<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 000-22389
Ocwen Asset Investment Corp.
(Exact name of registrant as specified in its charter)
Virginia 65-0736120
- -------- -----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
The Forum, Suite 1000
1675 Palm Beach Lakes Boulevard, West Palm Beach, Florida 33401
(Address of principal executive offices) (Zip Code)
(561) 681-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes_X_ No__.
Number of shares of Common Stock, $.01 par value, outstanding at the close
of business on November 13, 1997: 19,125,000
<PAGE>
OCWEN ASSET INVESTMENT CORP.
FORM 10-Q
I N D E X
- ------------------------------------------------------------------------------
PART I--FINANCIAL INFORMATION
PAGE
Item 1. Interim Financial Statements (Unaudited)....................... 3
Consolidated Statement of Financial Condition
at September 30, 1997.......................................... 3
Consolidated Statement of Operations for the three months
ended September 30, 1997 and for the period
May 19, 1997 to September 30, 1997............................. 4
Consolidated Statement of Changes in Stockholders' Equity for
the period May 19, 1997 to September 30, 1997.................. 5
Consolidated Statement of Cash Flows for the period
May 19, 1997 to September 30, 1997............................. 6
Notes to Consolidated Financial Statements..................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 10
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................... 16
Signature.............................................................. 17
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
OCWEN ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
September 30, 1997
Assets
Cash and amounts due from depository institutions................ $ 10,850
Interest bearing deposits........................................ 8,461,777
Repurchase agreements............................................ 130,000,000
Securities available for sale, at market value................... 89,520,700
Loan portfolio, net.............................................. 3,773,321
Discount loan portfolio, net..................................... 25,184,291
Investment in real estate, net................................... 26,263,717
Deposits on pending asset acquisitions........................... 6,184,300
Principal and interest receivable................................ 1,897,189
Other assets..................................................... 535,106
-----------
$291,831,251
-----------
-----------
Liabilities and Stockholders' Equity
Liabilities:
Dividends payable................................................ $ 4,590,000
Accrued expenses, payables and other liabilities................. 2,039,437
-----------
6,629,437
-----------
Stockholders' Equity:
Preferred stock, $.01 par value; 25,000,000 shares
authorized; 0 shares issued and outstanding.................... --
Common Stock, $.01 par value; 200,000,000 shares authorized;
19,125,000 shares issued and outstanding....................... 191,250
Additional paid-in capital....................................... 283,496,750
Distributions in excess of earnings.............................. (92,006)
Unrealized gain on securities available for sale................. 1,605,820
-----------
Total stockholders' equity....................................... 285,201,814
-----------
$291,831,251
-----------
-----------
The accompanying notes are an integral part of these consolidated financial
statements
3
<PAGE>
OCWEN ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(Unaudited)
FOR THE
FOR THE PERIOD
THREE MONTHS MAY 19, 1997
ENDED TO
SEPTEMBER 30, SEPTEMBER 30,
1997 1997
------------- -------------
Interest income:
Repurchase agreements and
interest bearing deposits.................... $ 2,753,729 $ 4,150,857
Securities available for sale.................. 2,492,172 3,497,356
Loans.......................................... 5,565 5,565
Discount loans................................. 260,471 340,966
------------- -------------
5,511,937 7,994,744
------------- -------------
Operating income:
Real estate investments, net................... 57,243 57,243
Other.......................................... 9,795 9,795
------------- -------------
67,038 67,038
------------- -------------
Operating expenses:
Management fees................................ 719,914 1,060,914
Due diligence expenses......................... 237,891 285,812
Other.......................................... 270,898 304,562
------------- -------------
1,228,703 1,651,288
------------- -------------
Net income..................................... $ 4,350,272 $ 6,410,494
------------- -------------
------------- -------------
Per share data:
Net income..................................... $ 0.22 $ 0.33
------------- -------------
------------- -------------
Weighted average shares outstanding............ 19,715,415 19,620,023
------------- -------------
------------- -------------
The accompanying notes are an integral part of these consolidated financial
statements
4
<PAGE>
OCWEN ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the period May 19, 1997 to September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON
COMMON STOCK DISTRIBUTIONS SECURITIES
------------------------ ADDITIONAL IN EXCESS AVAILABLE
SHARES AMOUNT PAID-IN-CAPITAL OF EARNINGS FOR SALE TOTAL
------------ ---------- -------------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock........... 19,125,000 $ 191,250 $ 283,496,750 $ -- $ -- $ 283,688,000
Net income......................... -- -- -- 6,410,494 -- 6,410,494
Dividends.......................... -- -- -- (6,502,500) -- (6,502,500)
Change in unrealized gain on
securities available for sale.... -- -- -- -- 1,605,820 1,605,820
------------ ---------- -------------- ------------ ------------ --------------
Balance at September 30, 1997...... 19,125,000 $ 191,250 $ 283,496,750 $ (92,006) $ 1,605,820 $ 285,201,814
------------ ---------- -------------- ------------ ------------ --------------
------------ ---------- -------------- ------------ ------------ --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
5
<PAGE>
OCWEN ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the period May 19, 1997 to September 30, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income................................................................... $ 6,410,494
Adjustments to reconcile net income to net cash provided by operating
activities:
Premium amortization (discount accretion), net........................... 1,422,847
Depreciation............................................................. 21,386
Increase in interest receivable.......................................... (1,897,189)
Increase in other assets................................................. (535,106)
Increase in accrued expenses, payables and other liabilities............. 2,039,437
-----------
Net cash provided by operating activities...................................... 7,461,869
-----------
Cash flows from investing activities:
Purchase of securities available for sale.................................... (92,295,129)
Maturities and principal payments received on securities available for sale.. 2,957,402
Purchase of loans............................................................ (3,773,321)
Purchase of discount loans................................................... (25,191,206)
Principal payments received from discount loans.............................. 6,915
Investment in real estate.................................................... (26,285,103)
Deposits on pending asset acquisitions....................................... (6,184,300)
-----------
Net cash used by investing activities.......................................... (150,764,742)
-----------
Cash flows from financing activities:
Dividend payments on common stock............................................ (1,912,500)
Proceeds from issuance of common stock, net of offering costs................ 283,688,000
-----------
Net cash provided by financing activities...................................... 281,775,500
-----------
Net increase in cash and cash equivalents...................................... 138,472,627
Cash and cash equivalents at beginning of period............................... --
-----------
Cash and cash equivalents at end of period..................................... $138,472,627
-----------
-----------
Reconciliation of cash and cash equivalents at end of period:
Cash and amounts due from depository institutions............................ 10,850
Interest bearing deposits.................................................... 8,461,777
Repurchase agreements........................................................ 130,000,000
-----------
$138,472,627
-----------
-----------
Supplemental schedule of non-cash financing activities:
Common stock dividends declared but not paid................................. $ 4,590,000
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
6
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in conformity with the instructions to Form 10-Q and Article 10,
Rule 10-01 of Regulation S-X for interim financial statements. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles ("GAAP") for complete financial
statements. The consolidated financial statements include the accounts of
Ocwen Asset Investment Corp. ("OAIC" or the "Company") and its subsidiaries.
OAIC directly owns two qualified real estate investment trust ("REIT")
subsidiaries, Ocwen General Partner, Inc. ("General Partner") and Ocwen
Limited, Inc. ("Limited Partner"), among others. General Partner and Limited
Partner own 1% and 99%, respectively of Ocwen Partnership, L.P. ("Operating
Partnership").
In the opinion of management, the accompanying financial statements
contain all adjustments, consisting of normal and recurring accruals,
necessary for a fair presentation of the Company's financial condition at
September 30, 1997, the results of its operations for the three months ended
September 30, 1997 and for the period May 19, 1997 to September 30, 1997, the
changes in stockholders' equity for the period May 19, 1997 to September 30,
1997 and its cash flows for the period May 19, 1997 to September 30, 1997.
Operating results for the periods ended September 30, 1997 are not
necessarily indicative of the results that may be expected for any other
interim periods or the entire year ended December 31, 1997.
In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the dates of the statements of financial
condition and revenues and expenses for the periods covered. Actual results
could differ from those estimates and assumptions.
NOTE 2 ORGANIZATION AND RELATIONSHIPS
OAIC was incorporated in the Commonwealth of Virginia on January 22, 1997.
In May 1997, the Company was capitalized with the sale of 19,125,000 shares of
common stock, par value $.01 per share, at a price of $16.00 per share (before
underwriting and offering expenses).
The Company has entered into a management agreement with Ocwen Capital
Corporation ("OCC"), a wholly owned subsidiary of Ocwen Financial Corporation
("Ocwen"), under which OCC advises the Company on various facets of its business
and manages its day-to-day operations, subject to the supervision of the
Company's Board of Directors. Ocwen currently owns 1,875,000 shares, or 9.8%, of
the Company's outstanding common stock and has options to purchase an additional
1,912,500 shares in the aggregate (25% of which vest each year over the next
four years) at an exercise price of $16.00 per share. For its services, OCC
receives a base management fee of 1% per annum of average invested assets, as
defined in the related agreement, payable quarterly. In addition, OCC receives
incentive compensation in an amount equal to 25% of the dollar amount by which
Funds From Operations ("FFO"), as adjusted, exceeds certain defined levels.
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SECURITIES AVAILABLE FOR SALE
Certain U.S. Treasury securities, mortgage-backed securities and
mortgage-related securities are designated as assets available for sale because
the Company does not intend to hold them to maturity. Securities available for
sale are carried at market value with the net unrealized gains or losses
reported as a separate component of stockholders' equity. Unrealized losses on
securities that reflect a decline in value which is other than temporary, if
any, are charged to earnings. At disposition the realized net gain or loss is
included in earnings on a specific identification basis. The amortization of
premiums and accretion of discounts are computed using the interest method after
considering actual and estimated prepayment rates,
7
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
if applicable. Actual prepayment experience is periodically reviewed and
effective yields are recalculated when differences arise between prepayments
originally anticipated and amounts actually received plus anticipated for
future prepayments.
DISCOUNT LOAN PORTFOLIO
Certain mortgage loans, for which the borrower is not current as to
principal and interest payments or for which there is a reason to believe the
borrower will be unable to continue to make its scheduled principal and
interest payments, are acquired at a discount. The acquisition cost for a
pool of loans is allocated to each individual loan within the pool based upon
the Company's pricing methodology. Interest income is accrued as it is
earned. Loans are placed on non-accrual status after being delinquent greater
than 89 days, or earlier if the borrower is deemed by management to be unable
to continue performance. When a loan is placed on non-accrual status,
interest accrued but not received is reversed. While a loan is on non-accrual
status, interest is recognized only as cash is received. Loans are returned
to accrual status only when the loan is reinstated and ultimate
collectibility of future interest is no longer in doubt. For multi-family and
commercial real estate loans which are current and which the Company believes
will remain current, the remaining unamortized discount is accreted to income
as a yield adjustment using the interest method over the contractual maturity
of the loan. Gains on the repayment and discharging of loans are reported as
interest income.
NOTE 4 RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, Statement of Financial Accounting Standards ("SFAS') No.
128, "Earnings per Share," and SFAS No. 129, "Disclosure of Information about
Capital Structure," were issued. SFAS 128 established standards for computing
and presenting earnings per share and applies to entities with publicly held
common stock or potential common stock. SFAS No. 128 simplifies the standards
previously found in Accounting Principles Board Opinion No. 15. SFAS No. 128 is
effective for financial statements for periods ending after December 15, 1997,
including interim periods and early adoption is not permitted. SFAS No. 129 is
effective for financial statements for periods ending after December 15, 1997.
The Company does not anticipate a material impact on its earnings per share
calculation as a result of implementing these statements.
NOTE 5 INVESTMENT IN REAL ESTATE
Investment in real estate is comprised of the following at September 30,
1997.
Office Buildings:
Land............................................................ $4,600,000
Building and improvements....................................... 21,685,103
Less: Accumulated depreciation.................................. (21,386)
----------
$26,263,717
----------
----------
Investment in real estate is recorded at cost less accumulated
depreciation (which is less than the net realizable value of the property).
The Company reviews its investment in real estate for impairment whenever
events or changes in circumstances indicate that the carrying amount may not
be recoverable. Depreciation is computed on a straight line basis over the
estimated useful lives of the assets as follows:
Buildings and improvements.......................................... 39 years
Tenant improvements................................................. Lesser of
lease term
or useful life
Furniture, fixtures and equipment................................... 7 years
8
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
NOTE 5 INVESTMENT IN REAL ESTATE (CONTINUED)
Expenditures for repairs and maintenance are charged to operations as
incurred. Significant renovations are capitalized. Fees and costs incurred in
the successful negotiation of leases are deferred and amortized on a
straight-line basis over the terms of the respective leases. Rental revenue is
reported on the straight-line basis over the terms of the respective leases.
INCOME TAXES
The Company qualifies as a REIT under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended. A REIT will generally not be subject
to federal income taxation on that portion of its income that qualifies as REIT
taxable income to the extent that it distributes at least 95 percent of its
taxable income to its shareholders and complies with certain other requirements.
Accordingly, no provision has been made for federal income taxes for the Company
and its subsidiaries in the accompanying consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include
non-interest bearing deposits, interest bearing deposits and all highly liquid
investments purchased with an original maturity date of three months or less.
EARNINGS PER SHARE
Earnings per share is calculated based upon the weighted average number of
shares of common stock outstanding during the year. The computation of the
weighted average number of shares outstanding includes the impact of the
exercise of the outstanding options to purchase common stock and assumes that
the proceeds from such issuance are used to repurchase common shares at the
average market price of the Company's common stock for the period.
NOTE 6 SUBSEQUENT EVENTS
On October 3, 1997, the Company closed a $7,650,000 loan for the acquisition
and renovation of the Doubletree Hotel in Lowell, Massachusetts, of which
$4,450,665 was funded at closing.
On October 30, 1997, the Company closed a $3,455,000 loan for the
acquisition and renovation of warehouse space into condominium loft units and
one commercial condominium unit in New York, New York, of which $1,285,415 has
been funded.
On November 10, 1997, the Company purchased a 289,686 square foot retail
power center in Brandenton, Florida for $19,050,000. The center is currently
97% occupied.
NOTE 7 COMMITMENTS
Excluding the assets which were subsequently acquired as discussed in
Note 6 above, the Company has entered into contracts to acquire $13,850,000
of real estate, subject to due diligence. In addition, the Company has
outstanding two loan commitments to fund $22,204,000, and a commitment to
purchase two subordinate investments for approximately $59,000,000, all of
which are subject to closing conditions.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- ----------------------------------------------------------------------------
GENERAL
The Company is a newly formed REIT specializing in opportunistic real
estate investments. To date the Company has invested $144,742,029 or 51% of
the $283,688,000 of net proceeds received from the sale of 19,125,000 shares
of its common stock in May 1997. Of such amount $89,520,700 was invested in
mortgage-related securities, $26,263,717 was invested in real estate,
$25,184,291 was invested in commercial discount loans and $3,773,321
was invested in single-family loans. The Company is currently performing due
diligence on a variety of assets including subordinate securities, mezzanine
loans and office, retail, hotel and multifamily properties in San Francisco,
Florida, Massachusetts and New York, among others.
The following discussion of the Company's consolidated financial condition,
results from operations, and capital resources and liquidity should be read in
conjunction with the Interim Consolidated Financial Statements and related Notes
included in Item 1 hereof.
FUNDS FROM OPERATIONS
Most industry analysts, including the Company, consider FFO an appropriate
supplementary measure of operating performance of a REIT. In general, FFO
adjusts net income for non-cash charges such as depreciation, certain
amortization expenses and most non-recurring gains and losses. However, FFO does
not represent cash provided by operating activities in accordance with GAAP and
should not be considered an alternative to net income as an indication of the
results of the Company's performance or to cash flows as a measure of liquidity.
In 1995, the National Association of Real Estate Investment Trusts
("NAREIT") established new guidelines clarifying its definition of FFO and
requested that REITs adopt this new definition beginning in 1996. The Company
computes FFO in accordance with the definition recommended by NAREIT.
For the quarter ended September 30, 1997 the Company's FFO was $4,371,658,
or $0.22 per common share. For the period May 19, 1997 to September 30, 1997,
the Company's FFO was $6,431,882, or $0.33 per common share. The following table
provides the calculation of the Company's FFO:
<TABLE>
<CAPTION>
FOR THE THREE FOR THE PERIOD
MONTHS ENDED MAY 19, 1997 TO
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
------------------ ------------------
<S> <C> <C>
Net income................................................................ $ 4,350,272 $ 6,410,494
Add: Real estate related depreciation..................................... 21,386 21,386
------------------ ------------------
FFO....................................................................... $ 4,371,658 $ 6,431,880
------------------ ------------------
------------------ ------------------
</TABLE>
RESULTS OF OPERATIONS
The Company began operations on May 19, 1997. Net income for the quarter
ended September 30, 1997 was $4,350,272, or $0.22 per share. Net income for the
period May 19, 1997 to September 30, 1997 amounted to $6,410,494 or $0.33 per
share.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- ----------------------------------------------------------------------------
INTEREST INCOME. The following tables sets forth information regarding the
total amount of income from interest-earning assets and the resultant average
yields. Information is based on daily average balances during the reported
period.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1997
-------------------------------------------
<S> <C> <C> <C>
AVERAGE INTEREST ANNUALIZED
BALANCE INCOME YIELD
-------------- ------------ -------------
Repurchase agreements and interest- bearing deposits................... $ 193,385,018 $ 2,753,729 5.70%
Securities available for sale.......................................... 65,699,443 2,492,172 15.17
Loan portfolio......................................................... 293,481 5,565 7.58
Discount loan portfolio................................................ 11,479,691 260,471 9.08
-------------- ------------
Total.................................................................. $ 270,857,633 $ 5,511,937 8.14%
-------------- ------------
-------------- ------------
</TABLE>
<TABLE>
<CAPTION>
FOR THE PERIOD MAY 19, 1997 TO SEPTEMBER
30, 1997
-------------------------------------------
<S> <C> <C> <C>
AVERAGE INTEREST ANNUALIZED
BALANCE INCOME YIELD
-------------- ------------ -------------
Repurchase agreements and interest-bearing deposits.................... $ 203,526,600 $ 4,150,857 5.58%
Securities available for sale.......................................... 61,524,800 3,497,356 15.55
Loan portfolio......................................................... 200,700 5,565 7.58
Discount loan portfolio................................................ 9,632,500 340,966 9.68
-------------- ------------
Total.................................................................. $ 274,884,600 $ 7,994,744 7.96%
-------------- ------------
-------------- ------------
</TABLE>
OPERATING EXPENSES. Management fees of $719,914 and $1,060,914 for the
three months ended September 30, 1997 and the period May 19, 1997 to September
30, 1997, respectively, were comprised solely of the 1% (per annum) base
management fee paid to OCC for the period (as provided pursuant to the
management agreement between OCC and the Company), as OCC earned no incentive
fee for such period. In addition to the management fee, the Company incurred
asset acquisition expenses of $237,891 during the quarter ended September 30,
1997 which were paid by OCC on behalf of the Company and for which OCC was
reimbursed by the Company subsequent to September 30, 1997. Other expenses are
comprised of auditing fees, insurance premiums and other sundry expenses.
CHANGES IN FINANCIAL CONDITION
GENERAL. From May 19, 1997 to September 30,1997 total assets increased to
$291,831,251. This increase was primarily due to $138,472,627 of cash and
cash equivalents, $89,520,700 of securities available for sale, $26,263,717
of investments in real estate and $25,184,291 of discount loans. Total
liabilities increased to $6,629,437 during the period, primarily as a result
of declared but unpaid dividends of $4,590,000, unpaid management fees due
OCC of $741,096 and $471,595 of unpaid costs incurred in connection with the
organization and capitalization of the Company.
CASH AND CASH EQUIVALENTS. At September 30, 1997 total cash and cash
equivalents of $138,472,627 were comprised of $10,850 of non-interest bearing
deposits on deposit in an account at Ocwen Federal Bank FSB (the "Bank"), a
wholly owned subsidiary of Ocwen, $8,461,777 of interest bearing deposits (of
which $19,671 was on deposit in an account at the Bank) and $130,000,000 of
repurchase agreements.
The Company enters into repurchase agreements which are carried at the
amounts at which the securities will be subsequently resold plus accrued
interest, as specified in the respective agreements. The securities purchased
are held in custody for the benefit of the Company. All of the transactions
are in United States agency or investment grade securities. The Company's
exposure to credit risks associated with the non-performance of
counterparties in fulfilling their contractual obligations can be directly
impacted by market fluctuations, which may impair the counterparties' ability
to satisfy their obligations. The Company monitors the market value of the
underlying securities relative to the amounts due under the agreements, and
when necessary, requires prompt additional collateral or reduction in loan
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- ----------------------------------------------------------------------------
balance to ensure that the market value remains sufficient to protect itself
in the event of default by the counterparty.
The Company earned interest income of $2,753,729 and $4,150,857 during
the three months ended September 30, 1997 and the period May 19, 1997 to
September 30, 1997, respectively, from its investment in interest bearing
deposits and repurchase agreements. Of such income, $2,634,701 and $3,792,972
was earned from investments in repurchase agreements during the three months
ended September 30, 1997 and the period May 19, 1997 to September 30, 1997,
respectively. Given the Company's intention to invest cash and cash
equivalents of the Company in other types of assets, operating results for
the periods presented are unlikely to be indicative of the results that may
be expected for future periods.
SECURITIES AVAILABLE FOR SALE. At September 30, 1997, an aggregate of
$1,605,820 of net unrealized gains related to the securities available for sale
were included in stockholders' equity. The Company's securities available for
sale were comprised of the following at September 30, 1997.
<TABLE>
<S> <C>
Mortgage-related securities:
Single-family residential:
FHLMC interest only........................................................ $17,350,628
FNMA interest only......................................................... 25,126,676
AAA-rated interest only.................................................... 1,223,009
Subordinates............................................................... 9,383,639
-----------
53,083,952
-----------
Multi-family residential and commercial:
AAA-rated interest only..................................................... 1,426,425
Subordinates................................................................ 35,010,323
-----------
36,436,748
-----------
Total..................................................................... $89,520,700
-----------
-----------
</TABLE>
The increase in securities available for sale of $89,520,700 during the
period May 19, 1997 to September 30, 1997 is due to purchases of $92,295,129 and
unrealized gains of $1,605,820, offset in part by $2,957,402 of principal
payments and maturities and $1,422,847 of net premium amortization. Year to date
purchases include nine securities purchased for $45,228,640 from Ocwen and its
affiliates.
LOAN PORTFOLIO. During September, 1997 the Company acquired fifteen
single-family loans with an unpaid principal balance of $3,773,321 with the
intent of accumulating such loans and executing a securitization, to
effectively retain a subordinate interest. At September 30, 1997 fourteen
loans were current and one loan (unpaid principal balance of $78,323) was
sixty days delinquent.
DISCOUNT LOAN PORTFOLIO. The following table sets forth the composition of
the Company's discount loan portfolio by type of loan at September 30, 1997.
<TABLE>
<S> <C>
Commercial real estate loans:
Office........................................................................ $9,215,720
Retail........................................................................ 28,948,038
----------
Total unpaid principal balance.............................................. 38,163,758
Unaccreted discount............................................................. (12,979,467)
----------
Discount loans, net......................................................... $25,184,291
----------
----------
</TABLE>
The increase in discount loans of $25,184,291 during the period ended
September 30, 1997 is the result of two acquisitions. During June 1997 the
Company acquired a 13.83% PARI PASSU interest in nine sub-performing
commercial loans with an aggregate unpaid principal balance of $10,490,652.
The loans are collateralized by three office buildings located in New York,
New York and one shopping center in Yorktown, New York. The loans are
serviced by the Bank, who was also OAIC's partner in the acquisition
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- ----------------------------------------------------------------------------
of the loans. During September 1997 the Company acquired four Canadian
commercial loans with an unpaid principal balance of $27,682,327 ($38,259,945
Canadian). The loans are collateralized by a 395,000 square foot shopping
center located in Halifax, Nova Scotia, Canada. These loans are also serviced
by the Bank.
The following table sets forth certain information relating to the payment
status of loans in the Company's discount loan portfolio at September 30, 1997.
<TABLE>
<S> <C>
Past due less than 31 days..................................................... $ 9,215,720
Past due 31 days to 89 days.................................................... --
Past due 90 days or more....................................................... 28,948,038
-----------
$38,163,758
-----------
-----------
</TABLE>
ALLOWANCES FOR LOAN LOSSES. The Company maintains an allowance for loan
losses at a level which management considers adequate to provide for
potential losses based upon an evaluation of known and inherent risks. At
September 30, 1997, no allowance for loan losses had been provided.
INVESTMENT IN REAL ESTATE. During the three months ended September 30,
1997, the Company acquired the properties listed below.
<TABLE>
<CAPTION>
ACQUISITION
DATE ACQUIRED PROPERTY LOCATION SQUARE FEET COST
- ------------- ---------------- ------------------ ----------- -------------
<C> <S> <C> <C> <C>
09/23/97 450 Sansome St. San Francisco, CA 123,000 $ 17,205,361
09/03/97 10 U.N. Plaza San Francisco, CA 68,560 9,079,742
------------
$ 26,285,103
------------
------------
</TABLE>
For additional information regarding investments in real estate see
Note 5 to the Interim Consolidated Financial Statements included in
Item 1 hereof.
The Company's strategy is to renovate and reposition the facilities and
target full floor tenants with five to ten year lease terms. The Company
estimates that over the next twelve months approximately $4,400,000 in capital
improvements, tenant improvements and leasing commissions will be spent to
renovate and reposition the above properties. It is anticipated that
repositioning will result in rents that are considerably greater than the
current rents being achieved at the sites.
ACCRUED EXPENSES, PAYABLES AND OTHER LIABILITIES. At September 30, 1997,
accrued expenses, payables and other liabilities of $2,039,437 were primarily
comprised of $741,096 of unpaid management fees earned by OCC during the
reported period, unpaid costs of $471,595 incurred in connection with the
organization and capitalization of the Company (of which $226,312 was paid by
the Bank on behalf of the Company), $206,914 of due diligence expenses paid
by OCC on behalf of the Company and $162,206 of rent security deposits.
STOCKHOLDERS' EQUITY. Stockholders' equity increased to $285,201,814 from
May 19, 1997 to September 30, 1997. The increase in stockholders' equity
during this period was attributable to net income of $6,410,494, unrealized
gains on securities available for sale of $1,605,820 and net proceeds of
$283,688,000 from the issuance of 19,125,000 shares of common stock in May
1997, offset by $6,502,500 of dividends on common stock. See the Consolidated
Statement of Changes in Stockholders' Equity in the Interim Consolidated
Financial Statements included in Item 1 hereof.
CAPITAL RESOURCES AND LIQUIDITY
Liquidity is a measurement of the Company's ability to meet potential
cash requirements, including ongoing commitments to repay borrowings, fund
investments, loan acquisition and lending activities and for other general
business purposes. The primary sources of funds for liquidity consist of
reverse repurchase agreements and other secured borrowings and maturities and
principal payments on loans and securities and proceeds from sales thereof.
The Company's operating activities provided cash flows of $7,461,869 during
the period May 19, 1997 to September 30, 1997. During the foregoing period cash
resources from operating activities were provided primarily by net income.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- ----------------------------------------------------------------------------
The Company's investing activities used cash flows totaling $150,764,742
during the period May 19, 1997 to September 30, 1997. During the foregoing
period, cash flows from investing activities were used primarily to purchase
securities available for sale, discount loans and investments in real estate.
The Company's financing activities provided $281,775,500 during the period
May 19, 1997 to September 30, 1997 and consisted of $283,688,000 net proceeds
from the issuance of common stock, net of $1,912,500 of dividends paid in July
1997.
As discussed above, the Company has outstanding commitments of
$95,854,000, subject to various closing conditions, and is engaged in due
diligence with respect to a variety of investments. The Company currently
plans to have 100% of its initial publicly offering net proceeds invested by
end of year 1997 and to be fully leveraged by end of year 1998. In addition,
the Company is engaged in discussions with respect to obtaining various
third-party borrowings. As a result, the Company's liquidity and capital
resources could be materially affected.
MARKET CONDITIONS
Over the past several months, the competitive conditions of some of the
markets in which the Company operates have changed due to the significant
amount of capital made available in the marketplace. This competition is
particularly notable in the subordinated commercial mortgage-backed
securities (CMBS) market for new issuances. New issuances have reduced
subordination levels with spreads declining by approximately 200 basis points
in the BB and B tranches. The Company believes that investment in a new issue
CMBS at this time does not meet its return objectives; therefore, the Company
is focusing on seasoned or special situation subordinates which meet its
return objectives and take advantage of Ocwen's special servicing
capabilities. In addition, the Company intends to purchase pools of
residential loans for securitization, to effectively create its own
subordinated interest.
FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED HEREIN ARE NOT, AND CERTAIN STATEMENTS
CONTAINED IN FUTURE FILINGS BY THE COMPANY WITH THE SEC, IN THE COMPANY'S
PRESS RELEASES OR IN THE COMPANY'S OTHER PUBLIC OR SHAREHOLDER COMMUNICATIONS
MAY NOT BE, BASED ON HISTORICAL FACTS AND ARE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED,
AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
FORWARD-LOOKING STATEMENTS WHICH ARE BASED ON VARIOUS ASSUMPTIONS (SOME OF
WHICH ARE BEYOND THE COMPANY'S CONTROL) MAY BE IDENTIFIED BY REFERENCE TO A
FUTURE PERIOD OR PERIODS, OR BY THE USE OF FORWARD-LOOKING TERMINOLOGY, SUCH
AS "MAY," "WILL," "BELIEVE," "EXPECT," "ANTICIPATE," "CONTINUE," OR SIMILAR
TERMS OR VARIATIONS ON THOSE TERMS, OR THE NEGATIVE OF THOSE TERMS. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN FORWARD-LOOKING
STATEMENTS DUE TO A VARIETY OF FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE
RELATED TO THE ECONOMIC ENVIRONMENT, PARTICULARLY IN THE MARKET AREAS IN
WHICH THE COMPANY OPERATES, COMPETITIVE PRODUCTS AND PRICING, FISCAL AND
MONETARY POLICIES OF THE U.S. GOVERNMENT, CHANGES IN PREVAILING INTEREST
RATES, ACQUISITIONS AND THE INTEGRATION OF ACQUIRED BUSINESSES, CREDIT RISK
MANAGEMENT, ASSET/LIABILITY MANAGEMENT, THE FINANCIAL AND SECURITIES MARKETS
AND THE AVAILABILITY OF AND COSTS ASSOCIATED WITH SOURCES OF LIQUIDITY. THE
COMPANY DOES NOT UNDERTAKE, AND SPECIFICALLY DISCLAIMS ANY OBLIGATION, TO
PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS WHICH MAY BE MADE TO ANY
FORWARD-LOOKING STATEMENTS TO REFLECT THE OCCURRENCE OF ANTICIPATED OR
UNANTICIPATED EVENTS OR CIRCUMSTANCES AFTER THE DATE OF SUCH STATEMENTS.
14
<PAGE>
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
10.1 Form of Management Agreement (incorporated herein by reference to
the Exhibits to Amendment No. 1 to Registrant's Registration
Statement No. 333-21965 on Form S-11 filed March 31, 1997).
10.2 Form of Registration Rights Agreement (incorporated herein by
reference to the Exhibits to Amendment No 1 to Registrant's
Registration Statement No. 333-21965 on Form S-11 filed March 31,
1997).
10.3 Limited Partnership Agreement of Ocwen Partnership L.P.
(incorporated herein by reference to the Exhibits to Amendment No.
2 to Registrant's Registration Statement No. 333-21965 on Form
S-11 filed April 15, 1997).
10.4 Form of Stock Option Plan (incorporated herein by reference to the
Exhibits to Amendment No. 2 to Registrant's Registration Statement
No. 333-21965 on Form S-11 filed April 15, 1997).
27.0 Financial Data Schedule
(b) Reports on Form 8-K
(1) A Form 8-K was filed by the Company on July 29, 1997 which
contained a news release announcing the Company's financial
results for the reported period of May 19, 1997 to June 30,
1997.
(2) A Form 8-K was filed by the Company on October 31, 1997 which
contained a news release announcing the Company's financial
results for the three months ended September 30, 1997 and for the
period May 19, 1997 to September 30, 1997.
15
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
Ocwen Asset Investment Corp.
By:/s/ Mark S. Zeidman
----------------------------------------
Mark S. Zeidman
Senior Vice President and Chief Financial Officer
(On behalf of the Registrant and as its principal
financial officer)
Date: November 14, 1997
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM OCWEN ASSET INVESTMENT
CORP.'S CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AND STATEMENT OF
OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1996
<CASH> 138,472,627<F1>
<SECURITIES> 89,520,700
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 291,831,251
<CURRENT-LIABILITIES> 6,629,437
<BONDS> 0
0
0
<COMMON> 191,250
<OTHER-SE> 285,010,564
<TOTAL-LIABILITY-AND-EQUITY> 291,831,251
<SALES> 0
<TOTAL-REVENUES> 8,061,782<F2>
<CGS> 0
<TOTAL-COSTS> 1,346,726<F3>
<OTHER-EXPENSES> 304,560
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,410,496
<INCOME-TAX> 0
<INCOME-CONTINUING> 6,410,496
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,410,496
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.33
<FN>
<F1>Tag 10 includes cash and amounts due from depository institutions of $10,850,
interest bearing deposits of $8,461,777 and repurchase agreements of
$130,000,000.
<F2>Tag 27 includes interest income on repurchase agreements and interest bearing
deposits of $4,150,857, securities available for sale of $3,497,356, discount
loans of $340,966, loans of $5,565 and operating income of $67,038.
<F3>Tag 29 includes management fees of $1,060,914 and loan expenses of $285,812.
</FN>
</TABLE>
