 1, 2000, at maturity the scheduled principal
balance of each RMSC Mortgage Loan Pair (assuming no prepayments or defaults)
will have been reduced only to approximately 94.8% of its principal balance as
of the cut-off date related to the issuance of the RMSC Subordinated Interests.
Under certain circumstances, the Servicer may grant a partial forbearance
or balloon forbearance for up to four consecutive six-month periods, which would
extend the maturity of the related RMSC Mortgage Loan.
The terms of the Mortgage Loans prohibit prepayment thereof until May 1,
1996. Currently, the Mortgage Loans can be prepaid in whole, but not in part, on
the first day of any month. A prepayment premium must be paid, unless the
prepayment is made in connection with a condemnation or casualty. Until April
30, 1998, the prepayment premium is equal to 3% of the principal balance of the
Mortgage Loans, and on May 1, 1998, the prepayment premium reduces to 1% of the
principal balance of the Mortgage Loans. Beginning six months before the
maturity of the loan, prepayments can be made without penalty.
The RMSC Mortgage Loans are serviced by Bankers Trust Company, which also
serves as custodian and paying agent for the trustee, Union Bank. Norwest Bank
of Minnesota, N.A. serves as the securities administrator and tax administrator.
Right of the Class F Securities to Purchase Defaulted RMSC Second Mortgage
Loans. As the holder of the Class F Securities, the Company will have the right,
in the event that any RMSC Second Mortgage Loan becomes 90 days or more
delinquent, to purchase such RMSC Second Mortgage Loan at a price equal
generally to par plus accrued interest. The Company will have the option to make
settlement for the purchase price by applying all or a portion of the principal
of the Class F Securities against the price. In order to exercise its right to
purchase an RMSC Second Mortgage Loan, the Company will be required to cure any
defaults on the related RMSC First Mortgage Loan. Moreover, the Company has
agreed to foreclose the RMSC Second Mortgage Loan only if (i) the related RMSC
First Mortgage Loan is not in default, (ii) the foreclosure does not terminate
any leases or management agreements or adversely affect the value or operation
of the related RMSC Mortgaged Property, without the consent of the trustee, and
(iii) the purchaser at the foreclosure sale assumes all obligations of the
borrower under the RMSC First Mortgage Loan.
Special Servicer. With the consent of Financial Asset Securitization, Inc.
(formerly known as Ryland Mortgage Securities Corporation), the trustee and a
majority in interest of the Class R securities, and confirmation that no ratings
on the securities will be downgraded, the Company, as holder of the Class F
securities, can require the servicer to appoint a special servicer. The special
servicer is responsible, if any RMSC Mortgage Loan is more than 60 days past
due, or has a balloon payment that is past due, for negotiating forbearance
agreements, foreclosing on the RMSC Mortgage Loan if necessary, and supervising
the management of the resulting REO Property.
Restrictions on Transfer of RMSC Subordinated Interests. The Class C RMSC
Subordinated Interests and the RMSC IOs were registered with the Commission
pursuant to a Prospectus and Prospectus Supplement, each dated April 5, 1993.
Classes D, E and F, however, have not been registered under the Securities Act
or any state securities laws, and, accordingly, transfer of Classes D, E and F
is restricted. Moreover, none of the RMSC Subordinated Interests, including
Class C, can be transferred to a Plan or Plan investor. As a result, there is no
liquid market for the RMSC Subordinated Interests.
A-3
<PAGE>
Ratings. The RMSC IOs are rated "AA" by Fitch Investors Service, LLC
("Fitch"), Duff & Phelps Credit Rating Co. ("Duff") and Standard & Poors Ratings
Group ("S&P" and, together with Fitch and Duff, the "Rating Agencies.") The
Class C Securities are rated "BBB" by Duff and "BB" by Fitch, and the Class D
Securities are rated "BB" by Duff and "B" by Fitch. The Class E and Class F
Securities are unrated.
The ratings of the Rating Agencies on mortgage pass-through securities
address the likelihood of receipt by securityholders of all distributions on the
underlying mortgage loans to which they are entitled. The rating from each
Rating Agency takes into consideration the characteristics of the assets of the
Trust and the structural, legal and tax aspects associated with the securities.
The ratings on the securities do not, however, represent any assessment of (i)
the likelihood or frequency of prepayments on the Mortgage Loans, (ii) the
degree to which such prepayments might differ from those originally anticipated
and (iii) whether or to what extent Prepayment Premiums will be received. Also,
a security rating does not represent any assessment of the yield to maturity
that investors may experience or the possibility that the holder of an IO might
not recover its investment in the event of rapid prepayments of the Mortgage
Loans (including prepayments resulting from defaults on the Mortgage Loans). A
security rating is not a recommendation to buy, sell or hold securities and may
be subject to revision or withdrawal at any time by the assigning rating
organization.
DLJMAC, Series 1993-MF17
Classes B-2, B-3 and C-1
Principal
Initial Balance
Pass-Through Principal as of
Designation Rate Balance February 1, 1997
- ----------- ------------ --------- ----------------
Class AF-1 Securities(1) (2) $64,476,000 $55,410,996
Class AN-1 Securities(1) (3) 29,924,000 25,716,835
Class A-2 Securities(1) 7.35% 19,700,000 19,700,000
Class B-1 Securities(1) 8.0% 5,600,000 5,600,000
DLJ IOs:
Class S-1 Securities (4) (4) (4)
Class S-2 Securities (5) (5) (5)
DLJ Subordinated Interests:
Class B-2 Securities 8.0% 13,100,000(6) 13,100,000(6)
Class B-3 Securities 8.0% 4,600,000 4,600,000
Class C-1 Securities 8.0% 1,783,000 1,783,000
Class R Securities(1) 0 0 0
Class R-L Securities(1) 0 0 0
- ----------
(1) The Class AF-1, Class AN-1, Class A-2, Class B-1, Class R and Class R-L
Securities are not being sold to the Company.
(2) The Class AF-1 Securities accrue interest at a floating rate that is based
on LIBOR.
A-4
<PAGE>
(3) The Class AN-1 Securities accrue interest at a floating rate that varies
inversely with changes in LIBOR.
(4) The Class S-1 Securities accrue interest at 0.34% per annum on the
notional balance of such class, which is equal to the sum of outstanding the
principal balances of the Class A-1 and the Class AN-1 Securities. As of
February 1, 1997, the notional balance of the Class S-1 Securities is
$81,127,832.
(5) The Class S-2 Securities accrue interest at 0.65% per annum on the notional
balance of such class, which is equal to the outstanding principal balance of
the Class A-2 Securities. As of February 1, 1997, the notional balance of the
Class S-2 Securities is $19,700,000.
(6) The Company is acquiring a Class B-2 Security with an original principal
balance and a principal balance as of February 1, 1997 $8,500,000, representing
approximately 64.8% by principal balance of such class.
Structure and Subordination. Each of the DLJ Subordinated Interests is
subordinated in right of payments of principal and interest and protects the
more senior classes from losses on the related mortgage loans (the "DLJ Mortgage
Loans"). Principal distributions on the securities are applied sequentially,
with no principal paid to a class until the outstanding principal balance of the
more senior classes are reduced to zero. Thus, to date, no principal has been
distributed to any of the DLJ Subordinated Interests.
Moreover, the DLJ Subordinated Interests provide credit support to the
more senior classes. On any distribution date, no interest is distributed to the
DLJ Subordinated Interests until principal and interest allocable to Classes A-2
and B-1 and interest allocable to the DLJ IOs and Classes AF-1 and AN-1 for that
distribution date has been distributed. Thus, if there are any losses on the DLJ
Mortgage Loans, interest otherwise distributable on the DLJ Subordinated
Interests will be reduced by the amount of such losses, and that cash will be
used to make principal and interest payments to the more senior classes. In
addition, as losses are incurred on the DLJ Mortgage Loans, the principal
balance of Class C-1, then Class B-3, then Class B-2 will be reduced, until the
outstanding principal balance of each such class has been reduced to zero.
As of February 1, 1997, there have been no reported realized losses on the
DLJ Mortgage Loans, and no DLJ Mortgage Loans have been reported to Ocwen
Financial as being in default.
DLJ Mortgage Loans. The Mortgage Loans underlying the DLJ 1993-MF17
Subordinated Interests are monthly-pay, fixed rate, balloon mortgage loans with
an initial aggregate principal balance of $139,183,000 and an aggregate
principal balance as of January 1, 1997, of $125,910,832. The Mortgage Loans
are secured by first liens on 40 multifamily rental properties (the "DLJ
Mortgaged Properties"). When the DLJ Investments were originally issued, they
were secured by 42 DLJ Mortgage Loans. However, two DLJ Mortgage Loans have
prepaid in full, leaving only 40 DLJ Mortgage Loans in the Pool. The
following table sets forth certain information, obtained from the servicer of
the DLJ Mortgage Loans, about the DLJ Mortgaged Properties, as of January 1,
1997, except as otherwise indicated.
<TABLE>
<CAPTION>
Mortgage
Loan Debt Service
Property Principal Occupancy 1994 1995 Coverage
Name Location Balance Rate NOI NOI Ratio
-------- -------- --------- --------- ---- ---- ------------
<S> <C> <C> <C> <C> <C> <C>
Harbor Ridge Maineville, OH 2,779,133
Oakwood Toledo, OH 3,784,942
Stoneridge Dayton, OH 4,069,172
University Woods Fairborn, OH 3,205,956
The Glen Temple, TX 3,253,806
Wood River Corpus Christi, TX 3,493,057
Alhambra Village DePere, WI 1,698,678
Hazen Court Fon du Lac, WI 2,009,704
</TABLE>
A-5
<PAGE>
<TABLE>
<CAPTION>
Mortgage
Loan Debt Service
Property Principal Occupancy 1994 1995 Coverage
Name Location Balance Rate NOI NOI Ratio
-------- -------- --------- --------- ---- ---- ------------
<S> <C> <C> <C> <C> <C> <C>
Virginia Village Appleton, WI 2,311,159
Worthington Meadows Columbus, OH 12,345,325
Alexander Panama City, FL 635,449
Berkshire Manor Tallahassee, FL 2,778,176
Chaleau de Ville Tallahassee, FL 1,818,303
Colony Club Tallahassee, FL 3,569,617
Four Seasons Tallahassee, FL 985,711
Greehouse Patio Houston, TX 5,311,360
Heritage Panama City, FL 1,440,287
High Point Tallahassee, FL 1,872,852
Monticello on
Greenbriar Houston, TX 2,377,192
Saddlebrook San Antonio, TX 4,593,609
Southfirst Manor Champaign, IL 2,248,954
Mapleview Seven Fairborn, OH 2,768,606
Brady Station Odessa, TX 4,038,547
College Square One Cedar Falls, IN 1,978,122
Indian Trails Amarillo, TX 1,729,302
Pebblebend Odessa, TX 2,431,741
Persimmon Edmond, OK 1,148,402
Quinten's Walk Midland, TX 2,966,705
River Ranch Forth Worth, TX 5,697,031
Stonecreek Tulsa, OK 2,488,205
Westland Village West Burlington, IA 717,751
Willow Glen Amarillo, TX 6,220,512
Brookhollow Tulsa, OK 1,315,877
Candlewood Phenix City, AL 2,744,681
Country Square Carrollton, TX 9,552,793
Lake O' the Woods Arlington, TX 3,588,757
Las Brias Abilene, TX 3,110,256
Maryland Harlingen, TX 1,144,574
Monterey Tallahassee, FL 2,624,099
Wildwood Temple, TX 3,062,406
</TABLE>
Each DLJ Mortgage Loan provides for monthly payments of principal and
interest based upon a projected amortization schedule of 300 months, beginning
in January 1994, with a final balloon payment of remaining principal due in
December 2003.
The terms of the DLJ Mortgage Loans prohibit voluntary prepayment during
the first five years after origination. Thereafter, the DLJ Mortgage Loans can
be prepaid in whole or in part, provided that prepayments during the sixth and
seventh years must be accompanied by a yield maintenance premium. Yield
maintenance premiums are paid as excess interest on the more senior classes of
securities (and not to the DLJ Subordinated Interests). After the seventh year
following origination, the DLJ Mortgage Loans can be prepaid in whole or in part
without any penalty or prepayment premium.
The DLJ Mortgage Loans are being serviced by EQ Services, Inc., and the
trustee for the series is State Street Bank & Trust Company.
Restrictions on Transfer of DLJ Subordinated Interests. Although the DLJ
IOs have been registered with the Commission, the DLJ Subordinated Interests
have not been registered under the Securities Act or any state securities laws,
and, accordingly, transfer of the DLJ Subordinated Interests is restricted.
Moreover, the DLJ
A-6
<PAGE>
Subordinated Interests cannot be transferred to a Plan or Plan investor except
in certain limited circumstances. As a result, there is no liquid market for the
DLJ Subordinated Interests.
Ratings. The Class S-1 Securities are rated "Aaa" by Moody's Investors
Service, Inc. ("Moody's") and "AAA") by Duff & Phelps Credit Rating Co.
("Duff"). The Class S-2 Securities are rated "A2" by Moody's and "A") by Duff.
The Class B-2 Securities are rated "BB" by Duff, and the Class B-3 Securities
are rated "B" by Duff. Neither the Class B-2 Securities nor the Class B-3
Securities are rated by Moody's. The Class C-1 Securities are unrated.
The ratings of the Rating Agencies on mortgage pass-through certificates
address the likelihood of the receipt of all distributions to which such Holders
are entitled. The ratings do not represent any assessment of (i) the likelihood
or frequency of principal prepayments on the Mortgage Loans, (ii) the degree to
which such prepayments might differ from those originally anticipated or (iii)
whether and to what extent yield maintenance premiums will be received. Also, a
security rating does not represent any assessment of the yield to maturity that
investors may experience on any Class of DLJ Investments nor does it assess any
possibility that the holders of the DLJ IOs might not fully recover their
investment in the event of rapid prepayments of the Mortgage Loans (including
both voluntary and involuntary prepayments). A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time by assigning the rating agency.
A-7
<PAGE>
APPENDIX B
YIELD CONSIDERATIONS RELATED TO THE INITIAL INVESTMENTS
General
The actual yield to maturity on the Initial Investments will depend upon,
among other things, the interest rate for each class of Initial Investments and
the timing and aggregate amount of distributions on the securities of such
class, which in turn will depend primarily on losses and prepayments on the
related mortgage loans. See "Yield Considerations Related to the Company's
Investments."
Initial Subordinated Interests
The yield to maturity on the RMSC Subordinated Interests and the DLJ
Subordinated Interests (collectively, the "Initial Subordinated Interests") will
be extremely sensitive to the default and loss experience of the underlying
mortgage loans and the timing of any such defaults or losses. See "Risk
Factors--Investment Activity Risks" and "Yield Considerations Related to the
Company's Investments."
The significance of the effect of potential Realized Losses on the
Mortgage Loans is illustrated in the following tables. This information is
presented for analytical purposes only, and is not intended as an accurate
indicator or prediction of the actual defaults and losses that may occur in the
future with respect to the Mortgage Loans. Actual defaults, liquidations and
losses are likely to differ in timing and amount from those assumed (and may
differ significantly). Investors in the Company are urged to consider their own
estimates as to possible levels and timing of defaults and losses.
The Company will purchase each class of Initial Subordinated Interests at
a discount from its principal amount. Accordingly, if the Company calculates the
anticipated yield to maturity of any such class based on an assumed rate of
payment that is faster than that actually experienced on the Mortgage Loans, the
actual yield may be lower than that so calculated. The tables on the following
pages that show yields for the Initial Subordinated Interests assume that no
prepayments are made on the underlying Mortgage Loans.
Modeling Assumptions
The Pre-Tax Yields and Total Cash Flows set forth in the following tables
were calculated assuming the indicated purchase prices and the following
additional assumptions. There can be no assurance that these assumptions are
reasonable or that additional or different assumptions should not be made to
determine potential yields on these investments.
(i) No prepayments of principal are assumed to occur;
(ii) Liquidations occur on the indicated payment date for the Mortgage
Loans in an amount equal to the indicated Liquidation Percentage
multiplied by the aggregate Scheduled Principal Balance of the
Mortgage Loans as of January 1, 1997. Such liquidations are assumed
to occur concurrently with defaults on the Mortgage Loans;
(iii) Realized Losses on liquidations of defaulted Mortgage Loans reflect
net recoveries in amounts equal to (a) 1 minus the indicated Loss
Severity indicated in the table, multiplied by (b) the amount of
liquidated Mortgage Loans as calculated in (ii) above;
B-1
<PAGE>
(iv) at such time that the principal balance of a class is reduced to
zero, such class shall no longer be entitled to any future
distributions of principal and interest;
(v) the aggregate principal amount of each class is as indicated in
Appendix A;
(vi) the aggregate principal amount of the RMSC Mortgage Loans as of
January 1, 1997 is $22,958,439, the amortization term to stated
maturity is 316 months, and the interest rate is 10.05%;
(vii) the aggregate principal amount of the DLJ Mortgage Loans as of
January 1, 1997 is $125,910,832, the amortization term to stated
maturity is 263 months, and the interest rate is 8.15%;
(viii) for each Mortgage Loan not in default, scheduled monthly payments
are timely received on the first day of each month;
(ix) all servicing fees and other administration fees are deducted from
the interest received on the Mortgage Loans;
(x) beginning in __________ 1997, the Company receives cash
distributions on the RMSC Initial Investments by the Company on the
15th day of each month and on the DLJ Initial Investments on the
18th day of each month;
(xi) there will be no optional termination of the trust related to either
series of Initial Investments, and no Mortgage Loan is repurchased
pursuant to any obligation under the related trust agreement;
(xii) prepayment premiums and yield maintenance premiums are assumed not
to be distributed to the Company as holder of the Initial
Investments.
RMSC 1993-M1
RMSC Subordinated Interests
(Purchase Price of 92.4860% of Principal Amount)
<TABLE>
<CAPTION>
Date of Assumed Liquidation/Realized Loss Occurs
==========================================================
May 1998 May 1999 May 2000
------------------ ------------------ ------------------
Principal Balance of
Mortgage Loans Liquidated
as a Percentage of the Loss
Scheduled Principal Balance Severity Pre-tax Total Pre-tax Total Pre-tax Total
as of January 1, 1997 Percentage Yield Cash Flow Yield Cash Flow Yield Cash Flow
- --------------------------- ---------- ------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
No Liquidations 0% 12.8% 133% 12.8% 133% 12.8% 133%
5.0% 20% 12.2% 130% 12.3% 131% 12.3% 131%
50% 11.4% 128% 11.5% 128% 11.7% 129%
10.0% 20% 11.7% 129% 11.8% 129% 11.9% 130%
50% 10.0% 123% 10.2% 124% 10.5% 125%
20.0% 20% 10.5% 124% 10.8% 125% 11.0% 126%
50% 6.9% 114% 7.5% 115% 8.0% 117%
</TABLE>
B-2
<PAGE>
DLJ 1993-MF17
DLJ Subordinated Interests
(Purchase Price of 74.4376% Principal Amount)
<TABLE>
<CAPTION>
Date of Assumed Liquidation/Realized Loss Occurs
==========================================================
December 1999 December 2001 December 2003
------------------ ------------------ ------------------
Principal Balance of
Mortgage Loans Liquidated
as a Percentage of the Loss
Scheduled Principal Balance Severity Pre-tax Total Pre-tax Total Pre-tax Total
as of January 1, 1997 Percentage Yield Cash Flow Yield Cash Flow Yield Cash Flow
- --------------------------- ---------- ------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
No Liquidations 0% 14.1% 155% 14.1% 155% 14.1% 155%
5.0% 20% 13.0% 147% 13.2% 148% 13.3% 149%
50% 11.3% 134% 11.8% 137% 12.1% 139%
10.0% 20% 11.9% 138% 12.2% 140% 12.5% 142%
50% 8.0% 113% 9.0% 118% 9.9% 123%
20.0% 20% 9.4% 121% 10.2% 125% 10.8% 129%
50% -1.4% 70% 1.5% 80% 4.1% 90%
</TABLE>
The pre-tax yields set forth in the preceding tables were calculated by
determining the monthly discount rates that, when applied to the assumed stream
of cash flows to be paid on the Initial Subordinated Interests, would cause the
discounted present value of such assumed stream of cash flows to equal the
assumed aggregate purchase prices of such securities and converting such monthly
rates to semi-annual corporate bond equivalent rates. Such calculations do not
take into account variations that may occur in the interest rates at which
investors may be able to reinvest funds received by them as distributions on
such classes and consequently do not purport to reflect the return on any
investment in such classes when such reinvestment rates are considered.
There can be no assurance that the assumptions used in these tables are
accurate or that defaults and losses on the Mortgage Loans will not exceed those
shown herein. Moreover, other Subordinated Interests purchased by the Company in
the future are likely to have different characteristics.
Yield on the Initial IOs
The yield to investors on the RMSC IOs and DLJ IOs (collectively, the
"Initial IOs") will be highly sensitive to the rate and timing of principal
payments (including prepayments and liquidations) on the Mortgage loans.
Investors should fully consider the associated risks to the Company, including
the risk that a rapid rate of principal prepayments of the Mortgage Loans could
result in the failure of the Company to recoup fully its investment in the
Initial IOs.
The following tables reflect the pre-tax yield to maturity of each of the
Initial IOs at the purchase prices indicated and the assumptions listed in
clauses (iv), (ix), (x), (xi) and (xii) on pages B-1 and B-2 above. There can
be no assurance that the assumptions are reasonable or that additional or
different assumptions should not be made to determine potential yields on these
investments.
(i) scheduled monthly payments on the Mortgage Loans are timely
received on the first day of each month;
B-3
<PAGE>
(ii) there are no defaults on the Mortgage Loans;
(iii) the Mortgage Loans do not prepay during the lock-out period
and thereafter prepay in full on the 1st day of the month and year
indicated;
(iv) the Initial IOs have initial notional amounts as set forth in
Appendix A:
(xi) the Initial IOs are paid in full on the distribution dates
indicated.
RMSC 1993-M1
Sensitivity of RMSC IOs to Principal Prepayments
Pre-Tax Yields to Assumed Maturity
Purchase
Price Assumed Payment in Full Date
- -------- ----------------------------------------
May 1998 May 1999 May 2000
-------- -------- --------
0.4613 6.60% 66.00% 82.96%
DLJ 1993-MF17
Sensitivity of DLJ IOs to Principal Prepayments
Pre-Tax Yields to Assumed Maturity
Purchase
Price Assumed Payment in Full Date
- -------- -----------------------------------------------------------
December 2000 December 2001 December 2002 December 2003
------------- ------------- ------------- -------------
1.5313 -1.7990% 7.8510% 13.4710% 16.9480%
The pre-tax yields set forth in the preceding tables were calculated by
determining the monthly discount rates that, when applied to the assumed stream
of cash flows to be paid on the Initial IOs, would cause the discounted present
value of such assumed stream of cash flows to equal the aggregate purchase
prices of such securities and converting such monthly rates to semi-annual
corporate bond equivalent rates. Such calculations do not take into account
variations that may occur in the interest rates at which investors may be able
to reinvest funds received by them as distributions on such classes and
consequently do not purport to reflect the return on any investment in such
classes when such reinvestment rates are considered.
It is not likely that the Mortgage Loans will prepay in accordance with
the assumptions. In addition, there can be no assurance that the Mortgage Loans
will not prepay (including in connection with a casualty or condemnation or by
reason of default and consequent liquidation) prior to the end of the lock-out
period or that the pre-tax yields on the Initial IOs will correspond to any of
the pre-tax yields shown herein. Investors must make their own decisions as to
the appropriate prepayment assumptions and model to be used in evaluating the
Company's investment in the Initial IOs. Moreover, other IOs purchased by the
Company in the future may have substantially different characteristics and
yields to maturity than the Initial IOs.
B-4
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To: The Board of Directors of
Ocwen Asset Investment Corp.
In our opinion, the accompanying balance sheet presents fairly, in all material
respects, the financial position of Ocwen Asset Investment Corp. (the "Company")
at February 12, 1997, in conformity with generally accepted accounting
principles. This financial statement is the responsibility of the Company's
management; our responsibility is to express an opinion on this financial
statement based on our audit. We conducted our audit in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Fort Lauderdale, Florida
February 12, 1997
F-1
<PAGE>
OCWEN ASSET INVESTMENT CORP.
BALANCE SHEET
February 12, 1997
ASSETS
Cash....................................................... $1,600
======
LIABILITIES AND STOCKHOLDER'S EQUITY
Stockholder's Equity
Preferred Stock, par value $0.01 per share;
25,000,000 shares authorized
Common Stock, par value $0.01 per share;
200,000,000 shares authorized; 100
shares issued and outstanding..................... $ 1
Additional paid-in-capital............................. 1,599
------
Total Stockholder's Equity........................ $1,600
======
See accompanying notes to balance sheet.
F-2
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO BALANCE SHEET
February 12, 1997
NOTE 1-THE COMPANY
Ocwen Asset Investment Corp. (the "Company") was incorporated in Virginia
on January 22, 1997 and was initially capitalized on February 12, 1997 through
the sale of 100 shares of Common Stock for $1,600. The Company seeks to generate
income primarily through the acquisition of mortgage loans and mortgage
certificates and the acquisition of interests in or from entities which own and
finance mortgage loans and mortgage certificates.
The Company's sole activity through February 12, 1997, consisted of the
organization and start-up of the Company. Accordingly, no statement of
operations is presented.
NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Federal Income Taxes
The Company will elect to be taxed as a real estate investment trust under
the Internal Revenue Code. As a result, for such taxable years the Company will
not be subject to federal income taxation at the corporate level to the extent
it distributes annually its predistribution taxable income of at least 95% of
its real estate investment trust taxable income is so distributable.
Income Recognition
Income and expenses are to be recorded on the accrual basis of accounting.
NOTE 3-TRANSACTIONS WITH AFFILIATES
The Company intends to enter into a Management Agreement (the "Management
Agreement") with Ocwen Management Company (the "Manager"), a wholly-owned
subsidiary of Ocwen Financial Corporation, under which the Manager will advise
the Company on various facets of its business and manage its day-to-day
operations, subject to the supervision of the Company's Board of Directors. The
Manager will receive an annual base management fee of 1% of Average Invested
Assets, plus incentive compensation in an amount equal to the product of (A) 25%
of the dollar amount by which (1)(a) Funds from Operations (before the incentive
fee) of the Company per weighted average number of shares of Common Stock
outstanding plus (b) gains (or minus losses) from debt restructuring and sales
of property per weighted average number of shares of Common Stock, exceed (2) an
amount equal to (a) the weighted average of the price per share at the initial
offering and the prices per share at any secondary offerings multiplied by (b)
the Ten-Year U.S. Treasury Rate plus five percent multiplied by (B) the weighted
average number of shares of Common Stock outstanding during such period.
The Company intends to adopt an incentive option plan to provide a means
of incentive compensation for the Manager, whereby the Manager will be granted
an option to purchase Units in Ocwen Partnership, L.P. (or, at the Company's
option, shares of Common Stock in the Company) in an amount equal to 10% of the
shares outstanding following the Company's initial public offering, exercisable
at the initial public offering price. One quarter of the Manager's options will
be exercisable on each of the first four anniversaries of the Closing Date of
the initial public offering.
The Company further intends to issue Common Stock to Ocwen Financial
Corporation, concurrent with the closing of the initial public offering, at the
initial public offering price net of any underwriting discounts and
F-3
<PAGE>
commissions. Moreover, with a portion of the net proceeds of the initial public
offering, the Company intends to purchase certain securities with an approximate
market value of $25.7 million from Ocwen Financial Corporation.
NOTE 4-PUBLIC OFFERING OF COMMON STOCK
The Company is in the process of filing a Registration Statement for sale
of its common stock. Contingent upon the consummation of the public offering,
the Company will be liable for organization and offering expenses in connection
with the sale of the shares offered.
F-4
<PAGE>
================================================================================
No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made by this Prospectus and, if given or
made, such information or representations must not be relied upon as having been
authorized by the Company or any of the Underwriters. This Prospectus does not
constitute an offer to sell or the solicitation of any offer to buy any security
other than the shares of Common Stock offered by this Prospectus, nor does it
constitute an offer to sell or a solicitation of any offer to buy the shares of
Common Stock by anyone in any jurisdiction in which such offer or solicitation
is not authorized, or in which the person making such offer or solicitation is
not qualified to do so, or to any person to whom it is unlawful to make such
offer or solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that
information contained herein is correct as of any time subsequent to the date
hereof.
Until _________, 1997, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a Prospectus. This is in addition to the obligation of dealers to
deliver a Prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
--------------------
SUMMARY TABLE OF CONTENTS
Prospectus Summary....................................................... 1
Organization and Relationships........................................... 10
Risk Factors............................................................. 11
Operating Policies and Objectives........................................ 20
Yield Considerations Related to the
Company's Investments.................................................. 29
Initial Investments...................................................... 33
Management of Operations................................................. 34
The Company.............................................................. 42
Distribution Policy...................................................... 43
Capitalization........................................................... 44
Management's Discussion and Analysis
of Liquidity and Capital Resources..................................... 44
Description of Capital Stock............................................. 45
Certain Provisions of Virginia Law and
of OAIC's Articles of
Incorporation and Bylaws............................................... 48
Common Stock Available for Future Sale................................... 50
Operating Partnership Agreement.......................................... 51
Federal Income Tax Considerations........................................ 54
ERISA Considerations..................................................... 67
Certain Legal Aspects of Mortgage Loans
and Real Property Investments.......................................... 70
Use of Proceeds.......................................................... 77
Underwriting............................................................. 77
Legal Matters............................................................ 79
Experts.................................................................. 79
Additional Information................................................... 79
================================================================================
================================================================================
12,500,000 Shares
OCWEN ASSET
Investment
Corp.
Common Stock
PROSPECTUS
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
____________, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 30. Other Expenses of Issuance and Distribution
Set forth below is an estimate of the approximate amount of the fees and
expenses (other than sales commissions) payable by the Registrant in connection
with the issuance and distribution of the Common Shares.
SEC Registration Fee.... ............................................ $69,697
Blue Sky Fees and Expenses .......................................... *
NASD Filing Fee ..................................................... *
Printing and Mailing Fees ........................................... *
Counsel Fees and Expenses ........................................... *
Accountant's Fees and Expenses ...................................... *
Miscellaneous ....................................................... *
-------
Total ........................................................... $ *
=======
Item 31. Sales to Special Parties
Not Applicable.
Item 32. Recent Sales of Unregistered Securities
Not Applicable.
Item 33. Indemnification of Directors and Officers
Not Applicable.
Item 34. Treatment of Proceeds from Shares Being Registered
Not Applicable.
Item 35. Financial Statements and Exhibits
(a) Index to Financial Statements.
Report of Independent Certified Public Accountants............ F-1
Consolidated Balance Sheet as of February 12, 1997............ F-2
Notes to Balance Sheet........................................ F-3
(b) Exhibits.
1.1* Form of Underwriting Agreement.
3.1 Amended and Restated Articles of Incorporation of the Registrant.
3.2 Bylaws of the Registrant.
4.1* Form of Common Stock Certificate.
5.1* Form of Opinion of Hunton & Williams
8.1* Form of Opinion of Hunton & Williams as to Tax Matters.
10.1* Form of Management Agreement.
10.2* Form of Registration Rights Agreement between the Company and the
persons named therein.
10.3 Partnership Agreement of Ocwen Partnership, L.P.
II-1
<PAGE>
10.4* Form of Incentive Option Plan
21* List of Subsidiaries of Registrant
23.1* Consent of Hunton & Williams (included in Exhibits 5.1 and 8.1).
23.2 Consent of Price Waterhouse L.L.P.
24.1 Powers of Attorney (included on Signature Page)
- ----------
* To be filed by Amendment.
Item 36. Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in th successful defense of any action, suit or
proceeding) is asserted against the Registrant by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issues.
The undersigned Registrant hereby undertakes to provide to the
Underwriters as the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of West Palm Beach, State of Florida, on the 14th day of
February, 1997.
OCWEN ASSET INVESTMENT CORP.,
a Virginia corporation
(Registrant)
By /s/ CHRISTINE A. REICH
--------------------------------
Christine A. Reich
President
Each person whose signature appears below hereby constitutes and appoints
Christine A. Reich his true and lawful attorney-in-fact and agent, with full
powers of substitution, for him and in his name, place and stead, in any and
all capacities, to sign and to file any and all amendments, including
post-effective amendments and any registration statements filed pursuant to Rule
462(b), to this Registration Statement with the Securities and Exchange
Commission, granting to said attorney-in-fact power and authority to perform any
other act on behalf of the undersigned required to be done in connection
therewith.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on the 14th day
of February, 1997, in the capacities indicated.
Signature Title
- --------- -----
/s/ WILLIAM C. ERBEY Chairman of the Board of Directors
- ------------------------------- and Chief Executive Officer
William C. Erbey
/s/ CHRISTINE A. REICH Director, President and
- ------------------------------- Chief Financial Officer
Christine A. Reich
II-3
<PAGE>
EXHIBIT 3.1
RESTATED AND AMENDED
ARTICLES OF INCORPORATION
OF
OCWEN ASSET INVESTMENT CORP.
(A Stock Corporation)
I.
The name of the corporation (which is hereinafter called the "Corporation")
is Ocwen Asset Investment Corp.
II.
The purpose for which this Corporation is formed is to transact any and all
lawful business, not required to be specifically stated in these Articles, for
which corporations may be incorporated under the Virginia Stock Corporation Act,
as amended from time to time.
III.
The total number of shares of stock that the Corporation has authority to
issue is two hundred million (200,000,000) shares of Common Stock, $.01 par
value per share, and twenty-five million (25,000,000) shares of Preferred Stock,
$.01 par value per share.
No holder of shares of capital stock of the Corporation shall have any
preemptive or preferential right to subscribe to or purchase (i) any shares of
any class of the Corporation, whether now or hereafter authorized; (ii) any
warrants, rights, or options to purchase any such shares; or (iii) any
securities or obligations convertible into any such shares or into warrants,
rights, or options to purchase any such shares.
The Preferred Stock may be issued from time to time by the Board of
Directors of the Corporation, in such series and with such preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications or other provisions as may be fixed by the Board of
Directors.
IV.
The address of the Corporation's initial registered office is Riverfront
Plaza, East Tower, 951 E. Byrd Street, which is in the City of Richmond. The
name and address of the initial Registered Agent is Jack A. Molenkamp, who is a
resident of Virginia and a member of the Virginia State Bar, and whose business
address is Riverfront Plaza, East Tower, 951 East Byrd Street, Richmond,
Virginia 23219-4074, which is in the City of Richmond.
<PAGE>
V.
A. The Corporation shall have a Board of Directors consisting of not less
than three (3) nor more than nine (9) members unless otherwise determined from
time to time by resolution adopted by the affirmative vote of at least 80% of
the members of the Board of Directors. A director need not be a shareholder.
At each annual meeting of the shareholders, the shareholders shall elect
directors to serve a one-year term and until their successors are elected and
qualify.
B. The following Persons are the initial directors of the Corporation, to
serve until their successors are elected at the 1998 annual meeting of the
shareholders and qualified:
Name Address
---- -------
William C. Erbey The Forum, Suite 1002
1675 Palm Beach Lakes Boulevard
West Palm Beach, FL 33401
Christine A. Reich The Forum, Suite 1002
1675 Palm Beach Lakes Boulevard
West Palm Beach, FL 33401
J. Roderick Heller, III 8065 Leesburg Pike, Suite 400
Vienna, VA 22182
C. 1. Notwithstanding anything herein to the contrary, at all times
(except during a period not to exceed sixty (60) days following the death,
resignation, incapacity or removal from office of a director prior to expiration
of the director's term of office), a majority of the Board of Directors shall be
"Independent Directors." "Independent Director" shall mean any director who
within the last two years has not directly or indirectly (i) owned an interest
in the "Manager" or any of its "Affiliates," (ii) been employed by the "Manager"
or any of its "Affiliates," (iii) been an officer or director of the "Manager"
or any of its "Affiliates," (iv) performed services for the "Manager" or (v) had
any "material business or professional relationship" with the "Manager" or any
of its "Affiliates."
2. For the purposes of this Section C, the term "Manager" means the
Person responsible for directing day-to-day business affairs of the Company,
including any Person to which the "Manager" subcontracts substantially all such
functions.
3. For purposes of this Section C, "Affiliate" of a Person shall
mean (i) any Person directly or indirectly owning, controlling, or holding, with
power to vote ten percent or more of the outstanding voting securities of such
other Person, (ii) any Person ten percent or more of whose outstanding voting
securities are directly or indirectly owned, controlled, or held, with power to
vote, by such other Person, (iii) any Person directly or indirectly controlling,
controlled by, or under common control with such other Person, (iv) any
executive officer,
-2-
<PAGE>
director, trustee or general partner of such other Person,
and (v) any legal entity for which such Person acts as an executive officer,
director, trustee or general partner.
4. For the purposes of this Section C, an indirect relationship
shall include circumstances in which a director's spouse, children, parents,
siblings or mothers-, fathers-, sisters- or brothers-in-law is or has been
associated with the "Manager" or any of its "Affiliates."
5. For the purposes of this Section C, a business relationship is
material per se if the gross revenue derived by the potential director from the
"Manager" and its "Affiliates" exceeds 5% of his or her (i) annual gross revenue
from all sources in either of the last two years and (ii) net worth, on a fair
market value basis.
6. "Person" means and includes any natural person, corporation,
partnership, association, trust, limited liability company or any other legal
entity.
D. Notwithstanding any other provisions of these Articles of
Incorporation or the Bylaws of the Corporation (and notwithstanding that some
lesser percentage may be specified by law, these Articles of Incorporation or
the Bylaws of the Corporation), the provisions of this Article V shall not be
amended, altered, changed or repealed without the affirmative vote of at least
80% of the members of the Board of Directors or the affirmative vote of the
holders of not less than two-thirds (2/3) of the outstanding shares of capital
stock of the Corporation entitled to vote generally in the election of
directors, voting separately as a class.
VI.
A. In this Article:
"Applicant" means the Person seeking indemnification pursuant to this
Article.
"Expenses" includes counsel fees.
"Liability" means the obligation to pay a judgment, settlement,
penalty, fine, including any excise tax assessed with respect to an employee
benefit plan, or reasonable expenses incurred with respect to a proceeding.
"Party" includes an individual who was, is, or is threatened to be
made a named defendant or respondent in a proceeding.
"Proceeding" means any threatened, pending, or completed action, suit,
or proceeding, whether civil, criminal, administrative or investigative and
whether formal or informal.
-3-
<PAGE>
B. In any proceeding brought by or in the right of the Corporation or
brought by or on behalf of shareholders of the Corporation, no director or
officer of the Corporation shall be liable to the Corporation or its
shareholders for monetary damages with respect to any transaction, occurrence or
course of conduct, whether prior or subsequent to the effective date of this
Article, except for liability resulting from such Person's having engaged in
willful misconduct or a knowing violation of the criminal law or any federal or
state securities law or in the case of the Directors, other than the Independent
Directors, such director engaging in misconduct or negligent conduct.
C. The Corporation shall indemnify (i) any Person who was or is a party
to any proceeding, including a proceeding brought by a shareholder in the right
of the Corporation or brought by or on behalf of shareholders of the
Corporation, by reason of the fact that he is or was a director or officer of
the Corporation, or (ii) any director or officer who is or was serving at the
request of the Corporation as a director, trustee, partner, member or officer of
another corporation, partnership, joint venture, limited liability company,
trust, employee benefit plan or other enterprise, against any liability incurred
by him in connection with such proceeding if his conduct in question was in the
best interest of the Company and he was acting on behalf of the Corporation or
performing services for the Corporation unless he engaged in gross negligence,
willful misconduct or a knowing violation of the criminal law or in the case of
the Directors, other than the Independent Directors, such director engaged in
misconduct or negligent conduct. A Person is considered to be serving an
employee benefit plan at the Corporation's request if his duties to the
Corporation also impose duties on, or otherwise involve services by, him to the
plan or to participants in or beneficiaries of the plan. The Board of Directors
is hereby empowered, by a majority vote of a quorum of disinterested directors,
to enter into a contract to indemnify any director or officer in respect of any
proceedings arising from any act or omission, whether occurring before or after
the execution of such contract.
D. The provisions of this Article shall be applicable to all proceedings
commenced after the adoption hereof by the Corporation, arising from any act or
omission, whether occurring before or after such adoption. No amendment or
repeal of this Article shall have any effect on the rights provided under this
Article with respect to any act or omission occurring prior to such amendment or
repeal. The Corporation shall promptly take all such actions, and make all such
determinations, as shall be necessary or appropriate to comply with its
obligation to make any indemnity under this Article and shall promptly pay or
reimburse all reasonable expenses, including attorneys' fees, incurred by any
such indemnified Person in connection with such actions and determinations or
proceedings of any kind arising therefrom.
E. The termination of any proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not of
itself create a presumption that the applicant did not meet the standard of
conduct described in Section B or C of this Article.
F. Any indemnification under Section C of this Article (unless ordered by
a court) shall be made by the Corporation only as authorized in the specific
case upon a determination that indemnification of the applicant is proper in the
circumstances because he has met the applicable standard of conduct set forth in
Section C.
-4-
<PAGE>
The determination shall be made:
1. By the Board of Directors by a majority vote of a quorum
consisting of directors not at the time parties to the proceeding;
2. If a quorum cannot be obtained under subsection 1 of this
Section, by majority vote of a committee duly designated by the Board of
Directors (in which designation directors who are parties may participate),
consisting solely of two or more directors not at the time parties to the
proceeding;
3. By special legal counsel:
a. Selected by the Board of Directors or its committee in the
manner prescribed in subsection 1 or 2 of this Section; or
b. If a quorum of the Board of Directors cannot be obtained under
subsection 1 of this Section and a committee cannot be designated
under subsection 2 of this Section, selected by majority vote of the
full Board of Directors, in which selection directors who are parties
may participate; or
4. By the shareholders, but shares owned by or voted under the
control of directors who are at the time parties to the proceeding may not
be voted on the determination.
Any evaluation as to reasonableness of expenses shall be made in the same
manner as the determination that indemnification is appropriate, except that if
the determination is made by special legal counsel, such evaluation as to
reasonableness of expenses shall be made by those entitled under subsection 3 of
this Section F to select counsel.
Notwithstanding the foregoing, in the event there has been a change in the
composition of a majority of the Board of Directors after the date of the
alleged act or omission with respect to which indemnification is claimed, any
determination as to indemnification and advancement of expenses with respect to
any claim for indemnification made pursuant to this Article shall be made by
special legal counsel agreed upon by the Board of Directors and the applicant.
If the Board of Directors and the applicant are unable to agree upon such
special legal counsel the Board of Directors and the applicant each shall select
a nominee, and the nominees shall select such special legal counsel.
G. 1. The Corporation shall pay for or reimburse the reasonable
expenses incurred by any applicant who is a party to a proceeding in advance of
final disposition of the proceeding or the making of any determination under
section C if the applicant furnishes the Corporation:
-5-
<PAGE>
a. a written statement of his good faith belief that he has met
the standard of conduct described in Section C; and
b. a written undertaking, executed personally or on his behalf,
to repay the advance if it is ultimately determined that he did not
meet such standard of conduct. Provided, however, that this Section G
shall apply only if the action was initiated by a third party who is
not a shareholder of the Company or if the action was initiated by a
shareholder and such advance is approved by a court of competent
jurisdiction.
2. The undertaking required by paragraph (b) of subsection 1 of this
Section shall be an unlimited general obligation of the applicant but need not
be secured and may be accepted without reference to financial ability to make
repayment.
3. Authorizations of payments under this Section shall be made by
the Persons specified in Section F.
H. The Board of Directors is hereby empowered, by majority vote of a
quorum consisting of disinterested directors, to cause the Corporation to
indemnify or contract to indemnify any Person not specified in Section B or C of
this Article who was, is or may become a party to any proceeding, by reason of
the fact that he is or was an employee or agent of the Corporation, or is or was
serving at the request of the Corporation as director, officer, employee or
agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, to the same extent as if such Person were
specified as one to whom indemnification is granted in Section C. The
provisions of Sections D through G of this Article shall be applicable to any
indemnification provided hereafter pursuant to this Section H.
I. The Corporation may purchase and maintain insurance to indemnify it
against the whole or any portion of the liability assumed by it in accordance
with this Article and may also procure insurance, in such amounts as the Board
of Directors may determine, on behalf of any Person who is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against any liability asserted against or incurred by him in any
such capacity or arising from his status as such, whether or not the Corporation
would have power to indemnify him against such liability under the provisions of
this Article.
J. Every reference herein to directors, officers, employees or agents
shall include former directors, officers, employees and agents and their
respective heirs, executors and administrators. The indemnification hereby
provided and provided hereafter pursuant to the power hereby conferred by this
Article on the Board of Directors shall not be exclusive of any other rights to
which any Person may be entitled, including any right under policies of
insurance that may be purchased and maintained by the Corporation or others,
with respect to claims, issues or matters in relation to which the Corporation
would not have the power to indemnify
-6-
<PAGE>
such Person under the provisions of this Article. Such rights shall not
prevent or restrict the power of the Corporation to make or provide for any
further indemnity, or provisions for determining entitlement to indemnity,
pursuant to one or more indemnification agreements, bylaws, or other
arrangements (including, without limitation, creation of trust funds or
security interests funded by letters of credit or other means) approved by
the Board of Directors (whether or not any of the directors of the
Corporation shall be a party to or beneficiary of any such agreements, bylaws
or arrangements); provided, however, that any provision of such agreements,
bylaws or other arrangements shall not be effective if and to the extent that
it is determined to be contrary to this Article or applicable laws of the
Commonwealth of Virginia.
K. Each provision of this Article shall be severable, and an adverse
determination as to any such provision shall in no way affect the validity of
any other provision.
VII.
The Corporation shall seek to elect and maintain status as a REIT under the
Code. It shall be the duty of the Board of Directors to ensure that the
Corporation satisfies the requirements for qualification as a REIT under the
Code, including, but not limited to, the ownership of its outstanding stock, the
nature of its assets, the sources of its income, and the amount and timing of
its distributions to its shareholders. The Board of Directors shall take no
action to disqualify the Corporation as a REIT or to otherwise revoke the
Corporation's election to be taxed as a REIT without the affirmative vote of
two-thirds (2/3) of the number of shares of Common Stock entitled to vote on
such matter at a special meeting of the shareholders.
VIII.
A. Restrictions on Transfer.
1. Definitions. The following terms shall have the following
meanings:
"Beneficial Ownership" shall mean ownership of shares of Equity Stock
by a Person who would be treated as an owner of such shares of Equity Stock
either directly or indirectly through the application of Section 544 of the
Code, as modified by Section 856(h)(1)(B) of the Code. The terms "Beneficial
Owner," "Beneficially Owns," and "Beneficially Owned" shall have correlative
meanings.
"Beneficiary" shall mean, with respect to any Trust, one or more
organizations described in each of Section 170(b)(1)(A) (other than clauses
(vii) or (viii) thereof) and Section 170(c)(2) of the Code that are named by the
Corporation as the beneficiary or beneficiaries of such Trust, in accordance
with the provisions of Section (B)(1) of Article VIII hereof.
"Board of Directors" shall mean the Board of Directors of the
Corporation.
-7-
<PAGE>
"Constructive Ownership" shall mean ownership of shares of Equity
Stock by a Person who would be treated as an owner of such shares of Equity
Stock either directly or indirectly through the application of Section 318 of
the Code, as modified by Section 856(d)(5) of the Code. The terms "Constructive
Owner," "Constructively Owns," and "Constructively Owned" shall have correlative
meanings.
"Equity Stock" shall mean Preferred Stock and Common Stock of the
Corporation. The term "Equity Stock" shall include all shares of Preferred
Stock and Common Stock of the Corporation that are held as Shares-in-Trust in
accordance with the provisions of Section (B) of Article VIII hereof.
"Initial Public Offering" means the sale of shares of Common Stock
pursuant to the Corporation's first effective registration statement for such
shares of Common Stock filed under the Securities Act of 1933, as amended.
"Market Price" on any date shall mean the average of the Closing Price
for the five consecutive Trading Days ending on such date. The "Closing Price"
on any date shall mean the average of the high bid and low asked prices in the
over-the-counter market, as reported by The Nasdaq Stock Market, or, if such
system is no longer in use, the principal other automated quotations system that
may then be in use or, if the shares of Equity Stock are not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in the shares of Equity Stock selected
by the Board of Directors.
"Non-Transfer Event" shall mean an event other than a purported
Transfer that would cause any Person to Beneficially Own or Constructively Own
shares of Equity Stock in excess of the Ownership Limit, including, but not
limited to, the granting of any option or entering into any agreement for the
sale, transfer or other disposition of shares of Equity Stock or the sale,
transfer, assignment or other disposition of any securities or rights
convertible into or exchangeable for shares of Equity Stock.
"Operating Partnership Agreement" shall mean the agreement of limited
partnership governing Ocwen Partnership, L.P., a Virginia limited
partnership, as may be amended from time to time.
"Ownership Limit" shall mean the restriction on ownership (or deemed
ownership by virtue of the attribution provisions of the Code) of (a) more than
8.7% of the outstanding shares of Common Stock by any stockholder other than
Ocwen Financial, (b) more than 15% of the outstanding shares of Common Stock by
Ocwen Financial, or (c) more than 9.9% of the shares of any series of Preferred
Stock by any stockholder.
"Permitted Transferee" shall mean any Person designated as a Permitted
Transferee in accordance with the provisions of Section (B)(5) of Article VIII
hereof.
"Person" shall mean an individual, corporation, partnership, estate,
trust, a portion of a trust permanently set aside for or to be used exclusively
for the purposes described
-8-
<PAGE>
in Section 642(c) of the Code, association, private foundation within the
meaning of Section 509(a) of the Code, joint stock company or other entity
and also includes a "group" as that term is used for purposes of Section
12(d)(3) of the Securities Exchange Act of 1934, as amended.
"Prohibited Owner" shall mean, with respect to any purported Transfer
or Non-Transfer Event, any Person who, but for the provisions of Section (A)(3)
of Article VIII hereof, would own record title to shares of Equity Stock.
"Redemption Rights" shall mean the rights granted under the Operating
Partnership Agreement to the limited partners to redeem, under certain
circumstances, their limited partnership interests for shares of Common Stock
(or cash at the option of the Corporation).
"Restriction Termination Date" shall mean the first day after the date
of the Initial Public Offering on which (i) the Board of Directors determines
that it is no longer in the best interests of the Corporation to attempt to, or
continue to, qualify as a REIT and (ii) there is an affirmative vote of
two-thirds of the number of shares of Common Stock entitled to vote on such
matter at a special meeting of the shareholders of the Corporation.
"Shares-in-Trust" shall mean any shares of Equity Stock designated
Shares-in-Trust pursuant to Section (A)(3) of Article VIII hereof.
"Trading Day" shall mean any day other than a Saturday, a Sunday or a
day on which banking institutions in the State of New York are authorized or
obligated by law or executive order to close.
"Transfer" (as a noun) shall mean any sale, transfer, gift,
assignment, devise or other disposition of shares of Equity Stock, whether
voluntary or involuntary, whether of record, constructively or beneficially and
whether by operation of law or otherwise. "Transfer" (as a verb) shall not have
the correlative meaning.
"Trust" shall mean any separate trust created pursuant to Section
(A)(3) of Article VIII hereof and administered in accordance with the terms of
Section (B) of Article VIII hereof, for the exclusive benefit of any
Beneficiary.
"Trustee" shall mean any Person or entity unaffiliated with both the
Corporation and any Prohibited Owner, such Trustee to be designated by the
Corporation to act as trustee of any Trust, or any successor trustee thereof.
2. Restriction on Transfers.
a. Except as provided in Section (A)(7) of Article VIII hereof,
from the date of the Initial Public Offering and prior to the Restriction
Termination Date, (i) no Person shall Beneficially Own or Constructively Own
outstanding shares of Equity Stock in
-9-
<PAGE>
excess of the Ownership Limit and (ii) any Transfer that, if effective, would
result in any Person Beneficially Owning or Constructively Owning shares of
Equity Stock in excess of the Ownership Limit shall be void ab initio as to
the Transfer of that number of shares of Equity Stock which would be
otherwise Beneficially Owned or Constructively Owned by such Person in excess
of the Ownership Limit, and the intended transferee shall acquire no rights
in such excess shares of Equity Stock.
b. Except as provided in Section (A)(7) of Article VIII hereof,
from the date of the Initial Public Offering and prior to the Restriction
Termination Date, any Transfer that, if effective, would result in shares of
Equity Stock being beneficially owned by fewer than 100 Persons (determined
without reference to any rules of attribution) shall be void ab initio as to the
Transfer of that number of shares which would be otherwise beneficially owned
(determined without reference to any rules of attribution) by the transferee,
and the intended transferee shall acquire no rights in such shares of Equity
Stock.
c. From the date of the Initial Public Offering and prior to
the Restriction Termination Date, any Transfer of shares of Equity Stock that,
if effective, would result in the Corporation being "closely held" within the
meaning of Section 856(h) of the Code shall be void ab initio as to the Transfer
of that number of shares of Equity Stock which would cause the Corporation to be
"closely held" within the meaning of Section 856(h) of the Code, and the
intended transferee shall acquire no rights in such shares of Equity Stock.
d. From the date of the Initial Public Offering and prior to
the Restriction Termination Date, any Transfer of shares of Equity Stock that,
if effective, would cause the Corporation to Constructively Own 10% or more of
the ownership interests in a tenant of the Corporation's real property, within
the meaning of Section 856(d)(2)(B) of the Code, shall be void ab initio as to
the Transfer of that number of shares of Equity Stock which would cause the
Corporation to Constructively Own 10% or more of the ownership interests in a
tenant of the Corporation's real property, within the meaning of Section
856(d)(2)(B) of the Code, and the intended transferee shall acquire no rights in
such excess shares of Equity Stock.
3. Transfer to Trust.
a. If, notwithstanding the other provisions contained in this
Section (A) of Article VIII, at any time after the Initial Public Offering and
prior to the Restriction Termination Date, there is a purported Transfer or
Non-Transfer Event such that any Person would either Beneficially Own or
Constructively Own shares of Equity Stock in excess of the Ownership Limit,
then, (i) except as otherwise provided in Section (A)(7) of Article VIII hereof,
the purported transferee shall acquire no right or interest (or, in the case of
a Non-Transfer Event, the Person holding record title to the shares of Equity
Stock Beneficially Owned or Constructively Owned by such Beneficial Owner or
Constructive Owner, shall cease to own any right or interest) in such number of
shares of Equity Stock which would cause such Beneficial Owner or Constructive
Owner to Beneficially Own or Constructively Own shares of Equity Stock in excess
of the Ownership Limit, (ii) such number of shares of Equity Stock in excess
-10-
<PAGE>
of the Ownership Limit (rounded up to the nearest whole share) shall be
designated Shares-in-Trust and, in accordance with the provisions of Section
(B) of Article VIII hereof, transferred automatically and by operation of law
to the Trust to be held in accordance with that Section (B) of Article VIII,
and (iii) the Prohibited Owner shall submit such number of shares of Equity
Stock to the Corporation for registration in the name of the Trustee. Such
transfer to a Trust and the designation of shares as Shares-in-Trust shall be
effective as of the close of business on the business day prior to the date
of the Transfer or Non-Transfer Event, as the case may be.
b. If, notwithstanding the other provisions contained in this
Section (A) of Article VIII, at any time after the Initial Public Offering and
prior to the Restriction Termination Date, there is a purported Transfer or
Non-Transfer Event that, if effective, would (i) result in the shares of Equity
Stock being beneficially owned by fewer than 100 Persons (determined without
reference to any rules of attribution), (ii) result in the Corporation being
"closely held" within the meaning of Section 856(h) of the Code, or (iii) cause
the Corporation to Constructively Own 10% or more of the ownership interests in
a tenant of the Corporation's real property, within the meaning of Section
856(d)(2)(B) of the Code, then (x) the purported transferee shall not acquire
any right or interest (or, in the case of a Non-Transfer Event, the Person
holding record title of the shares of Equity Stock with respect to which such
Non-Transfer Event occurred, shall cease to own any right or interest) in such
number of shares of Equity Stock, the ownership of which by such purported
transferee or record holder would (A) result in the shares of Equity Stock being
beneficially owned by fewer than 100 Persons (determined without reference to
any rules of attribution), (B) result in the Corporation being "closely held"
within the meaning of Section 856(h) of the Code, or (C) cause the Corporation
to Constructively Own 10% or more of the ownership interests in a tenant of the
Corporation's real property, within the meaning of Section 856(d)(2)(B) of the
Code, (y) such number of shares of Equity Stock (rounded up to the nearest whole
share) shall be designated Shares-in-Trust and, in accordance with the
provisions of Section (B) of Article VIII hereof, transferred automatically and
by operation of law to the Trust to be held in accordance with that Section (B)
of Article VIII, and (z) the Prohibited Owner shall submit such number of shares
of Equity Stock to the Corporation for registration in the name of the Trustee.
Such transfer to a Trust and the designation of shares as Shares-in-Trust shall
be effective as of the close of business on the business day prior to the date
of the Transfer or Non-Transfer Event, as the case may be.
4. Remedies For Breach. If the Corporation, or its designees, shall
at any time determine in good faith that a Transfer has taken place in violation
of Section (A)(2) of Article VIII hereof or that a Person intends to acquire or
has attempted to acquire Beneficial Ownership or Constructive Ownership of any
shares of Equity Stock in violation of Section (A)(2) of Article VIII hereof,
the Corporation shall take such action as it deems advisable to refuse to give
effect to or to prevent such Transfer or acquisition, including, but not limited
to, refusing to give effect to such Transfer on the books of the Corporation or
instituting proceedings to enjoin such Transfer or acquisition.
5. Notice of Restricted Transfer. Any Person who acquires or
attempts to acquire shares of Equity Stock in violation of Section (A)(2) of
Article VIII hereof, or any
-11-
<PAGE>
Person who owned shares of Equity Stock that were
transferred to the Trust pursuant to the provisions of Section (A)(3) of Article
VIII hereof, shall immediately give written notice to the Corporation of such
event and shall provide to the Corporation such other information as the
Corporation may request in order to determine the effect, if any, of such
Transfer or Non-Transfer Event, as the case may be, on the Corporation's status
as a REIT.
6. Owners Required To Provide Information. From the date of the
Initial Public Offering and prior to the Restriction Termination Date:
a. Every Beneficial Owner or Constructive Owner of more than
5%, or such lower percentages as required pursuant to regulations under the
Code, of the outstanding shares of all classes of capital stock of the
Corporation shall, within 30 days after January 1 of each year, provide to
the Corporation a written statement or affidavit stating the name and
address of such Beneficial Owner or Constructive Owner, the number of
shares of Equity Stock Beneficially Owned or Constructively Owned, and a
description of how such shares are held. Each such Beneficial Owner or
Constructive Owner shall provide to the Corporation such additional
information as the Corporation may request in order to determine the
effect, if any, of such Beneficial Ownership or Constructive Ownership on
the Corporation's status as a REIT and to ensure compliance with the
Ownership Limit.
b. Each Person who is a Beneficial Owner or Constructive Owner
of shares of Equity Stock and each Person (including the stockholder of
record) who is holding shares of Equity Stock for a Beneficial Owner or
Constructive Owner shall provide to the Corporation a written statement or
affidavit stating such information as the Corporation may request in order
to determine the Corporation's status as a REIT and to ensure compliance
with the Ownership Limit.
7. Exception. The Ownership Limit shall not apply to the
acquisition of shares of Equity Stock by an underwriter that participates in a
public offering of such shares for a period of 90 days following the purchase by
such underwriter of such shares provided that the restrictions contained in
Section (A)(2) of Article VIII hereof will not be violated following the
distribution by such underwriter of such shares. In addition, the Board of
Directors, upon receipt of a ruling from the Internal Revenue Service or an
opinion of counsel in each case to the effect that the restrictions contained in
Section (A)(2)(B), Section (A)(2)(C), and/or Section (A)(2)(D) of Article VIII
hereof will not be violated, may exempt a Person from the Ownership Limit
provided that (i) the Board of Directors obtains such representations and
undertakings from such Person as are reasonably necessary to ascertain that no
individual's Beneficial Ownership or Constructive Ownership of shares of Equity
Stock will violate the Ownership Limit and (ii) such Person agrees in writing
that any violation or attempted violation will result in such transfer to the
Trust of shares of Equity Stock pursuant to Section (A)(3) of Article VIII
hereof.
-12-
<PAGE>
B. Shares-in-Trust.
1. Trust. Any shares of Equity Stock transferred to a Trust and
designated Shares-in-Trust pursuant to Section (A)(3) of Article VIII hereof
shall be held for the exclusive benefit of the Beneficiary. The Corporation
shall name a Beneficiary for each Trust within five days after discovery of the
existence thereof. Any transfer to a Trust, and subsequent designation of
shares of Equity Stock as Shares-in-Trust, pursuant to Section (A)(3) of Article
VIII hereof shall be effective as of the close of business on the business day
prior to the date of the Transfer or Non-Transfer Event that results in the
transfer to the Trust. Shares-in-Trust shall remain issued and outstanding
shares of Equity Stock of the Corporation and shall be entitled to the same
rights and privileges on identical terms and conditions as are all other issued
and outstanding shares of Equity Stock of the same class and series. When
transferred to a Permitted Transferee in accordance with the provisions of
Section (B)(5) of Article VIII hereof, such Shares-in-Trust shall cease to be
designated as Shares-in-Trust.
2. Dividend Rights. The Trust, as record holder of Shares-in-Trust,
shall be entitled to receive all dividends and distributions as may be declared
by the Board of Directors on such shares of Equity Stock and shall hold such
dividends or distributions in trust for the benefit of the Beneficiary. The
Prohibited Owner with respect to Shares-in-Trust shall repay to the Trust the
amount of any dividends or distributions received by it that (i) are
attributable to any shares of Equity Stock designated Shares-in-Trust and
(ii) the record date of which was on or after the date that such shares became
Shares-in-Trust. The Corporation shall take all measures that it determines
reasonably necessary to recover the amount of any such dividend or distribution
paid to a Prohibited Owner, including, if necessary, withholding any portion of
future dividends or distributions payable on shares of Equity Stock Beneficially
Owned or Constructively Owned by the Person who, but for the provisions of
Section (A)(3) of Article VIII hereof, would Constructively Own or Beneficially
Own the Shares-in-Trust; and, as soon as reasonably practicable following the
Corporation's receipt or withholding thereof, shall pay over to the Trust for
the benefit of the Beneficiary the dividends so received or withheld, as the
case may be.
3. Rights Upon Liquidation. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of, or any distribution of
the assets of, the Corporation, each holder of Shares-in-Trust shall be entitled
to receive, ratably with each other holder of shares of Equity Stock of the same
class or series, that portion of the assets of the Corporation which is
available for distribution to the holders of such class and series of shares of
Equity Stock. The Trust shall distribute to the Prohibited Owner the amounts
received upon such liquidation, dissolution, or winding up, or distribution;
provided, however, that the Prohibited Owner shall not be entitled to receive
amounts pursuant to this Section (B)(3) of Article VIII in excess of, in the
case of a purported Transfer in which the Prohibited Owner gave value for shares
of Equity Stock and which Transfer resulted in the transfer of the shares to the
Trust, the price per share, if any, such Prohibited Owner paid for the shares of
Equity Stock and, in the case of a Non-Transfer Event or Transfer in which the
Prohibited Owner did not give value for such shares (e.g., if the shares were
received through a gift or devise) and which Non-Transfer
-13-
<PAGE>
Event or Transfer, as the case may be, resulted in the transfer of shares to
the Trust, the price per share equal to the Market Price on the date of such
Non-Transfer Event or Transfer. Any remaining amount in such Trust shall be
distributed to the Beneficiary.
4. Voting Rights. The Trustee shall be entitled to vote all
Shares-in-Trust. Any vote by a Prohibited Owner as a holder of shares of Equity
Stock prior to the discovery by the Corporation that the shares of Equity Stock
are Shares-in-Trust shall, subject to applicable law, be rescinded and shall be
void ab initio with respect to such Shares-in-Trust and the Prohibited Owner
shall be deemed to have given, as of the close of business on the business day
prior to the date of the purported Transfer or Non-Transfer Event that results
in the transfer to the Trust of shares of Equity Stock under Section (A)(3) of
Article VIII hereof, an irrevocable proxy to the Trustee to vote the
Shares-in-Trust in the manner in which the Trustee, in its sole and absolute
discretion, desires.
5. Designation of Permitted Transferee. The Trustee shall have the
exclusive and absolute right to designate a Permitted Transferee of any and all
Shares-in-Trust. In an orderly fashion so as not to materially adversely affect
the Market Price of the Shares-in-Trust, the Trustee shall designate any Person
as Permitted Transferee, provided, however, that (i) the Permitted Transferee so
designated purchases for valuable consideration (whether in a public or private
sale) the Shares-in-Trust and (ii) the Permitted Transferee so designated may
acquire such Shares-in-Trust without such acquisition resulting in a transfer to
a Trust and the redesignation of such shares of Equity Stock so acquired as
Shares-in-Trust under Section (A)(3) of Article VIII hereof. Upon the
designation by the Trustee of a Permitted Transferee in accordance with the
provisions of this Section (B)(5) of Article VIII, the Trustee shall (i) cause
to be transferred to the Permitted Transferee that number of Shares-in-Trust
acquired by the Permitted Transferee, (ii) cause to be recorded on the books of
the Corporation that the Permitted Transferee is the holder of record of such
number of shares of Equity Stock, (iii) cause the Shares-in-Trust to be
canceled, and (iv) distribute to the Beneficiary any and all amounts held with
respect to the Shares-in-Trust after making that payment to the Prohibited Owner
pursuant to Section (B)(6) of Article VIII hereof.
6. Compensation to Record Holder of Shares of Equity Stock that
Become Shares-in-Trust. Any Prohibited Owner shall be entitled (following
discovery of the Shares-in-Trust and subsequent designation of the Permitted
Transferee in accordance with Section (B)(5) of Article VIII hereof or following
the acceptance of the offer to purchase such shares in accordance with Section
(B)(7) of Article VIII hereof) to receive from the Trustee following the sale or
other disposition of such Shares-in-Trust the lesser of (i) in the case of (a) a
purported Transfer in which the Prohibited Owner gave value for shares of Equity
Stock and which Transfer resulted in the transfer of the shares to the Trust,
the price per share, if any, such Prohibited Owner paid for the shares of Equity
Stock, or (b) a Non-Transfer Event or Transfer in which the Prohibited Owner did
not give value for such shares (e.g., if the shares were received through a gift
or devise) and which Non-Transfer Event or Transfer, as the case may be,
resulted in the transfer of shares to the Trust, the price per share equal to
the Market Price on the date of such Non-Transfer Event or Transfer, and (ii)
the price per share received by the
-14-
<PAGE>
Trustee from the sale or other disposition of such Shares-in-Trust in
accordance with Section (B)(5) of Article VIII hereof. Any amounts received
by the Trustee in respect of such Shares-in-Trust and in excess of such
amounts to be paid the Prohibited Owner pursuant to this Section (B)(6) shall
be distributed to the Beneficiary in accordance with the provisions of
Section (B)(5) of Article VIII hereof. Each Beneficiary and Prohibited Owner
waive any and all claims that they may have against the Trustee and the Trust
arising out of the disposition of Shares-in-Trust, except for claims arising
out of the gross negligence or willful misconduct of, or any failure to make
payments in accordance with this Section (B), by such Trustee or the
Corporation.
7. Purchase Right in Shares-in-Trust. Shares-in-Trust shall be
deemed to have been offered for sale to the Corporation, or its designee, at a
price per share equal to the lesser of (i) the price per share in the
transaction that created such Shares-in-Trust (or, in the case of devise, gift
or Non-Transfer Event, the Market Price at the time of such devise, gift or
Non-Transfer Event) and (ii) the Market Price on the date the Corporation, or
its designee, accepts such offer. The Corporation shall have the right to
accept such offer for a period of ninety days after the later of (i) the date of
the Non-Transfer Event or purported Transfer which resulted in such
Shares-in-Trust and (ii) the date the Corporation determines in good faith that
a Transfer or Non-Transfer Event resulting in Shares-in-Trust has occurred, if
the Corporation does not receive a notice of such Transfer or Non-Transfer Event
pursuant to Section (A)(5) of Article VIII hereof.
C. Remedies Not Limited. Nothing contained in this Article VIII shall
limit the authority of the Corporation to take such other action as it deems
necessary or advisable to protect the Corporation and the interests of its
shareholders by preservation of the Corporation's status as a REIT and to ensure
compliance with the Ownership Limit.
D. Ambiguity. In the case of an ambiguity in the application of any of
the provisions of this Article VIII, including any definition contained in
Section (A)(1) of Article VIII hereof, the Board of Directors shall have the
power to determine the application of the provisions of this Article VIII with
respect to any situation based on the facts known to it.
E. Legend. Each certificate for shares of Equity Stock shall bear the
following legend:
"The shares of [Common or Preferred] Stock represented by this
certificate are subject to restrictions on transfer for the purpose of
the Corporation's maintenance of its status as a real estate
investment trust under the Internal Revenue Code of 1986, as amended
(the "Code"). No Person may (i) Beneficially Own or Constructively
Own shares of Common Stock in excess of 9.9% of the number of
outstanding shares of Common Stock, (ii) Beneficially Own or
Constructively Own shares of any class or series of Preferred Stock in
excess of 9.9% of the number of outstanding shares of such class or
series of Preferred Stock, (iii) beneficially own shares of Equity
Stock that would result in the shares of Equity Stock being
beneficially owned by fewer than 100 Persons (determined
-15-
<PAGE>
without reference to any rules of attribution), (iv) Beneficially Own shares
of Equity Stock that would result in the Corporation being "closely
held" under Section 856(h) of the Code, or (v) Constructively Own
shares of Equity Stock that would cause the Corporation to
Constructively Own 10% or more of the ownership interests in a tenant
of the Corporation's real property, within the meaning of Section
856(d)(2)(B) of the Code. Any Person who attempts to Beneficially Own
or Constructively Own shares of Equity Stock in excess of the above
limitations must immediately notify the Corporation in writing. If
the restrictions above are violated, the shares of Equity Stock
represented hereby will be transferred automatically and by operation
of law to a Trust and shall be designated Shares-in-Trust. All
capitalized terms in this legend have the meanings defined in the
Corporation's Amended and Restated Articles of Incorporation, as the
same may be further amended from time to time, a copy of which,
including the restrictions on transfer, will be sent without charge to
each shareholder who so requests."
F. Severability. If any provision of this Article VIII or any
application of any such provision is determined to be invalid by any federal or
state court having jurisdiction over the issues, the validity of the remaining
provisions shall not be affected and other applications of such provision shall
be affected only to the extent necessary to comply with the determination of
such court.
Dated: February __, 1997
-16-
<PAGE>
EXHIBIT 3.2
BYLAWS
OF
OCWEN ASSET INVESTMENT CORP.
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I................................................... 1
Section 1. Principal Office............................ 1
Section 2. Additional Offices.......................... 1
Section 3. Fiscal and Taxable Years.................... 1
ARTICLE II.................................................. 1
ARTICLE III................................................. 4
Section 1. Place....................................... 4
Section 2. Annual Meeting.............................. 4
Section 3. Special Meetings............................ 5
Section 4. Notice...................................... 5
Section 5. Scope of Notice............................. 6
Section 6. Organization................................ 7
Section 7. Quorum...................................... 7
Section 8. Voting...................................... 8
Section 9. Proxies..................................... 8
Section 10. Voting of Shares by Certain Holders......... 9
Section 11. Inspectors.................................. 10
Section 12. Fixing Record Date.......................... 11
Section 13. Action Without a Meeting.................... 12
Section 14. Voting by Ballot............................ 12
Section 15. Voting List................................. 12
Section 16. Shareholder Proposals....................... 13
ARTICLE IV.................................................. 14
Section 1. General Powers.............................. 14
Section 2. Number, Tenure and Qualifications........... 15
Section 3. Changes in Number; Vacancies................ 15
Section 4. Resignations................................ 16
Section 5. Removal of Directors........................ 16
Section 6. Annual and Regular Meetings................. 17
Section 7. Special Meetings............................ 17
Section 8. Notice...................................... 17
Section 9. Quorum...................................... 18
Section 10. Voting...................................... 18
Section 11. Telephone Meetings.......................... 20
Section 12. Action Without a Meeting.................... 20
Section 13. Compensation................................ 20
Section 14. Policies and Resolutions.................... 20
Section 15. Nominations................................. 21
ARTICLE V................................................... 22
Section 1. Committees of the Board..................... 22
Section 2. Telephone Meetings.......................... 24
Section 3. Action By Committees Without a Meeting...... 25
ARTICLE VI.................................................. 25
Section 1. General Provisions.......................... 25
<PAGE>
Section 2. Subordinate Officers, Committees and
Agents..................................... 26
Section 3. Removal and Resignation..................... 26
Section 4. Vacancies................................... 27
Section 5. General Powers.............................. 27
Section 6. Duties of the President..................... 27
Section 7. Duties of the Vice-Presidents............... 28
Section 8. Duties of the Treasurer..................... 28
Section 9. Duties of the Secretary..................... 28
Section 10. Other Duties of Officers.................... 29
Section 11. Salaries.................................... 29
ARTICLE VII................................................. 30
Section 1. Contracts.................................... 30
Section 2. Checks and Drafts............................ 30
Section 3. Deposits..................................... 30
ARTICLE VIII................................................ 30
Section 1. Certificates of Stock....................... 30
Section 2. Lost Certificate............................ 31
Section 3. Transfer Agents and Registrars.............. 32
Section 4. Transfer of Stock........................... 32
Section 5. Stock Ledger................................ 33
ARTICLE IX.................................................. 33
Section 1. Declaration................................. 33
Section 2. Contingencies............................... 34
ARTICLE X................................................... 34
Section 1. Seal........................................ 34
Section 2. Affixing Seal............................... 34
ARTICLE XI.................................................. 35
Waiver of Notice........................................ 35
ARTICLE XII................................................. 35
Section 1. By Directors................................ 35
Section 2. By Shareholders............................. 36
ii
<PAGE>
BYLAWS
OF
OCWEN ASSET INVESTMENT CORP.
The Board of Directors of Ocwen Asset Investment Corp. (the
"Corporation") hereby sets out the Bylaws of the Corporation in their
entirety, as follows:
ARTICLE I
Offices
Section 1. Principal Office. The principal office of the Corporation
shall be located at 1675 Palm Beach Lakes Boulevard, Suite 532, West Palm
Beach, Florida 33401, or at any other place or places as the Board of
Directors may designate.
Section 2. Additional Offices. The Corporation may have additional
offices at such places as the Board of Directors may from time to time
determine or the business of the Corporation may require.
Section 3. Fiscal and Taxable Years. The fiscal and taxable years of
the Corporation shall begin on January 1 and end on December 31.
ARTICLE II
Definitions
For purposes of these Bylaws, the following words shall have the
meanings set forth below:
(a) For the purposes of this Section C, the term "Manager" means
the Person responsible for directing day-to-day
<PAGE>
business affairs of the Company, including any Person to which the Manager
subcontracts substantially all such functions.
(b) For purposes of this Section C, "Affiliate" of a Person shall
mean (i) any Person directly or indirectly owning, controlling, or holding,
with power to vote ten percent or more of the outstanding voting securities
of such other Person, (ii) any Person ten percent or more of whose
outstanding voting securities are directly or indirectly owned, controlled,
or held, with power to vote, by such other Person, (iii) any Person directly
or indirectly controlling, controlled by, or under common control with such
other Person, (iv) any executive officer, director, trustee or general
partner of such other Person, and (v) any legal entity for which such Person
acts as an executive officer, director, trustee or general partner.
(c) For the purposes of this Section C, an indirect relationship
shall include circumstances in which a director's spouse, children, parents,
siblings or mothers-, fathers-, sisters- or brothers-in-law is or has been
associated with the Manager or any of its Affiliates.
(d) For the purposes of this Section C, a business relationship is
material per se if the gross revenue derived from the potential director from
the Manager and its Affiliates exceeds 5% of his or her (i) annual gross
revenue from all sources in either of the last two years and (ii) net worth,
on a fair market value basis.
2
<PAGE>
(e) The term "Person" means and includes any natural person,
corporation, partnership, association, trust, limited liability company or
any legal entity.
(f) Notwithstanding anything herein to the contrary, at all times
(except during a period not to exceed sixty (60) days following the death,
resignation, incapacity or removal from office of a director prior to
expiration of the director's term of office), a majority of the Board of
Directors shall be "Independent Directors." "Independent Directors" shall
mean any director who within the last two years has not directly or
indirectly (i) owned an interest in the Manager or any of its Affiliates,
(ii) been employed by the Manager or any of its Affiliates or been an officer
or director of the Manager or any of its Affiliates, (iii) performed
services for the Manager or any of its Affiliates or (iv) had any material
business or professional relationship with the Manager or any of its Affiliates.
ARTICLE III
Meetings of Shareholders
Section 1. Place. All meetings of shareholders shall be held at 1675
Palm Beach Lakes Boulevard, Suite 532, West Palm
3
<PAGE>
Beach, Florida 33401, or at such other place within the United States as
shall be stated in the notice of the meeting.
Section 2. Annual Meeting. The President or the Board of Directors may
fix the time of the annual meeting of the shareholders for the election of
Directors and the transaction of any business as may be properly brought
before the meeting, but if no such date and time is fixed by the President or
the Board of Directors, the meeting for any calendar year shall be held on
the fourth Thursday in May, if that day is not a legal holiday. If that day
is a legal holiday, the annual meeting shall be held on the next succeeding
business day that is not a legal holiday.
Section 3. Special Meetings. The President, a majority of the Board
of Directors or a majority of the Independent Directors may call special
meetings of the shareholders. Special meetings of shareholders also shall be
called by the Secretary upon the written request of the holders of shares
entitled to cast not less than ten percent (10%) of all the votes entitled to
be cast at such meeting. Such request shall state the purpose of such
meeting and the matters proposed to be acted on at such meeting. The
Secretary shall inform such shareholders of the reasonably estimated cost of
preparing and mailing notice of the meeting and, upon payment to the
Corporation of such costs, the Secretary shall give notice to each
shareholder entitled to notice of the meeting. Unless requested by
shareholders entitled to cast a majority of all the votes entitled to be cast
at such meeting, a special meeting need not be called to consider any matter
which
4
<PAGE>
is substantially the same as a matter voted on at any annual or special
meeting of the shareholders held during the preceding twelve months.
Section 4. Notice. Not less than 10 nor more than 60 days before each
meeting of shareholders, the Secretary shall give to each shareholder
entitled to vote at such meeting and to each shareholder not entitled to vote
who is entitled to notice of the meeting, written or printed notice stating
the time and place of the meeting and, in the case of a special meeting or as
otherwise may be required by statute, the purpose for which the meeting is
called, either by mail or by presenting it to such shareholder personally or
by leaving it at his residence or usual place of business. If mailed, such
notice shall be deemed to be given when deposited in the United States mail
addressed to the shareholder at his post office address as it appears on the
records of the Corporation, with postage thereon prepaid.
Notice of a meeting of shareholders to act on (i) an amendment of the
Articles of Incorporation of the Corporation (the "Articles of
Incorporation"), (ii) plan of merger or share exchange, (iii) the sale,
lease, exchange or other disposition of all, or substantially all, the
property of the Corporation otherwise than in the usual and regular course of
its business, or (iv) the dissolution of the Corporation, shall be given in
the manner provided above, to each shareholder, whether or not entitled to
vote, not less than twenty-five nor more than sixty days before the date of
the meeting. Any such notice shall state
5
<PAGE>
that one of the purposes of the meeting is to consider the particular
extraordinary corporate act and, when applicable, shall be accompanied by a
copy of the (i) proposed amendment, (ii) plan of merger or share exchange, or
(iii) agreement pursuant to which the disposition of all or substantially all
of the Corporation's property will be effected.
Section 5. Scope of Notice. No business shall be transacted at a
special meeting of shareholders except that specifically designated in the
notice of the meeting. Subject to the provisions of Section 16 of this
Article III, any business of the Corporation may be transacted at the annual
meeting without being specifically designated in the notice, except such
business as is required by statute to be stated in such notice.
Section 6. Organization. At every meeting of the shareholders, the
Chairman of the Board, if there be one, shall conduct the meeting or, in the
case of vacancy in office or absence of the Chairman of the Board, one of the
following officers present shall conduct the meeting and act as Chairman in
the order stated: the Vice Chairman of the Board, if there be one, the
President, the Vice Presidents in their order of rank and seniority, or a
Chairman chosen by the shareholders entitled to cast a majority of the votes
which all shareholders present in person or by proxy are entitled to cast.
The Secretary, or, in his absence, an assistant secretary, or in the absence
of both the Secretary and assistant secretaries, a person appointed by the
Chairman shall act as Secretary.
6
<PAGE>
Section 7. Quorum. At any meeting of shareholders, the presence in
person or by proxy of shareholders entitled to cast a majority of all the
votes entitled to be cast at such meeting shall constitute a quorum; but this
Section 7 shall not affect any requirement under any statute, the Articles of
Incorporation or these Bylaws for the vote necessary for the adoption of any
measure. If such quorum shall not be present at any meeting of the
shareholders, the shareholders representing a majority of the shares entitled
to vote at such meeting, present in person or by proxy, may vote to adjourn
the meeting from time to time to a date not more than 120 days after the
original record date without notice other than announcement at the meeting
until such quorum shall be present. At such adjourned meeting at which a
quorum shall be present, any business may be transacted which might have been
transacted at the meeting as originally notified. Any meeting at which
Directors are to be elected shall be adjourned only from day to day, as may
be directed by shareholders representing a majority of the shares who are
present in person or by proxy and who are entitled to vote on the election of
Directors.
Section 8. Voting. A plurality of all the votes cast at a meeting of
shareholders duly called and at which a quorum is present shall be sufficient
to elect a director. There shall be no cumulative voting. Each share of
stock may be voted for as many individuals as there are Directors to be
elected and for whose election the share is entitled to be voted. A majority
of
7
<PAGE>
the votes cast at a meeting of shareholders duly called and at which a quorum
is present shall be sufficient to approve any other matter which may properly
come before the meeting, unless more than a majority of the votes cast is
required by statute, by the Articles of Incorporation or by these Bylaws.
Each shareholder of record shall have the right, at every meeting of
shareholders, to one vote for each share held.
Section 9. Proxies. A shareholder may vote the shares of stock owned of
record by him, either in person or by proxy executed in writing by the
shareholder or by his duly authorized attorney in fact. Such proxy shall be
filed with the Secretary of the Corporation before or at the time of the
meeting. No proxy shall be valid after eleven months from the date of its
execution, unless otherwise provided in the proxy.
Section 10. Voting of Shares by Certain Holders. Shares registered in
the name of another corporation, if entitled to be voted, may be voted by the
president, a vice president or a proxy appointed by the president or a vice
president of such other corporation, unless some other person who has been
appointed to vote such shares pursuant to a bylaw or a resolution of the
board of directors of such other corporation presents a certified copy of
such bylaw or resolution, in which case such person may vote such shares.
Any fiduciary may vote shares registered in his name as such fiduciary,
either in person or by proxy.
Shares of its own stock indirectly owned by this Corporation shall not be
voted at any meeting and shall not be counted in
8
<PAGE>
determining the total number of outstanding shares entitled to be voted at
any given time, unless they are held by it in a fiduciary capacity, in which
case they may be voted and shall be counted in determining the total number
of outstanding shares at any given time.
The Board of Directors may adopt by resolution a procedure by which a
shareholder may certify in writing to the Corporation that any shares of
stock registered in the name of the shareholder are held for the account of a
specified person other than the shareholder. The resolution shall set forth
the class of shareholders who may make the certification, the purpose for
which the certification may be made, the form of certification and the
information to be contained in it; if the certification is with respect to a
record date or closing of the stock transfer books, the time after the record
date or closing of the stock transfer books within which the certification
must be received by the Corporation; and any other provisions with respect to
the procedure which the Board of Directors considers necessary or desirable.
On receipt of such certification, the person specified in the certification
shall be regarded as, for the purposes set forth in the certification, the
shareholder of record of the specified stock in place of the shareholder who
makes the certification.
Section 11. Inspectors. At any meeting of shareholders, the Chairman of
the meeting may, or upon the request of any shareholder shall, appoint one or
more persons as inspectors for
9
<PAGE>
such meeting. Such inspectors shall ascertain and report the number of shares
represented at the meeting based upon their determination of the validity and
effect of proxies, count all votes, report the results and perform such other
acts as are proper to conduct the election and voting with impartiality and
fairness to all the shareholders.
Each report of an inspector shall be in writing and signed by him or by a
majority of them if there is more than one inspector acting at such meeting.
If there is more than one inspector, the report of a majority shall be the
report of the inspectors. The report of the inspector or inspectors on the
number of shares represented at the meeting and the results of the voting
shall be prima facie evidence thereof.
Section 12. Fixing Record Date. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of the
shareholders or any adjournment thereof, or entitled to receive payment for
any dividend, or in order to make a determination of shareholders for any
other proper purpose, the Board of Directors may fix in advance a date as the
record date for any such determination of shareholders, such date in any case
to be not more than seventy days prior to the date on which the particular
action, requiring such determination of shareholders, is to be taken. If no
record date is fixed for the determination of shareholders entitled to notice
of or to vote at a meeting of shareholders, or shareholders entitled to
receive payment of a dividend, the date on which notice of the meeting is
mailed or
10
<PAGE>
the date on which the resolution of the Board of Directors declaring such
dividend is adopted, as the case may be, shall be the record date for such
determination of shareholders. When a determination of shareholders entitled
to vote at any meeting of shareholders has been made as provided in this
section such determination shall apply to any adjournment thereof.
Section 13. Action Without a Meeting. Any action required or permitted
to be taken at a meeting of shareholders may be taken without a meeting if a
consent in writing, setting forth such action, is signed by each shareholder
entitled to vote on the matter and any other shareholder entitled to notice
of a meeting of shareholders (but not to vote thereat) has waived in writing
any right to dissent from such action, and such consent and waiver are filed
with the minutes of proceedings of the shareholders.
Section 14. Voting by Ballot. Voting on any question or in any election
may be viva voce unless the presiding officer shall order or any shareholder
shall demand that voting be by ballot.
Section 15. Voting List. The officer or agent having charge of the
stock transfer books for shares of the Corporation shall make, at least ten
(10) days before each meeting of shareholders, a complete list of the
shareholders entitled to vote at such meeting or any adjournment thereof,
with the address of and the number of shares held by each. Such list, for a
period of ten (10) days prior to such meeting, shall be kept on file at the
registered office of the Corporation or at its
11
<PAGE>
principal place of business or at the office of its transfer agent or
registrar and shall be subject to inspection by any shareholder at any time
during usual business hours. Such list shall also be produced and kept open
at the time and place of the meeting and shall be subject to the inspection
of any shareholder during the whole time of the meeting. The original stock
transfer books shall be prima facie evidence as to who are the shareholders
entitled to examine such list or transfer books or to vote at any meeting of
shareholders. If the requirements of this section have not been
substantially complied with, the meeting shall, on the demand of any
shareholder in person or by proxy, be adjourned until the requirements are
complied with.
Section 16. Shareholder Proposals. To be properly brought before an
annual meeting of shareholders, business must be (i) specified in the notice
of meeting (or any supplement thereto) given by or at the direction of the
Board of Directors, (ii) otherwise properly brought before the meeting by or
at the direction of the Board of Directors, or (iii) otherwise properly
brought before the meeting by a shareholder. In addition to any other
applicable requirements, for business to be properly brought before an annual
meeting by a shareholder, the shareholder must have given timely notice
thereof in writing to the Secretary of the Corporation. To be timely, a
shareholder's notice must be given, either by personal delivery or by United
States mail, postage prepaid, to the Secretary of the Corporation not later
than ninety (90) days in advance of the annual meeting.
12
<PAGE>
A shareholder's notice to the Secretary shall set forth as to each matter the
shareholder proposes to bring before the annual meeting (i) a brief
description of the business desired to be brought before the annual meeting
(including the specific proposal to be presented) and the reasons for
conducting such business at the annual meeting, (ii) the name and record
address of the shareholder proposing such business, (iii) the class and
number of shares of the Corporation that are beneficially owned by the
shareholder, and (iv) any material interest of the shareholder in such
business.
In the event that a shareholder attempts to bring business before an
annual meeting without complying with the provisions of this Section 16, the
Chairman of the meeting shall declare to the meeting that the business was
not properly brought before the meeting in accordance with the foregoing
procedures, and such business shall not be transacted.
No business shall be conducted at the annual meeting except in accordance
with the procedures set forth in this Section 16, provided, however, that
nothing in this Section 16 shall be deemed to preclude discussion by any
shareholder of any business properly brought before the annual meeting.
ARTICLE IV
Directors
Section 1. General Powers. The Board of Directors shall have full power
to conduct, manage, and direct the business and
13
<PAGE>
affairs of the Corporation, and all powers of the Corporation, except those
specifically reserved or granted to the shareholders by statute or by the
Articles of Incorporation or these Bylaws, shall be exercised by, or under
the authority of, the Board of Directors. Unless otherwise agreed between the
Corporation and the Director, each individual Director, including each
Independent Director, may engage in other business activities of the type
conducted by the Corporation and is not required to present to the
Corporation any investment opportunities presented to them even though the
investment opportunities may be within the scope of the Corporation's
investment policies.
Section 2. Number, Tenure and Qualifications. The number of Directors
of the Corporation shall be not less than three (3) nor more than nine (9).
The initial Board of Directors shall consist of five (5) persons. The
initial term of the Directors shall expire at the 1995 annual meeting of
shareholders. Directors need not be shareholders in the Corporation.
At all times (except during a period not to exceed 60 days following the
death, resignation, incapacity or removal from office of a Director prior to
the expiration of the Director's term of office), a majority of the Directors
shall be Independent Directors.
Section 3. Changes in Number; Vacancies.
Any vacancy occurring on the Board of Directors may, subject to the
provisions of Section 5 of this Article IV, be filled by a majority of the
remaining members of the Board of Directors,
14
<PAGE>
although such majority is less than a quorum; provided, however, that a
majority of Independent Directors shall nominate replacements for vacancies
among the Independent Directors, which replacements must be elected by a
majority of the Directors, including a majority of the Independent Directors.
Any vacancy occurring by reason of an increase in the number of Directors
may be filled by action of a majority of the entire Board of Directors
including a majority of Independent Directors. If the shareholders of any
class or series are entitled separately to elect one or more Directors, a
majority of the remaining Directors elected by that class or series or the
sole remaining Director elected by that class or series may fill any vacancy
among the number of Directors elected by that class or series. A Director
elected by the Board of Directors to fill a vacancy shall be elected to hold
office until the next annual meeting of shareholders or until his successor
is elected and qualified. The Board of Directors may declare vacant the
office of a Director who has been declared of unsound mind by an order of
court, who has pled guilty or nolo contendere to, or been convicted of, a
felony involving moral turpitude, or who has willfully violated the Company's
Articles of Incorporation or these Bylaws.
Section 4. Resignations. Any Director or member of a committee may
resign at any time. Such resignation shall be made in writing and shall take
effect at the time specified therein,
15
<PAGE>
or if no time be specified, at the time of the receipt by the Chairman of the
Board, the President or the Secretary.
Section 5. Removal of Directors. The shareholders may, at any time,
remove any Director, with or without cause, by the affirmative vote of the
holders of not less than two-thirds of all the shares entitled to vote on the
election of Directors and may elect a successor to fill any resulting vacancy
for the balance of the term of the removed Director.
Section 6. Annual and Regular Meetings. An annual meeting of the Board
of Directors shall be held immediately after and at the same place as the
annual meeting of shareholders, no notice other than this bylaw being
necessary. The Board of Directors may provide, by resolution, the time and
place, either within or without the Commonwealth of Virginia, for the holding
of regular meetings of the Board of Directors without other notice than such
resolution.
Section 7. Special Meetings. Special meetings of the Board of Directors
may be called by or at the request of the President, a majority of the Board
of Directors or a majority of the Independent Directors then in office. The
person or persons authorized to call special meetings of the Board of
Directors may fix any place, either within or without the Commonwealth of
Virginia, as the place for holding any special meeting of the Board of
Directors called by them.
Section 8. Notice. Notice of any special meeting of the Board of
Directors shall be given by written notice delivered
16
<PAGE>
personally, telegraphed, telecopied or mailed to each Director at his
business or resident address. Personally delivered, telegraphed or telecopied
notices shall be given at least two days prior to the meeting. Notice by
mail shall be given at least five days prior to the meeting. If mailed, such
notice shall be deemed to be given when deposited in the United States mail
properly addressed, with postage thereon prepaid. If given by telegram, such
notice shall be deemed to be given when the telegram is delivered to the
telegraph company. Neither the business to be transacted at, nor the purpose
of, any annual, regular or special meeting of the Board of Directors need be
stated in the notice, unless specifically required by statute or these Bylaws.
Section 9. Quorum. Subject to the provisions of Section 10 of this
Article IV, a majority of the entire Board of Directors shall constitute a
quorum for transaction of business at any meeting of the Board of Directors,
provided that, if less than a quorum is present at said meeting, a majority
of the Directors present may adjourn the meeting from time to time without
further notice.
Subject to the provisions of Section 10 of this Article IV, the Directors
present at a meeting which has been duly called and convened may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
Directors to leave less than a quorum.
17
<PAGE>
Section 10. Voting. (a) Except as provided in subsection (b) of this
Section 10, the action of the majority of the Directors present at a meeting
at which a quorum is present shall be the action of the Board of Directors,
unless the concurrence of a greater proportion is required for such action by
the Articles of Incorporation, these Bylaws, or applicable statute.
(b) Notwithstanding anything in these Bylaws to the contrary, (i)
any action pertaining to a sale or other disposition of an "Initial Hotel,"
as defined in the Corporation's registration statement on Form S-11 (the
"Registration Statement"), as declared effective by the Securities and
Exchange Commission (the "SEC") in connection with the Corporation's initial
public offering of common stock (the "Initial Public Offering") (ii) any
action pertaining to the refinancing of or prepayment of any principal on the
"Assumed Indebtedness" as defined in the Registration Statement as declared
effective by the SEC in connection with the Initial Public Offering, (iii)
any action pertaining to the purchase of any real estate asset, (iv) any
other action pertaining to any transaction involving the Corporation,
including the purchase, sale, lease, or mortgage of any real estate asset or
any other transaction, in which an advisor, Director or officer of the
Corporation, or any Affiliate of any of the foregoing persons, has any direct
or indirect interest other than solely as a result of their status as a
director, officer, or shareholder of the Corporation and (v) subject to the
Company having sufficient
18
<PAGE>
funds, any decision to decrease the Company's quarterly distribution of
dividends to holders of Common Stock below $.15 per share of Common Stock,
must be approved by a majority of the Directors, including a majority of the
Independent Directors, even if the Independent Directors constitute less than
a quorum.
Section 11. Telephone Meetings. Members of the Board of Directors may
participate in a meeting by means of a conference telephone or similar
communications equipment if all persons participating in the meeting can hear
each other at the same time. Participation in a meeting by these means shall
constitute presence in person at the meeting.
Section 12. Action Without a Meeting. Any action required or permitted
to be taken at any meeting of the Board of Directors may be taken without a
meeting, if a consent in writing to such action is signed by each Director
and such written consent is filed with the minutes of proceedings of the
Board of Directors.
Section 13. Compensation. Directors shall receive such reasonable
compensation for their services as Directors as the Board of Directors may
fix or determine from time to time; such compensation may include a fixed
sum, shares of capital stock of the Corporation and reimbursement of
reasonable expenses incurred in traveling to and from or attending regular or
special meetings of the Board of Directors or of any committee thereof.
Section 14. Policies and Resolutions. It shall be the duty of the Board
of Directors to insure that the purchase, sale, retention and disposal of the
Corporation's assets, the
19
<PAGE>
investment policies and the borrowing policies of the Corporation and the
limitations thereon or amendment thereof are at all times:
(a) consistent with such policies, limitations and restrictions as
are contained in these Bylaws, or in the Corporation's Articles of
Incorporation, or as described in the Registration Statement or in the
Corporation's ongoing periodic reports filed with the SEC following the
Initial Public Offering, subject to revision from time to time at the
discretion of the Board of Directors without shareholder approval unless
otherwise required by law; and
(b) in compliance with the restrictions applicable to real estate
investment trusts pursuant to the Internal Revenue Code of 1986, as amended.
Section 15. Nominations. Subject to the rights of holders of any class
or series of stock having a preference over the common stock as to dividends
or upon liquidation, nominations for the election of Directors shall be made
by the Company's notice of the meeting of shareholders for such election, the
Board of Directors, or by any shareholder entitled to vote in the election of
Directors generally. However, any shareholder entitled to vote in the
election of Directors generally may nominate one or more persons for election
as Directors at a meeting only if written notice of such shareholder's intent
to make such nomination or nominations has been given, either by personal
delivery or by United States mail, postage prepaid, to the
20
<PAGE>
Secretary of the Corporation not later than (i) with respect to an election
to be held at an annual meeting of shareholders, ninety (90) days in advance
of such meeting, and (ii) with respect to an election to be held at a special
meeting of shareholders for the election of Directors, the close of business
on the seventh (7th) day following the date on which notice of such meeting
is first given to shareholders. Each notice shall set forth: (a) the name
and address of the shareholder who intends to make the nomination and of the
person or persons to be nominated; (b) a representation that the shareholder
is a holder of record of stock of the Corporation entitled to vote at such
meeting and intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice; (c) a description of
all arrangements or understandings between the shareholder and each nominee
and any other person or persons (naming such person or persons) pursuant to
which the nomination or nominations are to be made by the shareholder; (d)
such other information regarding each nominee proposed by such shareholder as
would be required to be included in a proxy statement filed pursuant to the
proxy rules of the Securities and Exchange Commission, had the nominee been
nominated, or intended to be nominated, by the Board of Directors; and (e)
the consent of each nominee to serve as a Director of the Corporation if so
elected. The Chairman of the meeting may refuse to acknowledge the
nomination of any person not made in compliance with the foregoing procedure.
21
<PAGE>
ARTICLE V
Committees
Section 1. Committees of the Board. The Board of Directors may appoint
from among its members an executive committee and other committees comprised
of two or more Directors. A majority of the members of any committee so
appointed shall be Independent Directors. The Board of Directors shall
appoint (i) an acquisition committee which is comprised of not less than two
members, a majority of whom are Independent Directors and (ii) an audit
committee of which is comprised entirely of Independent Directors. The Board
of Directors may delegate to any committee any of the powers of the Board of
Directors except the power to elect Directors, declare dividends or
distributions on stock, recommend to the shareholders any action which
requires shareholder approval, amend or repeal these Bylaws, approve any
merger or share exchange which does not require shareholder approval, or
issue stock. However, if the Board of Directors has given general
authorization for the issuance of stock, a committee of the Board of
Directors, in accordance with a general formula or method specified by the
Board of Directors by resolution or by adoption of a stock option plan, may
fix the terms of stock, subject to classification or reclassification, and
the terms on which any stock may be issued.
Notice of committee meetings shall be given in the same manner as notice
for special meetings of the Board of Directors.
22
<PAGE>
One-third, but not less than two, of the members of any committee shall
be present in person at any meeting of such committee in order to constitute
a quorum for the transaction of business at such meeting, and the act of a
majority present shall be the act of such committee. The Board of Directors
may designate a chairman of any committee, and such chairman or any two
members of any committee may fix the time and place of its meetings unless
the Board shall otherwise provide. In the absence or disqualification of any
member of any such committee, the members thereof present at any meeting and
not disqualified from voting, whether or not they constitute a quorum, may
unanimously appoint another Director to act at the meeting in the place of
such absent or disqualified members; provided, however, that in the event of
the absence or disqualification of an Independent Director, such appointee
shall be an Independent Director.
Each committee shall keep minutes of its proceedings and shall report the
same to the Board of Directors at the meeting next succeeding, and any action
by the committees shall be subject to revision and alteration by the Board of
Directors, provided that no rights of third persons shall be affected by any
such revision or alteration.
Subject to the provisions hereof, the Board of Directors shall have the
power at any time to change the membership of any committee, to fill all
vacancies, to designate alternative
23
<PAGE>
members to replace any absent or disqualified member, or to dissolve any such
committee.
Section 2. Telephone Meetings. Members of a committee of the Board of
Directors may participate in a meeting by means of a conference telephone or
similar communications equipment if all persons participating in the meeting
can hear each other at the same time. Participation in a meeting by these
means shall constitute presence in person at the meeting.
Section 3. Action By Committees Without a Meeting. Any action required
or permitted to be taken at any meeting of a committee of the Board of
Directors may be taken without a meeting, if a consent in writing to such
action is signed by each member of the committee and such written consent is
filed with the minutes of proceedings of such committee.
ARTICLE VI
Officers
Section 1. General Provisions. The officers of the Corporation may
consist of a Chairman of the Board, a Vice Chairman of the Board, a
President, one or more Vice Presidents, a Treasurer, one or more assistant
treasurers, a Secretary, and one or more assistant secretaries and such other
officers as may be elected in accordance with the provisions of Section 2 of
this Article VI. The officers of the Corporation shall be elected annually by
the Board of Directors at the first meeting of the Board of Directors held
after each annual meeting of shareholders. If the election of officers shall
not be held at
24
<PAGE>
such meeting, such election shall be held as soon thereafter as may be
convenient. Each officer shall hold office until his successor is elected and
qualifies or until his death, resignation or removal in the manner
hereinafter provided. Any two or more offices may be held by the same
person. In its discretion, the Board of Directors may leave unfilled any
office except that of President and Secretary. Election or appointment of an
officer or agent shall not of itself create contract rights between the
Corporation and such officer or agent.
Section 2. Subordinate Officers, Committees and Agents. The Board of
Directors may from time to time elect such other officers and appoint such
committees, employees, other agents as the business of the Corporation may
require, including one or more assistant secretaries, and one or more
assistant treasurers, each of whom shall hold office for such period, have
such authority, and perform such duties as are provided in these Bylaws, or
as the Board of Directors may from time to time determine. The Directors may
delegate to any officer or committee the power to elect subordinate officers
and to retain or appoint employees or other agents.
Section 3. Removal and Resignation. Any officer or agent of the
Corporation may be removed by the Board of Directors if in its judgment the best
interests of the Corporation would be served thereby, but such removal shall be
without prejudice to the contract rights, if any, of the person so removed. Any
officer of the Corporation may resign at any time by giving
25
<PAGE>
written notice of his resignation to the Board of Directors, the Chairman of
the Board, the President or the Secretary. Any resignation shall take effect
at the time specified therein or, if the time when it shall become effective
is not specified therein, immediately upon its receipt. The acceptance of a
resignation shall not be necessary to make it effective unless otherwise
stated in the resignation.
Section 4. Vacancies. A vacancy in any office may be filled by the
Board of Directors for the balance of the term.
Section 5. General Powers. All officers of the Corporation as between
themselves and the Corporation shall, respectively, have such authority and
perform such duties in the management of the property and affairs of the
Corporation as may be determined by resolution of the Board of Directors, or
in the absence of controlling provisions in a resolution of the Board of
Directors, as may be provided in these Bylaws.
Section 6. Duties of the President. The President shall be the chief
executive officer of the Corporation and shall be primarily responsible for
the execution of policies of the Board of Directors. He shall have authority
over the general management and direction of the business and operations of
the Corporation and its divisions, if any, subject only to the ultimate
authority of the Board of Directors. In the absence of the Chairman of the
Board, or if there are no such officers, the President shall preside at all
corporate meetings. He may sign and execute in the name of the Corporation
share certificates,
26
<PAGE>
deeds, mortgages, bonds, contracts or other instruments except in cases where
the signing and the execution thereof shall be expressly delegated by the
Board of Directors or by these Bylaws to some other officer or agent of the
Corporation or shall be required by law otherwise to be signed or executed.
In addition, he shall perform all duties incident to the office of the
President and such other duties as from time to time may be assigned to him
by the Board of Directors.
Section 7. Duties of the Vice-Presidents. Each Vice-President, if any,
shall have such powers and duties as may from time to time be assigned to him
by the President or the Board of Directors. Any Vice-President may sign and
execute in the name of the Corporation deeds, mortgages, bonds, contracts or
other instruments authorized by the Board of Directors, except where the
signing and execution of such documents shall be expressly delegated by the
Board of Directors or the President to some other officer or agent of the
Corporation or shall be required by law or otherwise to be signed or executed.
Section 8. Duties of the Treasurer. The Treasurer shall have such
powers and duties as may be assigned to him by the President of the Board of
Directors. The Treasurer may sign and execute in the name of the Corporation
share certificates, deeds, mortgages, bonds, contracts or other instruments,
except in cases where the signing and the execution thereof shall be
expressly delegated by the Board of Directors or by these Bylaws to some
27
<PAGE>
other officer or agent of the Corporation or shall be required by law or
otherwise to be signed or executed.
Section 9. Duties of the Secretary. The Secretary shall act as
secretary of all meetings of the Board of Directors, the Executive Committee
and all other Committees of the Board and shareholders of the Corporation.
He shall keep and preserve the minutes of all such meetings in the proper
book or books provided for that purpose. He shall see that all notices
required to be given by the Corporation are duly given and served; shall have
custody of the seal of the Corporation and shall affix the seal or cause it
to be affixed to all share certificates of the Corporation and to all
documents the execution of which on behalf of the Corporation under its
corporate seal is duly authorized in accordance with law or the provisions of
these Bylaws; shall have custody of all deeds, leases, contracts and other
important corporate documents; shall have charge of the books, records and
papers of the Corporation relating to its organization and management as a
Corporation; shall see that all reports, statements and other documents
required by law (except tax returns) are properly filed; and shall, in
general perform, all the duties incident to the office of Secretary and such
other duties as from time to time may be assigned to him by the Board of
Directors or the President.
Section 10. Other Duties of Officers. Any officer of the Corporation
shall have, in addition to the duties prescribed
28
<PAGE>
herein or by law, such other duties as from time to time shall be prescribed
by the Board of Directors or the President.
Section 11. Salaries. The salaries of the officers shall be fixed from
time to time by the Board of Directors and no officer shall be prevented from
receiving such salary by reason of the fact that he is also a Director of the
Corporation.
ARTICLE VII
Contracts, Notes, Checks and Deposits
Section 1. Contracts. The Board of Directors may authorize any officer
or agent to enter into any contract or to execute and deliver any instrument
in the name of and on behalf of the Corporation and such authority may be
general or confined to specific instances.
Section 2. Checks and Drafts. All checks, drafts or other orders for
the payment of money, notes or other evidences of indebtedness issued in the
name of the Corporation shall be signed by such officer or officers, agent or
agents of the Corporation and in such manner as shall from time to time be
determined by the Board of Directors.
Section 3. Deposits. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the
Corporation in such banks, trust companies or other depositories as the Board
of Directors may designate.
29
<PAGE>
ARTICLE VIII
Shares of Stock
Section 1. Certificates of Stock. Each shareholder shall be entitled
to a certificate or certificates which shall represent and certify the number
of shares of each kind and class of shares held by him in the Corporation.
Each certificate shall be signed by the Chairman of the Board or the
President or a Vice President and countersigned by the Secretary or an
assistant secretary or the Treasurer or an assistant treasurer and may be
sealed with the corporate seal.
The signatures may be either manual or facsimile. Certificates shall be
consecutively numbered; and if the Corporation shall, from time to time,
issue several classes of stock, each class may have its own number series. A
certificate is valid and may be issued whether or not an officer who signed
it is still an officer when it is issued. Each certificate representing
stock which is restricted as to its transferability or voting powers, which
is preferred or limited as to its dividends or as to its share of the assets
upon liquidation or which is redeemable at the option of the Corporation,
shall have a statement of such restriction, limitation, preference or
redemption provision, or a summary thereof, plainly stated on the
certificate. In lieu of such statement or summary, the Corporation may set
forth upon the face or back of the certificate a statement that the
Corporation will furnish to any
30
<PAGE>
shareholder, upon request and without charge, a full statement of such
information.
Section 2. Lost Certificate. The Board of Directors may direct a new
certificate to be issued in place of any certificate previously issued by the
Corporation alleged to have been lost, stolen or destroyed upon the making of
an affidavit of that fact by the person claiming the certificate of stock to
be lost, stolen or destroyed. When authorizing the issuance of a new
certificate, the Board of Directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificate or his legal representative to advertise the same in
such manner as it shall require and/or to give bond, with sufficient surety,
to the Corporation to indemnify it against any loss or claim which may arise
as a result of the issuance of a new certificate.
Section 3. Transfer Agents and Registrars. At such time as the
Corporation lists its securities on a national securities exchange or
qualifies for trading in the over-the-counter market, the Board of Directors
shall appoint one or more banks or trust companies in such city or cities as
the Board of Directors may deem advisable, from time to time, to act as
transfer agents and/or registrars of the shares of stock of the Corporation;
and, upon such appointments being made, no certificate representing shares
shall be valid until countersigned by one of such transfer agents and
registered by one of such registrars.
31
<PAGE>
Section 4. Transfer of Stock. No transfers of shares of stock of the
Corporation shall be made if (i) void ab initio pursuant to any provision of
the Corporation's Articles of Incorporation or (ii) the Board of Directors,
pursuant to any provision of the Corporation's Articles of Incorporation,
shall have refused to permit the transfer of such shares. Permitted
transfers of shares of stock of the Corporation shall be made on the stock
records of the Corporation only upon the instruction of the registered holder
thereof, or by his attorney thereunto authorized by power of attorney duly
executed and filed with the Secretary or with a transfer agent or transfer
clerk, and upon surrender of the certificate or certificates, if issued, for
such shares properly endorsed or accompanied by a duly executed stock
transfer power and the payment of all taxes thereon. Upon surrender to the
Corporation or the transfer agent of the Corporation of a certificate for
shares duly endorsed or accompanied by proper evidence of succession,
assignment or authority to transfer, as to any transfers not prohibited by
any provision of the Corporation's Articles of Incorporation or by action of
the Board of Directors thereunder, it shall be the duty of the Corporation to
issue a new certificate to the person entitled thereto, cancel the old
certificate and record the transaction upon its books.
Section 5. Stock Ledger. The Corporation shall maintain at its
principal office or at the office of its counsel, accountants or transfer
agent, an original or duplicate stock ledger
32
<PAGE>
containing the name and address of each shareholder and the number of shares
of stock of each class held by such shareholder.
ARTICLE IX
Dividends
Section 1. Declaration. Dividends upon the shares of stock of the
Corporation may be declared by the Board of Directors, subject to applicable
provisions of law and the Articles of Incorporation. Dividends may be paid
in cash, property or shares of the Corporation, subject to applicable
provisions of law and the Articles of Incorporation.
Section 2. Contingencies. Before payment of any dividends, there may be
set aside out of any funds of the Corporation available for dividends such
sum or sums as the Board of Directors may from time to time, in its absolute
discretion, think proper as a reserve fund for contingencies, for equalizing
dividends, for repairing or maintaining the property of the Corporation, its
subsidiaries or any partnership for which it serves as general partner, or
for such other purpose as the Board of Directors shall determine to be in the
best interest of the Corporation, and the Board of Directors may modify or
abolish any such reserve in the manner in which it was created.
33
<PAGE>
ARTICLE X
Seal
Section 1. Seal. The Corporation may have a corporate seal, which may
be altered at will by the Board of Directors. The Board of Directors may
authorize one or more duplicate or facsimile seals and provide for the
custody thereof.
Section 2. Affixing Seal. Whenever the Corporation is required to place
its corporate seal to a document, it shall be sufficient to meet the
requirements of any law, rule or regulation relating to a corporate seal to
place the word "(SEAL)" adjacent to the signature of the person authorized to
execute the document on behalf of the Corporation.
ARTICLE XI
Waiver of Notice
Whenever any notice is required to be given pursuant to the Articles of
Incorporation or these Bylaws of the Corporation or pursuant to applicable
law, a waiver thereof in writing, signed by the person or persons entitled to
such notice, whether before or after the time stated therein, shall be deemed
equivalent to the giving of such notice. Neither the business to be
transacted at nor the purpose of any meeting need be set forth in the waiver
of notice, unless specifically required by statute. The attendance of any
person at any meeting shall constitute a waiver of notice of such meeting,
except where such person attends a meeting for the express purpose of
objecting to the transaction
34
<PAGE>
of any business on the ground that the meeting is not lawfully called or
convened.
ARTICLE XII
Amendment of Bylaws
Section 1. By Directors. The Board of Directors shall have the power to
adopt, alter or repeal any Bylaws of the Corporation and to make new Bylaws,
except that the Board of Directors shall not alter or repeal this Article XII
or any Bylaws made by the shareholders and provided that any amendment to
Section 2, Section 3, Section 5, Section 9, or Section 10(b) of Article IV
requires the affirmative vote of 80% of the entire Board of Directors,
including a majority of the Independent Directors.
Section 2. By Shareholders. The shareholders shall have the power to
adopt, alter or repeal any Bylaws of the Corporation and to make new Bylaws,
provided that any amendment to Section 2, Section 3, Section 5, Section 9, or
Section 10(b) of Article IV requires the affirmative vote of the holders of
two-thirds of all the outstanding shares entitled to vote on the election of
Directors, voting separately as a class.
35
<PAGE>
The foregoing are certified as the Bylaws of the Corporation adopted by
the Board of Directors effective February ___, 1997.
-------------------------------------
Secretary
36
<PAGE>
EXHIBIT 10.3
LIMITED PARTNERSHIP AGREEMENT
OF
OCWEN PARTNERSHIP, L.P.
THIS LIMITED PARTNERSHIP AGREEMENT (this "Agreement") OF OCWEN PARTNERSHIP,
L.P. (the "Partnership"), is made and entered into as of the ____ day of
February, 1997, by and between OCWEN GENERAL, INC., a Virginia corporation (the
"General Partner"), and OCWEN LIMITED, INC., a Virginia corporation (the
"Limited Partner") (collectively, the "Partners" and individually, a "Partner").
NOW, THEREFORE, in consideration of the promises and mutual covenants and
agreements between the parties hereto, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereby agree as follows:
ARTICLE I
FORMATION OF PARTNERSHIP
1.1 Name. The name of the Partnership shall be Ocwen Partnership,
L.P.
1.2 Term. The Partnership shall continue until December 31, 2050,
unless sooner terminated as hereinafter provided or by operation of law.
1.3 Purpose. The purposes of the Partnership are to (a) own, hold,
sell, lease, transfer, exchange, and operate real estate-related assets and
(b) transact any and all other lawful business for which the Partnership may be
organized under Virginia law that is incident, necessary, and appropriate to
accomplish the foregoing.
1.4 Specified Office. The specified office and place of business of
the Partnership, and where the records of the Partnership shall be kept, shall
be 1675 Palm Beach Lakes Boulevard, Suite 532, West Palm Beach, Florida 33401.
1.5 Registered Agent. The initial registered agent shall be George
C. Howell, III, who is a resident of Virginia and a member of the Virginia State
Bar, and whose business address is the Riverfront Plaza, East Tower, 951 East
Byrd Street in the City of Richmond.
<PAGE>
ARTICLE II
PERCENTAGE INTERESTS AND CAPITAL CONTRIBUTIONS
2.1 Percentage Interests and Initial Capital Contributions. Each
Partner's address and percentage interest in the Partnership ("Percentage
Interest") are as follows:
Percentage
Partner Interest
------- ----------
General Partner: 1%
Ocwen General, Inc.
1675 Palm Beach Lakes Boulevard, Suite 532
West Palm Beach, Florida 33401
Limited Partner: 99%
Ocwen Limited, Inc.
1675 Palm Beach Lakes Boulevard, Suite 532
West Palm Beach, Florida 33401
The General Partner's initial contribution to the capital of the
Partnership shall be $1. The Limited Partner's initial contribution to the
capital of the Partnership shall be $99.
2.2 Additional Contributions. As and when the Partnership shall
require funds to meet the costs and expenses of all business activities with
respect to the Partnership, the General Partner shall contribute to the
Partnership such required funds as may be determined by the General Partner.
The Limited Partner shall have no obligation to contribute any funds pursuant to
this Section 2.2.
ARTICLE III
MANAGEMENT
3.1 Authority of the General Partner; Indemnification. The overall
management and control of the business and affairs of the Partnership shall be
vested in the General Partner. Except as otherwise provided in this Agreement,
all decisions concerning the management of the business and affairs of the
Partnership and its assets shall be made exclusively by the General Partner, all
in accordance with the objects and purposes of the Partnership set forth in
Section 1.3. The General Partner shall be authorized to execute documents and
take actions on behalf of the Partnership, which shall be binding on the
Partnership and on which third parties shall be entitled to rely. The
Partnership shall indemnify each Partner for any costs and/or expenses incurred
in connection with actions taken in good faith on behalf of the Partnership.
2
<PAGE>
ARTICLE IV
DISTRIBUTIONS
4.1 Definition of Net Cash Flow. As used herein, the term "Net Cash
Flow" for any period shall mean the excess, if any, of (i) the cash receipts of
the Partnership (other than from the sale of the Partnership's assets upon
liquidation) and amounts withdrawn from reserves, over (ii) disbursements of
cash by the Partnership (other than distributions to Partners and amounts paid
pursuant to Section 4.3 hereof), including the payment of operating expenses,
debt-service on any mortgage or deed of trust encumbering the Partnership's
property, capital expenditures, and such amounts as may be required by the
Partnership (as reasonably determined by the General Partner) to pay Partnership
expenses and to maintain reserves and working capital.
4.2 Distribution of Net Cash Flow. Net Cash Flow shall be
distributed on a quarterly basis (or, at the election of the General Partner, on
a more frequent basis) among the Partners at such time or times as shall be
determined by the General Partner in accordance with their respective Percentage
Interests.
4.3 Distributions upon Liquidation. (a) Upon liquidation of the
Partnership, after payment of, or adequate provision for, debts and obligations
of the Partnership, including any Partner loans, any remaining assets of the
Partnership shall be distributed to all Partners with positive Capital Accounts
(as defined in Section 5.1 hereof) in accordance with their respective positive
Capital Account balances. For purposes of this Section 4.3(a), the Capital
Account of each Partner shall be determined (i) after all adjustments made in
accordance with Article V and Section 4.2 hereof resulting from Partnership
operations and from all sales and dispositions of all or any part of the
Partnership's assets. Any distributions pursuant to this Section 4.3 shall be
made by the end of the Partnership's taxable year in which the liquidation
occurs (or, if later, within 90 days after the date of the liquidation). To the
extent deemed advisable by the General Partner, appropriate arrangements
(including the use of a liquidating trust) may be made to assure that adequate
funds are available to pay any contingent debts or obligations of the
Partnership.
(b) If the General Partner has a negative balance in its Capital
Account following a liquidation of the Partnership, as determined after taking
into account all Capital Account adjustments in accordance with Article V and
Section 4.2 hereof resulting from Partnership operations and from all sales and
dispositions of all or any part of the Partnership's assets, the General Partner
shall contribute to the Partnership an amount of cash equal to the negative
balance in its Capital Account and such cash shall be distributed by the
Partnership to creditors, if any, and then to the Limited Partner in accordance
with Section 4.3(a). Such contribution by the General Partner shall be made by
the end of the Partnership's taxable year in which the liquidation occurs (or,
if later, within 90 days after the date of the liquidation).
3
<PAGE>
ARTICLE V
CAPITAL ACCOUNTS; PROFITS AND LOSSES
5.1 Capital Accounts. The General Partner, on behalf of the
Partnership, shall establish and maintain, or cause to be established and
maintained, a capital account ("Capital Account") for each Partner in accordance
with the rules described in section 1.704-1(b)(2)(iv) of the Treasury
regulations (the "Regulations") promulgated under the Internal Revenue Code of
1986, as amended (the "Code").
5.2 Definition of Profit and Loss. "Profit" and "Loss" and any items
of income, gain, expense, or loss referred to in this Agreement shall be
determined in accordance with federal income tax accounting principles, as
modified by Regulations section 1.704-1(b)(2)(iv), except that Profit and Loss
shall not include items allocable pursuant to Section 5.4, 5.5, or 5.6 hereof.
All allocations of income, Profit, gain, Loss, and expense (and all items
contained therein) for federal income tax purposes shall be identical to all
allocations of such items set forth in this Article V, except as otherwise
required by section 704(c) of the Code and Regulations section 1.704-1(b)(4).
5.3 Allocation of Profit and Loss. Except as otherwise provided in
this Article V, Profit and Loss of the Partnership shall be allocated among the
Partners in accordance with their respective Percentage Interests.
5.4 Minimum Gain Chargeback. Notwithstanding any provision to the
contrary, (i) any expense of the Partnership that is a "nonrecourse deduction"
within the meaning of Regulations section 1.704-2(b)(1) shall be allocated in
accordance with the Partners' respective Percentage Interests, (ii) any expense
of the Partnership that is a "partner nonrecourse deduction" within the meaning
of Regulations section 1.704-2(i)(2) shall be allocated in accordance with
Regulations section 1.704-2(i)(1), (iii) if there is a net decrease in
Partnership Minimum Gain (as hereinafter defined) within the meaning of
Regulations section 1.704-2(f)(1) for any Partnership taxable year, items of
gain and income shall be allocated among the Partners in accordance with
Regulations section 1.704-2(f) and the ordering rules contained in Regulations
section 1.704-2(j), and (iv) if there is a net decrease in Partner Nonrecourse
Debt Minimum Gain (as hereinafter defined) within the meaning of Regulations
section 1.704-2(i)(4) for any Partnership taxable year, items of gain and income
shall be allocated among the Partners in accordance with Regulations section
1.704-2(i)(4) and the ordering rules contained in Regulations section
1.704-2(j). A Partner's "interest in partnership profits" for purposes of
determining its share of the nonrecourse liabilities of the Partnership within
the meaning of Regulations section 1.752-3(a)(3) shall be such Partner's
Percentage Interest. "Partnership Minimum Gain" shall have the meaning set
forth in Regulations section 1.704-2(d). A Partner's share of Partnership
Minimum Gain shall be determined in accordance with Regulations section
1.704-2(g)(1). "Partner Nonrecourse Debt Minimum Gain" shall have the meaning
set forth in Regulations section 1.704-2(i). A Partner's share of Partner
Nonrecourse Debt Minimum Gain shall be determined in accordance with Regulations
section 1.704-2(i)(5).
4
<PAGE>
5.5 Qualified Income Offset. If the Limited Partner receives in any
taxable year an adjustment, allocation, or distribution described in
subparagraph (4), (5), or (6) of Regulations section 1.704-1(b)(2)(ii)(d) that
causes or increases a negative balance in such Partner's Capital Account that
exceeds the sum of such Partner's shares of Partnership Minimum Gain and Partner
Nonrecourse Debt Minimum Gain, as determined in accordance with Regulations
sections 1.704-2(g) and 1.704-2(i), such Partner shall be allocated specially
for such taxable year (and, if necessary, later taxable years) items of income
and gain in an amount and manner sufficient to eliminate such negative Capital
Account balance as quickly as possible as provided in Regulations section
1.704-1(b)(2)(ii)(d). After the occurrence of an allocation of income or gain
to the Limited Partner in accordance with this Section 5.5, to the extent
permitted by Regulations section 1.704-1(b) and Section 5.6 hereof, items of
expense or loss shall be allocated to such Partner in an amount necessary to
offset the income or gain previously allocated to such Partner under this
Section 5.5.
5.6 Capital Account Deficits. Loss shall not be allocated to the
Limited Partner to the extent that such allocation would cause a deficit in such
Partner's Capital Account (after reduction to reflect items described in
Regulations sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6)) to exceed the sum of
such Partner's shares of Partnership Minimum Gain and Partner Nonrecourse Debt
Minimum Gain. Any Loss in excess of that limitation shall be allocated to the
General Partner. After the occurrence of an allocation of Loss to the General
Partner in accordance with this Section 5.6, to the extent permitted by
Regulations section 1.704-1(b), Profit shall be allocated to such Partner in an
amount necessary to offset the Loss previously allocated to such Partner under
this Section 5.6.
ARTICLE VI
TRANSFERS; TERMINATION
6.1 Transfers. Interests in the Partnership ("Partnership
Interests") may be assigned in whole or in part only as follows:
(a) The assignee shall have accepted and agreed to be bound by
the terms and provisions of this Agreement by executing a counterpart or
an amendment thereof.
(b) If the assignee is a corporation, partnership or trust, the
assignee shall have provided the General Partner with evidence satisfactory to
counsel for the Partnership of the assignee's authority to become a Partner
under the terms and provisions of this Agreement.
(c) The assignee shall have paid all reasonable legal fees of the
Partnership in connection with his admission as a Partner.
(d) Unless waived by the non-selling Partner, a Partnership
Interest shall not be transferred in the absence of an opinion of counsel,
satisfactory to the non-selling
5
<PAGE>
Partner, that the registration of the sale of the Partnership Interest is not
required under the Securities Act of 1933, as amended, or any applicable
state securities laws.
(e) A Partner who has assigned his Partnership Interest shall
cease to be a Partner upon assignment of the Partner's entire Partnership
Interest and thereafter shall have no further powers, rights and privileges as a
Partner hereunder, but shall, unless otherwise relieved of such obligations by
agreement of all of the other Partners or by operation of law, remain liable for
all obligations and duties incurred as a Partner.
(f) No person shall have a perfected lien or security interest in
a Partnership Interest unless the creation of such interest is in accordance
with the provisions of this Agreement and the Partnership is notified of such
interest and provided a copy of all documentation with respect thereto,
including financing statements, prior to execution and filing.
(g) Each Partner agrees not to transfer all or any part of his
Partnership Interest (or take or omit any action, filing election or other
action which could result in a deemed transfer) if such transfer (either
considered alone or in the aggregate with prior transfers by the other Partner)
would result in the termination of the Partnership for federal income tax
purposes, without the prior written consent of the non-transferring Partner,
which consent may be withheld in its sole discretion.
(h) Any transfer not in accord with this Agreement shall be void
AB INITIO.
6.2 Termination. (a) The Partnership shall terminate upon the
first to occur of any of the following events or dates:
(i) in accordance with Section 1.2 above;
(ii) by written agreement of the Partners;
(iii) by the sale or other disposition of all or
substantially all of the assets of the
Partnership;
(iv) the withdrawal, removal, bankruptcy, or termination
of the General Partner unless, within 90 days
after such event, the Partners agree in writing to
continue the business of the Partnership and to
appoint another general partner;
(v) the entry of a decree of judicial dissolution; or
(vi) the automatic cancellation of the Partnership's
certificate of limited partnership due to
nonpayment of the annual registration fee.
6
<PAGE>
(b) Upon termination of the Partnership under Section 6.2(a),
the Partnership shall discharge the obligations and pay the indebtedness of the
Partnership, or provide therefor, and distribute the balance, if any, of the
assets of the Partnership to the Partners as set forth in Section 4.3. After
the foregoing has been accomplished, it shall be deemed that the Partnership has
been liquidated and this Agreement shall terminate and no Partner shall have any
further rights or obligations hereunder. The liquidation of the Partnership and
the termination of the business and affairs of the Partnership shall be
conducted by the General Partner. During such period, the business and affairs
of the Partnership shall be conducted so as to maintain and preserve the assets
of the Partnership in a manner consistent with the liquidation of the
Partnership.
ARTICLE VII
BOOKS, RECORDS, AND ACCOUNTING
7.1 Fiscal and Taxable Year. The fiscal and taxable year of the
Partnership shall be the calendar year.
7.2 Method of Accounting. The General Partner shall keep, or cause
to be kept, full and accurate records of all transactions of the Partnership in
accordance with a method of accounting that is (i) permissible under the Code
and (ii) agreed to by the Partners.
7.3 Books and Records. All books and records of the Partnership
shall, at all times be maintained at the principal office of the Partnership or
at such other place as shall be determined by the General Partner.
7.4 Federal Tax Returns. The General Partner shall prepare, or cause
to be prepared, at the expense of the Partnership, a federal information tax
return in compliance with the provisions of the Code, and any required state and
local tax returns for the Partnership for each taxable year of the Partnership.
7.5 Tax Return Information. The General Partner shall cause to be
delivered to the Limited Partner such information as shall be necessary for the
preparation by the Limited Partner of its federal, state and local income and
other tax returns.
7.6 Tax Matters Partner. The General Partner shall be the Tax
Matters Partner of the Partnership within the meaning of section 6231 of the
Code. All elections required or permitted to be made by the Partnership under
the Code shall be made by the General Partner in its sole discretion.
7
<PAGE>
ARTICLE VIII
GENERAL
8.1 Notice. All notices, instructions, requests, demands or other
communications that are required or permitted to be given hereunder shall be in
writing and shall be deemed to have been duly given when delivered by hand or
when deposited in the United States Mail, by registered or certified mail,
return receipt requested, postage prepaid to the addresses set forth in Article
II or at such different address as shall be specified by notice given in the
manner described herein.
8.2 Applicable Law. This Agreement and the obligations of the
parties hereunder shall be interpreted, construed, and enforced in accordance
with the laws of the Commonwealth of Virginia.
8.3 Entire Agreement; Amendments. This Agreement contains the
entire agreement among the parties hereto relative to the operation of the
Partnership. No variations, modifications, or changes to or of this Agreement
shall be binding upon a party unless set forth in a document duly executed by
or on behalf of such party.
8.4 Severability. If any provision of this Agreement or the
application thereof to any person or circumstance shall be invalid or
unenforceable to any extent, the remainder of this Agreement and the application
of such provisions to other persons or circumstances shall not be affected
thereby and shall be enforced to the greatest extent permitted by law.
8.5 Counterparts. This Agreement may be executed in counterparts and
as so executed shall constitute one Agreement.
8.6 Captions. Captions and headings contained in this Agreement are
inserted only as a matter of convenience and in no way define, limit, extend or
describe the scope of this Agreement or the intent of any provisions hereof.
8.7 Attorney's Fees. In the event of any litigation between the
Partners arising out of this Agreement or relating to the Partnership, the
prevailing party shall be entitled to recover from the nonprevailing party its
reasonable attorney's fees and costs at the trial and all appellate levels.
8.8 Binding Effect. Except as otherwise provided in this Agreement,
every covenant, term and provision of this Agreement shall be binding upon and
inure to the benefit of the Partners and their respective heirs, legatees, legal
representatives, and permitted successors, transferees, and assigns.
8
<PAGE>
IN WITNESS WHEREOF, each of Ocwen General, Inc. and Ocwen Limited,
Inc. has caused this Agreement to be executed by its duly authorized officer or
representative as of the date first above written.
GENERAL PARTNER:
OCWEN GENERAL, INC.,
a Virginia corporation
By:_____________________________________
Name:
Title:
LIMITED PARTNER:
OCWEN LIMITED, INC.,
a Virginia corporation
By:______________________________________
Name:
Title:
9
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of the
Registration Statement on Form S-11 of our report dated February 12, 1997
relating to the financial statement of Ocwen Asset Investment Corp., which
appears in such Prospectus. We also consent to the reference to us under
the heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Fort Lauderdale, Florida
February 14, 1997
