<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 15, 1997
REGISTRATION NO. 333-21965
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2 TO
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 1000
WEST PALM BEACH, FLORIDA 33401
(561) 681-8000
(561) 681-8177 (TELECOPY)
(Address of principal executive officer)
------------------------
WILLIAM C. ERBEY
1675 PALM BEACH LAKES BLVD., SUITE 1000
WEST PALM BEACH, FLORIDA 33401
(Name and address of agent for service)
------------------------
COPIES TO:
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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) 455-2000
(804) 788-8200 (212) 455-2502 (telecopy)
(804) 788-8218 (telecopy)
</TABLE>
------------------------
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 462(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. / /
------------------------
This registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until this registrant
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.
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<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 15, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
12,500,000 SHARES
[LOGO]
OCWEN ASSET
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.
OAIC will elect to be taxed as a real estate investment trust ("REIT") under the
Internal Revenue Code of 1986. Ocwen Capital Corporation (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 net of any underwriting
discounts or commissions. After such sale Ocwen Financial will own approximately
13% 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 will be determined by negotiation between the Company and the
Underwriters. See "Underwriting." The Common Stock has been approved for listing
on The Nasdaq Stock Market under the symbol "OAIC."
------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK INCLUDING, AMONG OTHERS:
- Most of the Company's investments have not been identified;
- The Company intends to invest in non-investment grade, subordinated
mortgage-backed securities, which are sensitive to events of loss, such as
credit losses due to borrower default, hazard losses and state law
enforceability issues;
- The Company intends to invest in distressed real estate;
- The Company's investments (particularly those in mortgage-backed
securities) will be sensitive to changes in prevailing interest rates;
- Ownership of Common Stock by each stockholder other than Ocwen Financial
is limited to 9.1% of the outstanding Common Stock, which may deter third
parties from seeking to control or acquire the Company;
- The Company may be taxed as a corporation if it fails to qualify as a
REIT; and
- Certain officers and directors of the Company are officers and directors
of the Manager, which will sell assets to the Company from time to time.
------------------------------
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.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Share.....................
Total (3)(4)..................
</TABLE>
(1) The Company has agreed to indemnify the several 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 several 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.
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. EVEREN SECURITIES, INC.
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZATION, THE PURCHASE OF COMMON STOCK TO COVER SYNDICATE SHORT
POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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PROSPECTUS SUMMARY............................. 5
ORGANIZATION AND RELATIONSHIPS................. 12
RISK FACTORS................................... 13
Investment Activity Risks.................... 13
Credit and Prepayment Risks from Ownership of
Subordinated Interests in Pools of
Commercial and Residential Mortgage
Loans...................................... 13
Value of Real Estate Dependent on Conditions
Beyond Company's Control................... 14
Distressed Real Properties May Have Unleased
Space...................................... 14
Illiquidity of Real Estate................... 14
Uninsured and Underinsured Losses............ 14
Property Taxes............................... 14
Compliance with Americans with Disabilities
Act and Other Changes in Governmental Rules
and Regulations............................ 14
Environmental Matters........................ 15
Real Properties with Known Environmental
Problems May Create Liabilities for the
Company.................................... 15
Foreign Real Properties are Subject to
Currency Conversion Risk and Uncertainty of
Foreign Laws............................... 15
Risk of Loss from Multifamily Residential,
Commercial and Construction Lending
Activities................................. 15
Default Risks Associated with Distressed
Mortgage Loans............................. 16
Risks from Ownership of IOs, Inverse IOs and
Sub IOs.................................... 16
REMIC Residual Interests May Generate Taxable
Income Exceeding Cash Flow................. 16
Limited Available Investments................ 16
Full Investment of Net Proceeds Will Be
Delayed.................................... 17
Economic and Business Risks.................. 17
Interest Rate Risk........................... 17
Use of Leverage.............................. 18
General Economic Conditions.................. 18
Competition.................................. 18
Legal and Tax Risks.......................... 19
Tax Risks.................................... 19
Effects of Ownership Limitation.............. 20
ERISA Risks.................................. 20
Preferred Stock May Prevent Change in
Control.................................... 20
Virginia Anti-Takeover Statutes.............. 20
Ability of Board of Directors to Change
Certain Policies........................... 20
Investment Company Act Exemption............. 21
Limitation on Liability of Manager and
Officers and Directors of the Company...... 21
Other Risks.................................. 21
Conflicts of Interest in the Business of the
Company.................................... 21
Risk that Market for Common Stock Will Not
Develop.................................... 24
Newly Organized Corporation.................. 24
External Management of the Company........... 24
Regulation of Manager's Affiliates........... 24
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OPERATING POLICIES AND OBJECTIVES.............. 24
The Company's Assets......................... 26
Portfolio Management......................... 34
MANAGEMENT OF OPERATIONS....................... 35
Ocwen Financial Corporation.................. 35
The Manager.................................. 35
The Management Agreement..................... 37
Management Fees.............................. 39
Stock Options................................ 40
Limits of Responsibility..................... 41
Certain Relationships; Conflicts of
Interest................................... 41
THE COMPANY.................................... 43
Directors and Executive Officers............. 43
DISTRIBUTION POLICY............................ 45
YIELD CONSIDERATIONS RELATED TO THE COMPANY'S
ASSETS....................................... 45
Subordinated Interests....................... 45
Distressed Real Properties................... 47
Mortgage Loans............................... 47
IOs and Inverse IOs.......................... 48
INITIAL INVESTMENTS............................ 48
General...................................... 48
MLMC, Series 1993-MI Classes B and C......... 49
DLJMAC, Series 1993-MF17, Classes B-2, B-3,
C-1, S-1 and S-2........................... 54
Supplemental Initial Investment.............. 57
YIELD CONSIDERATIONS RELATED TO THE INITIAL
INVESTMENTS.................................. 58
CAPITALIZATION................................. 62
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
LIQUIDITY AND CAPITAL RESOURCES.............. 62
DESCRIPTION OF CAPITAL STOCK................... 63
General...................................... 63
Common Stock................................. 63
Preferred Stock.............................. 63
Restrictions on Transfer..................... 64
Dividend Reinvestment Plan................... 66
Reports to Stockholders...................... 66
Transfer Agent and Registrar................. 66
CERTAIN PROVISIONS OF VIRGINIA LAW AND OF
OAIC'S ARTICLES OF INCORPORATION AND
BYLAWS....................................... 66
Board of Directors........................... 66
Amendment.................................... 66
Business Combination......................... 67
Control Share Acquisitions................... 67
Operations................................... 68
Advance Notice of Director Nominations and
New Business............................... 68
COMMON STOCK AVAILABLE FOR FUTURE SALE......... 68
OPERATING PARTNERSHIP AGREEMENT................ 69
General...................................... 69
General Partner Not to Withdraw.............. 69
Capital Contribution......................... 69
Redemption Right............................. 70
Operations................................... 71
Distributions................................ 71
</TABLE>
3
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<TABLE>
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PAGE
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<S> <C>
Allocations.................................. 71
Term......................................... 71
Tax Matters.................................. 71
FEDERAL INCOME TAX CONSIDERATIONS.............. 72
Taxation of the Company...................... 72
Requirements for Qualification............... 74
Failure to Qualify........................... 80
Taxation of Taxable U.S. Stockholders........ 80
Taxation of Stockholders on the Disposition
of the Common Stock........................ 82
Capital Gains and Losses..................... 82
Information Reporting Requirements and Backup
Withholding................................ 82
Taxation of Tax-Exempt Stockholders.......... 83
Taxation of Non-U.S. Stockholders............ 84
State and Local Taxes........................ 85
Sale of the Company's Property............... 85
ERISA CONSIDERATIONS........................... 86
Employee Benefit Plans, Tax-Qualified
Retirement Plans, and IRAs................. 86
Status of OAIC and the Operating Partnership
under ERISA................................ 87
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CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND
REAL PROPERTY INVESTMENTS.................... 88
General...................................... 88
Types of Mortgage Instruments................ 89
Leases and Rents............................. 89
Condemnation and Insurance................... 89
Foreclosure.................................. 89
Bankruptcy Laws.............................. 92
Default Interest and Limitations on
Prepayments................................ 93
Forfeitures in Drug and RICO Proceedings..... 93
Environmental Risks.......................... 93
Applicability of Usury Laws.................. 95
Americans With Disabilities Act.............. 95
USE OF PROCEEDS................................ 96
UNDERWRITING................................... 96
LEGAL MATTERS.................................. 98
EXPERTS........................................ 98
ADDITIONAL INFORMATION......................... 98
The Company.................................. 98
Ocwen Financial.............................. 98
GLOSSARY OF TERMS.............................. 99
FINANCIAL STATEMENT............................ F-1
</TABLE>
4
<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") of the Common Stock 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 beginning on page 99.
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
invest primarily 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 these investment activities will
complement each other 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 ("Nonperforming 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 Real
Property that is (i) environmentally distressed or (ii) located outside the
United States, or Mortgage Loans secured by such Real Property and other real
property interests.
In order to invest the net proceeds of the Offering as efficiently 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.
5
<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:
- Certain of the Company's real estate investments will require significant
management resources, are illiquid, and may decrease in value because of
changes in economic conditions.
- The Company intends to acquire significant amounts of non-investment grade
mortgage-backed securities. These investments may be subject to a greater
risk of loss of principal and non-payment of interest than investments in
whole mortgage loans or senior, investment grade rated securities.
- The Company's Distressed Real Properties (which may have significant
amounts of unleased space) may not generate sufficient revenue to provide
a return on the investment after meeting operating expenses and interest
expense.
- Borrower default, hazard losses and state or foreign law enforceability
issues may result in losses on the Company's investment in Mortgage Loans
and MBS.
- Investing in commercial, multifamily residential and construction loans is
riskier than investing in 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.
- 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. Conversely, in periods of rising
interest rates, prepayments on mortgage loans and MBS generally decrease
and the value of the Company's fixed-rate investments generally declines.
- The Company's 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 Company's Inverse IOs, which
have interest rates that vary inversely with changes to an index, will be
negatively affected by higher than anticipated levels of the index.
- Applying leverage to the Company's assets can compound losses.
- OAIC may be taxed as a corporation if it fails to qualify as a REIT.
- To maintain its exemption from regulation under the Investment Company
Act, the Company, among other things, must 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.
- OAIC, a company with no operating history and minimal initial investments,
will invest in highly competitive businesses, albeit with the assistance
of a manager with employees that have substantial experience investing in
similar assets.
- Conflicts of interests between the Company and Ocwen Financial in relation
to business decisions regarding the Company could result in decisions that
do not fully reflect the interests of all of OAIC's stockholders.
- The Company must rely on the experience of the Manager's employees
generally, and in particular the Independent Directors must rely on
information provided by the Manager to review transactions of the Company
with Ocwen Financial and its affiliates.
- The directors and officers of the Company will have other calls on their
time.
6
<PAGE>
THE MANAGER
The business and investment affairs of the Company will be managed by Ocwen
Capital Corporation (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 (the
"Bank"), a federally-chartered savings bank (formerly known as Berkeley Federal
Bank & Trust FSB), have substantial experience in the acquisition and resolution
of loans and the management of diverse real estate related assets.
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 $4.2 billion of distressed loans, including $1.7 billion of
distressed commercial mortgage loans. To date, Ocwen Financial has owned 607
commercial REO properties, having a market value of approximately $298 million,
which it acquired by purchasing and foreclosing on distressed mortgage loans. As
a result of this experience, Ocwen Financial developed procedures, facilities
and systems to enable it to evaluate, acquire and manage distressed loans and to
resolve such loans in a timely and expeditious manner. Furthermore, Ocwen
Financial has experience in the acquisition and management of MBS, including
over $223 million of subordinated securities, the majority of which have been
sold. Since 1993, Ocwen Financial has also acquired or originated $1.1 billion
of performing multifamily residential and commercial mortgage loans, including
construction, rehabilitation and other loans with respect to which Ocwen
Financial participates in net operating income of the property and increases in
value of the property, if any. 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
operations.
Although many of the Company's prospective competitors may have access to
greater capital and other advantages, the Company believes that the experience
of Ocwen Financial in acquiring and managing MBS and in acquiring, managing and
resolving distressed mortgage loans will provide it with the means to compete.
Ocwen Financial has made substantial investments in the computer systems,
technology and other resources that it believes are necessary to conduct this
business, and has developed strategic relationships and contacts in connection
with these activities. There can be no assurances, however, that such systems,
resources and relationships will enable the Company to be successful.
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, 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 base management fee in an amount equal to 1% per
annum, calculated and paid quarterly based upon the Average Invested Assets of
the Company for such quarter, 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 share
of Common Stock (based on the weighted average number of shares outstanding)
plus (b) gains (or minus losses) from debt restructuring or sales of property
per share of Common Stock (based on the weighted average number of shares
outstanding), 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
7
<PAGE>
percent per annum 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.
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 13% 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 shares of Common Stock (1,625,000 shares if the Underwriters
exercise their over-allotment option) or, at the option of the Company, units of
limited partnership interest in the Operating Partnership ("Units"), at a price
per share (or Unit) equal to the initial offering price of the Common Stock. The
Manager may redeem any Units so purchased for cash, or, at the election of the
General Partner, shares of Common Stock, on a one-for-one basis. 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's objective is to build a diverse portfolio of assets that will
provide a high risk-adjusted rate of return to its stockholders, but there can
be no assurance that this objective can be met. The Company intends to implement
policies and strategies for investment in Subordinated Interests, Distressed
Real Properties and Other Real Estate Related Assets designed to enable it to
produce 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 is expected to include the use of appropriate amounts of
borrowings and other forms of leverage.
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 efficiently during approximately the
first year following Closing, and from time to time thereafter, the Company
intends also to 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. Subordinated Interests offer the potential of a higher
yield than relatively more senior classes (customarily rated investment grade),
but carry greater credit risk, including a substantially greater risk of loss of
principal and non-payment of interest than investment grade rated classes. 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. See "Operating
Policies and
8
<PAGE>
Procedures--The Company's Assets" and "Risk Factors--Investment Activity
Risks--Credit and Prepayment Risks from Ownership of Subordinated Interests in
Pools of Commercial and Residential Mortgage Loans."
The Company's other main investment focus will be Distressed Real
Properties. Distressed Real Properties generally do not generate sufficient cash
flow to provide a current cash return on the investment therein after meeting
operating expenses and debt service. The Company believes, however, that there
are significant opportunities to purchase Distressed Real Properties at
attractive prices, to increase cash flow through effective management, 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 but
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 (from Distressed Real Properties) and current
income for distribution to stockholders (from Subordinated Interests). 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") and may be deemed to have market discount
for federal income tax purposes. The Company will be required to recognize a
portion of the OID and market discount as income each year, which will increase
the REIT distribution requirement in such year, 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 and market
discount 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 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. The Company may originate or acquire Performing Mortgage Loans that are
well-suited for financing through the issuance of collateralized mortgage
obligations and may invest in Distressed Mortgage Loans. In addition, the
Company may take advantage of opportunities to provide construction or
rehabilitation financing on commercial property ("Construction Loans") and to
invest in loans that are subordinate to first lien mortgage loans on commercial
real estate ("Mezzanine Loans").
The Company may invest in other classes of MBS, including IOs and Inverse
IOs, as a short term liquidity tool or 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--Risks
from Ownership of IOs, Inverse IOs, and Sub IOs."
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. An investment in real estate located in foreign
countries contains risks associated with the uncertainty of foreign laws and
markets and currency conversion risks. See "Risk Factors--Investment Activity
Risks--Foreign Real Properties are Subject to Currency Conversion Risks and
Uncertainty of Foreign Laws." Moreover, the Company may invest in real estate or
Mortgage Loans secured by real estate with known material environmental
problems. See "Risk Factors--Investment Activity Risks--Real Properties with
Known Environmental Problems May Create Liability for the Company."
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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--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 on
the Company's investments.
CONFLICTS OF INTEREST
The Company will be managed by the Manager, and the Bank is expected to
provide mortgage servicing and certain asset management services for the
Company. Both the Manager and the Bank are wholly-owned subsidiaries of Ocwen
Financial, which will own 13% of the outstanding shares of Common Stock in OAIC
immediately after the Closing. Because of the Company's relationship with the
Manager, the Bank and Ocwen Financial, the Company will be subject to various
potential conflicts of interest.
To protect the Company's shareholders from risks related to these potential
conflicts, beginning ninety days after this Offering a majority of the Company's
Board of Directors will be unaffiliated with the Manager ("Independent
Directors"). The Independent Directors will approve the execution of the
Management Agreement and will establish general guidelines for the Company's
investments, borrowings and operations (the "Guidelines"). Although the Manager
will perform the day to day operations of the Company, the Independent Directors
will review transactions on a quarterly basis to ensure compliance with the
Guidelines. In such a review, the Independent Directors will rely primarily on
information provided by the Manager.
The Management Agreement does not limit the Manager's right to engage in
business or to render services to others that compete with the Company. The
Manager is required to give the Company an exclusive right to invest in
Distressed Real Property and Subordinated Interests, with certain exceptions as
described herein, but not with respect to Other Real Estate Related Assets.
Subject to approval of the Independent Directors, the Company will acquire
certain MBS from an affiliate of the Manager soon after the Closing. The Company
may acquire additional assets from the Manager's affiliates in the future, and,
if so, the Company will obtain an appraisal, Price Evaluation or similar
estimate, and the Independent Directors will be asked to approve the
transaction, relying, however, primarily on information provided by the Manager.
THE OFFERING
<TABLE>
<S> <C>
Shares offered to the public(1)(2).............................................. 12,500,000
Shares to be outstanding after offering(1)(2)................................... 14,375,000
</TABLE>
- ------------------------
(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 (subject to the consent of the Independent
Directors) with affiliates of the Manager to purchase certain assets upon
completion of this Offering for a purchase price of approximately $36.0 million,
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
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herein. In addition, the Company expects to purchase a Subordinated Interest
from a third party for a purchase price of approximately $10 million.
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
efficiently 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 has received an opinion of its legal counsel that OAIC
qualifies as a REIT, which opinion is 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 is not 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 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."
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<PAGE>
ORGANIZATION AND RELATIONSHIPS
The Company intends to invest primarily in 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 CAPITAL CORPORATION AND OCWEN FEDERAL BANK FSB.]
(1) OAIC, a Virginia corporation taxable as a REIT, will issue approximately
13% of its common stock to Ocwen Financial and approximately 87% 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. ("Initial
Limited Partner").
(3) Initial Limited Partner and General Partner will organize and capitalize
Ocwen Partnership, L.P. (the "Operating Partnership"), with the Initial 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
Real Estate Related 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 Capital
Corporation (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.
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<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
CREDIT AND PREPAYMENT RISKS 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. 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 would be the case if, for
example, prepayments were allocated pro rata to all classes of MBS. 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.
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<PAGE>
VALUE OF REAL ESTATE DEPENDENT ON CONDITIONS BEYOND COMPANY'S CONTROL. 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 or local economic conditions, 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.
DISTRESSED REAL PROPERTIES MAY HAVE UNLEASED SPACE. 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 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.
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<PAGE>
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.
REAL PROPERTIES WITH KNOWN ENVIRONMENTAL PROBLEMS MAY CREATE LIABILITY FOR
THE COMPANY. 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.
FOREIGN REAL PROPERTIES ARE SUBJECT TO CURRENCY CONVERSION RISKS AND
UNCERTAINTY OF FOREIGN LAWS. 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.
RISKS OF LOSS 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, seek to mitigate this risk by
providing a Mezzanine Loan to the entity that owns a property, secured by a
controlling equity 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, 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.
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
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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 an equity investment of
10% to 15% of total project costs, such equity may not be sufficient to protect
the Company's investment.
DEFAULT RISKS ASSOCIATED WITH DISTRESSED MORTGAGE LOANS. The Company may
purchase Nonperforming and Subperforming Mortgage Loans, as well as Mortgage
Loans that have had a history of delinquencies. These Mortgage Loans may
presently be in default or may have a greater than normal risk of future
defaults and delinquencies, as compared to a pool of newly originated, high
quality loans of comparable type, size and geographic concentration. Returns on
an investment of this type depend on the borrower's ability to make required
payments (or, with respect to Subperforming Loans, the modified monthly payments
required under the applicable forbearance plan) or, in the event of default, the
ability of the loan's servicer to foreclose and liquidate the Mortgage Loan.
There can be no assurance that the servicer can liquidate a defaulted Mortgage
Loan successfully or in a timely fashion. See "Certain Legal Aspects of Mortgage
Loans and Real Property Investments."
INTEREST RATE RISKS AND OTHER RISKS 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."
REMIC RESIDUAL INTERESTS MAY GENERATE TAXABLE INCOME EXCEEDING CASH
FLOW. 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."
LIMITED 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
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pose risks to the Company and to the Company's stockholders that are different
from or in addition to the risks enumerated herein.
FULL INVESTMENT OF NET PROCEEDS WILL BE DELAYED. 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, 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. Moreover, because the Company has identified only a small
number of investments to acquire at Closing, the Company will have broad
authority to invest the remaining proceeds in whatever Real Estate Related
Assets the Company deems appropriate at the time of their acquisition. In making
these investment decisions, the Company will rely on the Manager's
recommendations and on the Guidelines. The Independent Directors will approve
and monitor compliance with the Guidelines. Subject to the Guidelines, the
Manager will have great latitude in the types of Real Estate Related assets it
may decide are proper investments for the Company. No assurance can be made that
the Manager's decisions in this regard will result in a profit for the Company.
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
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contracts. The use of these types of derivatives to hedge a portfolio carries
certain risks, including the risk that losses on a hedge position will reduce
the funds available for distribution to shareholders and, indeed, that such
losses may exceed the amount invested in such instruments. There is no perfect
hedge for any investment, and a hedge may not perform its intended use of
offsetting losses on an investment. Moreover, with respect to certain of the
instruments used as hedges for the Company's portfolio, the Company is exposed
to the risk that the counterparties with which the Company trades may cease
making markets and quoting prices in such instruments, which may render the
Company unable to enter into an offsetting transaction with respect to an open
position. 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." The profitability of the Company may be adversely affected during any
period as a result of changing interest rates.
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.
Although there is no specified limitation on the Company's indebtedness, in
general the Company expects the ratio of the Company's overall indebtedness (as
defined below) to its equity (as defined below) not to exceed four to one. For
these purposes "indebtedness" includes only full recourse debt of the Company,
but not any debt issued in a securitization transaction or otherwise for which
recourse is limited to a fixed pool of assets, and "equity" excludes any assets
pledged to secure any such non-recourse debt. However, the Company's Articles
and Bylaws do not limit the amount of indebtedness the Company can incur, and
the Board of Directors has the discretion to deviate from or change this
indebtedness policy at any time, without consent from or notice to the Company's
shareholders.
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, including Goldman Sachs' Whitehall Street
Real Estate Fund, BlackRock Capital Finance, AMRESCO, General Electric Capital
Corporation, First Chicago Commercial Assets, LaSalle National Bank, and CRIIMI
MAE Inc., 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.
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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 has received 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 or sell assets 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 (i) to sell assets in adverse market
conditions, (ii) to distribute amounts that represent a return of capital, or
(iii) to distribute amounts that would otherwise be spent on future
acquisitions, unanticipated capital expenditures, or repayment of debt. Gain
from the disposition of any asset held primarily for sale to customers in the
ordinary course of business generally will be subject to a 100% tax. In
addition, gain from the sale of securities held for less than one year and real
property (including interests in mortgages on real property) held for less than
four years generally will be nonqualifying income for purposes of the 30% gross
income test. See "Federal Income Tax Considerations -- Income Tests."
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 Company also may acquire Subordinated Interests and other
debt obligations that are deemed to have market discount for federal income tax
purposes, which generally is equal to the excess of an obligation's redemption
price over the basis of the obligation at the time of purchase. The income
generated by such instruments for federal income tax purposes will consist of
amortization of the OID, the market discount and the coupon interest associated
with the instruments. OAIC will be required to recognize as income each year the
portion of the OID and market discount 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
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Considerations." Consequently, an acquisition by OAIC of Subordinated Interests,
other debt obligations that are deemed to have OID or market discount, 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 and market discount generated by the Company's other
holdings.
EFFECTS OF 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) 9.1% (or, with
respect to Ocwen Financial, 13%) 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."
PREFERRED STOCK MAY PREVENT CHANGE IN CONTROL. 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 majority of the Company's Common
Stockholders believed such change of control was in their best interest. See
"Description of Capital Stock--Preferred Stock."
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
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or revise these and other policies, or approve transactions that deviate from
these 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 assets. The assets that 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 Common Stock.
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 or 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."
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,
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the Articles of Incorporation of the Company provide that, beginning ninety days
after this Offering, a majority 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 after two years 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 stockholder value, by tying the Manager's incentive
compensation to Funds From Operations per share, before the incentive fee and
adjusted by adding gains (or subtracting losses) from debt restructuring and
sales of properties. See "Management of Operations--Management Fees." 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
Company's performance or to cash flows as a measure of liquidity or ability to
make distributions.
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
evaluations of the price for Subordinated Interests and other classes of MBS
("Price Evaluations") and appraisals for Distressed Real Properties purchased
from the Manager or its affiliates. Price Evaluations typically issued by the
underwriter or placement agent of the MBS can provide only a general sense of
the value of an MBS; and with respect to unregistered MBS, a Price Evaluation
does not necessarily represent the price that can be obtained for the MBS
because the market for such securities is illiquid. 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 (subject to the consent of the Independent
Directors) with the Bank to purchase Subordinated Interests and IOs (the
"Initial Investments") soon after the Closing for an aggregate purchase price of
approximately $36.0 million plus accrued interest. The Bank will realize a book
gain of approximately $2.5 million as a result of this sale. The Independent
Directors will be asked to approve this transaction prior to the Closing. The
Manager based the price at which the Company will purchase each Initial
Investment on a Price Evaluation that was obtained from the placement agent of
that Initial Investment. Each of these placement agents is an investment banking
firm with experience in underwriting and placing MBS and was selected to provide
the Price Evaluation because it had "modeled" the MBS transaction as part of the
initial placement. "Modeling" a transaction involves analyzing the payment
structure of the MBS and evaluating the characteristics of the underlying
mortgage collateral under various conditions in order to estimate future cash
flows on the MBS. Moreover, placement agents often track the value of MBS they
have placed in the past. Consequently, the placement agents were
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chosen to provide Price Evaluations because they are most familiar with the
characteristics of the Initial Investments. Investors should understand that an
unrelated third party might place lower values on the Initial Investments than
those provided by the placement agents. Moreover, the Price Evaluations by their
own terms are limited. The Manager gave the placement agents no specific
instructions or limitations, but the placement agents have made clear that the
certain factors, which may affect value, such as costs of carry, were not
considered in the Price Evaluations. Moreover, each Price Evaluation states that
it is not an offer to buy or sell or a representation or warranty of the value
of the Initial Investments, and that other estimates of the value of the Initial
Investments may vary significantly from the Price Evaluations.
The Manager, Ocwen Financial and the Bank 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 Interests. 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 and may compete with the Company for such assets.
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, Ocwen Financial and the
Bank 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, the Bank may choose an unaffiliated entity with which to submit a joint
bid for the pool, as long as the Bank takes title only to the mortgage loans and
not to the real estate. In the alternative the Bank may, but is not required to,
invite the Company to submit a joint bid for such pool. If the Company and the
Bank are successful bidders on a pool of Mortgage Loans and real estate, in
general the Company would take title to the real estate and the Bank would take
title to the Mortgage Loans.
At times investors in mortgage loans will jointly own the same loan or pool
of loans in transactions known as "participations." The Company does not
currently intend to participate in mortgage loans together as a co-participant
with the Manager or its affiliates. To the extent that the Company does so
participate, the Independent Directors must approve the transaction as part of
their quarterly review. Generally, the terms of the participation would be
structured so that the Bank would service the loans for a market servicing fee
and after such servicing fee, the remaining proceeds from the loan would be
shared pari passu in accordance with their interests in the loan.
Notwithstanding the foregoing, the Company may purchase Real Estate Related
Assets, including Subordinated Interests, Distressed Real Properties and
Mortgage Loans (including Performing, Subperforming and Nonperforming Mortgage
Loans, Mortgage Loans with a history of delinquency and Construction Loans),
from affiliates of the Manager, in situations where the Manager's affiliate
retains no interest in such asset or retains only the related servicing rights.
Such transactions will be reviewed by the Independent Directors as part of their
quarterly review to ensure compliance with the Guidelines. Nevertheless,
investors should be aware of the conflict of interest that exists in such a
situation. In addition, investors should be aware of the risks related to
investments of these kinds. See "Risk Factors-- Investment Activity Risks."
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RISK THAT MARKET FOR COMMON STOCK WILL NOT DEVELOP. 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. The Common Stock has been approved for listing on The Nasdaq Stock
Market. Quotation through The Nasdaq Stock Market does not ensure, however, that
an active market will develop for the Company's Common Stock.
NEWLY ORGANIZED CORPORATION. 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.
EXTERNAL MANAGEMENT OF THE COMPANY. The Company will be managed by the
Manager, subject to the supervision of the Board of Directors. Thus, the Company
will depend on the services of the Manager and its officers and employees for
the success of the Company. Moreover, the Manager's personnel are employees of
Ocwen Financial or the Bank, and accordingly the Company's success depends in
part on the continuing ability of Ocwen Financial to hire and retain
knowledgeable personnel. This ability may be affected, in turn, by Ocwen
Financial's continued financial health. Finally, the Company is subject to the
risk that the Manager will terminate the Management Agreement and that no
suitable replacement can be found to manage the Company.
REGULATION OF MANAGER'S AFFILIATES. The Manager is a wholly-owned
subsidiary of Ocwen Financial, a registered savings and loan holding company
that conducts most of its operations through 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 invest primarily 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 efficiently in appropriate real estate assets,
the Company expects initially to emphasize the acquisition or origination of
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, the Company may
originate or acquire Mezzanine Loans on commercial or multifamily residential
properties, secured by a
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controlling equity interest in the entity that owns the property, or make
Construction Loans to facilitate construction or rehabilitation of commercial or
multifamily residential real estate. The Company may acquire or originate
Mortgage Loans at any time in the future and 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 cannot anticipate with any certainty the percentage of the
proceeds of the Offering that will be invested in each category of Real Estate
Related Assets, except that the Company does not anticipate investing more than
25% of its assets in foreign real estate and foreign loans or more than 10% of
its assets in real estate or loans with known material environmental problems.
Subject to the Guidelines, the Company has a great deal of discretion in the
manner in which to invest the proceeds of the Offering. There can be no
assurance that the Company will be successful in its investment strategy.
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 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
practical limits to the leverage that can be applied to the Company's
investments.
The Company will acquire the Initial Investments from Ocwen Financial, and
in the future may acquire additional assets from affiliates of the Manager.
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 $4.2 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 experience, Ocwen Financial developed
procedures, facilities and systems to enable it to identify, evaluate, acquire
and manage distressed loans appropriately and to resolve such loans in a timely
and expeditious manner.
Furthermore, Ocwen Financial has experience in the acquisition and
management of MBS, including over $223 million of subordinated securities, the
majority of which have been sold. The Company believes
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that this experience will enable the Manager 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.
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 operations. 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 a centralized basis for
decision support. The Company believes these resources will be important to the
Company's operations. 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 the
experience of Ocwen Financial in managing and resolving Distressed Real
Properties and 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 will provide the Company with the means to compete. No
assurances can be made, however, in this regard.
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. See "Additional Information."
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 one or more lower rated, non-investment grade
classes, 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--Credit and Prepayment Risks 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
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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.
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--Credit and Prepayment 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--Interest Rate and Other
Risks 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 a Subordinated Interest, the Company performs a number of
due diligence tasks to evaluate the investment and to verify the information and
material provided by the seller. With respect to RMBS, the Manager creates two
sample pools: 1) a random sample and 2) an adverse sample, with characteristics
(such as high loan-to-value ratios or poor delinquency histories) that make them
likely to perform more poorly than the average loans in the pool under
consideration. The Manager will obtain broker's price opinions ("BPOs") from one
of its approved brokers for each of the loans in the sample pools. The Manager
evaluates each BPO to verify its reasonableness, and, if appropriate, additional
information is obtained until the Manager is satisfied that a reasonable
determination of the value of the loan can be made. The Manager also estimates
the potential for increases or decreases in estimated property values based on
local real estate trends.
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Losses on mortgage loans are measured in two ways, loss frequency and loss
severity. Loss frequency (the monthly percentage of the loan balances projected
to default during the life of the securitization) is estimated by using industry
standard predictive models, supplemented by Ocwen Financial's historical data
and experience.
Loss severity (the amount of loss expected to be realized on defaulted
loans) is estimated by projecting the net resolution proceeds expected to be
derived from the defaulted loans based upon Ocwen Financial's proprietary
in-house computer models. This net resolution analysis reviews all potential
forms of resolution, including full payoff, discounted payoff, reinstatement,
foreclosure and sale, deed-in-lieu and sale, and takes into account, among other
things, real estate value, carrying costs (that is, property taxes, insurance
and maintenance) and average months to foreclose in the particular state.
With respect to CMBS, the Company determines on a loan-by-loan basis which
loans will undergo a full-scope review and which loans will undergo a more
streamlined "desktop analysis." Considerations that influence the choice for
scope of review are loan size, debt service coverage ratio, loan to value ratio,
loan maturity, lease rollover, property type and geographic location. A
full-scope review may include, among other factors, a property site inspection,
tenant-by-tenant rent roll analysis, review of historical income and expenses
for each property securing the loan, a review of major leases for each property
(if available); recent appraisals (if available), engineering and environmental
reports (if available), and a BPO review. For those loans that are selected for
the more streamlined desktop analysis, the Manager's evaluation may include a
review of the property operating statements, summary loan level data, third
party reports, and a BPO review, each as available. If the Manager's review of
such information does not reveal any unusual or unexpected characteristics or
factors, no further due diligence is performed. After completing the review of
the documentation and the property inspection, the information compiled will be
analyzed to determine collateral value for each property securing the loans.
Based on these factors, the Manager will determine a resolution value for each
loan for purposes of projecting future cash flows after adjustments for
estimated future losses.
After completing the foregoing evaluations, the Manager will model the
structure of the RMBS or CMBS securitization based on the disclosure documents
that reveal the payment structure of the MBS and the characteristics of the
underlying mortgage collateral. This modeling is done in order to estimate
future cash flows to be received by the Subordinated Interests, after
adjustments for estimated future losses. Using that information, the Manager
will determine the price at which it would effect the purchase of the
Subordinated Interest on behalf of the Company.
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, among other things, 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.
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
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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 and Sub IOs)
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 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
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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. Except with respect to loans originated under
programs sponsored by HUD, 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 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.
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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 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 may benefit from the
ability to direct certain of the Special Servicing activities but 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 by 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. Prior to purchasing assets, the Manager will generally identify and
contact real estate brokers and/or appraisers in the market area of the subject
properties to obtain rent and sale comparables and BPOs for each asset in a
portfolio. This information is used to supplement due diligence that is
performed by the Manager's employees.
The Company's due diligence will generally include the review of market
studies for each market within a portfolio. The studies typically will include
area economic data, employment trends, absorption rates and market rental rates.
Due diligence will also include site inspections by the Manager's employees or
agents of most properties in a portfolio and a review of all available asset
files and documentation. To the extent possible those will include examinations
of available legal documents, litigation files, correspondence, title reports,
operating statements, appraisals and engineering and environmental reports. The
information compiled is then analyzed to determine a valuation for each
property.
The property valuation process utilizes a variety of tools which may include
various proprietary financial models that have been developed by Ocwen Financial
and will be available to the Company through the Management Agreement. Sources
of information examined to determine value may include: (a) current and
historical operating statements; (b) existing appraisals; (c) BPOs; (d) rent and
sales comparables; (e) industry statistics and reports regarding operating
expenses such as those compiled by the Institute of Real Estate Management; (f)
leases; and (g) deferred maintenance observed during site inspections or
described in structural reports, reports and correspondence found in the loan
files.
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The Manager develops projections of net operating income and cash flows
taking into account lease rollovers, tenant improvement costs and leasing
commissions. The Manager will compare its estimates of revenue and expenses to
historical operating statements and estimates provided in BPOs, appraisals and
general industry and regional statistics. Market capitalization rates and
discount rates are then applied to the cash flow projections to estimate values.
These values are then compared to available appraisals, BPOs and market sale
comparables to determine recommended bid prices for each asset. The bids take
into account projected holding periods, capital costs and projected profit
expectations. Recommended bid prices are then reviewed with senior management
and a decision whether to bid is made. 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.
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. Following increased cash flows and stabilization of the property,
the Company will 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.
DISTRESSED MORTGAGE LOANS. The Company may purchase Nonperforming or
Subperforming Mortgage Loans, particularly those secured by commercial
properties. In general, the Company will foreclose on such Mortgage Loans in
order to acquire title to the underlying Distressed Real Properties. See
"Certain Legal Aspects of Mortgage Loans and Real Property Investments."
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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 loan would be secured, either by the
property subject to the first lien (giving the Company a second lien position)
or by a controlling equity interest in the owner. If the equity 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 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.
SALE LEASEBACK TRANSACTIONS. In addition, the Company may participate in
sale leaseback transactions, in which the Company would purchase improved or
unimproved real estate and then lease such real estate back to the seller under
a long-term triple net lease. The Company also may provide financing necessary
to build commercial improvements on the land, to refinance existing debt on the
property or to provide additional funds to operate the business. After
participating in a number of these transactions, the Company may pool the leased
real estate, and issue debt backed by the real estate and the related leases in
a securitization transaction.
OTHER MBS. The Company may invest not only in classes of Subordinated
Interests but also in other classes of MBS. For example, the Company may invest
in IOs, which are entitled to no (or only nominal) payments of principal, but
only to payments of interest. If the mortgage loans underlying an IO prepay
slowly, then the weighted average life of the IO will be extended, which will
increase the yield to maturity on the IO. Conversely, faster prepayments have an
adverse effect on the yield to maturity of an IO. The Company also may invest in
Inverse IOs, which bear interest at a floating rate that varies inversely with
(and often at a multiple of) changes in a specified index. The yield to maturity
of a class of Inverse IOs is not only very sensitive to the rate of prepayments
on the underlying mortgage loans, but also changes in the related index. 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 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
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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--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 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 non-REMIC CMOs collateralized by
such loans. Moreover, the Company
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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."
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 the Bank. 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 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.
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DIRECTORS OF THE MANAGER
<TABLE>
<CAPTION>
NAME AGE POSITION(S) HELD
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
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
</TABLE>
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
<TABLE>
<CAPTION>
NAME AGE POSITION(S) HELD
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
John R. Barnes....................................... 54 Senior Vice President
Joseph A. Dlutowski.................................. 32 Senior Vice President
Jordan C. Paul....................................... 35 Senior Vice President
</TABLE>
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 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.
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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. Dlutowski was elected a Senior Vice President of Ocwen Financial and the
Bank on March 21, 1997. Mr. Dlutowski joined the Bank in October 1992 and served
as a Vice President from May 1993 until March 1997. From 1989 to 1991, Mr.
Dlutowski was associated with the law firm of Baker and Hostetler. He holds a
Bachelor of Science from the University of Pennsylvania, and a Master of
Business Administration and Juris Doctor from the University of Pittsburgh.
Mr. Paul has served as Senior Vice President of the Bank since March 1996
and served as Vice President of the same since February 1994. Mr. Paul joined
the Bank in September 1993 establishing its commercial loan acquisition and
asset management divisions. From 1990 to 1993 Mr. Paul was an attorney in the
real estate department of the Philadelphia law firm of Wolf, Block, Schorr and
Solis-Cohen. From 1983 to 1987 Mr. Paul served in a variety of positions with
The Travelers Insurance Company in their Real Estate Investment Department. Mr.
Paul received a bachelor of science degree from the Wharton School of the
University of Pennsylvania and a juris doctor degree from the University of
Pennsylvania Law School.
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 the second anniversary of the Closing Date. 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 after the first two years 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
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 certain 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 (or cause to be performed) 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;
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(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 executive and administrative personnel, office space and
office 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 or
trading markets 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
(xii) counseling the Company regarding the maintenance of its status as a
REIT and monitoring compliance with the various REIT qualification tests and
other rules set out in the Code and Treasury Regulations thereunder.
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, financing 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
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<PAGE>
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 base management fee equal to 1% per annum,
calculated and paid quarterly based upon 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 share of Common Stock (based on the weighted average number of shares
outstanding) plus (b) gains (or minus losses) from debt restructuring and sales
of property per share of Common Stock (based on the weighted average number of
shares outstanding), 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 per annum 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
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.
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<PAGE>
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
out-of-pocket expenses and an allocated portion of salary and benefits 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.
STOCK OPTIONS
The Company intends to adopt a non-qualified stock option plan (the "Option
Plan"), which provides for options to purchase shares of Common Stock (or, at
the election of the Company, limited partnership interests ("Units") in the
Operating Partnership that may be redeemed for cash, or, at the election of the
General Partner, shares of Common Stock on a one-for-one basis). See "Operating
Partnership-- Redemption Rights." The maximum aggregate number of shares of
Common Stock that may be issued pursuant to options granted under the Option
Plan is 5,000,000. 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.
Before Closing, the Company will grant to the Manager 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 share equal to the initial offering price of the Common Stock. If the
options could be exercised immediately, they would represent 10% of the number
of shares of Common Stock outstanding after completion of this offering.
However, the options cannot be exercised immediately. One quarter of the
Manager's options become 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 shares of Common Stock that may be issued pursuant to the
Option Plan, increases the maximum number of shares of Common Stock 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.
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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 Price
Evaluations concerning the price for Subordinated Interests and appraisals for
Distressed Real Properties purchased from the 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.
Moreover, Price Evaluations and appraisals are not always reliable indicators of
the value of assets. In particular, Price Evaluations generally are obtained
from the underwriter or placement agent of the MBS, who may have an incentive to
overstate the value of the MBS. Moreoever, the market for unregistered MBS is
illiquid, and therefore accurate prices are difficult to estimate. See "Risk
Factors--Other Risks--Conflicts of Interest in the Business of the Company."
If the Independent Directors determine in their periodic review of
transactions that a particular transaction does not comply with the Guidelines,
then the Independent Directors will consider what corrective action, if any, can
be taken. If the transaction is one with the Manager or an affiliate of the
Manager, then the Manager will be required to repurchase the asset at the
purchase price to the Company.
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Moreover, if transactions are consummated that deviate from the Guidelines, then
the Independent Directors will have the option, under the terms of the
Management Agreement, to terminate the Manager.
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, however, mortgage lenders offer for sale large pools of mortgage
loans and REO Properties pursuant to a competitive bidding process. In such a
case, the Bank may choose an unaffiliated entity with which to submit a joint
bid for the pool, as long as the Bank takes 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 (subject to the consent of the Independent
Directors) the Initial Investments from Ocwen Financial for an aggregate
purchase price of approximately $36.0 million plus accrued interest, which will
result in a gain to Ocwen Financial of approximately $2.5 million.
The Company may purchase additional assets from the Manager and its
Affiliates in the future and may participate on a joint basis with the Manager
and its affiliates in investments. See "Risk Factors" Other Risks--Conflicts of
Interest in the Business of the Company. 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, net of any
underwriting discounts or commissions. This purchase will result in Ocwen
Financial's ownership of approximately 13% 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).
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.
42
<PAGE>
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
<TABLE>
<CAPTION>
NAME AGE POSITION(S) HELD
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
William C. Erbey..................................... 47 Chairman and Chief Executive Officer
Christine A. Reich................................... 35 President and Chief Financial Officer
Timothy J. Riddiough................................. 39 Director
Robert F. Pugliese................................... 64 Director
</TABLE>
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
<TABLE>
<S> <C> <C>
John R. Erbey............................. 55 Managing Director and Secretary
John R. Barnes............................ 54 Senior Vice President
Joseph A. Dlutowski....................... 32 Senior Vice President
Jordan C. Paul............................ 35 Senior Vice President
</TABLE>
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.
Mr. Riddiough holds the Edward H. and Joyce Linde Career Development Chair
in Real Estate Finance at the Massachusetts Institute of Technology Center for
Real Estate, where he has taught since 1994. From 1991 to 1994, Mr. Riddiough
was an Assistant Professor in the Department of Finance at the University of
Cincinnati. He has a background in the mortgage insurance business, having
worked at Foremost Guaranty Corporation and Verex Assurance Corporation from
1984 to 1988. Mr. Riddiough's specialties include commercial mortgage and CMBS
pricing as well as mortgage disposition/workout strategy. Mr. Riddiough is
widely published, with other areas of interest that include capitalization of
REITs, option pricing and real estate valuation. He serves on the editorial
boards for the two influential academic journals in the real estate/urban
economics area and the advisory board of the Real Estate Research Institute. Mr.
Riddiough has recently consulted with several large pension fund advisors/
consultants on CMBS pricing and investment strategy. Mr. Riddiough received his
Ph.D. from the University of Wisconsin-Madison in 1991.
Mr. Pugliese has been special counsel at the law firm of Eckert Seamans
Cherin & Mellott, LLC since 1993. Previously he served as Executive Vice
President, Legal and Corporate Affairs, for Westinghouse Electric Corporation
where he was responsible for legal and environmental affairs, government and
public relations, employee communications and corporate insurance. In addition,
Mr. Pugliese served as a director of several Westinghouse subsidiaries,
including Westinghouse Credit Corporation. From 1970-1976, he served as General
Tax Counsel for Westinghouse Electric Corporation. Mr. Pugliese has an extensive
background in business and legal matters involving the manufacturing, energy,
services and broadcast sectors, as well as the environment and international
areas. Mr. Pugliese is a director of International Technology Corporation. He
has lectured on business ethics at the University of Pittsburgh,
43
<PAGE>
Loyola University in Baltimore and at the University of Scranton, where he
served as chairman of the Board of Trustees. Mr. Pugliese holds bachelor's and
master's degrees from Georgetown University Law Center, and he received a
bachelor's degree in accounting from the University of Scranton.
For biographical information on Messrs. William C. Erbey, John R. Erbey,
John R. Barnes, Joseph A. Dlutowski and Jordan C. Paul and Ms. Christine A.
Reich, see "Management of Operations--The Manager."
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 such 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 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
44
<PAGE>
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 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."
YIELD CONSIDERATIONS RELATED TO THE COMPANY'S INVESTMENTS
Before purchasing any Real Estate Related Assets, the Company, with the
assistance of the Manager, will consider the expected yield of the investment.
The Company considers the expected yield of an investment to be a benchmark for
evaluating profitability of all types of assets over time. "Yield" or "yield to
maturity" is the interest rate that will make the present value of the future
cash flow from an investment equal to its price. 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 actual 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, as described in more detail below, such that the actual yield on an
investment may vary substantially from its expected yield.
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 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
45
<PAGE>
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 number
of defaults 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 (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.
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<PAGE>
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. The yield of such an
investment 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, (ii) whether and when there are any prepayments of such Mortgage
Loans, (iii) the interest rates on such Mortgage Loans, and (iv) the purchase
price 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 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.
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<PAGE>
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, interest on which 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).
INITIAL INVESTMENTS
GENERAL
The Company has contracted (subject to the consent of the Independent
Directors) with the Bank to purchase the Subordinated Interests and other
classes of MBS described below (the "Initial Investments") for an aggregate cash
price equal to approximately $36 million plus accrued interest ( % of the
expected net proceeds of this Offering). In addition, the Company has contracted
to purchase from a third party a Subordinated Interest expected to be issued in
April 1997 (the "Supplemental Initial Investment") at a purchase price of
approximately $10 million.
The purchase price for the Initial Investments and Supplemental Initial
Investment 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
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<PAGE>
underlying mortgage loans and other factors that are not controlled by the
Company, such as prepayment experience on the underlying mortgage loans. These
factors may result in a below market rate of return or a loss on the purchase
price in certain situations. See "Risk Factors--Credit and Prepayment Risks from
Ownership of Subordinated Interests in Pools of Commercial and Residential
Mortgage Loans."
The Bank will realize a book gain of approximately $2.5 million on the sale
of the Initial Investments to the Company. The sale of the Initial Investments
and Supplemental Initial Investment to the Company will be subject to the
consent of the Independent Directors. The Company will account for the Initial
Investments in accordance with SFAS No. 115.
This Section contains summary descriptions of the terms of the MLMC 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.
MLMC, SERIES 1993-M1, CLASSES B AND C
The Initial Investments include Merrill Lynch Mortgage Capital Inc.,
Multifamily Mortgage Pass-Through Certificates, Series 1993-M1, Class B and
Class C (the "MLMC Subordinated Interests"), which were issued on September 28,
1993. The securities to be purchased represent 100% of the outstanding principal
balance of each class purchased. The MLMC Subordinated Interests were acquired
by the Bank on August 11, 1995, have a book value as of February 28, 1997 of
approximately $21.4 million and will be acquired by the Company for
approximately $23.6 million plus accrued interest.
The following table shows each class of MBS issued as part of MLMC Series
1993-M1, including the MLMC Subordinated Interests, as well as other classes of
MBS that are not being sold to the Company. The table indicates the interest
rate at which interest accrues on each class (the "Pass-Through Rate"), the
principal balance as of September 1993 (the "Initial Principal Balance") and the
principal balance as of March 1, 1997. Only Classes B and C are being sold to
the Company.
MLMC, SERIES 1993-M1
CLASSES B AND C
<TABLE>
<CAPTION>
PRINCIPAL
BALANCE
INITIAL AS OF
PASS-THROUGH PRINCIPAL MARCH 1,
DESIGNATION RATE BALANCE 1997
- ------------------------------------------------------ --------------- ----------- -----------
<S> <C> <C> <C>
Class A(1) (2) $230,300,000 $95,571,534
MLMC SUBORDINATED INTERESTS:
CLASS B (3) 23,288,000 23,288,000
CLASS C (3) 5,176,596 5,176,596
Class R(1) (4) (4) (4)
</TABLE>
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<PAGE>
- ------------------------
(1) The Class A and Class R Securities are not being sold to the Company.
(2) The Class A Securities accrue interest at a per annum rate based on the Net
Mortgage Rate (as defined below) of the MLMC Mortgage Loans (as defined
below).
(3) The Class B and Class C Securities accrue interest at a per annum rate equal
to the weighted average of the Net Mortgage Rates on the related mortgage
loans (the ("MLMC Mortgage Loans"). With respect to each MLMC Mortgage Loan,
the "Net Mortgage Rate" is the interest rate on such MLMC Mortgage Loan
minus 0.192% per annum, which is used to pay servicing and trustee fees. As
of February 1, 1997, the weighted average of the Net Mortgage Rate on the
MLMC Mortgage Loans was equal to 8.3764% per annum.
(4) The Class R Securities have no principal balance and bear no interest.
STRUCTURE AND SUBORDINATION. Each of the MLMC Subordinated Interests is
subordinated in right of payments of principal and interest and protects the
Class A Securities from losses on the MLMC Mortgage Loans. In general, on any
distribution date, all principal will be distributed to the Class A Securities,
and not to the MLMC Subordinated Interests, as long as the Class A Securities
represent at least 67% of the scheduled principal balance of the MLMC Mortgage
Loans, and at any time thereafter when the principal balance of the Class A
Securities rises above 70%, until it is reduced again to 67%. On distribution
dates other than those described in the previous sentence, the Class A
Securities generally will receive only a percentage of available principal. The
percentage generally equals a fraction, the numerator of which is the principal
balance of the Class A Securities, and the denominator of which is the scheduled
principal balance of the MLMC Mortgage Loans. The MLMC Subordinated Interests
receive principal only to the extent it is not required to be distributed to the
Class A Securities. To date, no principal has been distributed to the MLMC
Subordinated Interests.
Moreover, on any distribution date, no interest is distributed to the MLMC
Subordinated Interests until principal and interest allocable to Class A for
that distribution date has been distributed. Thus, if there are any losses on
the MLMC Mortgage Loans, interest otherwise distributable on the MLMC
Subordinated Interests will be reduced by the amount of such losses, and that
cash will be used to make principal and interest payments to Class A. From
September 1995 through March 1, 1997, $7,115,053 has been distributed as
interest to Class B and $1,581,576 has been distributed as interest to Class C.
In addition, as losses are incurred on the MLMC Mortgage Loans, the principal
balance of Class C, and then Class B, 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
MLMC Mortgage Loans. However, the servicer has reported that two MLMC Mortgage
Loans, representing approximately 3.73% by principal balance of the MLMC
Mortgage Loans, currently are in foreclosure. Any losses that result from these
foreclosures (or any others) will be allocated to the MLMC Subordinated
Interests in reduction of their aggregate principal balance, and thus will
adversely affect the yield on the MLMC Subordinated Interests.
MLMC MORTGAGE LOANS. The MLMC Mortgage Loans, which underlie the MLMC
Subordinated Interests, as well as Classes A and R, which are not being sold to
the Company, had an aggregate principal balance as of September 1, 1993 of
$258,764,596 and an aggregate principal balance as of February 1, 1997 of
$124,036,129. At origination, most of the MLMC Mortgage Loans had ten year terms
and bore interest at a fixed interest rate that was subject to a one-time
adjustment at year five. As of February 1, 1997, the interest rates on most of
these loans have been adjusted, so that such loans currently bear interest at a
rate that is fixed until maturity. However, one MLMC Mortgage Loan is still
subject to a one-time adjustment, and three MLMC Mortgage Loans are adjustable
rate loans subject to periodic interest rate adjustments.
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Forty-three of the MLMC Mortgage Loans, representing 98.07% of the MLMC
Mortgage Loans as of February 1, 1997 by principal balance, are balloon loans,
which provide for little or no amortization prior to stated maturity. Only nine
MLMC Mortgage Loans fully amortize over their respective terms.
The following table sets forth the range of interest rates on the MLMC Loans
(the "Mortgage Rates") as of February 1, 1997.
MORTGAGE RATES AS OF FEBRUARY 1, 1997
<TABLE>
<CAPTION>
AGGREGATE
FEBRUARY 1, PERCENT OF
RANGE OF NUMBER OF 1997 CURRENT
MORTGAGE RATES (%) MORTGAGE LOANS BALANCE POOL BALANCE
- ----------------------------------------------------------------- ------------------- --------------- -------------
<S> <C> <C> <C>
7.00 ..................................................... 1 6,052,382 4.88%
7.01 to 8.00................................................... 9 27,295,803 22.01%
8.01 to 9.00................................................... 25 48,458,340 39.07%
9.01 to 10.00................................................... 12 38,551,661 31.08%
10.01 to 11.00................................................... 5 3,677,942 2.97%
--
--------------- ------
Total...................................................... 52 124,036,129 100.00%
--
--
--------------- ------
--------------- ------
</TABLE>
Weighted Average Mortgage Rate: 8.5684%
The following table sets forth the range of years in which the MLMC Mortgage
Loans are scheduled to mature:
YEARS OF SCHEDULED MATURITY
<TABLE>
<CAPTION>
AGGREGATE
FEBRUARY 1, PERCENT OF
NUMBER OF 1997 CURRENT
RANGE OF YEARS MORTGAGE LOANS BALANCE POOL BALANCE
- ----------------------------------------------------------------- ------------------- --------------- -------------
<S> <C> <C> <C>
1996*............................................................ 2 7,673,850 6.19%
1997............................................................. 19 46,406,637 37.41%
1998............................................................. 17 55,646,466 44.86%
1999............................................................. 7 9,545,239 7.70%
2000 to 2004..................................................... 3 2,647,963 2.13%
2005 to 2009..................................................... 2 448,238 0.36%
2018............................................................. 1 690,696 0.56%
2020............................................................. 1 977,039 0.79%
--
--------------- ------
Total...................................................... 52 124,036,129 100.00%
--
--
--------------- ------
--------------- ------
</TABLE>
- ------------------------
* With respect to two MLMC Mortgage Loans, with an aggregate principal balance
as of February 1, 1997 of $7,673,850, representing approximately 6.19% by
principal balance of the MLMC Mortgage Loans, the scheduled maturity date
(on which date a balloon payment was due) has passed without payments in
full. The borrowers have continued to make monthly payments as though the
servicer has extended the maturity date, although no formal extension
agreement has been executed.
Weighted Average months to scheduled maturity: 18 months.
The MLMC Mortgage Loans are secured by first liens on multifamily
residential properties (the "MLMC Mortgaged Properties"). When the MLMC
Subordinated Interests were originally issued, they
51
<PAGE>
were secured by 103 MLMC Mortgage Loans. However, one MLMC Mortgage Loan was
repurchased and 50 MLMC Mortgage Loans have prepaid in full, leaving only 52
MLMC Mortgage Loans in the pool. Forty-four of these remaining MLMC Mortgage
Loans, representing 75.26% of the MLMC Mortgage Loans as of February 1, 1997 by
principal balance, are secured by Mortgaged Properties located in New York
State. Two Mortgage Loans, representing 13.05% by principal balance, are located
in California, and the remaining Mortgaged Properties are located in Florida,
Georgia, Kansas, Missouri and New Jersey. Twenty-one of the MLMC Mortgage
Properties, representing security for 32.2% of the MLMC Mortgaged Loans by
principal balance, are cooperatively owned.
The following table sets forth certain information, obtained from the
servicer of the MLMC Mortgage Loans, about the MLMC Properties, as of February
1, 1997, except as otherwise indicated.
<TABLE>
<CAPTION>
MORTGAGE
LOAN
LOAN COOPERATIVELY PRINCIPAL 1995 1995
NUMBER OWNED LOCATION BALANCE NOI(3) DSCR(4)
-------- ----------------- ----------------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C>
7773.......................................... No Queens, NY 469,516 94,992(5) 1.95(5)
7906.......................................... No Queens, NY 448,527 N/A N/A
18663......................................... Yes Brooklyn, NY 407,269 N/A N/A
22624......................................... Yes Manhattan, NY 2,042,366 N/A N/A
23010......................................... Yes Manhattan, NY 1,386,357 146,346 1.01
24505......................................... No Manhattan, NY 25,505 268,288 4.88
24539......................................... No Manhattan, NY 4,516,920 932,642 2.03
25486......................................... No Queens, NY 14,437 N/A N/A
418988........................................ No Manhattan, NY 18,423 N/A N/A
469734........................................ No Miami Beach, FL 144,347 196,607 2.03
478073........................................ No Manhattan, NY 963,133 N/A N/A
479535........................................ Yes Queens, NY 915,717 130,830 1.45
482018........................................ No Brooklyn, NY 1,016,351 N/A N/A
482893........................................ No Manhattan, NY 551,799 65,541 1.00
485243........................................ No Brooklyn, NY 213,068 N/A N/A
487538........................................ Yes Manhattan, NY 2,745,005 N/A N/A
489815........................................ No Salina, KS 977,039 148,640 1.68
493239........................................ No Manhattan, NY 744,567 146,151 2.30
494971........................................ Yes Weehawken, NJ 1,621,469 178,424 0.96
495986........................................ No Ferguson, MO 6,052,382 884,298 1.77
496364........................................ No Bronx, NY 902,895 144,453 1.49
497156........................................ No Miami, FL 3,085,956 N/A N/A
497750(1)..................................... Yes Brooklyn, NY 2,721,260 N/A N/A
497875........................................ No Manorville, NY 11,312,597 1,550,751 1.24
498238........................................ No Wateryliet, NY 6,736,857 1,180,278 1.49
499327........................................ Yes Yonkers, NY 1,623,270 N/A N/A
499426........................................ No Brighton, NY 4,094,764 724,625 1.68
499822........................................ Yes Queens, NY 1,319,424 N/A N/A
Port Jefferson,
501577........................................ No NY 2,915,943 291,697 0.92
502732........................................ Yes Queens, NY 2,422,152 N/A N/A
505990........................................ No Manorville, NY 10,024,177 1,550,751 1.44
506006........................................ Yes Bronx, NY 1,098,382 N/A N/A
508879........................................ No Manhattan, NY 690,696 N/A N/A
508960........................................ Yes Queens, NY 1,216,738 N/A N/A
510180........................................ Yes Queens, NY 945,111 N/A N/A
510602........................................ No Queens, NY 4,155,877 N/A N/A
510636........................................ Yes Manhattan, NY 1,232,190 N/A N/A
511782........................................ No San Diego, CA 16,105,506 2,699,389(6) 1.75(6)
512061........................................ Yes Queens, NY 668,040 89,426 1.40
512681........................................ No Manhattan, NY 1,382,912 250,548(5) 1.92(5)
513937........................................ Yes Bronx, NY 10,510,726 1,586,380 1.54
514265........................................ Yes Brooklyn, NY 3,487,650 444,840(5) 1.30(5)
516161........................................ No Monroe, NY 782,840 N/A N/A
524397........................................ No Bronx, NY 875,783 140,495 1.37
524447(2)..................................... Yes Brooklyn, NY 1,802,122 N/A N/A
531608........................................ No Norcross, GA 2,615,102 639,465 1.69
12767109...................................... No Manhattan, NY 1,284,347 N/A N/A
Port Jefferson,
30000343...................................... No NY 235,170 41,542 1.49
5030024177.................................... No Hempstead, NY 745,325 N/A N/A
5030082571.................................... Yes Yonkers, NY 679,733 60,881(5) 0.86(5)
5030082969.................................... Yes Bronx, NY 1,007,634 126,365 1.27
5430081041.................................... Yes Castro Valley, CA 80,754 303,745 1.75
</TABLE>
- ------------------------
* N/A means not available.
52
<PAGE>
(1) Foreclosure proceedings were instituted on February 11, 1995. Principal
balance shown reflects a reduction of approximately $92,559 in principal
advanced by the servicer. Total advances made by the servicer on this
Mortgage Loan equal approximately $904,863.
(2) Foreclosure proceedings were instituted on December 12, 1996. Principal
balance shown reflects a reduction of approximately $6,184 in principal
advanced by the servicer. Total advances made by the servicer on this
Mortgage Loan equal approximately $75,157.
(3) "Net Operating Income" or "NOI" is the revenue derived from the use and
operation of a Mortgaged Property (consisting primarily of, in the case of a
Mortgaged Property that is a multifamily rental property, rental income,
deposit forfeitures and fees derived from the use of parking areas and
laundry facilities, if any) less operating expenses (such as utilities,
general administrative expenses, management fees, advertising, repairs and
maintenance) and less fixed expenses (such as insurance and real estate
taxes). Net Operating Income does not include interest expense,
depreciation, amortization, partnership fees and other non-cash items, and
generally does not reflect capital expenditures. The figures shown are those
provided by the borrower to the servicer.
(4) "Debt Service Coverage Ratio (DSCR)" shall mean the NOI for the related
Mortgaged Property divided by the Annual Debt Service.
"Annual Debt Service" shall mean the annualized principal and interest
payable with respect to such Mortgage Loan as of December 31, 1995.
(5) Annual figure for year ended December 1994.
(6) Annual figure for March 1995 to March 1996.
Forty-one of the MLMC Mortgage Loans (representing 95.36% of the MLMC
Mortgage Loans as of February 1, 1997 by principal balance) have substantially
the same prepayment provisions. Generally, their ten year terms were divided
into two five year periods, separated by an interest rate reset date and a
prepayment window. Most have passed the reset date and prepayment window and
have fewer than five years until stated maturity. During the first three years
of this five-year period, the loans cannot be prepaid. In the remaining two
years, the loans may be prepaid, subject to a prepayment premium of 4%, which
decreases by 1% each six months. Of these forty-one loans, two have scheduled
maturity dates that have passed. The borrowers have the right (and indeed, the
obligation) to pay these loans in full without paying any prepayment penalty,
but to date have not done so. Instead, the borrowers have continued to make
regular monthly payments. One additional of the foregoing MLMC Mortgage Loans
are currently prepayable without penalty. Eight of the additional MLMC Mortgage
Loans, representing 4.44% of the MLMC Mortgage Loans as of February 1, 1997 by
principal balance, may be prepaid at any time without payment of any prepayment
penalty, and three loans, representing .20% of the MLMC Mortgage Loans as of
February 1, 1997 by principal balance, require that prepayment penalties
accompany any prepayments. Any prepayment premiums will be distributed as excess
interest to the Class A Securities, and not to the MLMC Subordinated Interests.
The MLMC Mortgage Loans are being serviced by NationsBanc Mortgage Corp.,
and the trustee for the series is State Street Bank & Trust Company.
RESTRICTIONS ON TRANSFER OF MLMC SUBORDINATED INTERESTS. The MLMC
Subordinated Interests have not been registered under the Securities Act or any
state securities laws, and, accordingly, transfer of the MLMC Subordinated
Interests is restricted. Moreover, the MLMC 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 MLMC Subordinated Interests.
NO RATINGS. The MLMC Subordinated Interests are not rated by any rating
agency.
53
<PAGE>
DLJMAC, SERIES 1993-MF17, CLASSES B-2, B-3, C-1, S-1 AND 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
64.9% of such class. The DLJ Investments were acquired by the Bank in October
and November of 1996, have a book value as of February 28, 1997 of approximately
$12.1 million, and will be acquired by the Company for approximately $12.3
million plus accrued interest.
The following table shows each class of MBS issued as part of DLJ Series
1993-MF17, including the DLJ Subordinated Interests and DLJ IOs, as well as
other classes of MBS that are not being sold to the Company. The table indicates
the interest rate at which interest accrues on each class (the "Pass-Through
Rate"), the principal balance as of November 1993 (the "Initial Principal
Balance") and the principal balance as of March 1, 1997. Only Classes S-1, S-2,
B-2, B-3 and C-1 are being sold to the Company.
DLJMAC, SERIES 1993-MF17
CLASSES B-2, B-3, C-1, S-1 AND S-2
<TABLE>
<CAPTION>
PRINCIPAL
BALANCE
INITIAL AS OF
PASS-THROUGH PRINCIPAL MARCH 1,
DESIGNATION RATE BALANCE 1997
- ------------------------------------------------ --------------- ---------- ------------
<S> <C> <C> <C>
Class AF-1 Securities(1).................... (2) $64,476,000 $55,292,545
Class AN-1 Securities(1).................... (3) 29,924,000 25,661,860
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
</TABLE>
- ------------------------
(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.
(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 AF-1 and the Class AN-1 Securities. As of
March 1, 1997, the notional balance of the Class S-1 Securities is
$80,954,405, and $1,003,953 has been distributed as interest on the Class
S-1 Securities since issuance.
54
<PAGE>
(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 March 1, 1997, the notional balance of
the Class S-2 Securities is $19,700,000, and $416,162 has been distributed
as interest on the Class S-2 Securities since issuance.
(6) The Company is acquiring a Class B-2 Security with an original principal
balance and a principal balance as of March 1, 1997 of $8,500,000,
representing approximately 64.9% 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, including the DLJ IOs. 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. From November 1993 through March 1, 1997 the following amounts
have been distributed as interest on the DLJ Subordinated Interests: $2,210,000
to Class B-2, $1,196,000 to Class B-3 and $463,580 to Class C-1. 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 March 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 DLJ Mortgage Loans, which underlie the DLJ
1993-MF17 Subordinated Interests, the DLJ IOs and the other classes of MBS in
DLJ Series 1993-MF17, 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 February 1, 1997, of $125,737,405. 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 February 1, 1997,
except as otherwise indicated.
<TABLE>
<CAPTION>
MORTGAGE
LOAN
PROPERTY PRINCIPAL 1995 1995
NAME LOCATION BALANCE NOI(1)(2) DSCR(1)(3)
- ------------------------------------------------ -------------------- --------- ------------ -------------------
<S> <C> <C> <C> <C>
Harbor Ridge.................................... Maineville, OH 2,775,306 26,260 0.39
Oakwood......................................... Toledo, OH 3,779,729 142,600 1.54
Stoneridge...................................... Dayton, OH 4,063,568 144,674 1.47
University Woods................................ Fairborn, OH 3,201,541 205,521 0.65
The Glen........................................ Temple, TX 3,249,325 523,208 1.64
Wood River...................................... Corpus Christi, TX 3,488,246 547,401 1.60
Alhambra Village................................ DePere, WI 1,696,339 97,168 1.17
Hazen Court..................................... Fon du Lac, WI 2,006,936 156,366 1.59
Virginia Village................................ Appleton, WI 2,307,976 268,080 1.18
Worthington Meadows............................. Columbus, OH 12,328,321 589,209 1.95
Alexander....................................... Panama City, FL 634,574 103,030 1.65
Berkshire Manor................................. Tallahassee, FL 2,774,350 492,243 1.81
Chateau de Ville................................ Tallahassee, FL 1,815,799 312,576 1.75
Colony Club..................................... Tallahassee, FL 3,564,701 599,750 1.71
Four Seasons.................................... Tallahassee, FL 984,354 171,539 1.78
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE
LOAN
PROPERTY PRINCIPAL 1995 1995
NAME LOCATION BALANCE NOI(1)(2) DSCR(1)(3)
- ------------------------------------------------ -------------------- --------- ------------ -------------------
<S> <C> <C> <C> <C>
Greehouse Patio................................. Houston, TX 5,304,045 443.756 0.85
Heritage........................................ Panama City, FL 1,438,304 268,275 1.90
High Point...................................... Tallahassee, FL 1,870,273 346,627 1.89
Monticello on Greenbriar........................ Houston, TX 2,373,918 177,515 1.31
Saddlebrook..................................... San Antonio, TX 4,587,282 742,755 1.65
Southfirst Manor................................ Champaign, IL 2,245,857 251,555 1.14
Mapleview Seven................................. Fairborn, OH 2,764,793 382,985 1.41
Brady Station................................... Odessa, TX 4,032,985 162,152 0.41
College Square One.............................. Cedar Falls, IN 1,975,398 234,979 1.21
Indian Trails................................... Amarillo, TX 1,726,921 277,923 1.64
Pebblebend...................................... Odessa, TX 2,428,393 374,433 1.57
Persimmon....................................... Edmond, OK 1,146,821 121,359 1.08
The Park at Caldera............................. Midland, TX 2,962,620 N/A N/A
River Ranch..................................... Forth Worth, TX 5,689,185 623,430 1.12
Stonecreek...................................... Tulsa, OK 2,484,778 436,798 1.79
Westland Village................................ West Burlington, IA 716,763 102,502 1.46
Willow Glen..................................... Amarillo, TX 6,211,945 996,742 1.63
Brookhollow..................................... Tulsa, OK 1,314,065 2,003 0.02
Candlewood...................................... Phenix City, AL 2,740,901 294,791 1.10
Country Square.................................. Carrollton, TX 9,539,636 1,355,795 1.45
Lake O' the Woods............................... Arlington, TX 3,583,814 470,013 1.34
Las Brisas...................................... Abilene, TX 3,105,973 483,560 1.59
Maryland........................................ Harlingen, TX 1,142,998 137,804 1.23
Monterey........................................ Tallahassee, FL 2,620,485 378,036 1.47
Wildwood........................................ Temple, TX 3,058,188 668,649 2.23
</TABLE>
- ------------------------
(1) Numbers shown for 1995 are for the 12 months ended December 31, 1995, except
Harbor Ridge, Oakwood, Stoneridge and Worthington Meadows (three months
ending March 1996), Alhambra Village and Hazen Court (six months ending June
1996) and Monticello on Greenbriar (seven months ending July 1996).
(2) "Net Operating Income" or "NOI" is the revenue derived from the use and
operation of a Mortgaged Property (consisting primarily of, in the case of a
Mortgaged Property that is a multifamily rental property, rental income,
deposit forfeitures and fees derived from the use of parking areas and
laundry facilities, if any) less operating expenses (such as utilities,
general administrative expenses, management fees, advertising, repairs and
maintenance) and less fixed expenses (such as insurance and real estate
taxes). Net Operating Income does not include interest expense,
depreciation, amortization, partnership fees and other non-cash items, and
generally does not reflect capital expenditures. The figures shown are those
provided by the borrower to the servicer.
(3) "Debt Service Coverage Ratio (DSCR)" shall mean the NOI for the related
Mortgaged Property divided by the Annual Debt Service.
"Annual Debt Service" shall mean the annualized principal and interest
payable with respect to such Mortgage Loan as of December 31, 1995.
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.
56
<PAGE>
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 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. The ratings assigned to
the DLJ IOs should be evaluated independently of similar ratings assigned to
securities that have a principal balance.
SUPPLEMENTAL INITIAL INVESTMENT
On or soon after the Closing, the Company anticipates purchasing not only
the Initial Investments, but also a Subordinated Interest to be issued as part
of a securitization transaction scheduled to close in late April 1997 (the
"Supplemental Initial Investment"). The Company intends to acquire from an
independent third party 100% of the Supplemental Initial Investment, which is
expected to have a principal balance of approximately $26.5 million and will be
purchased for approximately $10 million.
The Supplemental Initial Investment is expected to be subordinated in right
of payments of principal and interest and will protect the more senior classes
of MBS from losses on the related mortgage loans (the "Supplemental Mortgage
Loans"). Unlike the MLMC Mortgage Loans and the DLJ Mortgage Loans, which are
secured by multifamily residential properties, the Supplemental Mortgage Loans
will be secured by one-to-four family residential properties and they may be
prepaid at any time without a prepayment premium or penalty. The Supplemental
Mortgage Loans are being serviced, and will continue to be serviced after the
transaction is closed, by the Bank, except that the Company will have the
unilateral right to direct foreclosure on the properties underlying the
Supplemental Mortgage Loans.
The Mortgage Loans were acquired from the United States Department of
Housing and Urban Development ("HUD") in 1996 by an affiliate of the issuer of
the Supplemental Initial Investment. Each Supplemental Mortgage Loan is a
fixed-rate or adjustable-rate loan secured by a first lien on residential real
property and generally was originated as a 30-year, fully amortizing loan
primarily under HUD's Section 203(b) or 703 mortgage insurance programs. Each
Supplemental Mortgage Loan defaulted, and after default, such Supplemental
Mortgage Loan was determined by HUD to be eligible for forbearance relief and
was assigned to HUD. Forbearance relief generally resulted in a reduction and/or
suspension of the borrower's obligation to make scheduled monthly payments of
principal and interest required under the loan's original terms (the "Original
Scheduled Payment") for a period (the "Forbearance Period") which typically
lasted for 36 months. In each case, at the expiration of the Forbearance Period,
the borrower's "Legal Balance" was equal to the sum of the Unpaid Principal
Balance plus any Arrearage. The "Unpaid Principal Balance" equaled the unpaid
principal balance of the Supplemental Mortgage Loan as
57
<PAGE>
of the commencement of the Forbearance Period reduced by amounts, if any, paid
in respect of principal during the Forbearance Period. The "Arrearage" equaled
the sum of all accrued but unpaid interest on the Supplemental Mortgage Loan at
the end of the Forbearance Period and, in certain cases, accrued but unpaid
interest prior to the transfer of servicing to the current servicer. Following
the expiration of the Forbearance Period, each borrower was and is required to
make a monthly payment (the "Modified Scheduled Payment") generally in an amount
at least equal to the Original Scheduled Payment plus, to the extent of the
borrower's ability to pay, an additional amount to be applied to pay down the
Arrearage. As of April 1, 1997, no Mortgage Loan will be insured or guaranteed
by any governmental entity or private insurer. All HUD insurance with respect to
the Supplemental Mortgage Loans has terminated. As of April 1, 1997, the
borrowers under approximately 95% (by principal balance) of the Supplemental
Mortgage Loans have made at least 97% of the aggregate amount of Modified
Scheduled Payments due for the four calendar months preceding April 1, 1997
(regardless of either the timing of receipt of such payments or the payment
history of such loans prior to December 1996). It is expected that there will be
over 6,000 Supplemental Mortgage Loans with an aggregate Unpaid Principal
Balance as of March 26, 1997, of over $257 million and an aggregate Legal
Balance as of March 26, 1997 of $312.5 million.
Investors should note that the Company cannot control when or whether the
Supplemental Initial Investment will be issued, the precise terms of the
Supplemental Initial Investment if issued, nor the identity of the Supplemental
Mortgage Loans. If the Supplemental Initial Investment is issued with terms
materially different from those noted above, the Company may choose nevertheless
to acquire it. Similarly, although the Supplemental Mortgage Loans have been
preliminarily identified, it is possible that some of the identified loans will
not be included in the final pool of Supplemental Mortgage Loans. Thus, the
information contained herein concerning the Supplemental Initial Investment and
the Supplemental Mortgage Loans is subject to change that is not within the
control of the Company.
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 MLMC 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.
58
<PAGE>
MODELING ASSUMPTIONS
YIELD TABLE FOR THE MLMC SUBORDINATED INTERESTS
The following table, regarding the MLMC Subordinated Interests, indicates
the pre-tax yield to maturity and the weighted average lives that would be
produced by the various assumed annual default rates, assuming the indicated
purchase price 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) For loans that are to be liquidated, no other payment is received
prior to liquidation;
(iii) Upon liquidation, 50% of the scheduled principal balance of the
liquidated loan as of February 1, 1997 is recovered. Such liquidations are
assumed to occur concurrently with defaults on the Mortgage Loans;
(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 on page
49;
(vi) The aggregate principal amount of the MLMC Mortgage Loans as of
February 1, 1997 is $124,036,129, and the weighted average interest rate is
8.5684% per annum;
(vii) The weighted average number of months to scheduled maturity is 18
months, and with respect to each balloon loan, the scheduled maturity date
is not extended; provided that with respect to loan numbers 494971 and
495986, the scheduled maturity date has been extended for 12 months;
(viii) For each MLMC Mortgage Loan not in default, scheduled monthly
payments (including balloons) are timely received on the first day of each
month, and no borrower is the subject of bankruptcy proceedings;
(ix) All servicing fees and other administration fees are deducted from
the interest received on the Mortgage Loans;
(x) Beginning in March 1997, the Company receives cash distributions on
the MLMC Subordinated Interests by the Company on the 25th day of each
month;
(xi) There will be no optional termination of the trust related to the
MLMC Subordinated Interests, and no Mortgage Loan is purchased pursuant to
any obligation under the related trust agreement;
(xii) Prepayment premiums are assumed not to be distributed to the
Company as holder of the MLMC Subordinated Interests; and
(xiii) All of the MLMC Mortgage Loans require monthly payments, accrual of
interest on a 360-day year consisting of twelve 30-day months and payment of
interest in arrears.
MLMC 1993-M1 SUBORDINATED INTERESTS
(PURCHASE PRICE OF 83.0191% OF PRINCIPAL AMOUNT)
<TABLE>
<CAPTION>
ANNUAL DEFAULT RATE
---------------------------------------------------------------------------
0% 2% 4% 8% 10% 12% 16%
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
TOTAL ASSUMED DEFAULTS............... 0.0% 2.7% 5.2% 10.1% 12.4% 14.6% 19.0%
PRE-TAX YIELD TO MATURITY............ 21.55% 17.74% 13.34% 5.32% 1.61% -2.59% -10.27%
WEIGHTED AVERAGE LIFE WITHOUT
TERMINATION (YEARS)................. 1.79 1.67 1.79 1.54 1.68 1.62 1.68
</TABLE>
59
<PAGE>
YIELD TABLE FOR THE DLJ SUBORDINATED INTERESTS
The Pre-Tax Yields and Total Cash Flows for the DLJ Subordinated Interests,
set forth in the following table were calculated assuming the indicated purchase
price 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
February 1, 1997. Such liquidations are assumed to occur concurrently with
defaults on the Mortgage Loans for loans that are to be liquidated, no other
payment is received prior to liquidation;
(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;
(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 on page
54;
(vi) the aggregate principal amount of the DLJ Mortgage Loans as of
February 1, 1997 is $125,737,405, the principal is being amortized over a
term of 262 months, and the interest rate is 8.15%;
(vii) for each DLJ Mortgage Loan not in default, scheduled monthly
payments are timely received on the first day of each month, including
balloon amounts at stated maturity, and no borrower is the subject of
bankruptcy proceedings;
(viii) all servicing fees and other administration fees are deducted from
the interest received on the Mortgage Loans;
(ix) beginning in March 1997, the Company receives cash distributions on
the DLJ Initial Investments on the 18th day of each month;
(x) 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; and
(xi) prepayment premiums and yield maintenance premiums are assumed not
to be distributed to the Company as holder of the Initial Investments.
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<PAGE>
DLJ 1993-MF17
DLJ SUBORDINATED INTERESTS*
(PURCHASE PRICE OF 72.455% OF PRINCIPAL AMOUNT)
<TABLE>
<CAPTION>
DATE OF ASSUMED LIQUIDATION/REALIZED LOSS OCCURS
-----------------------------------------------------------------------
PRINCIPAL BALANCE OF DECEMBER
MORTGAGE LOANS LIQUIDATED DECEMBER 1999 DECEMBER 2001 2003
AS A PERCENTAGE OF THE LOSS ---------------------------- ---------------------------- -----------
SCHEDULED PRINCIPAL BALANCE SEVERITY PRE-TAX TOTAL PRE-TAX TOTAL PRE-TAX
AS OF FEBRUARY 1, 1997 PERCENTAGE YIELD CASH FLOW** YIELD CASH FLOW** YIELD
- --------------------------------- --------------- ----------- --------------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
No Liquidations.................. 0% 14.7% 155% 14.7% 155% 14.7%
5.0%........................... 20% 13.6% 146% 13.8% 147% 13.9%
50% 11.9% 133% 12.4% 136% 12.7%
10.0%.......................... 20% 12.5% 138% 12.9% 140% 13.1%
50% 8.5% 112% 9.6% 117% 10.5%
20.0%.......................... 20% 9.9% 121% 10.8% 125% 11.4%
50% -1.1% 69% 1.9% 80% 4.6%
<CAPTION>
PRINCIPAL BALANCE OF
MORTGAGE LOANS LIQUIDATED
AS A PERCENTAGE OF THE
SCHEDULED PRINCIPAL BALANCE TOTAL
AS OF FEBRUARY 1, 1997 CASH FLOW**
- --------------------------------- ---------------
<S> <C>
No Liquidations.................. 155%
5.0%........................... 148%
139%
10.0%.......................... 142%
122%
20.0%.......................... 129%
90%
</TABLE>
- ------------------------
* Note: This table relates to the DLJ Subordinated Interests only, and not the
DLJ IOs.
** Total Cash Flow as a Percentage of Principal Amount.
The pre-tax yields set forth in the preceding tables were calculated by
determining the monthly discount rates that, when applied to the projected
future stream of cash flows to be paid on the DLJ Subordinated Interests, would
cause the present value of such projected future 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 preparing 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 DLJ IOS
The yield to investors on the DLJ 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 DLJ IOs.
The following tables reflect the pre-tax yield to maturity of each of the
IOs at the purchase price indicated and the assumptions listed in clauses (iv),
(viii), (ix), (x) and (xi) on page 60 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;
(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 DLJ IOs have initial notional amounts as set forth in on page
54; and
(v) the DLJ IOs are paid in full on the distribution dates indicated.
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<PAGE>
DLJ 1993-MF17
SENSITIVITY OF DLJ IOS TO PRINCIPAL PREPAYMENTS
PRE-TAX YIELDS TO ASSUMED MATURITY
<TABLE>
<CAPTION>
ASSUMED PAYMENT IN FULL DATE
PURCHASE PRICE ----------------------------------------------------------------------------
(% OF NOTIONAL BALANCE) DECEMBER 2000 DECEMBER 2001 DECEMBER 2002 DECEMBER 2003
- ----------------------------- ----------------- ------------------- ----------------- -----------------
<S> <C> <C> <C> <C>
1.5497%...................... -3.4% 6.8% 12.7% 16.3%
</TABLE>
The pre-tax yields set forth in the preceding tables were calculated by
determining the monthly discount rates that, when applied to the projected
future stream of cash flows to be paid on the DLJ IOs, would cause the
discounted present value of such projected future 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 DLJ 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 DLJ IOs. Moreover, other IOs purchased by the
Company in the future may have substantially different characteristics and
yields to maturity than the DLJ IOs.
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:
<TABLE>
<CAPTION>
AS
ACTUAL ADJUSTED(1)
--------- -----------
<S> <C> <C>
Common Stock, par value $.01............................................................... $ 1 $ 143,750
Authorized--200,000,000 shares
Outstanding--100 shares, 14,375,000 shares, as adjusted
Additional Paid-in Capital............................................................... 1,599
--------- -----------
Total................................................................................ $ 1,600 $
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(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
62
<PAGE>
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 paper
borrowings, mortgage loans on the Company's real estate and future equity
offerings. From the net proceeds of this Offering, approximately $36 million
plus accrued interest will be used to purchase the Initial Investments,
consisting of the MLMC Subordinated Interests, the DLJ Subordinated Interests
and the DLJ IOs, and an additional $10 million is expected to be used to
purchase the Supplemental Initial Investment. The Initial Investments and
Supplemental Initial Investment comprise a relatively small portion of the
assets to be purchased with the net proceeds of this offering and most of the
net proceeds of the Offering initially will be invested in readily marketable
securities. Accordingly, the Company would not anticipate a need to sell the
Initial Investments or Supplemental Initial Investment for liquidity purposes.
Moreover, the Company has no capital commitments with respect to the Initial
Investments and Supplemental Initial Investment. The Initial Investments and
Supplemental Initial Investment may produce cash flows for the Company, although
losses on the Mortgage Loans underlying these investments would reduce that cash
flow, particularly with respect to the Subordinated Interests, and reductions in
the prevailing interest rate would be expected to increase prepayments on the
related mortgage loans and thereby reduce the cash flow on the DLJ IOs.
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, and 1,437,500 shares of
Common Stock will be reserved for issuance upon exercise of options, and no
Preferred Stock will be issued and outstanding.
COMMON STOCK
All outstanding 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 of
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
63
<PAGE>
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 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)
9.1% (or, with respect to Ocwen Financial, 13%) 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-
64
<PAGE>
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 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 (A)(i) such restrictions are no longer required in
order to qualify as a REIT, and (ii) the Board of Directors determines that it
is no longer in the best interest of the Company to retain such restrictions; or
(B)(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.
65
<PAGE>
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 is The Bank of New
York.
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 one 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, as a practical matter precludes OAIC's stockholders from removing
incumbent directors and filling the vacancies created by such removal with their
own nominees.
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 materially adversely 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 and
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.
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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%.
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
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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.
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 exercise of options) 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 one year has 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 two 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.
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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.
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, all 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 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
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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 net 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 cash or, at the election of the General Partner, shares of Common
Stock on a one-for-one basis. 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 shares of Common Stock (or,
at the option of the Company, Units), 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.
If the Company decides to securitize some or all of its Mortgage Loans
through the issuance of non-REMIC collaterized mortgage obligations with
multiple maturities ("CMOs"), it is anticipated that the Mortgage Loans will be
distributed, through the General Partner and the Initial Limited Partner, to
OAIC in order to prevent the Mortgage Loans from being treated as a taxable
mortgage pool for federal income tax purposes upon the issuance of the CMOs.
Accordingly, it is anticipated that the General Partner and the Initial Limited
Partner will have the right to redeem a portion of their partnership interests
in the Operating Partnership in exchange for Mortgage Loans to the extent
necessary to facilitate such a
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securitization transaction. The portion of the General Partner's or Initial
Limited Partner's partnership interest that is redeemed will be based on the
fair market value of the Mortgage Loans distributed, as determined by the
General Partner, but subject to review by the Independent Directors to ensure
compliance with the Guidelines.
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 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 terminated as provided in the Operating Partnership Agreement or by
operation of law.
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.
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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 has
rendered an opinion that the descriptions of the law and the legal conclusions
contained herein are correct in all material respects, and the discussions
hereunder fairly summarize the federal income tax considerations that are likely
to be material to OAIC and 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 SHOULD 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. Commencing with such taxable year, OAIC will be organized
and has represented that it will operate in such a manner as to qualify for
taxation as a REIT under the Code, but no assurance can be given that OAIC
actually 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, commencing with OAIC's short taxable year beginning the day
prior to the closing of the Offering and ending December 31, 1997, OAIC will
qualify to be taxed as a REIT pursuant to sections 856 through 860 of the Code,
and OAIC's organization and proposed method of operation will enable it to
continue to meet the requirements for qualification and taxation as a REIT under
the Code. 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, including
representations
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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 merger or other 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 it acquired such
asset, 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), OAIC 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 tax on "built-in-gain" assume that OAIC will elect pursuant to IRS Notice
88-19 to be subject to the rules described in the preceding sentence 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 equal to the percentage of the 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.
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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 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 (the "Check-the-Box Regulations"), an unincorporated
entity that has a single owner is disregarded as an entity separate from its
owner for federal income tax purposes. Because OAIC is deemed to own 100% of the
partnership interests in the Operating Partnership for federal income tax
purposes, the Operating Partnership will be disregarded as an entity separate
from OAIC under the Check-the-Box Regulations.
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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.
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. In
addition, an amount received or accrued generally will not be excluded from the
term "interest" solely by reason of being based on the income or profits of a
debtor if the debtor derives substantially all of its gross income from the
related property through the leasing of substantially all of its interests in
the property, to the extent the amounts received by the debtor would be
characterized as rents from real property if received by a REIT. 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.
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The interest, original issue discount, and market discount income that OAIC
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. Most of the income that OAIC 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, if OAIC forecloses on a loan that it has held for less than four
years, any gain that OAIC recognizes upon the act of foreclosure as a result of
the retirement of the loan will not be qualifying income for purposes of the 30%
gross income test.
OAIC may originate or acquire Construction or Mezzanine Loans that have
shared appreciation provisions. 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 originate or acquire Performing Mortgage Loans and securitize such
loans through the issuance of non-REMIC CMOs. As a result of such transactions,
OAIC will retain an equity ownership interest in the Performing Mortgage Loans
that has economic characteristics similar to those of a Subordinated Interest.
Such transactions will not cause OAIC to fail to satisfy the gross income tests
or the asset tests described below.
OAIC may receive income not described above that is not qualifying income
for purposes of the 75% and 95% gross income tests. For example, certain fees
for services rendered 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. 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."
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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 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
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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.
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
generally includes an interest in mortgage loans secured by controlling equity
interests in entities treated as partnerships for federal income tax purposes
that own real property, to the extent that the principal balance of the mortgage
does not exceed the fair market value of the real property that is allocable to
the equity interest. 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).
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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 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
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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.
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
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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.
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
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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 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,
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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 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.
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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.
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
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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).
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.
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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 SHOULD 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.
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
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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 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
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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.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
AND REAL PROPERTY INVESTMENTS
The Company intends primarily to acquire Subordinated Interests and
Distressed Real Property, but also may acquire Mortgage Loans and other Real
Property. Even though the Company will not own Mortgage Loans directly in
connection with its acquisition of Subordinated Interests, its return thereon
and on Distressed Mortgage Loans will depend upon, among other things, the
ability of the servicer of the underlying Mortgage Loans to foreclose upon those
Mortgage Loans in default and sell the underlying Real Property. There are a
number of legal considerations involved in the acquisition of Mortgage Loans or
Real Property or the foreclosure and sale of defaulted Mortgage Loans (whether
individually or as part of a series of mortgage-backed securities). The
following discussion provides general summaries of certain legal aspects of
mortgage loans and 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.
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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 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
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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 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
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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 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
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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 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.
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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.
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
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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.
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
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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.
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.
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USE OF PROCEEDS
All of the expected net proceeds of this Offering will be used to purchase
Units in the Operating Partnership. Thereupon, the Operating Partnership will
use approximately $36 million plus accrued interest to purchase the Initial
Investments and $10 million to purchase the Supplemental Initial Investment. The
purchase price for the Initial Investments and the Supplemental Initial
Investment was based on certain assumptions made with respect to the potential
net cash flows to be generated by the Initial Investments and the Supplemental
Initial Investment. 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 by the Operating Partnership 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. and EVEREN Securities, Inc., are acting as representatives,
has severally agreed to purchase, the number of shares of Common Stock offered
hereby set forth below opposite its name.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc......................................
EVEREN Securities, Inc.....................................................
Total.................................................................. 12,500,000
-----------------
-----------------
</TABLE>
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.
At the request of the Company, the Underwriters have reserved up to 300,000
shares of Common Stock (345,000 shares if the Underwriters' over-allotment
option is exercised) for sale to directors, officers and employees of Ocwen
Financial and its subsidiaries at the initial public offering price set forth on
the cover page of this Prospectus net of any underwriting discounts or
commissions, and up to 325,000 shares of Common Stock (373,750 shares if the
Underwriters' over-allotment option is exercised) for sale to certain other
persons at the initial public offering price. The number of shares of Common
Stock available for sale to the general public will be reduced to the extent
such persons purchase such reserved shares. Any reserved shares which are not so
purchased will be offered by the Underwriters to the general public on the same
basis as the other shares offered hereby.
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
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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, 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 representatives 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 representatives of the Underwriters have 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.
Until the distribution of the Common Stock is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for or purchase the Common Stock. As an exception to these rules,
the representatives are permitted to engage in certain transactions that
stabilize the price of the Common Stock. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering, I.E., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the representatives may
reduce that short position by purchasing Common Stock in the open market. The
representatives may also elect to reduce any short position by exercising all or
part of the over-allotment option described above.
The representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the representatives purchase
Common Stock in the open market to reduce the Underwriters' short position or to
stabilize the price of the Common Stock, they may reclaim the amount of the
selling concession from the Underwriters and selling group members who sold
those Common Stock as part of the Offering.
In general, purchases of securities for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
The Company has agreed not to offer, sell or contract to sell or otherwise
dispose of any Common Stock of OAIC without the prior consent of the
representatives for a period of 120 days from the date of this Prospectus.
Ocwen Financial has agreed not to offer, sell or contract to sell or
otherwise dispose of the Common Stock acquired on the Closing Date without the
prior consent of the representatives, for a period of two
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years from the date of Closing, provided that the Manager continues to serve as
the manager during such period.
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.
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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" shall mean 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" shall mean any material acquisition transaction
between the Company and any Interested Stockholder.
"Articles of Incorporation" shall mean 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" shall mean the Board of Directors of the Company.
"BPO" shall mean a broker's price opinion obtained by the Manager from one
of its approved brokers with respect to a loan.
"Bylaws" shall mean the Bylaws of the Company.
"CERCLA" shall mean the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended.
"Closing" shall mean 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.
"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.
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"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 with its subsidiaries, unless the context indicates otherwise.
"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" shall mean the Federal Home Loan Bank.
"FIRPTA" shall mean 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" shall mean 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" shall mean generally accepted accounting principles applied on a
consistent basis.
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"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) been employed by the Manager or any of its Affiliates, (ii) been an
officer or director of the Manager or any of its Affiliates, (iii) performed
services for the Manager or any of its Affiliates, (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 MLMC
Subordinated Interests, described under "Initial Investments," which are to be
acquired on or soon after the Closing Date.
"Initial Limited Partner" shall mean Ocwen Limited, Inc., as limited partner
of the Operating Partnership.
"Interested Stockholder" shall mean 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.
"LIBOR" shall mean the London Interbank Offering Rate for one-month U.S.
Dollar deposits.
"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 Capital Corporation
"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.
"MLMC Mortgage Loans" shall mean the mortgage loans underlying the Merrill
Subordinated Interests.
"MLMC Subordinated Interests" shall mean the Merrill Lynch Mortgage Capital
Inc. multifamily Mortgage Pass-Through Certificates, Series 1993-M1, Class B and
Class C.
"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.
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"Mortgaged Property" shall mean the real property securing a mortgage loan.
"NAREIT" shall mean the National Association of Real Estate Investment
Trusts, Inc.
"Net Income" shall mean 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" shall mean the offering of Common Stock hereby.
"Offering Price" shall mean the offering price of $16 per Common Share
offered hereby.
"OID" shall mean 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.
"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" shall mean the restriction on ownership (or deemed
ownership by virtue of the attribution provisions of the Code) of (a) more than
9.1% of the outstanding shares of Common Stock by any stockholder other than
Ocwen Financial, (b) more than 13% 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" shall mean 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" shall mean the preferred stock of the Company.
"Price Evaluation" shall mean an estimate of the price of an MBS obtained
from a broker, usually the underwriter or placement agent of such MBS.
"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.
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"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" shall mean 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.
"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 laws,
18 U.S.C.A. Section 1961, et seq.
"RMBS" shall mean a series of one- to four-family residential MBS.
"Rule 144" shall mean 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.
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"Sub-Performing Mortgage Loans" shall mean loans for which default is likely
or imminent.
"Supplemental Initial Investment" shall mean Subordinated Interests the
Company has contracted to purchase from a third party, which is expected to be
issued in April 1997, at a purchase price of approximately $10 million.
"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.
"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" shall mean 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 EVEREN
Securities, Inc. and each of the underwriters for whom Friedman, Billings,
Ramsey & Co., Inc. and EVEREN Securities, Inc. are acting as representatives.
"Underwriting Agreement" shall mean the agreement pursuant to which the
Underwriters will underwrite the Common Stock.
"Units" shall mean units of limited partnership interest in the Operating
Partnership.
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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
statement is 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.
/s/ Price Waterhouse LLP
- -------------------------------------------
PRICE WATERHOUSE LLP
Fort Lauderdale, Florida
February 12, 1997
F-1
<PAGE>
OCWEN ASSET INVESTMENT CORP.
BALANCE SHEET
FEBRUARY 12, 1997
<TABLE>
<S> <C>
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
---------
---------
</TABLE>
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 will seek to acquire
primarily subordinated interests in mortgage-backed securities and real
properties.
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 Capital Corporation (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 a base management fee of 1% per annum of Average Invested
Assets, payable quarterly, 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 share of Common Stock (based on
the weighted average number of shares outstanding) plus (b) gains (or minus
losses) from debt restructuring and sales of property per share of Common Stock
(based on the weighted average number of shares outstanding), 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 a non-qualified stock option plan to provide a
means of incentive compensation for the Manager, whereby the Manager will be
granted an option to purchase shares of Common Stock in the Company (or, at the
Company's election, Units in Ocwen Partnership, L.P.), 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 commissions.
Moreover, with a portion of the net proceeds of the initial public offering, the
F-3
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO BALANCE SHEET
FEBRUARY 12, 1997
NOTE 3--TRANSACTIONS WITH AFFILIATES (CONTINUED)
Company intends to purchase certain securities with an approximate market value
of $36.3 million from Ocwen Federal Bank FSB, a wholly-owned subsidiary of 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>
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- --------------------------------------------------------------------------------
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.
------------------------
SUMMARY TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary........................................................ 1
Organization and Relationships............................................ 12
Risk Factors.............................................................. 13
Operating Policies and Objectives......................................... 24
Management of Operations.................................................. 35
The Company............................................................... 43
Distribution Policy....................................................... 44
Yield Considerations Related to the Company's Investments................. 45
Initial Investments....................................................... 48
Yield Considerations Related to the Initial Investments................... 58
Capitalization............................................................ 62
Management's Discussion and Analysis of Liquidity and Capital Resources... 62
Description of Capital Stock.............................................. 63
Certain Provisions of Virginia Law and of OAIC's Articles of Incorporation
and Bylaws.............................................................. 66
Common Stock Available for Future Sale.................................... 68
Operating Partnership Agreement........................................... 69
Federal Income Tax Considerations......................................... 72
ERISA Considerations...................................................... 86
Certain Legal Aspects of Mortgage Loans and Real Property Investments..... 88
Use of Proceeds........................................................... 96
Underwriting.............................................................. 96
Legal Matters............................................................. 98
Experts................................................................... 98
Additional Information.................................................... 98
Glossary of Terms......................................................... 99
Financial Statements...................................................... F-1
</TABLE>
------------------------
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.
12,500,000 SHARES
[LOGO]
OCWEN ASSET
INVESTMENT
CORP.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
EVEREN SECURITIES, 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.
<TABLE>
<S> <C>
SEC Registration Fee.............................................. $ 69,697
Blue Sky Fees and Expenses........................................ 7,500
NASD Filing Fee................................................... 23,500
The NASDAQ Stock Market Filing Fee................................ 48,750
Printing and Mailing Fees......................................... 200,000
Counsel Fees and Expenses......................................... 325,000
Accounting Fees and Expenses...................................... 60,000
Miscellaneous..................................................... 15,553
---------
Total......................................................... $ 750,000
---------
---------
</TABLE>
ITEM 31. SALES TO SPECIAL PARTIES
Not Applicable.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES
On or about February 12, 1997, the Company sold 100 shares of Common Stock
to Christine A. Reich in a private placement.
ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Incorporation of the Registrant contain a provision which,
subject to certain exceptions described below, eliminates the liability of a
Director or officer to the Registrant or its shareholders 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 Registrant's Articles of Incorporation also require the Registrant to
indemnify any Director or officer who is or was a party to a proceeding,
including a proceeding by or in the right of the Registrant, by reason of the
fact that he or she is or was such a Director or officer or is or was serving at
the request of the Registrant as a Director, officer, employee or agent of
another entity provided that the Board of Directors determines that the conduct
in question was in the best interest of the Registrant and such person was
acting on behalf of the Registrant. A Director or officer of the Registrant is
entitled to be indemnified against all liabilities and expenses incurred by the
Director or officer in the proceeding, except such liabilities and expenses as
are incurred (i) if such person is an Independent Director or officer, because
of his or her gross negligence, willful misconduct or knowing violation of the
criminal law or (ii) in the case of the Director other than the Independent
Directors, because of his or her negligence or misconduct. Unless a
determination has been made that indemnification is not permissible, a Director
or officer also is entitled to have the Registrant make advances and
reimbursement for expenses prior to final disposition of the proceeding upon
receipt of a written undertaking from the Director or officer to repay the
amounts advanced or reimbursed if it is ultimately determined that he or she is
not entitled to indemnification. Such advance shall be permissible when the
proceeding has been initiated by a shareholder of the Registrant only if such
advance is approved by a court of competent jurisdiction. The Board of Directors
of the Registrant also has the authority to extend to any person who is an
employee or agent
II-1
<PAGE>
of the Registrant, or who is or was serving at the request of the Registrant as
a Director, officer, employee or agent of another entity, the same
indemnification rights held by Directors and officers, subject to all of the
accompanying conditions and obligations.
The Virginia Stock Corporation Act (the "Virginia Act") permits
indemnification of the Registrant's Directors and officers in a variety of
circumstances, which may include liabilities under the Securities Act of 1933,
as amended. Under Section 13.1-697 of the Virginia Act, a Virginia corporation
generally may indemnify its officers and Directors in civil or criminal actions
if they acted in good faith and believed their conduct to be in the best
interests of the corporation and, in the case of criminal actions, had no
reasonable cause to believe that the conduct was unlawful. The Virginia Act also
permits a corporation to require indemnification of officers and Directors with
respect to any action except in the case of willful misconduct or knowing
violation of the criminal law. In addition, the Virginia Act limits the damages
that may be assessed against a Director or officer of the Registrant in a
shareholder or derivative proceeding to the greater of (a) $100,000 or (b) the
amount of cash compensation received by him from the Registrant in the twelve
months immediately preceding the act or omission giving rise to liability. This
limit on liability will not apply in the event of willful misconduct or a
knowing violation of the criminal law or of federal or state securities laws.
The Registrant will carry an insurance policy providing directors' and
officers' liability insurance for any liability its directors or officers or the
directors or officers of any of its subsidiaries may incur in their capacities
as such.
The Registrant will indemnify Ocwen Capital Corporation, a Florida
corporation (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 Registrant or its affiliates. In
addition, the Manager and its officers and directors will not be liable to the
Registrant, and the Registrant will indemnify the Manager and its officers and
directors for acts performed pursuant to the Management Agreement, filed as
EXHIBIT 10.1 hereto, except for claims arising from acts constituting bad faith,
willful misconduct, gross negligence or reckless disregard of their duties under
the Management Agreement.
Reference is made to the form of Underwriting Agreement filed as EXHIBIT 1.1
hereto for provisions relating to the indemnification of directors, officers and
controlling persons of the Registrant against certain liabilities, including
liabilities under the Securities Act of 1933, as amended.
ITEM 34. TREATMENT OF PROCEEDS FROM SHARES BEING REGISTERED
Not Applicable.
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS
(a) Index to Financial Statements.
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants............................. F-1
Balance Sheet as of February 12, 1997.......................................... F-2
Notes to Balance Sheet......................................................... F-3
</TABLE>
(b) Exhibits.
<TABLE>
<C> <S>
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* Opinion of Hunton & Williams.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
8.1 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.
10.4 Form of Stock 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).
</TABLE>
- ------------------------
* Previously Filed.
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-3
<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 Amendment No. 2 to
the 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 15th day of April, 1997.
OCWEN ASSET INVESTMENT CORP.,
a Virginia corporation
(Registrant)
By /s/ CHRISTINE A. REICH
-----------------------------------------
Christine A. Reich
PRESIDENT
POWER OF ATTORNEY
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 Amendment No. 2 to the 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 Amendment
No. 2 to the Registration Statement has been signed by the following persons on
the 15th day of April, 1997, in the capacities indicated.
SIGNATURE TITLE
- ------------------------------ --------------------------
/s/ WILLIAM C. ERBEY* Chairman of the Board of
- ------------------------------ Directors and Chief
William C. Erbey Executive Officer
/s/ CHRISTINE A. REICH
- ------------------------------ Director, President and
Christine A. Reich Chief Financial Officer
/s/ TIMOTHY J. RIDDIOUGH*
- ------------------------------ Director
Timothy J. Riddiough
/s/ ROBERT F. PUGLIESE*
- ------------------------------ Director
Robert F. Pugliese
<TABLE>
<S> <C>
*By /s/ CHRISTINE A. REICH
--------------------------------------
Christine A. Reich,
AS ATTORNEY IN FACT
</TABLE>
II-4
<PAGE>
UNDERWRITING AGREEMENT
April __, 1997
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
EVEREN SECURITIES, INC.
as Representatives of the several Underwriters
c/o Friedman, Billings, Ramsey & Co., Inc.
1001 19th Street North
Arlington, Virginia 22209
Dear Sirs:
Ocwen Asset Investment Corp. (the "Company") confirms its agreements with
Friedman, Billings, Ramsey & Co., Inc., EVEREN Securities, Inc., and each of the
other Underwriters listed on Schedule I hereto (collectively, the
"Underwriters"), for whom Friedman, Billings, Ramsey & Co., Inc. and EVEREN
Securities, Inc. are acting as representatives (in such capacity, the
"Representatives"), with respect to (i) the sale by the Company, and the
purchase by the Underwriters, acting severally and not jointly, of the
respective numbers of shares of Common Stock, par value $0.01 per share, of the
Company ("Common Stock") set forth in Schedule I hereto and (ii) the grant by
the Company to the Underwriters, acting severally and not jointly, of the option
described in Section 1(b) hereof to purchase all or any part of 1,875,000
additional shares of Common Stock to cover over-allotments, if any. The
12,500,000 shares of Common Stock (the "Initial Shares") to be purchased by the
Underwriters and all or any part of the 1,875,000 shares of Common Stock subject
to the option described in Section 1(b) hereof (the "Option Shares") are
hereinafter called, collectively, the "Shares".
The Company understands that the Underwriters propose to make a public
offering of the Shares as soon as the Underwriters deem advisable after this
Agreement has been executed and delivered.
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a registration statement on Form S-11 (No. 333-21965) and a
related preliminary prospectus for the registration of the Shares under the
Securities Act of 1933, as amended (the "Securities Act"), and the rules and
regulations thereunder (the "Securities Act Regulations"). The Company has
prepared and filed such amendments thereto, if any, and such amended preliminary
prospectuses, if any, as may have been required to the date hereof, and will
file such additional amendments thereto and such amended prospectuses as may
hereafter be required. The registration statement has been declared effective
under the Securities Act by the Commission. The registration statement as
amended at the time it became effective (including all information deemed to be
a part of the registration statement at the time it became effective
<PAGE>
2
pursuant to Rule 430A(b) of the Securities Act Regulations) is hereinafter
called the "Registration Statement," except that, if the Company files a
post-effective amendment to such registration statement which becomes
effective prior to the Closing Time (as defined below), "Registration
Statement" shall refer to such registration statement as so amended. Any
registration statement filed pursuant to Rule 462(b) of the Securities Act
Regulations is hereinafter called the "Rule 462(b) Registration Statement,"
and after such filing the term "Registration Statement" shall include the
462(b) Registration Statement. Each prospectus included in the registration
statement, or amendments thereof, before it became effective under the
Securities Act and any prospectus filed with the Commission by the Company
with the consent of the Underwriters pursuant to Rule 424(a) of the
Securities Act Regulations is hereinafter called the "Preliminary
Prospectus." The term "Prospectus" means the final prospectus, as first
filed with the Commission pursuant to paragraph (1) or (4) of Rule 424(b) of
the Securities Act Regulations. The Commission has not issued any order
preventing or suspending the use of any Preliminary Prospectus.
The Company and the Underwriters agree as follows:
1. Sale and Purchase: (a) Initial Shares. Upon the basis of the
warranties and representations and other terms and conditions herein set forth,
the Company agrees to sell to each Underwriter, severally and not jointly, and
each Underwriter agrees, severally and not jointly, to purchase from the
Company, at the purchase price per share of $____, that proportion of the number
of Initial Shares set forth opposite such Underwriter's name on Schedule I, plus
any additional number of Initial Shares which such Underwriter may become
obligated to purchase pursuant to the provisions of Section 8 hereof, subject to
such adjustments among the Underwriters as the Representatives in their sole
discretion shall make to eliminate any sales or purchases of fractional shares.
The Underwriters may from time to time increase or decrease the public offering
price after the initial public offering to such extent as the Underwriters may
determine.
(b) Option Shares. In addition, upon the basis of the warranties and
representations and other terms and conditions herein set forth, the Company
hereby grants an option to the Underwriters, severally and not jointly, to
purchase from the Company that number of Option Shares up to the maximum number
of Option Shares of Common Stock at the purchase price per share set forth in
paragraph (a) above plus any additional number of Option Shares which such
Underwriter may become obligated to purchase pursuant to the provisions of
Section 8 hereof. The option hereby granted will expire 30 days after the date
hereof and may be exercised in whole or in part from time to time only for the
purpose of covering over-allotments which may be made in connection with the
offering and distribution of the Initial Shares upon notice by the
Representatives to the Company setting forth the number of Option Shares as to
which the several Underwriters are then exercising the option and the time and
date of payment and delivery for such Option Shares. Any such time and date of
delivery (a "Date of Delivery") shall
<PAGE>
3
be determined by the Representatives, but shall not be later than seven full
business days after the exercise of said option, nor in any event prior to
the Closing Time, as hereinafter defined. If the option is exercised as to
all or any portion of the Option Shares, each of the Underwriters, acting
severally and not jointly, will purchase that proportion of the total number
of Option Shares then being purchased which the number of Initial Shares set
forth in Schedule I opposite the name of such Underwriter bears to the total
number of Initial Shares, subject in each case to such adjustments as the
Representatives in their discretion shall make to eliminate any sales or
purchases of fractional shares. The Underwriters may from time to time
increase or decrease the public offering price after the initial public
offering to such extent as the Underwriters may determine.
2. Payment and Delivery: (a) Initial Shares. Payment of the purchase
price for the Initial Shares shall be made to the Company by wire transfer or
certified or official bank check payable in federal (same-day) funds at the
office of Simpson Thacher & Bartlett, 425 Lexington Avenue, New York, New York
10017 (unless another place shall be agreed upon by the Representatives and the
Company) against delivery of the certificates for the Initial Shares to the
Representatives for the respective accounts of the Underwriters. Such payment
and delivery shall be made at 10:00 a.m., New York City time, on the third
(fourth, if pricing occurs after 4:30 p.m. (New York City time)) business day
after the date hereof (unless another time, not later than ten business days
after such date, shall be agreed to by the Representatives and the Company).
The time at which such payment and delivery are actually made is hereinafter
sometimes called the "Closing Time". Certificates for the Initial Shares shall
be delivered to the Representatives in definitive form registered in such names
and in such denominations as the Representatives shall specify. For the purpose
of expediting the checking of the certificates for the Initial Shares by the
Representatives, the Company agrees to make such certificates available to the
Representatives for such purpose at least one full business day preceding the
Closing Time.
(b) Option Shares. In addition, payment of the purchase price for the
Option Shares shall be made to the Company by wire transfer or certified or
official bank check payable in federal (same-day) funds at the office of Simpson
Thacher & Bartlett, 425 Lexington Avenue, New York, New York 10017 (unless
another place shall be agreed upon by the Representatives and the Company)
against delivery of the certificates for the Option Shares to the
Representatives for the respective accounts of the Underwriters. Such payment
and delivery shall be made at 10:00 a.m., New York City time, on each Date of
Delivery. Certificates for the Option Shares shall be delivered to the
Representatives in definitive form registered in such names and in such
denominations as the Representatives shall specify. For the purpose of
expediting the checking of the certificates for the Option Shares by the
Representatives, the Company agrees to make such certificates available to the
Representatives for such purpose at least one full business day preceding the
relevant Date of Delivery.
<PAGE>
4
3. Representations and Warranties of the Company: The Company represents
and warrants to the Underwriters that:
(a) each of the Registration Statement and any Rule 462(b)
Registration Statement has become effective under the Securities Act and no
stop order suspending the effectiveness of the Registration Statement or
any Rule 462(b) Registration Statement has been issued under the Securities
Act and no proceedings for that purpose have been instituted or are pending
or, to the knowledge of the Company, are contemplated by the Commission,
and any request on the part of the Commission for additional information
has been complied with;
(b) the Registration Statement complies and the Prospectus and any
further amendments or supplements thereto will, when they become effective
or are filed with the Commission, as the case may be, comply in all
material respects with the requirements of the Securities Act and the
Securities Act Regulations; the Registration Statement did not, and any
amendment thereto will not, in each case as of the applicable effective
date, contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading; and the Prospectus and any amendment or
supplement thereto will not, as of the applicable filing date and at
Closing Time and on each Date of Delivery (if any), contain an untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that the
Company makes no warranty or representation with respect to any statement
contained in the Registration Statement or the Prospectus in reliance upon
and in conformity with information concerning the Underwriters and
furnished in writing by or on behalf of the Underwriters to the Company
expressly for use in the Registration Statement or the Prospectus;
(c) the Prospectus delivered to the Underwriters for use in connection
with this offering was identical to the electronically transmitted copies
thereof filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T;
(d) the Company had at the date indicated the duly authorized and
outstanding capitalization set forth in the Prospectus under the caption
"Capitalization"; all of the issued and outstanding shares of capital stock
of the Company have been duly and validly authorized and issued and are
fully paid and non-assessable; the Company is a corporation duly organized
and validly existing under the laws of the Commonwealth of Virginia, with
full corporate power and authority to own its properties and conduct its
business as described in the Registration Statement and the Prospectus, and
to execute and deliver this Agreement and the Management Agreement (as
defined below); each of Ocwen General, Inc. and Ocwen Limited, Inc.
(together, the "Corporate Subsidiaries")
<PAGE>
5
has been duly organized and is validly existing under the laws of the
Commonwealth of Virginia with full corporate power and authority to own its
properties and conduct its business as described in the Registration
Statement and the Prospectus; Ocwen Partnership, L.P. (the "Operating
Partnership", and together with the Corporate Subsidiaries, the
"Subsidiaries") has been duly organized and is validly existing as a limited
partnership under the Virginia Revised Uniform Limited Partnership Act with
full partnership power and authority to own its properties and conduct its
business as described in the Registration Statement and the Prospectus;
(e) the Company and each of its Subsidiaries is duly qualified or
licensed by and in good standing in each jurisdiction in which they conduct
their respective businesses or own or lease property and in which the
failure, individually or in the aggregate, to be so licensed or qualified
could have a material adverse effect on the operations, business or
condition of the Company and its Subsidiaries, taken as a whole; the
Company and each of its Subsidiaries is in compliance in all material
respects with the laws, orders, rules, regulations and directives issued or
administered by such jurisdictions;
(f) neither the Company nor any of its Subsidiaries is in breach of,
or in default under (nor has any event occurred which with notice, lapse of
time, or both would constitute a breach of, or default under), its
respective articles of incorporation, by-laws or other constituent
documents or in the performance or observance of any obligation, agreement,
covenant or condition contained in any indenture, mortgage, deed of trust,
bank loan or credit agreement or other agreement or instrument to which the
Company or any of its Subsidiaries is a party or by which any of them is
bound, except for such breaches or defaults which would not have a material
adverse effect on the operations, business or condition of the Company and
its Subsidiaries, taken as a whole, and the execution, delivery and
performance of this Agreement and the Management Agreement (as defined
below) and consummation of the transactions contemplated hereby and thereby
will not conflict with, or result in any breach of or constitute a default
under (nor constitute any event which with notice, lapse of time, or both
would constitute a breach of, or default under), (i) any provision of the
articles of incorporation, by-laws or other constituent documents of the
Company or any of its Subsidiaries, or (ii) any provision of any license,
indenture, mortgage, deed of trust, bank loan or credit agreement or other
agreement or instrument to which the Company or any of its Subsidiaries is
a party or by which the Company or any of the Subsidiaries or any of their
respective properties may be bound or affected, or under any federal, state
or local law, regulation or rule or any decree, judgment or order
applicable to the Company or any of its Subsidiaries, except in the case of
this clause (ii) for such breaches or defaults which would not have a
material adverse effect on the operations, business or condition of the
Company and its Subsidiaries, taken as a whole;
<PAGE>
6
(g) this Agreement has been duly authorized, executed and delivered by
the Company and is a legal, valid and binding agreement of the Company
enforceable in accordance with its terms, except as may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' rights generally, and by general principles of equity,
and except to the extent that the indemnification provisions of Section 9
hereof may be limited by federal or state securities laws and public policy
considerations in respect thereof; the Management Agreement (the
"Management Agreement"), to be entered into at or prior to the Closing Time
between the Company and Ocwen Capital Corporation (the "Manager"), a form
of which has been filed as an exhibit to the Registration Statement, has
been duly authorized by the Company and the Manager and at the Closing Time
will have been duly executed and delivered by the Company and the Manager
and will constitute a valid and binding agreement of each of the Company
and the Manager enforceable in accordance with its terms, except as may be
limited by bankruptcy, insolvency, reorganization, moratorium or similar
laws affecting creditors' rights generally, and by general principles of
equity;
(h) the Shares conform in all material respects to the description
thereof contained in the Registration Statement and Prospectus;
(i) no approval, authorization, consent or order of or filing with any
federal, state or local governmental or regulatory commission, board, body,
authority or agency is required in connection with the sale of the Shares
as contemplated hereby other than (A) such as have been obtained, or will
have been obtained at the Closing Time or the relevant Date of Delivery, as
the case may be, under the Securities Act, (B) such approvals as have been
obtained in connection with the approval of the quotation of the Shares on
the Nasdaq National Market System and the registration of the Company's
Common Stock under the Exchange Act, and (C) any necessary qualification
under the securities or blue sky laws of the various jurisdictions in which
the Shares are being offered by the Underwriters;
(j) Price Waterhouse LLP, whose report on the financial statements of
the Company are filed with the Commission as part of the Registration
Statement and Prospectus, are independent public accountants as required by
the Securities Act and the Securities Act Regulations;
(k) the Company and each of its Subsidiaries has all necessary
licenses, authorizations, consents and approvals and has made all necessary
filings required under any federal, state or local law, regulation or rule,
and has obtained all necessary authorizations, consents and approvals from
other persons, required in order to conduct its respective business, except
to the extent that any failure to have any such licenses, authorizations,
consents or approvals, to make any such filings or to obtain any such
<PAGE>
7
authorizations, consents or approvals would not, alone or in the aggregate,
have a material adverse effect on the business, properties, prospects,
results of operations or condition of the Company and its Subsidiaries,
taken as a whole; neither the Company nor any of its Subsidiaries is in
violation of, or in default under, any such license, authorization, consent
or approval or any federal, state or local law, regulation or rule
or any decree, order or judgment applicable to the Company or any of the
Subsidiaries the effect of which could be material and adverse to the
business, properties, prospects, results of operations or condition of the
Company and its Subsidiaries, taken as a whole;
(l) all legal or governmental proceedings, contracts or documents of a
character required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement have
been so described or filed as required;
(m) there are no actions, suits or proceedings pending or, to the
Company's knowledge, threatened against the Company or any of the
Subsidiaries or any of their respective properties, at law or in equity, or
before or by any federal, state, local or foreign governmental or
regulatory commission, board, body, authority or agency which could result
in a judgment, decree or order having a material adverse effect on the
business, condition, prospects or property of the Company and its
Subsidiaries, taken as a whole;
(n) the financial statements, including the notes thereto, included in
the Registration Statement and the Prospectus present fairly the financial
position of the Company as of the date indicated; such financial statements
have been prepared in conformity with generally accepted accounting
principles applied on a consistent basis during the periods involved
(except as indicated in the notes thereto);
(o) subsequent to the effective date of the Registration Statement and
the date of the Prospectus, and except as may be otherwise stated in the
Registration Statement or Prospectus, there has not been (A) any material
and unfavorable change, financial or otherwise, in the business,
properties, prospects, results of operations or condition (financial or
otherwise), present or prospective, of the Company and its Subsidiaries,
taken as a whole, (B) any transaction, other than in the ordinary course of
business, which is material to the Company and its Subsidiaries, taken as a
whole, contemplated or entered into by the Company or any of its
Subsidiaries or (C) any obligation, contingent or otherwise, directly or
indirectly incurred by the Company or any of its Subsidiaries, other than
in the ordinary course of business, which is material to the Company and
its Subsidiaries, taken as a whole;
<PAGE>
8
(p) the Company is not, and upon the sale of the Shares as herein
contemplated will not be, an "investment company" or an entity "controlled"
by an "investment company" as such terms are defined in the Investment
Company Act of 1940, as amended (the "Investment Company Act"); the
transactions contemplated by the Registration Statement and the conduct of
the Company of its business as set forth in the Registration Statement will
not cause the Company to become an "investment company" subject to
registration under the Investment Company Act;
(q) Other than pursuant to the Registration Rights Agreement (the
"Registration Rights Agreement"), to be entered into at or prior to the
Closing Time among the Company, the Manager and Ocwen Financial
Corporation, a form of which has been filed as an exhibit to the
Registration Statement, there are no persons with registration or other
similar rights to have any securities registered pursuant to the
Registration Statement or otherwise registered by the Company under the
Securities Act;
(r) any certificate signed by any officer of the Company or any
Subsidiary delivered to the Representatives or to counsel for the
Underwriters pursuant to or in connection with this Agreement shall be
deemed a representation and warranty by the Company to each Underwriter as
to the matters covered thereby; and
(s) the Company is organized in conformity with the requirements for
qualification as a real estate investment trust (a "REIT") under the
Internal Revenue Code of 1986, as amended (the "Code"), and the present and
contemplated method of operation of the Company as set forth in the
Registration Statement does and will enable the Company to meet the
requirements for taxation as a REIT under the Code.
4. Certain Covenants of the Company: The Company hereby agrees with each
Underwriter:
(a) to furnish such information as may be required and otherwise to
cooperate in qualifying the Shares for offering and sale under the
securities or blue sky laws of such states as the Representatives may
designate and to maintain such qualifications in effect as long as required
for the distribution of the Shares, provided that the Company shall not be
required to qualify as a foreign corporation or to consent to the service
of process under the laws of any such state (except service of process with
respect to the offering and sale of the Shares);
(b) to prepare the Prospectus in a form approved by the Underwriters
and file such Prospectus with the Commission pursuant to Rule 424(b) not
later than 10:00 a.m. (New York City time), on the second business day
following the execution and delivery of this Agreement and to furnish
promptly (and with respect to the initial delivery of such
<PAGE>
9
Prospectus, not later than 10:00 a.m. (New York City time) on the second
business day following the execution and delivery of this Agreement) to the
Underwriters as many copies of the Prospectus (or of the Prospectus as
amended or supplemented if the Company shall have made any amendments or
supplements thereto after the effective date of the Registration Statement)
as the Underwriters may reasonably request for the purposes contemplated by
the Securities Act Regulations, which Prospectus and any amendments or
supplements thereto furnished to the Underwriters will be identical to the
electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T;
(c) to advise the Representatives promptly and (if requested by the
Representatives) to confirm such advice in writing, when the Registration
Statement has become effective and when any post-effective amendment
thereto becomes effective under the Securities Act Regulations;
(d) to advise the Representatives promptly, confirming such advice in
writing, of (i) any request by the Commission for amendments or supplements
to the Registration Statement or Prospectus or for additional information
with respect thereto, or (ii) the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or of any
order preventing or suspending the use of any Preliminary Prospectus or the
Prospectus, or of the suspension of the qualification of the Shares for
offering or sale in any jurisdiction, or of the initiation or threatening
of any proceedings for any of such purposes and, if the Commission or any
other government agency or authority should issue any such order, to make
every reasonable effort to obtain the lifting or removal of such order as
soon as possible; to advise the Representatives promptly of any proposal to
amend or supplement the Registration Statement or Prospectus and to file no
such amendment or supplement to which the Representatives shall reasonably
object in writing;
(e) to furnish to the Underwriters for a period of five years from the
date of this Agreement (i) copies of all annual, quarterly and current
reports supplied to holders of shares of Common Stock, (ii) copies of all
reports filed by the Company with the Commission, and (iii) such other
information as the Underwriters may reasonably request regarding the
Company;
(f) to advise the Underwriters promptly of the happening of any event
known to the Company within the time during which a Prospectus relating to
the Shares is required to be delivered under the Securities Act Regulations
which, in the judgment of the Company, would require the making of any
change in the Prospectus then being used so that the Prospectus would not
include an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
<PAGE>
10
therein, in light of the circumstances under which they are made, not
misleading, and, during such time, to prepare and furnish, at the Company's
expense, to the Underwriters promptly such amendments or supplements to
such Prospectus as may be necessary to reflect any such change and to
furnish to the Underwriters a copy of such proposed amendment or supplement
before filing any such amendment or supplement with the Commission;
(g) to furnish promptly to the Representatives a signed copy of the
Registration Statement, as initially filed with the Commission, and of all
amendments thereto (including all exhibits thereto) and such number of
conformed copies of the foregoing as the Underwriters may reasonably
request;
(h)to pay all expenses, fees and taxes (other than any transfer taxes
and the fees and disbursements of counsel for the Underwriters except as
set forth under Section 5 hereof and clauses (iii) and (iv) below) in
connection with (i) the preparation and filing of the Registration
Statement, each Preliminary Prospectus, the Prospectus, and any amendments
or supplements thereto, and the printing and furnishing of copies of each
thereof to the Underwriters and to dealers (including costs of mailing and
shipment), (ii) the preparation, issuance and delivery of the certificates
for the Shares to the Underwriters, including any stock or other transfer
taxes or duties payable upon the sale of the Shares to the Underwriters,
(iii) the word processing and/or printing of this Agreement and any dealer
agreements, and the reproduction and/or printing and furnishing of copies
of each thereof to the Underwriters and to dealers (including costs of
mailing and shipment), (iv) the qualification of the Shares for offering
and sale under state laws and the determination of their eligibility for
investment under state law as aforesaid (including the legal fees and
filing fees and other disbursements of counsel for the Underwriters) and
the printing and furnishing of copies of any blue sky surveys or legal
investment surveys to the Underwriters and to dealers, (v) any filing for
review of the public offering of the Shares by the NASD, (vi) the fees and
expenses of any transfer agent or registrar for the Shares, (vii) the fees
and expenses incurred in connection with the inclusion of the Shares in the
Nasdaq National Market System and (viii) the performance of the Company's
other obligations hereunder;
(i) to furnish to the Underwriters, not less than two business days
before filing with the Commission subsequent to the effective date of the
Prospectus and during the period referred to in paragraph (f) above, a copy
of any document proposed to be filed with the Commission pursuant to
Section 13, 14, or 15(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act");
(j) to make generally available to its security holders as soon as
practicable after the effective date of the Registration Statement an
earning statement (in form, at the
<PAGE>
11
option of the Company, complying with the provisions of Rule 158 under the
Securities Act) covering a period of 12 months beginning after the effective
date of the Registration Statement;
(k) to use its best efforts to effect and maintain the quotation of
the Shares on the Nasdaq National Market System and to file with the Nasdaq
National Market System all documents and notices required by the Nasdaq
National Market of companies that have securities that are traded in the
over-the-counter market and quotations for which are reported by the Nasdaq
National Market System;
(l) except as provided in the Prospectus, to refrain during a period
of 120 days from the date of the Prospectus, without the prior written
consent of the Representatives, from (i) offering, pledging, selling,
contracting to sell, selling any option or contract to purchase, purchasing
any option or contract to sell, granting any option for the sale of, or
otherwise disposing of or transferring, directly or indirectly, any share
of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, or filing any registration statement under
the Securities Act with respect to any of the foregoing or (ii) entering
into any swap or any other agreement or any transaction that transfers, in
whole or in part, directly or indirectly, the economic consequence of
ownership of the Common Stock, whether any such swap or transaction
described in clause (i) or (ii) above is to be settled by delivery of
Common Stock or such other securities, in cash or otherwise;
(m) except as otherwise expressly permitted by its articles of
incorporation or by-laws, the Company will continue to conduct its
operations in a manner that will meet the requirements to qualify as a
REIT under the Code and that will not subject it to registration as an
"investment company" under the Investment Company Act.
5. Reimbursement of the Underwriters' Expenses. If the Shares are not
delivered for any reason other than the termination of this Agreement pursuant
to the first two paragraphs of Section 7 hereof or the default by one or more of
the Underwriters in its or their respective obligations hereunder, the Company
shall reimburse the Underwriters for all of their reasonable out-of-pocket
expenses relating to the transactions contemplated hereby, including the fees
and disbursements of their counsel.
6. Conditions of the Underwriters' Obligations: The obligations of the
Underwriters hereunder are subject to the accuracy of the representations and
warranties on the part of the Company on the date hereof and at the Closing Time
and on each Date of Delivery, the performance by the Company of its obligations
hereunder and to the following conditions:
<PAGE>
12
(a) The Company shall furnish to the Underwriters at the Closing Time
and on each Date of Delivery an opinion of Hunton & Williams, counsel for
the Company, addressed to the Underwriters and dated the Closing Time and
each Date of Delivery substantially in the form of Exhibit B hereto.
(b) The Representatives shall have received from Price Waterhouse LLP,
letters dated, respectively, as of the date of this Agreement, the Closing
Time and each Date of Delivery, as the case may be, and addressed to the
Representatives as representatives of the Underwriters in the forms
heretofore approved by the Underwriters.
(c) The Underwriters shall have received at the Closing Time and on
each Date of Delivery the favorable opinion of Simpson Thacher & Bartlett,
counsel for the Underwriters, dated the Closing Time or such Date of
Delivery, in form and substance satisfactory to the Underwriters.
(d) No amendment or supplement to the Registration Statement or
Prospectus shall have been filed to which the Underwriters shall have
objected in writing.
(e) Prior to the Closing Time and each Date of Delivery (i) no stop
order suspending the effectiveness of the Registration Statement or any
order preventing or suspending the use of any Preliminary Prospectus or
Prospectus has been issued by the Commission, and no suspension of the
qualification of the Shares for offering or sale in any jurisdiction, or of
the initiation or threatening of any proceedings for any of such purposes,
has occurred; and (ii) the Registration Statement and all amendments
thereto, or modifications thereof, if any, and the Prospectus and all
amendments or supplements thereto, or modifications thereof, if any, shall
not contain an untrue statement of material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they are
made, not misleading.
(f) Between the time of execution of this Agreement and the Closing
Time or the relevant Date of Delivery (i) no material and unfavorable
change, financial or otherwise (other than as disclosed in the Registration
Statement and Prospectus), in the business, condition or prospects of the
Company and its Subsidiaries, taken as a whole, shall occur or become known
and (ii) no transaction which is material and unfavorable to the Company
shall have been entered into by the Company or any of the Subsidiaries.
(g) The Company will, at the Closing Time and on each Date of
Delivery, deliver to the Underwriters a certificate of two of its executive
officers to the effect that, to each of such officer's knowledge, the
representations and warranties of the Company set forth
<PAGE>
13
in this Agreement and the conditions set forth in paragraph (e) and
paragraph (f) have been met and are true and correct as of such date.
(h) At the Closing Time, the Shares shall have been approved for
inclusion on the Nasdaq National Market System.
(i) The NASD shall not have raised any objection with respect to the
fairness and reasonableness of the underwriting terms and arrangements.
(j) At or prior to the date of this Agreement, the Underwriters shall
have received an agreement substantially in the form of Exhibit A hereto
signed by Ocwen Financial Corporation.
(k) The Company shall have furnished to the Underwriters such other
documents and certificates as to the accuracy and completeness of any
statement in the Registration Statement and the Prospectus or any amendment
or supplement thereto as of the Closing Time or any Date of Delivery as the
Underwriters may reasonably request.
(l) The Company shall have performed such of its respective
obligations under this Agreement as are to be performed by the terms hereof
at or before the Closing Time or the relevant Date of Delivery.
7. Termination: The obligations of the several Underwriters hereunder
shall be subject to termination in the absolute discretion of the
Representatives, at any time prior to the Closing Time or any Date of Delivery,
if trading in securities on the New York Stock Exchange shall have been
suspended or minimum prices shall have been established on the New York Stock
Exchange, or if a banking moratorium shall have been declared either by the
United States or New York State authorities, or if the United States shall have
declared war in accordance with its constitutional processes or there shall have
occurred any material outbreak or escalation of hostilities or other national or
international calamity or crisis of such magnitude in its effect on the
financial markets of the United States as, in the judgment of the
Representatives, to make it impracticable to market the Shares.
If the Representatives elect to terminate this Agreement as provided in
this Section 7, the Company and the Underwriters shall be notified promptly by
letter or telegram.
If the sale to the Underwriters of the Shares, as contemplated by this
Agreement, is not carried out by the Underwriters for any reason permitted under
this Agreement or if such sale is not carried out because the Company shall be
unable to comply with any of the terms of this Agreement, the Company shall not
be under any obligation or liability under this Agreement (except to the extent
provided in Sections 4(h), 5 and 9 hereof) and the Underwriters shall be
<PAGE>
14
under no obligation or liability to the Company under this Agreement (except
to the extent provided in Section 9 hereof) or to one another hereunder.
8. Increase in Underwriters' Commitments: If any Underwriter shall
default at Closing Time or on a Date of Delivery in its obligation to take up
and pay for the Shares to be purchased by it under this Agreement on such date
and if the total number of Shares which such Underwriter shall have agreed but
failed to take up and pay for does not exceed 10% of the total number of Shares
to be purchased on such date, each non-defaulting Underwriter shall take up and
pay for (in addition to the number of Shares which it is obligated to purchase
on such date pursuant to this Agreement) the portion of the total number of
Shares agreed to be purchased by the defaulting Underwriter on such date in the
proportion that its underwriting obligations hereunder bears to the underwriting
obligations of all non-defaulting Underwriters. Without relieving any
defaulting Underwriter from its obligations hereunder, the Company agrees with
the non-defaulting Underwriters that it will not sell any Shares hereunder on
such date unless all of the Shares to be purchased on such date are purchased on
such date by the Underwriters (or by substituted Underwriters selected by the
Representatives with the approval of the Company or selected by the Company with
the approval of the Representatives).
If a new Underwriter or Underwriters are substituted for a defaulting
Underwriter in accordance with the foregoing provision, the Company or the
non-defaulting Underwriters shall have the right to postpone the Closing Time or
the relevant Date of Delivery for a period not exceeding five business days in
order that any necessary changes in the Registration Statement and Prospectus
and other documents may be effected.
The term Underwriter as used in this Agreement shall refer to and include
any Underwriter substituted under this Section 8 with the like effect as if such
substituted Underwriter had originally been named in this Agreement.
<PAGE>
15
9. Indemnity by the Company and the Underwriters:
(a) The Company agrees to indemnify, defend and hold harmless each
Underwriter and any person who controls any Underwriter within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act, from and
against any loss, expense, liability or claim (including the reasonable cost of
investigation) which, jointly or severally, any such Underwriter or controlling
person may incur under the Securities Act, the Exchange Act or otherwise,
insofar as such loss, expense, liability or claim arises out of or is based upon
any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement (or in the Registration Statement as amended by any
post-effective amendment thereof by the Company) or in a Prospectus (the term
Prospectus for the purpose of this Section 9 being deemed to include any
Preliminary Prospectus, the Prospectus and the Prospectus as amended or
supplemented by the Company), or arises out of or is based upon any omission or
alleged omission to state a material fact required to be stated in such
Registration Statement or necessary to make the statements made in the
Registration Statement not misleading or arises out of or is based on an
omission or alleged omission to state a material fact required to be stated in
the Prospectus or necessary to make the statements therein, in light of
circumstances under which they were made, not misleading, except insofar as any
such loss, expense, liability or claim arises out of or is based upon any untrue
statement or alleged untrue statement of a material fact contained in and in
conformity with information furnished in writing by the Underwriters through the
Representatives to the Company expressly for use in such Registration Statement
or such Prospectus, or arises out of or is based upon any omission or alleged
omission to state a material fact in connection with such information required
to be stated in either such Registration Statement or Prospectus or necessary to
make such information not misleading, provided, however, that the indemnity
agreement contained in this subsection (a) with respect to any Preliminary
Prospectus shall not inure to the benefit of any Underwriter (or to the benefit
of any person controlling such Underwriter) with respect to any person asserting
any such loss, expense, liability or claim which is the subject thereof if the
Prospectus corrected any such alleged untrue statement or omission and if such
Underwriter failed to send or give a copy of the Prospectus to such person at or
prior to the written confirmation of the sale of Shares to such person, unless
such failure resulted from non-compliance by the Company with Section 4(b).
If any action is brought against an Underwriter or controlling person in
respect of which indemnity may be sought against the Company pursuant to the
preceding paragraph, such Underwriter shall promptly notify the Company in
writing of the institution of such action and the indemnifying party shall
assume the defense of such action, including the employment of counsel and
payment of expenses. Such Underwriter or controlling person shall have the
right to employ its or their own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of such Underwriter or such
controlling person unless the employment of such counsel shall have been
authorized in writing by the indemnifying party in connection with the defense
of such action or the indemnifying party shall not have employed counsel to have
charge
<PAGE>
16
of the defense of such action within a reasonable time or such indemnified
party or parties shall have reasonably concluded (based on the advice of
counsel) that there may be defenses available to it or them which are
different from or additional to those available to the indemnifying party (in
which case the indemnifying party shall not have the right to direct the
defense of such action on behalf of the indemnified party or parties), in any
of which events such fees and expenses shall be borne by the indemnifying
party and paid as incurred (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel for the Underwriters or controlling persons in any one
action or series of related actions in the same jurisdiction representing the
indemnified parties who are parties to such action). Anything in this
paragraph to the contrary notwithstanding, the indemnifying party shall not
be liable for any settlement of any such claim or action effected without the
written consent of the indemnifying party.
(b) Each Underwriter agrees, severally and not jointly, to indemnify,
defend and hold harmless the Company, its directors and officers and any person
who controls the Company within the meaning of Section 15 of the Securities Act
or Section 20 of the Exchange Act, from and against any loss, expense, liability
or claim (including the reasonable cost of investigation) which, jointly or
severally, the Company or any such person may incur under the Securities Act,
the Exchange Act or otherwise, insofar as such loss, expense, liability or claim
arises out of or is based upon any untrue statement or alleged untrue statement
of a material fact contained in and in conformity with information furnished in
writing by such Underwriter through the Representatives to the Company expressly
for use in the Registration Statement (or in the Registration Statement as
amended by any post-effective amendment thereof by the Company) or in a
Prospectus, or arises out of or is based upon any omission or alleged omission
to state a material fact in connection with such information required to be
stated either in such Registration Statement or Prospectus or necessary to make
such information not misleading.
If any action is brought against the Company or any such person in respect
of which indemnity may be sought against any Underwriter pursuant to the
foregoing paragraph, the Company or such person shall promptly notify the
Representatives in writing of the institution of such action and the
Representatives, on behalf of the Underwriters, shall assume the defense of such
action, including the employment of counsel and payment of expenses. The
Company or such person shall have the right to employ its own counsel in any
such case, but the fees and expenses of such counsel shall be at the expense of
the Company or such person unless the employment of such counsel shall have been
authorized in writing by the Representatives in connection with the defense of
such action or the Representatives shall not have employed counsel to have
charge of the defense of such action within a reasonable time or such
indemnified party or parties shall have reasonably concluded (based on the
advice of counsel) that there may be defenses available to it or them which are
different from or additional to those available to the Underwriters (in which
case the Representatives shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which events
such fees and expenses shall
<PAGE>
17
be borne by such Underwriter and paid as incurred (it being understood,
however, that the Underwriters shall not be liable for the expenses of more
than one separate counsel in any one action or series of related actions in
the same jurisdiction representing the indemnified parties who are parties to
such action). Anything in this paragraph to the contrary notwithstanding, no
Underwriter shall be liable for any settlement of any such claim or action
effected without the written consent of such Underwriter.
(c) If the indemnification provided for in this Section 9 is unavailable to
an indemnified party under subsections (a) and (b) of this Section 9 in respect
of any losses, expenses, liabilities or claims referred to therein, then each
applicable indemnifying party, in lieu of indemnifying such indemnified party,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, expenses, liabilities or claims (i) in such proportion as
is appropriate to reflect the relative benefits received by the Company on the
one hand and the Underwriters on the other hand from the offering of the Shares
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company on the one hand and of the Underwriters on the other in connection
with the statements or omissions which resulted in such losses, expenses,
liabilities or claims, as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion as the
total proceeds from the offering (net of underwriting discounts and commissions
but before deducting expenses) received by the Company bear to the underwriting
discounts and commissions received by the Underwriters. The relative fault of
the Company on the one hand and of the Underwriters on the other shall be
determined by reference to, among other things, whether the untrue statement or
alleged untrue statement of a material fact or omission or alleged omission
relates to information supplied by the Company or by the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The amount paid or payable by a
party as a result of the losses, claims, damages and liabilities referred to
above shall be deemed to include any legal or other fees or expenses reasonably
incurred by such party in connection with investigating or defending any claim
or action.
(d) The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 9 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in subsection (c) above. Notwithstanding
the provisions of this Section 9, no Underwriter shall be required to contribute
any amount in excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages which such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent
<PAGE>
18
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 9 are several in proportion to their respective
underwriting commitments and not joint.
(e) The indemnity and contribution agreements contained in this Section 9
and the covenants, warranties and representations of the Company contained in
this Agreement shall remain in full force and effect regardless of any
investigation made by or on behalf of any Underwriter, or any person who
controls any Underwriter within the meaning of Section 15 of the Securities Act
or Section 20 of the Exchange Act, or by or on behalf of the Company, its
directors and officers or any person who controls the Company within the meaning
of Section 15 of the Securities Act or Section 20 of the Exchange Act, and shall
survive any termination of this Agreement or the sale and delivery of the
Shares. The Company and each Underwriter agree promptly to notify the others of
the commencement of any litigation or proceeding against it and, in the case of
the Company, against any of the Company's officers and directors, in connection
with the sale and delivery of the Shares, or in connection with the Registration
Statement or Prospectus.
10. Default by the Company. If the Company shall fail at the Closing Time
or on any Date of Delivery to sell and deliver the number of Shares that Company
is obligated to sell hereunder on such date, then the Underwriters may, at the
option of the Representatives by notice from the Representatives to the Company,
terminate this Agreement without any liability on the part of any non-defaulting
party except that the provisions of Sections 4(h), 5 and 9 shall remain in full
force and effect. No action taken pursuant to this Section 10 shall relieve the
Company from liability, if any, in respect of such default.
In the event of a default by the Company as referred to in this Section 10,
the Representatives shall have the right to postpone the Closing Time or the
relevant Date of Delivery for a period not exceeding seven days in order to
effect any required change in the Registration Statement or Prospectus or in any
other documents or arrangements.
11. Notices: Except as otherwise herein provided, all statements,
requests, notices and agreements shall be in writing or by telegram and, if to
the Underwriters, shall be sufficient in all respects if delivered or sent to
Friedman, Billings, Ramsey & Co., Inc., 1001 19th Street North, Arlington,
Virginia 22209, Attention: Compliance Department; and if to the Company, shall
be sufficient in all respects if delivered to the Company at the offices of the
Company at 1675 Palm Beach Lakes Boulevard, Suite 1002, West Palm Beach, Florida
33401 Attention: Secretary.
12. GOVERNING LAW; Headings: THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE
<PAGE>
19
STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. The
section headings in this Agreement have been inserted as a matter of
convenience of reference and are not a part of this Agreement.
13. Parties at Interest: The Agreement herein set forth has been and is
made solely for the benefit of the Underwriters and the Company and the
controlling persons, directors and officers referred to in Section 9 hereof, and
their respective successors, assigns, executors and administrators. No other
person, partnership, association or corporation (including a purchaser, as such
purchaser, from any of the Underwriters) shall acquire or have any right under
or by virtue of this Agreement.
14. Counterparts: This Agreement may be signed by the parties in
counterparts which together shall constitute one and the same agreement among
the parties.
If the foregoing correctly sets forth the understanding among the Company
and the Underwriters, please so indicate in the space provided below for the
purpose, whereupon this letter shall constitute a binding agreement among the
Company and the Underwriters.
Very truly yours,
OCWEN ASSET INVESTMENT CORP.
By ________________________
Title:
Accepted and agreed to as
of the date first above
written:
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
By __________________________
Title:
EVEREN SECURITIES, INC.
By __________________________
Title:
For themselves and as Representatives
of the other Underwriters named on
Schedule I hereto.
<PAGE>
Schedule I
Underwriters Number of Shares
- ------------ ----------------
Friedman, Billings, Ramsey
& Co., Inc.
EVEREN Securities, Inc.
Total 12,500,000
----------
<PAGE>
Exhibit A
---------
_______ __, 1997
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
EVEREN SECURITIES, INC.
as Representatives of the several
Underwriters to be named in the
within-mentioned Underwriting Agreement
c/o Friedman, Billings, Ramsey & Co., Inc.
1001 19th Street North
Arlington, Virginia 22209
Re: Proposed Public Offering by Ocwen Asset Investment Corp.
--------------------------------------------------------
Dear Sirs:
The undersigned understands that Friedman, Billings, Ramsey & Co.,
Inc. ("FBR") and EVEREN Securities, Inc., as representatives on behalf of the
underwriters, propose to enter into an Underwriting Agreement (the "Underwriting
Agreement") with Ocwen Asset Investment Corp., a Virginia corporation (the
"Company") providing for the public offering (the "Offering") of shares of the
Company's common stock, par value $0.01 per share (the "Common Stock").
Simultaneously with the Offering, the undersigned will purchase 1,875,000 shares
of Common Stock (the "OFC Stock"). In recognition of the benefit that such an
offering will confer upon the undersigned, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
undersigned agrees with each underwriter to be named in the Underwriting
Agreement that, during a period of two years from the date of the Underwriting
Agreement, the undersigned will not, without the prior written consent of FBR,
directly or indirectly, (i) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option for the sale of or otherwise transfer or dispose of, directly or
indirectly, any shares of OFC Stock or any securities convertible into or
exercisable or exchangeable for Common Stock, or file, or cause the Company to
file, any registration
<PAGE>
2
statement under the Securities Act of 1933, as amended, with respect to any
of the foregoing or (ii) enter into any swap or any other agreement or any
transaction that transfers, in whole or in part, directly or indirectly, the
economic consequence of ownership of the OFC Stock, whether any such swap or
transaction described in clause (i) or (ii) above is to be settled by
delivery of OFC Stock or such other securities, in cash or otherwise.
If for any reason the Underwriting Agreement shall be terminated prior
to the Closing Time (as defined in the Underwriting Agreement), the agreement
set forth above shall likewise be terminated. In addition, the agreement set
forth above shall terminate if at any time the Company shall terminate the
Management Agreement dated as of __________, 1997 between the Company and Ocwen
Capital Corporation.
Very truly yours,
Ocwen Financial Corporation
By: _____________________
Name:
Title:
<PAGE>
Exhibit B [Form of Opinion of Hunton & Williams]
<PAGE>
April __, 1997
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
EVEREN SECURITIES, INC.
As Representatives of the
Underwriters Named in Schedule I
c/o Friedman, Billings, Ramsey & Co., Inc.
1001 19th Street North
Arlington, VA 2209
Ocwen Asset Investment Corp.
Ladies and Gentlemen:
We have acted as counsel to Ocwen Asset Investment Corp., a
Virginia corporation (the "Company"), Ocwen Partnership, L.P., a
Virginia limited partnership (the "Operating Partnership"), Ocwen
General, Inc., a Virginia corporation (the "General Partner"),
Ocwen Limited, Inc., a Virginia corporation (the "Limited
Partner") and Ocwen Capital Corporation, a Florida corporation
(the "Manager") in connection with the issuance of sale by the
Company of 12,500,000 shares (the "Initial Shares") of its shares
of common stock, par value $.01 per share (the "Common Shares"),
and the consummation of certain transactions in connection
therewith. This opinion is being delivered to you pursuant to
Section 6(a) of the Underwriting Agreement dated as of April __,
1997 by and among the Company and you, as Representatives of the
several underwriters (the "Underwriting Agreement"). Capitalized
terms used but not otherwise defined herein shall have the
meanings assigned to those terms in the Underwriting Agreement
or, if not defined therein, in the Prospectus.
In this connection, we have examined the Company's registration
statement on Form S-11 (No. 333-21965),
filed on February 18, 1997 with the Securities and Exchange
Commission (the "Commission) under the Securities Act of 1933, as
amended (the "Securities Act"); (ii) Amendment No. 1 thereto
filed with the Commission on March 31, 1997; (iii) Amendment No.
2 thereto filed with the Commission on April __, 1997; [ and (iv)
Amendment No. 3 thereto filed with the Commission on April __,
1997] (such
<PAGE>
April __,1997
Page 2
registration statement, at the time it was declared
effective by the Commission being herein referred to as the
"Registration Statement"); and (iv) the prospectus, dated April __, 1997
filed with the Commission under Rule 424(b) (the
"Prospectus"). We also have examined each of the following
documents:
(a) the Underwriting Agreement;
(b) the Limited Partnership Agreement of the Operating
Partnership, dated as of March 3, 1997 (the "Operating
Partnership Agreement"), together with the certificate of limited
partnership filed with the State Corporation Commission of
Virginia on March 3, 1997;
(c) the articles of incorporation and bylaws of each of the
Company, the General Partner, the Limited Partner (collectively
with the Manager, the "Corporations"), together with good
standing certificates with respect to each such entity;
(d) resolutions of each of the Corporations (other than the
Manager) pertaining to the subject transactions, certified by the
Secretary or Assistant Secretary of the respective entity;
(e) the form of certificate evidencing the Common Shares;
and
(f) the management agreement by and between the Company and
the Manager (the "Management Agreement").
For purposes of the opinions expressed below, we have
assumed (i) the authenticity of all documents submitted to us as
originals, (ii) the conformity to the originals of all documents
submitted to us as certified or photostatic copies and the
authenticity of the originals of such copies, (iii) the
genuineness of signatures not witnessed by us, (iv) the legal
capacity of natural persons and (v) the due authorization,
execution and delivery of all documents by all parties and the
validity and enforceability thereof (other than the authorization,
execution and delivery of documents by the Corporations and the
Operating Partnership, and the validity and enforceability of such
documents upon the Corporations and the Operating Partnership,
as to which we express our opinion below).
As to factual matters, we have relied upon representations
included in the Underwriting Agreement and in documents delivered at
the closing, upon certificates of officers of the Corporations,
and upon certificates of public officials. Whenever the phrase
"to our knowledge" or "known to us" is used herein, it refers to
the actual knowledge of the attorneys of this firm involved in
the representation of the Corporations and the Operating
Partnership in connection with the transactions contemplated by
the Underwriting Agreement.
<PAGE>
April __,1997
Page 3
The enforceability of the Management Agreement against the
parties thereto is subject to the provisions of bankruptcy,
insolvency, reorganization or moratorium laws or laws relating to
or affecting the rights of creditors generally and principles of
equity, whether considered at law or in equity. The opinion set
forth in Paragraph 12 is based in part upon no-action letters
issued by the staff of the Commission, which no-action letters
are not binding on the Commission. Accordingly, the opinion set
forth therein is subject to the ability of the Commission or its
staff to modify or narrow its interpretation of Section
3(c)(5)(C) of the Investment Company Act of 1940 with respect to
the Company at any time without notice or cure.
We do not purport to express an opinion on any laws other
than those of the States of Florida and Virginia, and the United
States of America. With respect to all matters of Florida law,
we have, with your consent, relied solely upon the opinion of
James C. Godey, Senior Counsel to Ocwen Financial Corporation, a
copy of which opinion has been delivered to you.
I.
Based upon, and subject to the foregoing and such other
documents and information as we have considered necessary for the
purposes hereof, we are of the opinion that:
1. Each of the Corporations (other than the Manager) has
been duly formed and is validly existing as a corporation in good
standing under the laws of the Commonwealth of Virginia, with
full corporate power and authority necessary to own its
properties and to conduct its business as described in the
Registration Statement and the Prospectus. The Manager has been
duly formed and is validly existing as a corporation in good
standing under the laws of the State of Florida, with full
corporate power and authority necessary to own its properties and
to conduct its business as described in the Registration
Statement and the Prospectus.
2. The Operating Partnership has been duly formed and is
validly existing as a limited partnership under the laws of the
Commonwealth of Virginia, with full partnership power and
authority necessary to own its properties and to conduct its
business as described in the Registration Statement and the
Prospectus.
3. The Company has full corporate power and authority to
execute and deliver the Underwriting Agreement and Management
Agreement and the Manager has full corporate power and authority
to execute and deliver the Management Agreement. The Underwriting
Agreement has been duly and validly authorized, executed and
delivered by the Company. The Management Agreement has been duly
and validly authorized, executed and delivered by the Company and
the Manager, and constitutes a valid and binding agreement of each
of the Company and the Manager, enforceable in accordance with
its terms.
<PAGE>
April __,1997
Page 4
4. The execution, delivery and performance of the
Underwriting Agreement and Management Agreement by the Company
and the consummation of the transactions contemplated thereby, do
not and will not conflict with, or result in a breach of, or
constitute a default under (or constitute any event which with
notice, lapse of time, or both, would constitute a breach of or
default under), (i) any provisions of the articles of
incorporation or bylaws of the Corporations or the Operating
Partnership Agreement, (ii) any provision of any license,
indenture, mortgage, deed of trust, bank loan, credit agreement
or other agreement or instrument known to us to which any of the
Corporations or the Operating Partnership is a party, or by which
their respective properties may be bound or affected, or (iii)
any federal or state law or regulation or any decree, judgment or
order known to us which is applicable to any of the Corporations
or the Operating Partnership, except with respect to clause (ii),
for such conflicts, breaches or defaults which individually or in
the aggregate would not have a material adverse effect on the
operations, business or condition of the Corporations and the
Operating Partnership, taken as a whole.
5. To our knowledge, neither any of the Corporations nor
the Operating Partnership is in breach of, or in default under
(nor has any event occurred which with notice, lapse of time, or
both, would constitute a breach of, or default under) any
license, indenture, mortgage, deed of trust, bank loan or credit
agreement or any other agreement or instrument known to us to
which any of the Corporations or the Operating Partnership is a
party, or by which their respective properties may be bound or
affected, or under any law, regulation or rule or any decree,
judgment or order known to us which is applicable to the Company,
except such breaches or defaults which would not have a material
adverse effect on the operations, business or condition of the
Corporations and the Operating Partnership, taken as a whole.
6. The Company has an authorized capitalization as set
forth in the Prospectus under the caption "Capitalization," and
all of the issued shares of Common Stock (other than the Initial
Shares and the shares to be issued to Ocwen Financial Corporation
on the date hereof) have been duly and validly authorized and
issued and are fully paid and non-assessable.
7. The Initial Shares have been duly and validly
authorized and, when issued and delivered against payment
therefor as provided in the Underwriting Agreement, will be duly
and validly issued, fully paid and non-assessable. The terms of
the Common Shares conform in all material respects to the
statements and descriptions related thereto contained in the
Prospectus. The form of the certificates to be used to evidence
the Common Shares is in due and proper form and comply with all
applicable legal requirements, with any applicable requirements
of the articles of incorporation and by-laws of the Company and
the requirements of the NASDAQ National Market.
<PAGE>
April __,1997
Page 5
8. To our knowledge, except as provided in the
Registration Rights Agreement, there are no persons with
registration or other similar rights to have any securities
registered pursuant to the Registration Statement, or otherwise
registered by the Company under the Securities Act.
9. No approval, authorization, consent or other order of
or filing with any federal or state governmental or regulatory
commission, board, body, authority or agency is required in
connection with the sale of the Initial Shares other than (i)
such as have been obtained under the Securities Act and the
Exchange Act, (ii) such approvals as have been obtained in
connection with the approval of the quotation of the Initial
Shares on the NASDAQ National Market and (iii) any necessary
qualification of the Initial Shares under the securities or blue
sky laws of the various jurisdictions in which the Initial Shares
are being offered by the Underwriters, as to which we express no
opinion.
10. The Registration Statement has been declared effective
under the Securities Act and, to our knowledge, no stop order
suspending the effectiveness of the Registration Statement has
been issued and, to our knowledge, no proceeding for that purpose
is pending or threatened by the Commission.
11. The statements contained in the Prospectus under the
captions "Certain Provisions of Virginia Law and of OAIC's
Articles of Incorporation and Bylaws", "Description of Capital
Stock", "Federal Income Tax Considerations", "ERISA
Considerations" and "Operating Partnership Agreement," insofar as
those statements are descriptions of contracts, agreements or
other legal documents, or describe federal statutes, rules and
regulations, constitute a fair summary thereof.
12. The Company is not an "investment company" or an entity
"controlled" by an "investment company," as such terms are
defined in the Investment Company Act of 1940 and the rules and
regulations of the Commission thereunder. Section 3(c)(5)(C) of
the Investment Company Act provides an exception from the
definition of "investment company" for "any person...who is
primarily engaged in...purchasing or otherwise acquiring
mortgages and other liens on and interests in real estate." Rules
and regulations of the Commission and staff no-action letters
provide that a person is "primarily engaged" if at least 55% of
its assets consist of "mortgages and other liens on and interests
in real estate" and at least 25% of its total assets are invested
in real estate-related interests. The Company's acquisition,
either directly or through wholly-owned subsidiaries, of
Distressed Real Property or real property that is environmentally
distressed[, located outside the United States] or leased to a
third-party, will qualify as an "interest in real estate," as will
the acquisition or origination of the entire interest in a
Mortgage Loan secured by Real Property or the entire interest in
a pool of such Mortgage Loans. The Company's acquisition, either
directly or through wholly-owned subsidiaries, of various
Subordinated Interests
<PAGE>
April __,1997
Page 6
or other classes of MBS, including IOs and
Inverse IOs, will not qualify for the 55% test (unless the
Company has a substantial interest and the unilateral right to
direct foreclosure actions with respect to the mortgage loans
underlying the MBS), but will qualify for the 25% test. The
Company has advised us that it intends to conduct its activities
in a manner that will satisfy the foregoing criteria and, assuming
that it does so, the Company will not be an "investment company"
or an entity "controlled" by an "investment company," as such
terms are defined in the Investment Company Act of 1940 and
the rules and regulations of the Commission thereunder.
II.
We have participated in various conferences with the
officers and directors of the Company and its independent
certified public accountants. In some conferences you and your
counsel also participated. At those conferences, the contents of
the Registration Statement and Prospectus were discussed and
revised. Since the dates of those conferences, we have inquired
of certain officers whether there has been any material change in
the affairs of the Company.
Because of the inherent limitations in the independent
verification of factual matters, and the character of
determinations involved in the preparation of registration
statements under the Securities Act, we are not passing upon, and
do not assume any responsibility for, and make no representation
that we have independently verified the accuracy, completeness or
fairness of the statements contained in the Registration
Statement or the Prospectus, except as specifically set forth in
paragraph 11 of Part I of our opinion above. Also, we do not
express any opinion or belief as to the financial statements or
other financial or statistical information contained or
incorporated by reference into the Registration Statement.
However, subject to the foregoing, on the basis of our
participation in the conferences referred to above and our
examination of the documents referred to herein, we advise you
that: (a) in our opinion, the Registration Statement, when it
became effective, and the Prospectus, as of its date and as of
the date hereof (other than the financial statements, schedules
and other financial data included therein or excluded therefrom
or included in or excluded from the exhibits to the Registration
Statement, as to which we express no opinion) comply as to form
in all material respects with the requirements of the Securities
Act and the rules and regulations promulgated thereunder; (b) we
do not know of any contracts or documents of a character required
to be described in the Registration Statement or Prospectus or to
be filed as exhibits to the Registration Statement that are not
described or filed as required; and (c) we do not know of any
actions, suits or proceedings pending or threatened against the
Corporations or the Operating Partnership or any of their
respective properties, at law or in equity or before or by any
commission board, body, authority or agency which are required to
be described in the Prospectus but are not so described.
Further, nothing has come to our attention that leads us to
believe that the Registration Statement, when it became
effective, contained any untrue statement of a material fact or
omitted to state any material fact required to be stated
<PAGE>
April __,1997
Page 7
therein or necessary to make the statements therein not misleading; or that
the Prospectus, as of its date and as of the date hereof, contained or
contains any untrue statement of a material fact or omitted or omits to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; except that we make no statement with respect to the financial
statements or other financial or statistical data included therein.
We consent to reliance by you upon our opinion delivered to
the Company and filed as Exhibit 5.1 to the Registration
Statement. This opinion letter may not be relied upon by, nor
may copies be delivered to, any person without our prior written
consent. We do not undertake to advise you of any changes in the
opinions expressed herein from matters that might hereafter arise or
be brought to our attention.
Very truly yours,
<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 one (1) 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 1000
1675 Palm Beach Lakes Boulevard
West Palm Beach, FL 33401
Christine A. Reich The Forum, Suite 1000
1675 Palm Beach Lakes Boulevard
West Palm Beach, FL 33401
Timothy I. Riddiough MIT Center for Real Estate
Building W31-310
Cambridge, MASS 02139
Robert F. Pugliese Eckert Seamans Cherin & Mellott
600 Grant Street
Pittsburgh, PA 15219
C. 1. Notwithstanding anything herein to the contrary, at all
times beginning ninety (90) calendar days following the initial public
offering of the Corporation's Stock (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) been employed by the "Manager" or any of
its "Affiliates," (ii) been an officer or director of the "Manager" or any of
its "Affiliates," (iii) performed services for the "Manager" or (iv) 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,
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<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.
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<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.
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<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:
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<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
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<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.
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<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.
"Owner Financial" shall mean Ocwen Financial Corporation and its
affiliates.
"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
9.1% of the outstanding shares of Common Stock by any stockholder other than
Ocwen Financial, (b) more than 13% 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
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<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) or (A)(8) 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
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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) or (A)(8) 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) or (A)(8) 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
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of shares of Equity Stock in excess 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
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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.
8. Removal of Ownership Limit. The Ownership Limit will not be
removed until (A) such restrictions are no longer required in order to
qualify as a REIT, and (ii) the Board of Directors determines that it is no
longer in the best interests of the Company to retain such restrictions; or
(B)(i) the Board of Directors determines that it is no longer in the best
interest of the Corporation 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 the Corporation.
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<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
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<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
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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 9.1% of the number of
outstanding shares of Common Stock (except that Ocwen Financial may
Beneficially Own or Constructively Own no more than 13% 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
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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.
G. Amendments. Except as provided in Section (D) to Article V and
Section (A)(8) to Article VIII, and notwithstanding Section 13.1-707 of the
Virginia Stock Corporation Act, these Articles may be amended by an
affirmative vote of a majority of the number of shares of Common Stock
entitled to vote on such matter (and, if such amendment would affect the
Preferred Stock, a majority of the number of Preferred Stock entitled to vote
on such matter) at a regular or special meeting of the
stockholders of the Corporation.
Dated: April __, 1997
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EXHIBIT 3.2
BYLAWS
OF
OCWEN ASSET INVESTMENT CORP.
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I Offices........................................... 1
Section 1. Principal Office............................ 1
Section 2. Additional Offices.......................... 1
Section 3. Fiscal and Taxable Years.................... 1
ARTICLE II Definitions...................................... 1
ARTICLE III Meetings of Shareholders........................ 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 Directors........................................ 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 Committees........................................ 22
Section 1. Committees of the Board..................... 22
Section 2. Telephone Meetings.......................... 24
Section 3. Action By Committees Without a Meeting...... 25
ARTICLE VI Officers......................................... 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 Contracts, Notes, Checks and Deposits........... 30
Section 1. Contracts.................................... 30
Section 2. Checks and Drafts............................ 30
Section 3. Deposits..................................... 30
ARTICLE VIII Shares of Stock................................ 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 Dividends........................................ 33
Section 1. Declaration................................. 33
Section 2. Contingencies............................... 34
ARTICLE X Seal.............................................. 34
Section 1. Seal........................................ 34
Section 2. Affixing Seal............................... 34
ARTICLE XI Waiver of Notice................................. 35
Waiver of Notice........................................ 35
ARTICLE XII Amendment of Bylaws............................. 35
Section 1. By Directors................................ 35
Section 2. By Shareholders............................. 36
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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 1000, 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 these Bylaws, the term "Manager" means
the Person responsible for directing day-to-day
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business affairs of the Company, including any Person to which the Manager
subcontracts substantially all such functions.
(b) For purposes of these Bylaws, "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 these Bylaws, 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 these Bylaws, 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.
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(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
beginning ninety (90) calender days following the initial public offering of
the Corporation's Stock (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) been employed by the Manager or any of its
Affiliates or been an officer or director of the Manager or any of its
Affiliates, (ii) performed services for the Manager or any of its Affiliates
or (iii) 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 1000, West Palm Beach, FL 33401
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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
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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
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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.
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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
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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
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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
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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
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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
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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.
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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
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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 one (1) nor more than nine (9).
The initial Board of Directors shall consist of one (1) person. The
initial term of the Directors shall expire at the first annual meeting of
shareholders. Directors need not be shareholders in the Corporation.
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,
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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,
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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
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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.
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Section 10. Voting. (a) 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,
any 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 the Manager, a 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
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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
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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
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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.
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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. The Board of Directors shall appoint 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.
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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
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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 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 or 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 or Section 9,
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.
April 1997
35
<PAGE>
Exhibit 4.1
FORM OF COMMON STOCK CERTIFICATE
NUMBER [LOGO] SHARES
OCWEN ASSET INVESTMENT CORP.
Incorporated Under the Laws of the Commonwealth of Virginia
CUSIP 67574M 10 6
This certifies that __________________________ is the owner of _________
(____) fully paid and non-assessable shares of the common stock, par value
$.01 per share, of
OCWEN ASSET INVESTMENT CORP.
transferable only on the books of the Corporation by the holder hereof, in
person or by duly authorized attorney, upon surrender of this certificate
properly endorsed.
This Certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
_______________________ ________________________
John R. Erbey [SEAL] Christine A. Reich
Secretary President and Chief
Financial Officer
<PAGE>
OCWEN ASSET INVESTMENT CORP.
THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH SHAREHOLDER WHO SO
REQUESTS A SUMMARY OF THE DESIGNATIONS, RELATIVE RIGHTS, PREFERENCES AND
LIMITATIONS APPLICABLE TO EACH CLASS OF SHARES THE CORPORATION IS AUTHORIZED
TO ISSUE, AND THE VARIATIONS IN RIGHTS, PREFERENCES AND LIMITATIONS FOR EACH
SERIES, IF ANY, WITHIN A CLASS (INCLUDING THE AUTHORITY OF THE BOARD OF
DIRECTORS TO DETERMINE VARIATIONS FOR FUTURE SERIES).
THE SHARES OF COMMON 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 9.1% OF THE NUMBER OF
OUTSTANDING SHARES OF COMMON STOCK (EXCEPT THAT OCWEN FINANCIAL MAY
BENEFICIALLY OWN OR CONSTRUCTIVELY OWN UP TO 13% 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
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.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - __________Custodian__________
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of Under Uniform Gifts to Minors Act _______________
survivorship and not as tenants (State)
in common
</TABLE>
For value received, __________________________________ hereby sell
asssing and transfer
PLEASE INSERT SOCIAL SECURITY OR OTHER TAXPAYER IDENTIFYING NUMBER OF ASSIGNEE
______________________________________________________________________________
unto _________________________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF
ASSIGNEE
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
_________________________________ Shares of common stock represented
by this certificate, and do hereby irrevocably constitute and appoint
______________________, Attorney, to transfer the said shares on the books of
the within named Corporation, with full power of substitution in the premises.
Dated ____________, 19__
____________________________________
Signature
____________________________________
Signature
Notice: The signature to this assignment must correspond with the name
written upon the face of this certificate in every particular without
alteration or any change whatever.
<PAGE>
Exhibit 8.1
April 15, 1997
Ocwen Asset Investment Corp.
1675 Palm Beach Lakes Blvd., Suite 1000
West Palm Beach, Florida 33401
Ocwen Asset Investment Corp.
Qualification as
Real Estate Investment Trust
Ladies and Gentlemen:
We have acted as counsel to Ocwen Asset Investment Corp., a Virginia
corporation (the "Company"), in connection with the preparation of a Form
S-11 registration statement (the "Registration Statement") filed with the
Securities and Exchange Commission on February 18, 1997 (No. 333-21965), as
amended through the date hereof, with respect to the offering and sale (the
"Offering") of up to 14,375,000 shares of common stock, par value $0.01 per
share, of the Company (the "Common Stock"), and the Company's contribution of
the net proceeds of the Offering to its wholly-owned subsidiaries, Ocwen
General, Inc., a Virginia corporation (the "General Partner"), and Ocwen
Limited, Inc., a Virginia corporation (the "Limited Partner"), and the
contribution of such proceeds by the General Partner and the Limited Partner
to Ocwen Partnership, L.P., a Virginia limited partnership (the
"Partnership"), in exchange for a 1% general partnership interest and a 99%
limited partnership interest, respectively, in the Partnership. You have
requested our opinion regarding certain U.S. federal income tax matters in
connection with the Offering.
The Partnership has contracted to acquire certain subordinated
mortgage-backed securities. The Partnership will invest the balance of the
proceeds contributed by the General Partner and the Limited Partner in
short-term,
<PAGE>
Ocwen Asset Investment Corp.
April 15, 1997
Page 2
interest-bearing securities until the Partnership identifies additional real
estate-related assets for acquisition.
In giving this opinion letter, we have examined the following:
1. the Company's Articles of Incorporation, as duly filed with the
Secretary of State of the Commonwealth of Virginia on January 22, 1997;
2. the Company's Restated and Amended Articles of Incorporation, a form
of which is filed as an exhibit to the Registration Statement;
3. the Company's Bylaws;
4. the Registration Statement, including the prospectus contained as
part of the Registration Statement (the "Prospectus");
5. the Articles of Incorporation of the General Partner and the Limited
Partner;
6. the Limited Partnership Agreement of the Partnership (the
"Partnership Agreement") between the General Partner and the Limited Partner,
in the form filed as an exhibit to the Registration Statement; and
7. such other documents as we have deemed necessary or appropriate for
purposes of this opinion.
In connection with the opinions rendered below, we have assumed, with
your consent, that:
1. each of the documents referred to above has been duly authorized,
executed, and delivered; is authentic, if an original, or is accurate, if a
copy; and has not been amended;
2. during its short taxable year ending December 31, 1997 and future
taxable years, the Company will operate in a manner that will make the
representations contained in a certificate, dated March 27, 1997 and executed
by a duly appointed officer of the Company (the "Officer's Certificate"),
true for such years;
<PAGE>
Ocwen Asset Investment Corp.
April 15, 1997
Page 3
3. The Company will not make any amendments to its organizational
documents, the General Partner's or the Limited Partner's organizational
documents, or the Partnership Agreement after the date of this opinion that
would affect its qualification as a real estate investment trust (a "REIT")
for any taxable year; and
4. no action will be taken by the Company, the General Partner, the
Limited Partner, or the Partnership after the date hereof that would have the
effect of altering the facts upon which the opinions set forth below are
based.
In connection with the opinions rendered below, we also have relied upon
the correctness of the representations contained in the Officer's
Certificate. No facts have come to our attention, however, that would cause
us to question the accuracy and completeness of the facts contained in the
documents and assumptions set forth above, the representations set forth in
the Officer's Certificate, or the Prospectus in a material way. In addition,
to the extent that any of the representations provided to us in the Officer's
Certificate are with respect to matters set forth in the Internal Revenue
Code of 1986, as amended (the "Code"), or the Treasury regulations thereunder
(the "Regulations"), we have reviewed with the individuals making such
representations the relevant portion of the Code and the applicable
Regulations.
Based on the documents and assumptions set forth above, the
representations set forth in the Officer's Certificate, and the discussion in
the Prospectus under the caption "Federal Income Tax Considerations" (which
is incorporated herein by reference), we are of the opinion that:
(a) commencing with the Company's short taxable year beginning on
the day before the closing date of the Offering and ending December 31,
1997, the Company will qualify to be taxed as a REIT pursuant to
sections 856 through 860 of the Code, and the Company's organization and
proposed method of operation will enable it to continue to meet the
requirements for qualification and taxation as a REIT under the Code; and
(b) the descriptions of the law and the legal conclusions contained
in the Prospectus under the
<PAGE>
Ocwen Asset Investment Corp.
April 15, 1997
Page 4
caption "Federal Income Tax Considerations" are correct in all material
respects, and the discussion thereunder fairly summarizes the federal
income tax considerations that are likely to be material to a holder of
the Common Stock.
We will not review on a continuing basis the Company's compliance with the
documents or assumptions set forth above, or the representations set forth in
the Officer's Certificate. Accordingly, no assurance can be given that the
actual results of the Company's operations for any given taxable year will
satisfy the requirements for qualification and taxation as a REIT.
The foregoing opinions are based on current provisions of the Code and
the Regulations, published administrative interpretations thereof, and
published court decisions. The Internal Revenue Service has not issued
Regulations or administrative interpretations with respect to various
provisions of the Code relating to REIT qualification. No assurance can be
given that the law will not change in a way that will prevent the Company
from qualifying as a REIT.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the references to Hunton &
Williams under the caption "Federal Income Tax Considerations" in the
Prospectus. In giving this consent, we do not admit that we are in the
category of persons whose consent is required by Section 7 of the Securities
Act of 1933, as amended, or the rules and regulations promulgated thereunder
by the Securities and Exchange Commission.
The foregoing opinions are limited to the U.S. federal income tax
matters addressed herein, and no other opinions are rendered with respect to
other federal tax matters or to any issues arising under the tax laws of any
other country, or any state or locality. We undertake no obligation to update
the opinions expressed herein after the date of this letter. This opinion
letter is solely for the information and use of the addressee and the
purchasers of the Common Stock pursuant to the Prospectus, and it may not
be distributed, relied upon for any purpose by any other person, quoted
in whole or in part or otherwise reproduced in
<PAGE>
Ocwen Asset Investment Corp.
April 15, 1997
Page 5
any document, or filed with any governmental agency without our express
written consent.
Very truly yours,
/s/ Hunton & Williams
<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 3rd day of
March, 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 1000, 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 1000
West Palm Beach, Florida 33401
Limited Partner: 99%
Ocwen Limited, Inc.
1675 Palm Beach Lakes Boulevard, Suite 1000
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; REDEMPTIONS
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).
4.4 Redemption of Portion of Partnership Interests. If Ocwen Asset
Investment Corp., the parent corporation of the General Partner and the
Limited Partner (the "Company"), decides to securitize mortgage loans and/or
leases of real estate through the issuance of collateralized mortgage
obligations, each of the General Partner and the Limited Partner has the
right to redeem a portion of its interest in the Partnership (each, a
"Partnership Interest") in exchange for the mortgage loans and/or leases to
be securitized. The portion of a Partnership Interest redeemed pursuant to
this Section will be determined based on the fair market value of the
mortgage loans and/or leases distributed to the General Partner or Limited
Partner. Such fair market value will be determined by the General Partner,
but will be subject to the review of the "Independent Directors" of the
Company.
For Purposes of the Section, the term "Independent Directors" means
members of the Company's Board of Directors who, within the two years prior
to the date of this Agreement, have not owned an interest in, been employed
by, been an officer or director of, performed services for, or had any
material business or professional relationship with Ocwen Capital Corporation
or its affiliate.
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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).
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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. Partnership Interests may not be assigned in
whole or in part.
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Any transfer of a Partnership Interest 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.
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(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.
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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. Section 6.1 hereof shall not be amended unless
and until persons other than the General Partner and the Limited Partner are
admitted as partners of the Partnership.
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.
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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: /s/ William C. Erbey
Name: William C. Erbey
Title: President
LIMITED PARTNER:
OCWEN LIMITED, INC.,
a Virginia corporation
By: /s/ William C. Erbey
Name: William C. Erbey
Title: President
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EXHIBIT 10.4
OCWEN ASSET INVESTMENT CORP.
1997 STOCK OPTION PLAN
ARTICLE I.
DEFINITIONS
1.01 Affiliate means any entity under common control with the Company,
within the meaning of Code section 414(b) or (c) and any "subsidiary" or
"parent" corporation (within the meaning of Section 424 of the Code) of the
Company, including an entity that becomes an Affiliate after the adoption of
this Plan.
1.02 Agreement means a written agreement (including any amendment or
supplement thereto) between the Company and a Participant specifying the terms
and conditions of an Option granted to such Participant.
1.03 Board means the Board of Directors of the Company.
1.04 Change in Control means that (i) any person, including a "group" as
defined in Section 13(d)(3) of the Securities Exchange Act of 1934, becomes the
owner or beneficial owner of Company securities having 20% or more of the
combined voting power of the then outstanding Company securities that may be
cast for the election of the Company's directors (other than as a result of an
issuance of securities initiated by the Company, or open market purchases
approved by the Board, as long as the majority of the Board approving the
purchases are directors at the time the purchases are made); or (ii) as the
direct or indirect result of, or in connection with, a cash tender or exchange
offer, a merger or other business combination, a sale of assets, a contested
election of directors, or any combination of these transactions, the persons who
were directors of the Company before such transactions cease to constitute a
majority of the Company's Board, or any successor's board, within two years of
the last of such transactions. For purposes of this Plan, the Control Change
Date is the date on which an event described in (i) or (ii) occurs. If a Change
in Control occurs on account of a series of transactions, the Control Change
Date is the date of the last of such transactions.
1.05 Code means the Internal Revenue Code of 1986, as amended from time to
time.
1.06 Common Stock means the common stock of the Company, $.01 par value.
1.07 Company means Ocwen Asset Investment Corp.
1.08 Fair Market Value means, on any given date, the current fair market
value of a share of Common Stock as determined pursuant to subsection (a), (b)
or (c) below:
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(a) While the Company is a Non-Public Company, Fair Market Value
shall be determined by the Board using any reasonable method in good faith;
(b) While the Company is a Public Company, Fair Market Value shall be
determined as follows: if the Common Stock is not listed on an
established stock exchange, then the Fair Market Value shall be the
reported "closing" price in the New York over-the-counter market as
reported by the National Association of Securities Dealers, Inc. If the
Common Stock is listed on an established stock exchange or exchanges, Fair
Market Value shall be deemed to be the highest closing price of a share of
Common Stock reported on that stock exchange or exchanges or, if the Common
Stock was not traded on any stock exchange on such day, then on the next
preceding day that the Common Stock was traded, all as reported by such
source as the Board may select; and
(c) Notwithstanding the foregoing, Fair Market Value on the First
Award Date shall be the initial public offering price of the Shares.
1.09 First Award Date means the date that the registration statement
relating to the Company's initial public offering of shares of Common Stock is
declared effective by the Securities and Exchange Commission.
1.10 General Partner means Ocwen General, Inc., a wholly-owned subsidiary
of the Company, and the general partner of the Partnership.
1.11 Manager means Ocwen Capital Corporation, or any other person or entity
that becomes a manager of the Company.
1.12 Non-Public Company means an entity that is not a Public Company.
1.13 Option means an option that entitles the holder to purchase from the
Company a stated number of shares of Common Stock at the price set forth in the
Agreement, or, at the election of the Company, an equivalent number of Units at
the same price.
1.14 Participant means a Manager who satisfies the requirements of Article
IV and is selected by the Board to receive an Option.
1.15 Partnership means Ocwen Partnership, L.P.
1.16 Plan means the Ocwen Asset Investment Corp. 1997 Stock Option Plan.
1.17 Public Company means an entity that has sold securities pursuant to an
effective registration statement on Form S-11 filed pursuant to the Securities
Act of 1933, as amended.
1.18 Unit means a unit of limited partnership interest in the Partnership.
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ARTICLE II.
PURPOSES
The Plan authorizes the grant of options to acquire shares of Common Stock.
The Plan is intended to assist the Company in recruiting and retaining a Manager
with ability and initiative by enabling a Manager who contributes significantly
to the Company or an Affiliate to participate in its future success and to
associate its interests with those of the Company and its shareholders. The
proceeds received by the Company from the sale of Common Stock pursuant to the
Plan shall be used for general corporate purposes.
ARTICLE III.
ADMINISTRATION
The Plan shall be administered by the Board. The Board shall have
authority to grant Options upon such terms (not inconsistent with the provisions
of the Plan) as it may consider appropriate. Such terms may include conditions
(in addition to those contained in the Plan) upon the exercisability of all or
any part of an Option. Notwithstanding any such conditions, the Board, in its
discretion, may accelerate the time at which any Option may be exercised.
Furthermore, each outstanding Option shall become immediately exercisable (in
whole or part at the discretion of the holder) in the event of a Change in
Control and during the period (i) beginning on the first day following any
tender offer or exchange offer for shares of Common Stock (other than one made
by the Company) provided that such shares of Common Stock are acquired pursuant
to such offer and (ii) ending on the thirtieth day following the expiration of
such offer. In addition, the Board shall have complete authority to interpret
all provisions of the Plan; to prescribe the form of Agreements; to adopt,
amend, and rescind rules and regulations pertaining to the administration of the
Plan; and to make all other determinations necessary or advisable for the
administration of the Plan. The express grant in the Plan of any specific power
to the Board shall not be construed as limiting the power or authority of the
Board. Any decision made, or action taken, by the Board in or in connection
with the administration of the Plan shall be final and conclusive. No member of
the Board shall be liable for any act done in good faith with respect to the
Plan, any Agreement, or any Option. All expenses of administering the Plan
shall be borne by the Company.
ARTICLE IV.
ELIGIBILITY
4.01 General. Any Manager of the Company who, in the judgment of the
Board, has contributed or can be expected to contribute to the profits or growth
of the Company or an Affiliate may be granted one or more Options. No person
who is a member of the Board may be granted Options under the Plan.
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4.02 Grants. The Board will designate persons to whom Options are to be
granted and will specify the number of shares of Common Stock subject to each
grant. Options granted under the Plan shall be evidenced by Agreements that
shall be subject to applicable provisions of the Plan and to such other
provisions as the Board may adopt.
ARTICLE V.
STOCK SUBJECT TO OPTIONS
5.01 Delivery of Stock. Upon the exercise of any Option, the Company may
deliver to the Participant authorized but previously unissued Common Stock.
The maximum aggregate number of shares of Common Stock that may be issued
pursuant to Options granted under the Plan is 5,000,000, subject to
adjustment as provided in Article IX. If an Option is terminated, in whole
or in part, for any reason other than its exercise, the number of shares of
Common Stock allocated to the Option or portion thereof may be reallocated to
other Options to be granted under the Plan.
5.02 Delivery of Units or Cash in Lieu of Stock. Upon the exercise of any
Option, the Company shall have the sole and absolute right to deliver, in lieu
of shares of Common Stock, Units equivalent in number to the shares of Common
Stock. Such Units must be redeemable pursuant to the Agreement for (i) cash in
an amount equal to the Fair Market Value of the shares that would be delivered
pursuant to clause (ii) hereof, or, (ii) at the election of the General Partner,
shares of Common Stock on a one-for-one basis. The Company shall deliver, or
cause the delivery of, cash or Units in lieu of Common Stock if delivering
Common Stock to the Participant would cause the Participant's holdings of Common
Stock to violate the Ownership Limit (as that term is defined in the Company's
articles of incorporation, as amended).
ARTICLE VI.
OPTION PRICE
The price per share for Common Stock purchased on the exercise of any
Option granted under the Plan shall be determined by the Board on the date that
the Option is granted; provided, however, that the price per share shall not be
less than the Fair Market Value per share on the date such Option is granted.
ARTICLE VII.
EXERCISE OF OPTIONS
7.01 Maximum Option Period. No Option shall be exercisable after the
expiration of ten years from the date the Option was granted. The terms of any
Option may provide that it is exercisable for a period less than such maximum
period.
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7.02 Transferability. Any Option granted under the Plan shall be freely
transferable, provided such transfer is in compliance with all applicable
federal and state laws and regulations and the rules of all domestic stock
exchanges on which the Company's shares may be listed. The Company shall have
the right to rely on the opinion of its counsel as to such compliance.
ARTICLE VIII.
METHOD OF EXERCISE
8.01 Exercise. Subject to the provisions of Articles VII and X, an Option
may be exercised in whole at any time or in part from time to time at such times
and in compliance with such requirements as the Board shall determine. An
Option granted under the Plan may be exercised with respect to any number of
whole shares less than the full number for which the Option could be exercised.
A partial exercise of an Option shall not affect the right to exercise the
Option from time to time in accordance with the Plan and the Agreement with
respect to remaining shares subject to the Option.
8.02 Payment. Payment of the option price shall be made in a single sum,
in cash or a cash equivalent acceptable to the Board. If the Agreement
provides, payment of all or part of the option price may be made by surrendering
shares of Common Stock to the Company. If Common Stock is used to pay all or
part of the option price, the shares surrendered must have a Fair Market Value
(determined as of the day preceding the date of exercise) that is not less than
such price or part thereof.
8.03 Shareholder Rights. No Participant shall, as a result of receiving
any Option, have any rights as a shareholder (or a partner of the Partnership)
until the date he exercises such Option.
ARTICLE IX.
ADJUSTMENT UPON CHANGE IN COMMON STOCK
The maximum number of shares as to which Options may be granted under the
Plan shall be proportionately adjusted and the terms of Options shall be
adjusted as the Board shall determine to be equitably required if (a) the
Company effects one or more stock dividends, stock split-ups, subdivisions or
consolidations of shares, or other similar changes in capitalization, (b) the
Company becomes a party to any plan of merger, consolidation or reorganization,
or (c) there occurs any other event which, in the judgment of the Board,
necessitates such action. Any determination made under this Article IX by the
Board shall be final and conclusive.
The issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, for cash or property or for labor
or services, either upon direct sale or upon the exercise of rights or warrants
to subscribe therefor, or upon conversion of
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shares or obligations of the Company convertible into such shares or other
securities, shall not affect, and no adjustment by reason thereof shall be
made with respect to, Options.
ARTICLE X.
COMPLIANCE WITH LAW AND APPROVAL OF REGULATORY BODIES
No Option shall be exercisable, no Common Stock shall be issued, no
certificates for shares of Common Stock shall be delivered, and no payment shall
be made under the Plan except in compliance with all applicable federal and
state laws and regulations (including, without limitation, withholding tax
requirements) and the rules of all domestic stock exchanges on which the
Company's shares may be listed. The Company shall have the right to rely on the
opinion of its counsel as to such compliance. Any share certificate issued to
evidence Common Stock for which an Option is exercised may bear such legends and
statements as the Board may deem advisable or desirable. No Option shall be
exercisable, no Common Stock shall be issued, no certificate for shares shall be
delivered, and no payment shall be made under the Plan until the Company has
obtained such consent or approval as the Board may deem advisable from
regulatory bodies having jurisdiction over such matters.
ARTICLE XI.
GENERAL PROVISIONS
11.01 Effect on Employment. Neither the adoption of the Plan, its
operation, nor any documents describing or referring to the Plan (or any part
thereof) shall confer upon any Participant any right to continue as an employee
or an independent contractor of the Company or an Affiliate or in any way affect
any right and power of the Company or an Affiliate to terminate the service of
any Participant at any time with or without assigning a reason therefor.
11.02 Unfunded Plan. The Plan, insofar as it provides for grants, shall
be unfunded, and the Company shall not be required to segregate any assets that
may at any time be represented by grants under the Plan. Any liability of the
Company to any person with respect to any grant under the Plan shall be based
solely upon any contractual obligations that may be created pursuant to the
Plan. No such obligation of the Company shall be deemed to be secured by any
pledge of, or other encumbrance on, any property of the Company.
11.03 Rules of Construction. Headings are given to the articles and
sections of the Plan solely as a convenience to facilitate reference. The
reference to any statute, regulation, or other provision of law shall be
construed to refer to any amendment to or successor of such provision of law.
11.04 Notice. Unless specifically required by the terms of this Plan,
notice to the Company's shareholders, the Participant, or any other person or
entity of any action by the Board is not required before or after such action
occurs.
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ARTICLE XII.
AMENDMENT
The Board may amend from time to time or terminate the Plan; provided,
however, that no amendment may become effective until shareholder approval is
obtained if, except as provided in Article IX, the amendment (i) increases the
aggregate number of shares that may be issued pursuant to the Plan, (ii) changes
the class of persons eligible to become Participants, (iii) increases the
maximum number of shares that may be issued to any person, (iv) modifies the
period within which Options may be granted, (v) modifies the terms upon which
Options may be exercised, or (vi) increases the material benefits accruing to
Participants under the Plan. No amendment of the Plan or an Agreement shall,
without a Participant's consent, adversely affect any rights of such Participant
under any Option outstanding at the time such amendment is made.
ARTICLE XIII.
DURATION OF PLAN
No Options may be granted under the Plan more than ten years after the
earlier of the date that the Plan is adopted by the Board and the date that the
Plan is approved by the Company's shareholders in accordance with Article XIV.
Options granted before the expiration of such period shall remain valid in
accordance with their terms.
ARTICLE XIV.
EFFECTIVE DATE OF PLAN
Options may be granted under the Plan upon its adoption by the Board,
provided that no Option will be effective unless the Plan is approved (i) at a
duly held shareholders' meeting within twelve months of such adoption by
shareholders holding a majority of the Company's outstanding voting stock, or
(ii) by unanimous consent of the Company's shareholders.
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OCWEN ASSET INVESTMENT CORP.
Option Agreement
1997 Stock Option Plan
No. of shares subject to Option: ____________
THIS AGREEMENT dated the _____ day of __________________, 1997, among OCWEN
ASSET INVESTMENT CORP., a Virginia corporation (the "Company"), OCWEN
PARTNERSHIP, L.P., a Virginia limited partnership (the "Partnership"), OCWEN
GENERAL, INC., a Virginia corporation (the "General Partner"), and OCWEN CAPITAL
CORPORATION ("Participant"), is made pursuant and subject to the provisions of
the Company's 1997 Stock Option Plan (the "Plan"), a copy of which is attached.
1. Definitions. The following words and phrases shall have the following
meanings:
"Cash Amount" means an amount of cash per Unit equal to the Fair Market
Value of the Common Stock Amount on the date of receipt by the General Partner
of a Notice of Redemption.
"Common Stock" means the common stock of the Company, $.01 par value.
"Common Stock Amount" means a number of shares of Common Stock equal to the
product of the number of Units offered for redemption by the Participant,
multiplied by the Conversion Factor; provided that if the General Partner issues
to all holders of Common Stock rights, options, warrants or convertible or
exchangeable securities entitling the shareholders to subscribe for or purchase
Common Stock, or any other securities or property (collectively, the "rights"),
then the Common Stock Amount shall also include such rights that a holder of
that number of shares of Common Stock would be entitled to receive.
"Conversion Factor" means one (1), provided that if the Company (i)
declares or pays a dividend on its outstanding Common Stock in Common Stock or
makes a distribution to all holders of its outstanding Common Stock in Common
Stock, (ii) subdivides its outstanding Common Stock, or (iii) combines its
outstanding Common Stock into a smaller number of shares of Common Stock, then
the Conversion Factor shall be adjusted by multiplying the Conversion Factor by
a fraction, the numerator of which shall be the number of shares of Common Stock
issued and outstanding on the record date for such dividend, distribution,
subdivision or combination (assuming for such purposes that such dividend,
distribution, subdivision or combination has occurred as of such time), and the
denominator of which shall be the actual number of shares of Common Stock
(determined without the above assumption) issued and outstanding on such date.
Any adjustment to the Conversion Factor shall become effective immediately after
the effective date of such event retroactive to the record date, if any, for
such event.
<PAGE>
"General Partner" means Ocwen General, Inc. and any Person who becomes a
substitute or additional General Partner as provided in the agreement of the
Partnership, as amended, and any of their successors as General Partner.
"Notice of Redemption" means the Notice of Exercise of Redemption Right
substantially in the form attached as Exhibit A hereto.
"Redemption Amount" means the Cash Amount or, at the option of the General
Partner, the Common Stock Amount.
"Specified Redemption Date" means the first business day of the month that
is at least 5 business days after the receipt by the General Partner of the
Notice of Redemption (or any other date agreed to by the General Partner and the
Participant).
Each capitalized term used herein and not defined herein shall have the
meaning ascribed to it in the Plan.
2. Grant of Option. Pursuant to the Plan, the Company, on the First
Award Date, granted to Participant, subject to the terms and conditions of the
Plan and subject further to the terms and conditions herein set forth, the right
and option to purchase from the Company all or any part of an aggregate of
______________ shares of Common Stock (subject to the Company's right under
section 5.02 of the Plan to substitute Units for such Common Stock) at the
purchase price of $16 per share (the "Option Price"), being not less than the
Fair Market Value per share of the Common Stock on the First Award Date. Such
Option will be exercisable as hereinafter provided.
3. Terms and Conditions. The Option evidenced hereby is subject to the
following terms and conditions:
(a) Severance Date. The date on which the Participant's status as a
Manager is terminated.
(b) Expiration Date. The Expiration Date of this Option shall be
________________, 2007, which date is not more than ten years after the
First Award Date.
(c) Exercise of Option. This Option shall be exercisable, in whole
or in part, with respect to one quarter of the shares subject to this
Option on or after ______________ __, 1998, with respect to an additional
one quarter on or after ____________ __, 1999, with respect to an
additional one quarter on or after ____________ __, 2000, and with respect
to the remaining shares on or after __________________ __, 2001, until the
Expiration Date. This Option may be exercised with respect to any number
of whole shares less than the full number for which the Option could be
exercised. A partial exercise of this Option shall not affect the
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<PAGE>
Participant's right to exercise this Option with respect to the remaining
shares, subject to the conditions of the Plan and this Agreement.
(d) Method of Exercising and Payment for Shares. This Option shall
be exercised by written notice delivered to the attention of the Corporate
Secretary at the Company's principal office. The exercise date shall be
(i) in the case of notice by mail, the date of postmark, or (ii) if
delivered in person, the date of delivery. Such notice shall be
accompanied by payment of the Option Price in full, in cash, cash
equivalent acceptable to the Company, shares of Common Stock, or in any
combination thereof. If Common Shares are used to pay all or a portion of
the Option Price, any Common Shares surrendered must have an aggregate Fair
Market Value (determined as of the day preceding the date of exercise)
that, together with any cash or cash equivalent paid, is not less than the
Option Price for the number of Common Shares for which the Option is being
exercised.
(e) Transferability. This Option is freely transferable, provided
such transfer is in compliance with all applicable federal and state laws
and regulations and the rules of all domestic stock exchanges on which the
Company's shares may be listed. The Company may rely on the opinion of its
counsel as to such compliance. Any transferee remains subject to the terms
and conditions of the Option, and following the transfer, references in
this Agreement to Participant include the transferee.
(f) Nonqualified Option. This Option shall not be treated as an
incentive stock option within the meaning of Code section 422.
(g) Change in Control. Despite any other provision of this
Agreement, each outstanding Option shall become immediately exercisable (in
whole or part at the discretion of the holder) in the event of a Change in
Control and during the period (i) beginning on the first day following any
tender offer or exchange offer for shares of Common Stock (other than one
made by the Company) provided that such shares of Common Stock are acquired
pursuant to such offer and (ii) ending on the thirtieth day following the
expiration of such offer.
4. Issuance of Units and Redemption Rights.
(a) The Company intends to cause the Participant, in its capacity as
Manager of the Company, to perform services not only for the Company, but also
for the Company's Affiliates, including the Partnership. In exchange for this
and other good and valuable consideration, the Partnership hereby agrees that,
if the Participant exercises any Options, upon request of the Company, the
Partnership shall sell Units to the Participant at the Option Price per Unit.
The number of Units to be sold at such a price shall be equal to the product of
(i) the number of shares of Common Stock otherwise issuable pursuant to the
Options being exercised multiplied by (ii) the reciprocal of the Conversion
Factor.
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<PAGE>
(b) Subject to Section 4(c) below, the Participant shall have the right
(the "Redemption Right") to require the Partnership to redeem on a Specified
Redemption Date all or a portion of any Units held by the Participant at a
redemption price equal to and in the form of the Redemption Amount. The
Redemption Right shall be exercised pursuant to a Notice of Redemption delivered
to the General Partner. The Participant may not exercise the Redemption Right
for less than three hundred (300) Units or, if the Participant holds less than
three hundred (300) Units, all of the Units held by the Participant. The
Participant shall have no right, with respect to any Units so redeemed, to
receive any distribution paid with respect to Units if the record date for such
distribution is on or after the Specified Redemption Date.
(c) Notwithstanding the provisions of Section 4(b), the General Partner
may, in its sole and absolute discretion, assume directly and satisfy a
Redemption Right by paying to the Participant the Redemption Amount on the
Specified Redemption Date, whereupon the General Partner shall acquire the Units
offered for redemption by the Participant and shall be treated for all purposes
of this Agreement as the owner of such Units. In the event the General Partner
shall exercise its right to satisfy the Redemption Right in the manner described
in the preceding sentence, the Partnership shall have no obligation to pay any
amount to the Participant with respect to the Participant's exercise of the
Redemption Right, and each of the Participant, the Partnership, and the General
Partner shall treat the transaction between the General Partner and the
Participant as a sale of the Participant's Units to the General Partner for
federal income tax purposes. The Participant agrees to execute such documents
as the General Partner may reasonably require in connection with the issuance of
Common Stock upon exercise of the Redemption Right. Any Cash Amount or Common
Stock Amount to be paid to the Participant pursuant to this Section 4(c) shall
be paid within five (5) business days after the initial date of receipt by the
General Partner of the Notice of Redemption relating to the Units to be
redeemed; provided, however, that such five (5) day period may be extended for
up to an additional one hundred eighty (180) day period to the extent required
for the Company to issue additional shares of Common Stock to provide financing
to make such payment of the Cash Amount and provided further, that the General
Partner shall pay interest at the Prime Rate as published in The Wall Street
Journal, Eastern Edition, from time to time on the Cash Amount from the
expiration of the five day period to the date of payment. Notwithstanding the
foregoing, the General Partner and the Partnership agree to use their best
efforts to cause the closing of the acquisition of redeemed Units hereunder to
occur as quickly as reasonably possible.
(d) The Partnership or the General Partner, as the case may be, shall pay
the Cash Amount to the Participant as the Redemption Amount if (i) the
acquisition of Common Stock by the Participant on the Specified Redemption Date
would (A) result in the Participant or any other person owning, directly or
indirectly, shares of Common Stock in excess of the "Ownership Limit," as
defined in the Company's Restated and Amended Articles of Incorporation, as
amended ("Articles"), and calculated in accordance therewith, except as provided
in the Articles, (B) result in shares of Common Stock being owned by fewer than
100 persons (determined without reference to any rules of attribution), except
as provided in the Articles, (C) result in the Company being "closely held"
within the meaning of Section 856(h) of the Code, (D) cause the Company to own,
directly or constructively, 10% or more of the ownership interests in a
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<PAGE>
tenant of the Company's or the Partnership's real property, within the
meaning of Section 856(d)(2)(B) of the Code, or (E) cause the acquisition of
shares of Common Stock by the Participant to be "integrated" with any other
distribution of shares of Common Stock for purposes of complying with the
registration provisions of the Securities Act of 1933, as amended, or (ii)
the Partnership or the General Partner, as the case may be, so elects in its
sole discretion.
5. Exercise After Termination. To the extent that the Option becomes
exercisable in accordance with section 3(c) hereof, it may be exercised whether
or not the Participant has ceased to be a Manager by the date of exercise.
6. No Right to Continue as Manager. This Option does not confer upon
Participant any right with respect to continuing as a service provider to the
Company, nor shall it interfere in any way with the Company's right to terminate
the Participant's service at any time.
7. Fractional Shares. Fractional shares shall not be issuable hereunder,
and when any provision hereof may entitle Participant to a fractional share such
fraction shall be disregarded.
8. Investment Representation. Participant agrees any shares purchased by
him hereunder will be purchased for investment and not with a view to
distribution or resale.
9. Governing Law. This Agreement shall be governed by the laws of the
Commonwealth of Virginia.
10. Conflicts. In the event of any conflict between the provisions of the
Plan as in effect on the date hereof and the provisions of this Agreement, the
provisions of the Plan shall govern. All references herein to the Plan shall
mean the Plan as in effect on the date hereof.
11. Participant Bound by Plan. Participant hereby acknowledges receipt of
a copy of the Plan and agrees to be bound by all the terms and provisions
thereof.
12. Certificates. Certificates for any shares purchased under this
Agreement shall be issued as promptly as may be practicable, but the Company
shall not be required to issue, deliver or transfer any certificate until all
applicable requirements of law and this Agreement have been satisfied.
13. Binding Effect. Subject to the limitations stated above and in the
Plan, this Agreement shall be binding upon and inure to the benefit of any
successors in interest of the Participant and the Company.
14. Counterparts. This Agreement may be executed in any number of
counterparts, and each of such counterparts shall for all purposes be deemed an
original, and all such counterparts shall together constitute one and the same
instrument.
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the day and year first above written.
OCWEN ASSET INVESTMENT CORP.
By: ____________________________
Its: ____________________________
ATTEST:
__________________________
Secretary
OCWEN PARTNERSHIP, L.P.,
By: Ocwen General, Inc., its
General Partner
By: ____________________________
Its: ____________________________
OCWEN CAPITAL CORPORATION,
Participant
By: ____________________________
Its: ____________________________
OCWEN GENERAL, INC.
By: ____________________________
Its: ____________________________
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<PAGE>
EXHIBIT A
NOTICE OF EXERCISE OF REDEMPTION RIGHT
The undersigned hereby irrevocably (i) presents for redemption ______ units
of limited partnership interest ("Units") in Ocwen Partnership, L.P. (the
"Partnership") in accordance with the terms of the Option Agreement, among the
Partnership, Ocwen General, Inc., Ocwen Asset Investment Corp. and Ocwen Capital
Corporation (the "Agreement"), and the "Redemption Right" defined therein, (ii)
surrenders such Units and all right, title and interest therein, (iii)
surrenders herewith any certificate or other writing evidencing the Units (and
requests that any Units so evidenced that are not redeemed be evidenced by the
issuance of a new certificate or writing) and (iv) directs that the "Cash
Amount" or "Common Stock Amount" (as determined by the General Partner), as
defined in the Agreement, deliverable upon exercise of the Redemption Right be
delivered to the address specified below, and if shares of Common Stock are to
be delivered, such shares of Common Stock be registered or placed in the name(s)
and at the address(es) specified below.
Dated:________________ OCWEN CAPITAL CORPORATION
By: ______________________________
Its: ______________________________
______________________________
(Street Address)
______________________________
(City) (State) (Zip Code)
Signature Guaranteed by:
______________________________
If shares of Common Stock are to be issued, issue to:
____________________________
____________________________
____________________________
Please provide social security or identifying number:
______________________
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<PAGE>
ACCEPTANCE OF GENERAL PARTNER:
Ocwen General, Inc., as General Partner of the Partnership, hereby accepts
the Units described above for redemption in accordance with the Agreement, and
by its execution hereof evidences conclusively that the Participant has
satisfied all of the requirements under the Agreement for exercise of the
Redemption Right, or that some or all of such requirements have been waived,
such waiver being in the sole discretion of the General Partner.
OCWEN GENERAL, INC.
By: _____________________
Its: ____________________
Dated: ____________________
RI:AS:\ocwen\reit\option.3
<PAGE>
Exhibit 21
List of Subsidiaries of Registrant
Ocwen General, Inc., a Virginia corporation
Ocwen Limited, Inc., a Virginia corporation
Ocwen Partnership, L.P., a Virginia limited partnership
<PAGE>
Exhibit 23.2
Consent of Independent Certified Public Accountants
We hereby consent to the use in the Prospectus constituting part of
Pre-Effective Amendment No. 2 to 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
April 14, 1997
