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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from: __________________ to ____________________
Commission File No. 000-22389
OCWEN ASSET INVESTMENT CORP.
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(Exact name of Registrant as specified in its charter)
VIRGINIA 65-0736120
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
THE FORUM, SUITE 1000
1675 PALM BEACH LAKES BOULEVARD
WEST PALM BEACH, FLORIDA 33401
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(Address of principal executive office) (Zip Code)
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(561) 682-8000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: Not applicable.
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK, $.01 PAR VALUE National Association of Securities Dealers
Quotations (NASDAQ)
(Title of each class) (Name of each exchange on which registered)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No[ ] Indicate by check mark
if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of the this Form 10-K or any amendment to this Form 10-K
[ ]
Aggregate market value of the Common Stock, $.01 par value, held by
nonaffiliates of the registrant, computed by reference to the closing price as
reported by NASDAQ as of the close of business on February 27, 1998:
$337,132,688 (for purposes of this calculation affiliates include only Ocwen
Financial Corporation, directors and executive officers of the Company).
Number of shares of Common Stock, $.01 par value, outstanding as of
February 27, 1998: 18,965,000 shares.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Annual Report to
Stockholders are incorporated by reference into Part III, Items 5-8. Portions of
the definitive Proxy Statement for the annual meeting of stockholders to be held
on May 14, 1998 are incorporated by reference into Part III, Items 10-13 and
Part IV, Item 14 of this Form 10K.
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<PAGE>
OCWEN ASSET INVESTMENT CORP.
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PAGE
PART I
Item 1. Business........................................................... 4
General.......................................................... 4
Initial Stock Offering........................................... 4
The Manager...................................................... 5
Investment Activities............................................ 6
Distressed Commercial Real Estate Activities..................... 10
Discount Loan Acquisition and Resolution Activities.............. 12
Lending Activities .............................................. 14
Federal Taxation................................................. 14
Item 2. Properties......................................................... 21
Item 3. Legal Proceedings.................................................. 21
Item 4. Submission of Matters to a Vote of Security Holders................ 21
PART II
Item 5. Market for the Registrant's Common Equity and
Related Shareholder Matters....................................... 21
Item 6. Selected Consolidated Financial Data............................... 21
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................... 21
Item 8. Financial Statements............................................... 21
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................... 22
PART III
Item 10. Directors and Executive Officers of Registrant.................... 22
Item 11. Executive Compensation............................................ 22
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 22
Item 13. Certain Relationships and Related Transactions.................... 22
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.............................................. 22
Signatures........................................................ 24
2
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FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED HEREIN ARE NOT, AND CERTAIN STATEMENTS
CONTAINED IN FUTURE FILINGS BY THE COMPANY WITH THE SECURITIES AND EXCHANGE
COMMISSION, IN THE COMPANY'S PRESS RELEASES OR IN THE COMPANY'S OTHER PUBLIC OR
SHAREHOLDER COMMUNICATIONS, MAY NOT BE BASED ON HISTORICAL FACTS AND ARE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED, INCLUDING THE CONSUMMATION AND EXPECTED BENEFITS OF THE IDENTIFIED
TRANSACTIONS. THESE FORWARD-LOOKING STATEMENTS MAY BE IDENTIFIED BY REFERENCE TO
FUTURE PERIODS, OR BY THE USE OF FORWARD-LOOKING TERMINOLOGY, SUCH AS "MAY,"
"WILL," "BELIEVE," "ESTIMATE," "EXPECT," "ANTICIPATE," "CONSIDER," "CONTINUE,"
"ENCOURAGE," "INTENDS," "PLANS," "PRESENTS," "PROPOSE," "PROSPECT," FUTURE OR
CONDITIONAL VERB TENSES, OR SIMILAR TERMS, VARIATIONS OF THOSE TERMS, OR
NEGATIVES OF ANY SUCH TERMINOLOGY. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE SET FORTH IN FORWARD-LOOKING STATEMENTS DUE TO A VARIETY OF FACTORS,
INCLUDING, BUT NOT LIMITED TO, THOSE RELATED TO THE INTERNATIONAL, NATIONAL,
REGIONAL OR LOCAL ECONOMIC ENVIRONMENTS, PARTICULARLY IN THE MARKET AREAS IN
WHICH THE COMPANY OPERATES, COMPETITIVE PRODUCTS AND PRICING, FISCAL AND
MONETARY POLICIES OF THE U.S., CANADIAN OR OTHER GOVERNMENTS, CHANGES IN
GOVERNMENT REGULATIONS AFFECTING REAL ESTATE INVESTMENT TRUSTS, CHANGES IN
PREVAILING INTEREST AND CURRENCY EXCHANGE RATES, CHANGES IN FACTORS INHERENT TO
THE VALUATION AND PRICING OF VARIOUS SECURITIES INCLUDING THE IMPACT OF CHANGES
IN PREPAYMENT SPEEDS ON MORTGAGE LOANS, THE EFFECTIVENESS OF THE SERVICING OF
LOANS UNDERLYING VARIOUS SECURITIES, THE COURSE OF NEGOTIATIONS WITH RESPECT TO
VARIOUS TRANSACTIONS, THE ABILITY OF PARTIES TO AGREE TO MATERIAL TERMS OF A
TRANSACTION, THE ABILITY TO SATISFY OR FULFILL AGREED UPON TERMS AND CONDITIONS
OF CLOSING OR PERFORMANCE (INCLUDING BOARD APPROVALS, AS NECESSARY OR AGREED
UPON), THE OCCURRENCE OF MATERIAL ADVERSE CHANGES IN THE BUSINESS OF ANY PARTY
TO A TRANSACTION, THE TIMING OF TRANSACTION CLOSINGS, UNSATISFACTORY DUE
DILIGENCE RESULTS, BORROWER FAILURE TO SATISFY CLOSING CONDITIONS, THE ABILITY
TO SECURITIZE MORTGAGE LOANS ON MUTUALLY ACCEPTABLE TERMS, ACQUISITIONS AND THE
INTEGRATION OF ACQUIRED BUSINESSES, CREDIT RISK MANAGEMENT, ASSET/LIABILITY
MANAGEMENT, THE FINANCIAL AND SECURITIES MARKETS, THE AVAILABILITY OF AND COSTS
ASSOCIATED WITH TIMELY SOURCES OF LIQUIDITY ON MUTUALLY ACCEPTABLE TERMS AND
OTHER FACTORS GENERALLY UNDERSTOOD TO AFFECT THE REAL ESTATE ACQUISITION,
MORTGAGE AND LEASING MARKETS AND SECURITY INVESTMENTS. THE COMPANY DOES NOT
UNDERTAKE, AND SPECIFICALLY DISCLAIMS ANY OBLIGATION, TO PUBLICLY RELEASE THE
RESULTS OF ANY REVISIONS WHICH MAY BE MADE TO ANY FORWARD-LOOKING STATEMENTS TO
REFLECT THE OCCURRENCE OF ANTICIPATED OR UNANTICIPATED EVENTS OR CIRCUMSTANCES
AFTER THE DATE OF SUCH STATEMENTS.
3
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PART I
ITEM 1. BUSINESS
GENERAL
Ocwen Asset Investment Corp. ("OAIC" or the "Company") is a newly
formed corporation that has elected to be taxed as a Real Estate Investment
Trust ("REIT") under Sections 856 through 860 of the Internal Revenue Code of
1986, as amended (the "Code"). As such, OAIC will generally not be subject to
federal income taxation on that portion of its income that it distributes to its
shareholders if it distributes at least 95% of its taxable income to its
shareholders annually and meets certain other income and asset tests.
The Company was incorporated in the Commonwealth of Virginia on January
22, 1997, and on May 14, 1997, the Company was capitalized with the sale of
19,125,000 shares of common stock, par value $.01 per share, at a price of
$16.00 per share (before underwriting and offering expenses).
The Company's business and investment affairs are managed by Ocwen
Capital Corporation ("OCC" or the "Manager"), a Florida corporation wholly-owned
by Ocwen Financial Corporation ("Ocwen"). Ocwen 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 Company seeks to enhance the value of its common stock by pursuing
advantageous investments that capitalize on inefficiencies in the real estate
and mortgage markets. Pursuant to that strategy, the Company has invested in
several categories of real estate and real estate related assets. Such
investments consist primarily of: (i) subordinate interests in commercial and
residential mortgage-backed securities; and (ii) distressed commercial and
multi-family real property, including properties acquired by a mortgage lender
at foreclosure (or deed in lieu of foreclosure). The Company believes that these
investment activities complement each other from both a cash flow and a tax
planning perspective. Generally, distressed commercial real estate provides
significant long-term upside potential after the assets are re-positioned, while
providing modest dividend yields during the re-positioning process. Furthermore,
taxable income generally would be less than funds from operations ("FFO") and
cash flow during the holding period. Subordinate securities, on the other hand,
generally may provide significant current period income that balances the often
initially lower yield from re-positioning real estate assets. Further, taxable
income from subordinate securities generally would exceed FFO and cash flow in
the early years of the investment.
The Company also has invested, by way of purchase and origination, in:
(i) commercial, multi-family and single-family residential mortgage loans,
including construction and rehabilitation loans and mezzanine loans; (ii)
interest-only and inverse interest-only mortgage-related securities supported by
residential and commercial mortgage loans; and (iii) mortgage loans that are in
default or for which default is likely or imminent or for which the borrower is
currently making monthly payments in accordance with a forbearance plan
(collectively, "discount loans"). The Company also may acquire real property or
mortgage loans secured by such real property and other real property interests
that: (i) may be environmentally distressed; or (ii) is located outside the
United States.
INITIAL STOCK OFFERING
On May 19, 1997 the Company completed an initial public offering
("IPO") which consisted of the sale of 19,125,000 shares of its common stock at
a price of $16 per share (before underwriting discount of $1.12 per share),
including 1,875,000 shares of common stock sold to Investors Mortgage Insurance
Holding Company ("IMI"), a wholly-owned subsidiary of Ocwen. Total proceeds to
the Company, net of underwriting discount and offering expenses, were $283.7
million. The Company incorporated and capitalized two qualified REIT
subsidiaries, Ocwen General, Inc. ("General Partner") and Ocwen Limited, Inc.
("Limited Partner") which, in turn, organized and capitalized Ocwen Partnership,
L.P. (the "Operating Partnership"). The Company, through the General Partner and
the Limited Partner, contributed all of the net proceeds from the IPO to the
Operating Partnership. The General Partner and Limited partner initially had a
1% and a 99% ownership interest in the Operating Partnership, respectively.
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On December 9, 1997, the Company repurchased 160,000 shares of stock
from IMI at the weighted average price of the stock on the day of the
repurchase. IMI immediately acquired 160,000 units in the Operating Partnership,
representing a 0.8% ownership interest. The shares were repurchased in order to
comply with the stock ownership restrictions imposed on REITs. The shares
redeemed by the Company are presented as treasury stock in the Company's
consolidated financial statements, whereas the units acquired by IMI gave rise
to a minority interest in the Operating Partnership.
THE MANAGER
The Company's business and investment affairs are managed by OCC. The
Company has entered into a management agreement with OCC pursuant to which OCC,
subject to the supervision of the Company's Board of Directors, formulates
operating strategies for the Company, arranges for the acquisition of assets by
the Company and arranges for various types of financing for the Company,
including repurchase agreements and secured lines of credit. In addition, OCC
monitors the performance of the Company's assets and provides certain
administrative and managerial services in connection with the operation of the
Company. In consideration for performance of these services, OCC receives: (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 OCC'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) FFO (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 percent per annum multiplied by (B) the
weighted average number of shares of common stock outstanding.
In addition to the management fees described above, OCC is reimbursed
for its costs for performing due diligence on assets purchased by the Company or
considered for purchase by the Company, as well as for out-of-pocket expenses
incurred on behalf of the Company.
Under a non-qualified stock option plan (the "Option Plan") adopted by
the Company, the Manager was granted, at the IPO, options representing the right
to purchase 1,912,500 shares of the Company's common stock or, at the Company's
election, an equal amount of units in the operating partnership at an exercise
price per share equal to the initial offering price of $16 per share. One
quarter of these options will vest and become exercisable on each of the first
four anniversaries of the closing date of the IPO. 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.
OAIC does not maintain an office and does not employ full-time
personnel. Instead, OAIC relies on the facilities and resources of Ocwen
(through OCC). Ocwen has been actively involved since its formation in 1988 in
the real estate and mortgage markets and brings significant expertise to OAIC in
acquiring and managing distressed real estate assets. The Company's relationship
with Ocwen provides a number of advantages. First, Ocwen's primary operating
subsidiary, Ocwen Federal Bank FSB (the "Bank"), is one of only six firms in the
United States to be rated as a "Strong" Special Servicer for commercial loans by
Standard & Poor's, its highest rating category, and is the only firm to be
designated as a Special Servicer for residential mortgage loans. Further, Ocwen
has a proven track record in managing subperforming and nonperforming
residential and commercial real estate loans and distressed real estate. As a
result, OAIC has bid on many subordinate securities because Ocwen has been able
to be named as Special Servicer on a majority of those investments. Second, the
Company benefits from Ocwen's proprietary software applications, which include
acquisition modeling and resolution management systems. Third, the Company's
relationship with Ocwen has provided it with access to markets, as well as
instant and positive name recognition; OAIC may also benefit by being able to
co-bid on transactions jointly with Ocwen.
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Pursuant to the Company's management agreement with OCC, neither Ocwen
nor any of its affiliates is permitted to purchase non-investment grade
subordinate securities or distressed commercial real estate without first
obtaining the approval of OAIC's independent directors.
INVESTMENT ACTIVITIES
At December 31, 1997, the Company's investment in mortgage-backed
securities ("MBS") totaled $146.0 million or 50.7% of total assets. The
following table sets forth the fair value of the Company's MBS available for
sale at December 31, 1997:
Single family residential:
FHLMC interest-only................................. $ 21,177,964
FNMA interest-only.................................. 22,573,132
AAA-rated interest-only............................. 729,372
Subordinates........................................ 9,444,067
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Total............................................. 53,924,535
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Multi-family residential and commercial:
AAA-rated interest-only............................. 865,747
A-rated interest-only............................... 480,188
Non-rated interest-only............................. 4,802,873
Subordinates........................................ 85,953,564
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Total............................................. 92,102,372
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Total............................................ $ 146,026,907
==============
At December 31, 1997 the carrying value of the Company's investment in
subordinate interests amounted to $95.4 million or 65.3% of total securities
available for sale and supported senior classes of securities having an
outstanding principal balance of $1.53 billion. As discussed below, because of
their subordinate position, subordinate classes of mortgage-related securities
involve more risk than the other classes.
In December, 1997, after its successful bid for an equity interest in a
$320.0 million securitization of real estate owned assets and performing,
subperforming and nonperforming commercial loans, (BTC Trust Mortgage Investors
Trust 1997-S1), the Company effectively acquired 100% of the BB tranche as well
as 25% of the unrated tranche for $47.2 million. This subordinate interest,
which had an amortized cost and carrying value of $47.2 million at December 31,
1997, constitutes the Company's single largest security investment for the
reported period and represents 32.3% of the total carrying value of securities
available for sale at December 31, 1997.
At December 31, 1997, the carrying value of the Company's investment in
interest only securities amounted to $50.6 million or 34.7% of total securities
available for sale. As discussed below, interest only securities exhibit
considerably more price volatility than mortgages or ordinary mortgage
pass-through securities, due in part to the uncertain cash flows that result
from changes in the prepayment rates of the underlying mortgage collateral.
Increased prepayments of the underlying mortgage collateral resulting from a
decrease in market interest rates or other factors can result in a loss of all
or part of the purchase price of such security. At December 31, 1997, all of the
Company's interest only securities were either issued by FHLMC or FNMA or were
rated AAA by national rating agencies, with the exception of one commercial
security with a carrying value of $480,000, which was rated A, and two non-rated
commercial securities with an aggregate carrying value of $4.8 million.
During January and February 1998, the Company recorded charges of $2.5
million against its interest only securities portfolio. The charges resulted
from increases in projected prepayment speeds during this period and a resulting
shortening of the weighted average lives of certain individual securities in the
portfolio. As a result, a determination was
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made to write down the recorded investment in those securities where the
reduction in fair value was considered to be other than temporary. The Company
believes that the current low levels of interest rates, and the inverted shape
of the yield curve, are relatively short-term phenomena. To the extent that
longer term interest rates increase or the relationship between short-term and
long-term rates revert to their historical spreads, the value of the portfolio
should recover. To the extent that the current environment persists, or that
rates decrease further, additional impairment losses may be recognized.
SUBORDINATE INTERESTS. The Company has acquired subordinate interests
in multi-family residential, commercial and single family residential
mortgage-backed securitizations. 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, subordinate classes typically
includes 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 as 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.
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 a stated maturity or final
scheduled distribution date. Principal prepayments on the mortgage loans
comprising the mortgage collateral may cause the MBS to be retired substantially
earlier than their stated maturities or final scheduled distribution dates,
although, with respect to commercial mortgage loans and certain subprime
residential 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, the geographic diversification of the properties, and, in
the case of commercial mortgage loans, the credit-worthiness of tenants.
Additionally, 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 depends in part on the order and timing of
the receipt of cash flow generated from the underlying mortgage loans.
Subordinate interests carry significant credit risks. Typically, in a
"senior-subordinate" structure, the subordinate 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 subordinate
interests in commercial securitizations, the holders of subordinate 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,
subordinate interests in a typical securitization are subject to a substantially
greater risk of non-payment than are those more senior tranches. Accordingly,
the subordinate interests are assigned lower credit ratings or no ratings at
all. Neither the subordinate interests nor the underlying mortgage loans are
guaranteed by agencies or instrumentalities of the United States government or
by other governmental entities and, accordingly, are subject, among other
things, to credit risks.
As a result of the typical "senior-subordinate" structure, the
subordinate interest is extremely sensitive to losses on the underlying mortgage
loans. Accordingly, the holder of the subordinate interest is particularly
interested in
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minimizing the loss frequency (the percentage of the loan balances that default
over the life of the mortgage collateral) and the loss severity (the amount of
loss on a defaulted mortgage loan, I.E., the principal amount of the mortgage
loan unrecovered after applying any recovery to the expenses of foreclosure and
accrued interest) on the underlying mortgage loans.
The loss frequency on a pool of mortgage loans will depend upon a
number of factors, many of which will be beyond the control of the Company or
the applicable servicer. Among other things, the loss frequency will reflect
broad conditions in the economy generally and real estate particularly, economic
conditions in the local area in which the underlying mortgaged property is
located, the loan-to-value ratio of the mortgage loan, the purpose of the loan
and the debt service coverage ratio (with respect to commercial mortgage loans).
The loss serverity will depend upon many of the same factors described above and
will also be influenced by the servicer's ability to efficiently foreclose on
the defaulted mortgage loan and sell the underlying mortgaged property.
OTHER MBS. The Company also invests in interest-only and inverse
interest-only securities (together, "IOs"), which are entitled to no (or only
nominal) payments of principal, but only to payments of interest. The holder of
an IO may be entitled to receive a stated rate of interest on a notional
principal balance equal to the principal balance of the mortgage collateral,
that portion that bears interest in excess of a certain rate, or one or more
classes of that MBS. Alternatively, the holder of an IO may be entitled to a
variable rate of interest on a nominal principal balance that adjusts based upon
adjustment in the interest rate of the underlying mortgage collateral.
Because IOs often pay at a relatively small rate of interest on a large
notional principal balance, an accelerated reduction of that principal balance
will have an adverse effect on the anticipated yield to maturity of such IO.
Accordingly, if the underlying mortgage collateral prepays (including
prepayments as a result of default and repurchases by the seller) at a rate
faster than anticipated, the weighted average life of the IO will be reduced,
and the yield to maturity will be adversely affected. Conversely, if the
underlying mortgage collateral prepays at a rate slower than anticipated, the
weighted average life of the IO will be extended, and the anticipated yield to
maturity will be increased.
Residential mortgage loans typically do not have prepayment penalties.
As a result, prepayments tend to increase during periods of falling interest
rates and decrease during periods of rising interest rates. However, prepayments
are dependent upon a number of other factors as well (such as the number of jobs
available in the area, general economic conditions and the borrower's need for
additional cash). Commercial loans often carry prepayment restrictions or
require that the borrower pay a prepayment penalty (which generally is not for
the benefit of the holder of the IO). In any event, it is very difficult to
predict the prepayment pattern for any particular mortgage collateral, which
makes it difficult to predict the actual yield with respect to an IO.
Inverse interest-only securities 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 such a class of IOs is not only very sensitive to the
rate of prepayments on the underlying mortgage collateral, but also to changes
in the related index.
At February 28, 1998, the Company continued to hold a portfolio of
single family residential IOs having an amortized cost of $54.3 million and a
market value of $46.4 million on such date. The portfolio had a gross weighted
average mortgage coupon of 8.30% at February 28, 1998 and 8.34% at December 31,
1997, as follows:
<TABLE>
<CAPTION>
February 28, 1998 December 31, 1997
Gross Weighted Average -------------------------------- ---------------------------------
Mortgage Coupon Amortized Cost Market Value Amortized Cost Market Value
- ---------------------------------- -------------- ------------ -------------- ------------
(Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C>
9.00% to 10.25%................ $ 578 $ 567 $ 667 $ 587
8.25% to 8.99%................ 32,880 26,182 37,156 28,962
7.75% to 8.24%................ 13,661 12,623 11,116 9,585
7.25% to 7.74%................ 7,166 7,015 5,451 5,346
</TABLE>
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In addition, the portfolio was comprised of a diverse bond structure as
follows:
<TABLE>
<CAPTION>
February 28, 1998 December 31, 1997
--------------------------------- ---------------------------------
Bond Structure Amortized Cost Market Value Amortized Cost Market Value
- ----------------------------------- -------------- ------------ -------------- ------------
(Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C>
Prorata Strip................... $ 14,180 $ 13,177 $ 13,081 $ 11,768
Planned Amortization Class...... 3,005 2,968 386 286
Targeted Amortization Class..... 23,153 18,257 28,276 22,373
Scheduled Pay................... 929 835 1,809 1,166
Sequential Pay.................. 9,634 8,498 7,224 6,074
Support......................... 3,384 2,652 3,614 2,813
</TABLE>
Additionally, OAIC has modeled the portfolio at February 28, 1998 in an
interest rate environment which assumes: (i) an instantaneous and sustained
parallel shift in interest rates for the remaining duration of the portfolio;
(ii) a 50 basis point decrease in LIBOR to steepen the yield curve and an
instantaneous and sustained parallel shift in interest rates for the remaining
duration of the portfolio; and (iii) a 50 basis point increase in the 10 year
treasury rate to steepen the yield curve and then an instantaneous and sustained
parallel shift in interest rates for the remaining duration of the portfolio.
OAIC's model is based on median Wall Street prepayment assumptions. The yields
resulting from this analysis are presented below:
<TABLE>
<CAPTION>
LIBOR 10 Year Treasury
Shift in Basis Points Parallel Shift Decreases Increases
- -------------------------------------- -------------- --------- ----------------
<S> <C> <C> <C>
+200............................. 7.0% 28.6% 9.4%
+100............................. 19.5 42.8 28.6
+50.............................. 19.9 44.2 36.5
0.............................. 15.2 35.3 42.8
- -50.............................. (6.7) 15.2 44.2
- -100............................. (19.1) (1.6) 35.3
- -200............................. (28.5) (15.3) (1.6)
</TABLE>
In the above parallel shift scenario, a 50 basis point instantaneous
and sustained decline in current interest rates is estimated to result in a
yield of (6.7)% on a portfolio which would have a weighted average life of 1.26
years, for a loss of $4.6 million on the amortized cost of the IOs. On the other
hand, should the Company experience a 50 basis point parallel, instantaneous and
sustained increase in current interest rates, the portfolio is expected to yield
19.9% with a weighted average life of 3.0 years, for income of $32.4 million
over the remaining life of the portfolio.
OAIC believes that the assumptions used by it to evaluate the
vulnerability of OAIC's operations to changes in interest rates approximate
OIAC's and its affiliates actual experiences and considers them reasonable;
however, the interest rate sensitivity of the IO portfolio and the estimated
effects of changes in interest rates thereon could vary substantially if
different assumptions are used or if actual experience differs from the
historical experience on which they are based. Accordingly, no assurance can be
given that the assumptions used in creating OAIC's model will correspond to
actual results, including, in particular, prepayment speeds in any interest rate
environment.
SERVICING. The Company intends generally to acquire 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 servicing agreements vary considerably, and the Company
cannot predict with certainty the precise terms of the servicing agreements into
which it will enter. In general, the Company will attempt to negotiate servicing
agreements that will permit the Company to service, or to direct the servicing
of, mortgage loans that are more than 60 to 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.
The Company intends to assign to the Bank, all of its servicing rights
and obligations (other than the right to direct foreclosure and related
decisions). It is expected that most or all of the 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 servicing fees.
9
<PAGE>
The Bank has 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.,
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 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 Company has acquired subordinate residual interests in several
pools of mortgage loans and has assumed responsibility for the special servicing
of nonperforming loans underlying such subordinate residual interests. The
Company has assigned to the Bank the servicing rights related to these
acquisitions.
DISTRESSED COMMERCIAL REAL ESTATE ACTIVITIES
OAIC focuses on the acquisition of underperforming or distressed real
estate assets that it can reposition or rehabilitate in order to increase the
underlying value. The Company's $45.4 million net investment in real estate at
December 31, 1997 is the result of the acquisition of two office buildings in
California and one shopping center in Florida, as follows:
<TABLE>
<CAPTION>
Date Acquired Property Location Square Feet Acquisition Cost
- ----------------- ----------------- ----------------- ----------- ----------------
<S> <C> <C> <C> <C>
09/03/97 10 U.N. Plaza (1) San Francisco, CA 68,560 $ 9,095,341
09/23/97 450 Sansome St (2) San Francisco, CA 123,099 17,246,713
11/10/97 Cortez Plaza (3) Bradenton, FL 289,686 19,267,073
--------------
$ 45,609,127
==============
</TABLE>
- --------------------
(1) The leases, 90% of which mature over the next several months, are at below
market rate. OAIC intends to reposition the office building to offer large
blocks of contiguous space and full floor identity, both of which are
presently in demand in the San Francisco market.
(2) OAIC intends to reposition the office building with renovations and
upgrades to common areas to support increasing market rents. The property
has been 83% leased and a substantial number of leases mature over the
next few years.
(3) The shopping center has been 97% leased. In a separate simultaneous
transaction, the Company purchased fee simple title to a large portion of
the shopping center that had been subject to a ground lease. National and
regional tenants comprise over 86% of the center.
The Company's current overall strategy, with respect to these
properties, is to renovate and reposition the facilities and target full floor
tenants with five to ten year lease terms. The Company estimates that over the
next twelve months, the Company will spend approximately $4.4 million in capital
improvements, tenant improvements and leasing commissions to renovate and
reposition the above properties. Repositioning is intended to result in rents,
upon re-leasing, that are greater than the current rents at the sites.
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, and other
underperforming and otherwise distressed commercial and multifamily real estate
("Distressed Real Properties") offers significant opportunities to the Company.
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<PAGE>
The Company intends 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 is 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 in order to obtain rent and sale comparables and broker price
opinions ("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 generally includes the review of market
studies for each market within a portfolio. The studies typically include area
economic data, employment trends, absorption rates and market rental rates. Due
diligence also includes 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 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 in order to value each property.
The property valuation process utilizes a variety of tools which may
include various proprietary financial models that have been developed by Ocwen
and are available to the Company through its management agreement with Ocwen.
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, and correspondence found in the loan files.
The Manager develops projections of net operating income and cash flows
taking into account lease rollovers, tenant improvement costs and leasing
commissions. The Manager compares 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
strategy is to improve management of the property so as to increase the cash
flow from the property. If cash flows can be increased and the property
stabilized, the Company may begin to seek an opportunity to sell the property.
Although the period during which the Company holds Distressed Real Properties
varies 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
anticipates establishing 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
11
<PAGE>
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. 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.
DISCOUNT LOAN ACQUISITION AND RESOLUTION ACTIVITIES
The Company believes that under appropriate circumstances the
acquisition of nonperforming and underperforming mortgage loans at a discount
offers significant opportunities to the Company. Discount loans generally have
collateral coverage which is sufficiently in excess of the purchase price of the
loan, such that successful resolutions can produce total returns which are in
excess of an equivalent investment in performing mortgage loans.
COMPOSITION OF THE DISCOUNT LOAN PORTFOLIO. At December 31, 1997, the
Company's net discount loan portfolio amounted to $27.0 million or 9.4% of the
Company's total assets. All of the Company's discount loan portfolio is secured
by mortgage liens on real estate.
The following table sets forth the composition of the Company's discount
loan portfolio by type of loan at December 31, 1997:
Commercial real estate loans:
Office..................................................... $ 11,892,814
Retail..................................................... 30,635,968
-------------
Total discount loans..................................... 42,528,782
Unaccreted discount.......................................... (15,549,894)
Allowance for loan losses.................................... --
-------------
Discount loans, net.......................................... $ 26,978,888
=============
The properties which secure the Company's discount loans are located in
the United States and Canada. At December 31, 1997, discount loans with unpaid
principal balance of $26.8 million, $9.2 million, $3.9 million and $2.6 million
were secured by properties located in Nova Scotia (Canada), New York, Montana
and Ohio, respectively.
At December 31, 1997, the discount loan portfolio included one loan
with a carrying value greater than $16.0 million and four loans with a carrying
value of more than $1.1 million and less than $5.4 million.
ACQUISITION OF DISCOUNT LOANS. Commericial discount real estate loans
generally are acquired individually. The Company believes that it has a
competitive advantage relative to many of its competitors as a result of the
Manager's experience in managing and resolving discount loans, the Manager's
large investment in the computer systems, technology and other resources which
are necessary to conduct this business, the Manager's national reputation and
the strategic relationships and contacts developed by the Manager in connection
with these activities.
Prior to making an offer to purchase discount loans, the Manager
conducts an extensive investigation and evaluation of the loan. Evaluations of
potential discount loans are conducted primarily by the Manager's employees who
specialize in the analysis of nonperforming loans, often with further
specialization based on geographic or collateral specific factors. The Manager's
employees regularly use third parties, such as brokers, who are familiar with
the property's type and location, to assist them in conducting an evaluation of
the collateral property, and depending on the circumstances, particularly in the
case of commercial real estate loans, may use subcontractors, such as local
counsel and
12
<PAGE>
engineering and environmental experts, to assist in the evaluation and
verification of information and the gathering of other information not
previously made available by the potential seller.
The Company determines the amount to offer to acquire potential
discount loans by using the Manager's proprietary modeling system and loan
information database which focuses on the anticipated recovery amount, timing
and cost of the resolution of the loan. The amount offered by the Company
generally is at a discount from both the stated value of the loan and the value
of the underlying collateral and is sufficient to generate an acceptable return
on the Company's investment. Upon acquisition, the servicing of the loan is
transferred to the Manager.
RESOLUTION OF DISCOUNT LOANS. After a discount loan is acquired, the
Manager utilizes its computer software system to resolve the loan as
expeditiously as possible in accordance with specified procedures. The various
resolution alternatives generally include the following: (i) the borrower brings
the loan current in accordance with original or modified terms, (ii) the
borrower repays the loan or a negotiated amount of the loan, (iii) the borrower
agrees to deed the property to the Company in lieu of foreclosure, in which case
it is classified as real estate, or (iv) the Company forecloses on the loan and
the property is acquired at the foreclosure sale either by a third party or by
the Company, in which case it is classified as real estate.
ACTIVITY IN THE DISCOUNT LOAN PORTFOLIO. The following table sets forth
the activity in the Company's gross discount loan portfolio during the period
from May 19, 1997 to December 31, 1997:
Balance at beginning of period.............................. $ --
Acquisitions (1)............................................ 44,686,413
Resolutions and repayments (2).............................. (1,281,846)
Foreign exchange loss (3)................................... (875,785)
-------------
Balance at end of period.................................... $ 42,528,782
=============
- -------------------
(1) Acquisitions consisted of $31.6 million of commercial real estate loans
secured by retail buildings and $13.1 million of commercial real estate
loans secured by office buildings.
(2) Resolutions and repayments consists of loans which were resolved in a
manner which resulted in partial or full repayment of the loan to the
Company.
(3) Amount represents the gross foreign currency loss related to the unpaid
principal balance which, net of $307,220 related to the discount on the
loans, resulted in a net foreign currency loss of $568,565 for the period
from May 14, 1997 to December 31, 1997.
PAYMENT STATUS OF DISCOUNT LOANS. The following table sets forth
certain information relating to the payment status of loans in the Company's
discount loan portfolio at December 31, 1997:
Loan status:
Current................................................... $ 7,964,105
Past due 31 days to 89 days............................... --
Past due 90 days or more.................................. 34,564,677
-------------
$ 42,528,782
=============
13
<PAGE>
ACCOUNTING FOR DISCOUNT LOANS. The acquisition cost for a pool of
discount loans is allocated to each individual loan within the pool based upon
the Company's pricing methodology. The discount which is associated with
commercial real estate loans which are current, and which the Company believes
will remain current, is accreted into interest income as a yield adjustment
using the interest method over the contractual maturity of the loan. For all
other loans interest is earned as cash is received. Gains on the repayment and
discharge of loans are reported as interest income.
LENDING ACTIVITIES
COMPOSITION OF LOAN PORTFOLIO. At December 31, 1997, the Company's loan
portfolio, net amounted to $15.8 million or 5.5% of the Company's total assets.
Loans held for investment in the Company's loan portfolio are carried at
amortized cost, less any allowance for loan losses.
The following table sets forth the composition of the Company's loan
portfolio by type of loan at December 31, 1997:
Single-family residential................................ $ 6,465,080
Multi-family residential................................. 3,455,000
Commercial real estate:
Office................................................. 33,058,000
Hotel.................................................. 20,952,000
-------------
Total loans........................................... 63,930,080
Undisbursed loan proceeds................................ (47,639,676)
Deferred origination fees................................ (458,925)
Allowance for loan losses................................ --
-------------
Loans, net............................................. $ 15,831,479
=============
At December 31, 1997, the five states in which the largest amount of
properties securing loans in the Company's loan portfolio were located were
Massachusetts, Delaware, South Carolina, New York and Georgia, which had $40.7
million, $13.3 million, $3.5 million, $3.5 million and $2.0 million of principal
amount of loans, respectively.
During the reported period, the Company acquired 48 single family
residential loans with an aggregate unpaid principal balance of $6.5 million
with the intent of accumulating such loans, executing a securitization and
effectively retaining a subordinate interest. In addition, the Company
originated one multi-family residential loan in the amount of $3.5 million, of
which $1.4 million had been funded at December 31, 1997, two hotel acquisition
and renovation loans in the aggregate amount of $21.0 million, of which $8.4
million had been funded at December 31, 1997, and one office building renovation
and construction loan in the amount of $33.0 million which had not been funded
at December 31, 1997. At December 31, 1997 all loans were current with the
exception of four single family residential loans having an unpaid principal
balance of approximately $269,000 which were greater than 89 days past due.
FEDERAL TAXATION
OAIC operates in a manner so as to qualify as a REIT for federal income
tax purposes under sections 856 through 860 of the Code. Generally, a REIT that
complies with the Code and distributes at least 95% of its taxable income to its
stockholders does not pay federal income tax on its distributed income.
Qualification as a REIT involves the application of highly technical rules for
which there are only limited judicial or administrative interpretations. The
determination of various factual matters and circumstances not entirely within
OAIC's control, may affect its ability to qualify as a REIT. In addition, new
legislation, regulations, administrative interpretations, or court decisions
could have a substantial adverse impact on OAIC's qualification as a REIT or the
federal income tax consequences of such qualification. If OAIC were to fail to
qualify as a REIT in any taxable year, OAIC would not be allowed a deduction for
distributions to stockholders in computing its taxable income and would be
subject to federal income tax (including any applicable alternative minimum tax)
on its taxable income at regular corporate rates. Unless entitled to relief
under certain Code provisions, OAIC also would be disqualified from treatment as
a REIT for the four taxable years following the year during which qualification
was lost. As a result, the cash available for distribution to stockholders would
be reduced for each of the years involved. Although OAIC currently intends to
operate in a manner designed to qualify as a REIT, it is possible that future
economic, market, legal, tax, or other considerations could cause the Board of
Directors, with appropriate shareholder consent, to revoke OAIC's REIT election.
14
<PAGE>
OAIC 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 certain
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. 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.
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 IRS 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 record keeping requirements of
the Code and regulations promulgated thereunder ("Treasury Regulations"); 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 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
15
<PAGE>
considered an individual and beneficiaries of such trust are treated as holding
shares of a REIT for purposes of the 5/50 Rule in proportion to their actuarial
interests in such trust.
OAIC directly owns two qualified REIT 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. Effective for tax
years beginning after August 5, 1997, the definition of a "qualified REIT
subsidiary" was changed to require only that the REIT own 100% of such
corporation. 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.
Treasury Regulations provide that a REIT will be deemed to own its proportionate
share of the assets of a partnership in which it is a partner, 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. On December 19, 1997, IMI acquired 160,000 units in the operating
partnership. Accordingly, OAIC's proportionate share of the assets and gross
income of the Operating Partnership are 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. 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). This third requirement no longer exists as of the 1998
tax year. 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
16
<PAGE>
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.
Interest, original issue discount, and market discount income that OAIC
derives from its investments in subordinate 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 loans will be qualifying income for purposes
of both gross income tests. In some cases, however, the loan amount 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 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.
OAIC may originate or acquire construction or mezzanine loans that have
shared appreciation provisions. OAIC generally will 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 and securitize loans through the issuance
of non-REMIC CMOs. As a result of such transactions, OAIC will retain an equity
ownership interest in the loans that, after considering the notes issued in the
securitization, has economic characteristics similar to those of a subordinate
interest. In addition, OAIC may resecuritize MBS (or non-REMIC CMOs) through the
issuance of non-REMIC CMOs, retaining an equity interest in the MBS used as
collateral in the resecuritization transaction. Such transactions will not cause
OAIC to fail to satisfy the gross income tests or the asset tests described
herein.
OAIC may receive income 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."
Pursuant to a DE MINIMIS expection, OAIC may provide non-customary services to
its tenants other than through an independent contractor without disqualifying
the income from the property as long as the amount OAIC receives for the
impermissible services does not exceed 1% of OAIC's gross income from the
property. The amount that OAIC receives that is attributable to impermissible
services cannot be valued at less than 150% of the direct cost to OAIC of
providing the services.
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It is OAIC's policy 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 or sales, as described above) to the extent that the receipt of such
Rent would jeopardize OAIC's status as a REIT. In addition, it is OAIC's
intention 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. It is also OAIC's intention 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 intends 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. 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.
Net income derived from a prohibited 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."
OAIC will from time to time, enter into hedging transactions with
respect to one or more of its assets or liabilities. Any such hedging
transactions could take a variety of forms, including interest rate swap
contracts, interest rate cap or floor contracts, futures or forward contracts,
and options. To the extent that OAIC enters into an interest rate swap or cap
contract, option, future contract, forward rate agreement, or any similar
financial instrument to reduce its interest rate risk with respect to debt
incurred or to be 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. 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.
18
<PAGE>
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, 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.
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 on
land and improvements thereon, such as buildings or other inherently permanent
structures (including items that are structural components of such buildings on
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, any other
qualified REIT subsidiary, partnership or any other REIT).
OAIC expects that any distressed real properties, subordinate
interests, 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. 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
19
<PAGE>
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, original issue discount ("OID") accrues with respect to its subordinate
interests. Furthermore, some loans and 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. In addition, pursuant to certain Treasury Regulations, OAIC may be
required to recognize the projected 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. 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, subordinate
interests and loans that are "market discount bonds" (i.e., obligations with a
stated redemption price at maturity that is greater than OAIC's tax basis in
such obligations), although such proceeds often will be used to make
non-deductible principal payments on related borrowings. OAIC also may recognize
excess inclusion or other "phantom" taxable income from REMIC residual
interests. It also is possible that, from time to time, OAIC may recognize net
capital gain attributable to the sale of depreciated property that exceeds its
cash receipts from the sale. 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 IRS 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
20
<PAGE>
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.
ITEM 2. PROPERTIES
OFFICES
The Company does not maintain an office. It relies on the facilities
provided by its manager, OCC. In addition, reference is made to the section
entitled "Business-Distressed Commercial Real Estate Activities" which is
incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
Information required by this Item appears under the caption
"Shareholder Information" on page 27 of the Annual Report to Shareholders and is
incorporated herein by reference.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION
Information required by this Item appears under the caption "Selected
Consolidated Financial Information" on page 1 of the Annual Report to
Shareholders and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information required by this Item appears under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 2 to 9 of the Annual Report to Shareholders and is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS
Information required by this Item appears in the Annual Report to
Shareholders on pages 12 to 26 and is incorporated herein by reference.
21
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information contained in the Company's 1998 Proxy Statement for the
1998 Annual Meeting of Shareholders under the captions "Election of Directors
- --Nominees for Director," "Executive Officers Who Are Not Directors," and
"Security Ownership of Certain Beneficial Owners -- Section 16(a) Beneficial
Ownership Reporting Compliance" is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the Company's 1998 Proxy Statement for the
1998 Annual Meeting of Shareholders under the captions "Executive Compensation,"
other than under the sub-caption "Report of the Nominating and Compensation
Committee," and "Board of Directors Compensation" is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the Company's 1998 Proxy Statement for the
1998 Annual Meeting of Shareholders under the caption "Security Ownership of
Certain Beneficial Owners -- Beneficial Ownership of Common Stock" is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the Company's 1998 Proxy Statement for the
1998 Annual Meeting of Shareholders under the caption "Certain Relationships and
Related Transactions" is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Bylaws(1)
4.1 Form of Common Stock Certificate (1).
10.1 Form of Management Agreement (1).
10.2 Form of Registration Rights Agreement (1).
10.3 Second Amended and Restated Agreement of Limited
Partnership of Ocwen Partnership L.P. (filed
herewith).
10.4 Form of Stock Option Plan (1)
11.1 Computation of earnings per share.
13.1 Annual Report to Shareholders for the Period Ended
December 31, 1997
21.0 List of subsidiaries.
27.1 Financial Data Schedule - For the period ended
December 31, 1997
27.2 Financial Data Schedule - For the period ended June
30, 1997
27.3 Financial Data Schedule - For the period ended
September 30, 1997
(1) Incorporated by reference to the similarly
described exhibit filed in connection with the
Company's Registration Statement on Form S-11 (File
No. 333-21965), as amended, declared effective by the
Commission on May 14, 1997.
(2) Computation of earnings per share appears on
page 25 in the Annual Report to Shareholders and is
incorporated herein by reference.
22
<PAGE>
(b) Financial Statements and Schedules
The following Consolidated Financial Statements of Ocwen Asset
Investment Corp. and Report of Price Waterhouse LLP, Independent
Certified Public Accountants, are incorporated herein by reference to
pages 11 to 26 of the Company's Annual Report to Shareholders:
(1) Report of Independent Certified Public Accountants
(2) Consolidated Statement of Financial Condition at
December 31, 1997
(3) Consolidated Statement of Operations for the period
from May 14, 1997 to December 31, 1997
(4) Consolidated Statement of Changes in Stockholders'
Equity for the period from May 14, 1997 to December
31, 1997
(5) Consolidated Statement of Cash Flows for the period
from May 14, 1997 to December 31, 1997
(6) Notes to Consolidated Financial Statements
Financial statement schedules have been omitted because they
are not applicable or the required information is shown in the
Consolidated Financial Statements or notes thereto.
(c) Reports on Form 8-K filed during the quarter ended December 31,
1997
(1) A Form 8-K was filed by the Company on October 31,
1997 which contained a news release announcing the
Company's financial results for the three months
ended September 30, 1997 and for the period May 19,
1997 to September 30, 1997.
(2) A Form 8-K was filed by the Company on December 9,
1997 which contained a news release announcing the
Company's November 1997 investments of $35.4 million
and $164.9 million in outstanding commitments.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
OCWEN ASSET INVESTMENT CORP.
By:/s/ WILLIAM C. ERBEY
-----------------------------------------------------
William C. Erbey
Chairman of the Board and Chief Executive Officer
(duly authorized representative)
Date: March 31, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the date indicated:
/s/ WILLIAM C. ERBEY Date: March 31, 1998
- ---------------------------------------------
William C. Erbey, Chairman of the Board
and Chief Executive Officer
/s/ CHRISTINE A. REICH Date: March 31, 1998
- ---------------------------------------------
Christine A. Reich, President
/s/ TIMOTHY J. RIDDIOUGH Date: March 31, 1998
- ---------------------------------------------
Timothy J. Riddiough, Director
Date: March 31, 1998
- ---------------------------------------------
Robert F. Pugilese, Director
/s/ PETER M. SMALL Date: March 31, 1998
- ---------------------------------------------
Peter M. Small, Director
/s/ MARK S. ZEIDMAN Date: March 31, 1998
- ---------------------------------------------
Mark S. Zeidman, Chief Financial Officer
(principal financial and accounting officer)
24
EXHIBIT 10.3
SECOND AMENDED AND RESTATED AGREEMENT
OF LIMITED PARTNERSHIP
OF
OCWEN PARTNERSHIP, L.P.
<PAGE>
TABLE OF CONTENTS
ARTICLE I DEFINED TERMS...................................................1
ARTICLE II PARTNERSHIP CONTINUATION AND IDENTIFICATION.....................6
2.01. Continuation....................................................6
2.02. Name, Office and Registered Agent...............................6
2.03. Partners........................................................6
2.04. Term and Dissolution............................................6
2.05. Filing of Certificate and Perfection of Limited Partnership.....7
2.06. Certificates Describing Partnership Units.......................7
ARTICLE III BUSINESS OF THE PARTNERSHIP.....................................7
ARTICLE IV CAPITAL CONTRIBUTIONS AND ACCOUNTS..............................8
4.01. Capital Contributions...........................................8
4.02. Additional Capital Contributions and Issuances of
Additional Partnership Interests..............................8
4.03. Additional Funding.............................................11
4.04. Capital Accounts...............................................11
4.05. Percentage Interests...........................................11
4.06. No Interest on Contributions...................................11
4.07. Return of Capital Contributions................................11
4.08. No Third-Party Beneficiary.....................................12
ARTICLE V PROFITS AND LOSSES; DISTRIBUTIONS..............................12
5.01. Allocation of Profit and Loss..................................12
5.02. Distribution of Cash...........................................14
5.03. REIT Distribution Requirements.................................15
5.04. Distributions in Kind..........................................15
5.05. Limitations on Return of Capital Contributions.................15
5.06. Distributions Upon Liquidation.................................15
5.07. Substantial Economic Effect....................................15
ARTICLE VI RIGHTS, OBLIGATIONS AND POWERS OF THE GENERAL PARTNER..........16
6.01. Management of the Partnership..................................16
6.02. Delegation of Authority........................................19
6.03. Indemnification and Exculpation of Indemnitees.................19
6.04. Liability of the General Partner...............................20
6.05. Reimbursement of General Partner...............................21
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<PAGE>
6.06. Outside Activities.............................................21
6.07. Employment or Retention of Affiliates..........................22
6.08. General Partner Participation..................................22
6.09 Title to Partnership Assets....................................22
6.10. [Intentionally Omitted]........................................22
ARTICLE VII CHANGES IN GENERAL PARTNER.....................................23
7.01. Transfer of the General Partner's Partnership Interest........23
7.02. Admission of a Substitute or Additional General Partner.......24
7.03. Effect of Bankruptcy, Withdrawal, Death
or Dissolution of a General Partner.........................25
7.04. Removal of a General Partner..................................26
ARTICLE VIII RIGHTS AND OBLIGATIONS OF THE LIMITED PARTNERS................27
8.01. Management of the Partnership.................................27
8.02. Power of Attorney.............................................27
8.03. Limitation on Liability of Limited Partners...................27
8.04. Ownership by Limited Partner of Corporate
General Partner or Affiliate................................27
8.05. Exchange Right................................................27
8.06. Registration..................................................29
ARTICLE IX TRANSFER OF LIMITED PARTNERSHIP INTERESTS.....................30
9.01. Purchase for Investment.......................................30
9.02. Restrictions on Transfer of Limited Partnership Interests.....30
9.03. Admission of a Substitute Limited Partner.....................32
9.04. Rights of Assignees of Partnership Interests..................33
9.05. Effect of Bankruptcy, Death, Incompetence or
Termination of a Limited Partner............................33
9.06. Joint Ownership of Interests..................................33
ARTICLE X BOOKS AND RECORDS; ACCOUNTING; TAX MATTERS....................34
10.01. Books and Records.............................................34
10.02. Custody of Partnership Funds; Bank Accounts...................34
10.03. Fiscal and Taxable Year.......................................34
10.04. Annual Tax Information and Report.............................34
10.05. Tax Matters Partner; Tax Elections;
Special Basis Adjustments...................................35
10.06. Reports to Limited Partners...................................35
ARTICLE XI AMENDMENT OF AGREEMENT; MERGER................................36
ARTICLE XII GENERAL PROVISIONS............................................36
12.01. Notices.......................................................36
12.02. Survival of Rights............................................36
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12.03. Additional Documents..........................................36
12.04. Severability..................................................37
12.05. Entire Agreement..............................................37
12.06. Pronouns and Plurals..........................................37
12.07. Headings......................................................37
12.08. Counterparts..................................................37
12.09. Governing Law................................................ 37
EXHIBITS
EXHIBIT A -- Partners, Capital Contributions and Percentage Interests
EXHIBIT B -- Notice of Exercise of Exchange Right
-iii-
<PAGE>
SECOND AMENDED AND RESTATED AGREEMENT
OF LIMITED PARTNERSHIP
OF
OCWEN PARTNERSHIP, L.P.
RECITALS
Ocwen Partnership, L.P. (the "Partnership") was formed as a limited
partnership under the laws of the Commonwealth of Virginia pursuant to a
Certificate of Limited Partnership filed with the State Corporation Commission
of Virginia effective as of March 3, 1997. This Amended and Restated Agreement
of Limited Partnership is entered into this 17th day of February, 1998 among
Ocwen General, Inc., a Virginia corporation (the "General Partner"), and the
Limited Partners set forth on Exhibit A hereto, for the purpose of amending and
restating the Amended and Restated Agreement of Limited Partnership and the
Limited Partnership Agreement (together, the "Initial Agreement").
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, of mutual covenants
between the parties hereto, and of other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree to amend the Initial Agreement to read in its entirety as follows:
ARTICLE I
DEFINED TERMS
The following defined terms used in this Agreement shall have the
meanings specified below:
"ACT" means the Virginia Revised Uniform Limited Partnership Act, as it may be
amended from time to time.
"ADDITIONAL FUNDS" has the meaning set forth in Section 4.03 hereof.
"ADDITIONAL SECURITIES" means any additional REIT Shares (other than REIT Shares
issued in connection with an exchange pursuant to Section 8.05 hereof) or
rights, options, warrants or convertible or exchangeable securities containing
the right to subscribe for or purchase REIT Shares, as set forth in Section
4.02(a)(ii).
"ADMINISTRATIVE EXPENSES" means (i) all administrative and operating costs and
expenses incurred by the Partnership, (ii) those administrative costs and
expenses of the General Partner, including any salaries or other payments to
directors, officers or employees of the General Partner, and any accounting and
legal expenses of the General Partner, which expenses, the Partners have agreed,
are expenses of the Partnership and not the General Partner, and (iii) to the
extent not included in clause (ii) above, REIT Expenses; PROVIDED, HOWEVER, that
Administrative Expenses shall not include any administrative costs and expenses
incurred by the Company that are attributable to Properties or partnership
interests in a Subsidiary Partnership that are owned by the Company directly.
"AFFILIATE" means, (i) any Person that, directly or indirectly, controls or is
controlled by or is under common control with such Person, (ii) any other Person
that owns, beneficially, directly or indirectly, 10% or more of the outstanding
capital stock, shares or equity interests of such Person, or (iii) any officer,
director, employee, partner or trustee of such Person or any Person controlling,
controlled by or under common control with such Person (excluding trustees and
persons serving in similar capacities who are not otherwise an Affiliate of such
Person). For the purposes of this definition, "control" (including the
correlative meanings of the terms "controlled by" and "under common control
with"), as used with respect to any Person, shall mean the possession, directly
or indirectly,
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of the power to direct or cause the direction of the management and policies of
such Person, through the ownership of voting securities or partnership interests
or otherwise.
"AGREED VALUE" means the fair market value of a Partner's non-cash Capital
Contribution as of the date of contribution as agreed to by such Partner and the
General Partner. The names and addresses of the Partners, number of Partnership
Units issued to each Partner, and the Agreed Value of non-cash Capital
Contributions as of the date of contribution is set forth on EXHIBIT A.
"AGREEMENT" means this Amended and Restated Agreement of Limited Partnership.
"AMENDED AND RESTATED ARTICLES OF INCORPORATION" means the amended and restated
articles of incorporation of the Company filed with the State Corporation
Commission of Virginia, as amended or restated from time to time.
"CAPITAL ACCOUNT" has the meaning provided in Section 4.04 hereof.
"CAPITAL CONTRIBUTION" means the total amount of cash, cash equivalents, and the
Agreed Value of any Property or other asset contributed or agreed to be
contributed, as the context requires, to the Partnership by each Partner
pursuant to the terms of the Agreement. Any reference to the Capital
Contribution of a Partner shall include the Capital Contribution made by a
predecessor holder of the Partnership Interest of such Partner.
"CASH AMOUNT" means an amount of cash per Partnership Unit equal to the Value of
the REIT Shares Amount on the date of receipt by the Company of a Notice of
Exchange.
"CERTIFICATE" means any instrument or document that is required under the laws
of the Commonwealth of Virginia, or any other jurisdiction in which the
Partnership conducts business, to be signed or sworn to by the Partners of the
Partnership (either by themselves or pursuant to the power-of-attorney granted
to the General Partner in Section 8.02 hereof) and filed for recording in the
appropriate public offices in the Commonwealth of Virginia or such other
jurisdiction to perfect or maintain the Partnership as a limited partnership, to
effect the admission, withdrawal, or substitution of any Partner of the
Partnership, or to protect the limited liability of the Limited Partners as
limited partners under the laws of the Commonwealth of Virginia or such other
jurisdiction.
"CODE" means the Internal Revenue Code of 1986, as amended, and as hereafter
amended from time to time. Reference to any particular provision of the Code
shall mean that provision in the Code at the date hereof and any successor
provision of the Code.
"COMMISSION" means the U.S. Securities and Exchange Commission.
"COMPANY" means Ocwen Asset Investment Corp., a Virginia corporation organized
as a real estate investment trust.
"CONVERSION FACTOR" means 1.0, PROVIDED THAT, (a) in the event that the Company
(i) declares or pays a dividend on its outstanding REIT Shares in REIT Shares or
makes a distribution to all holders of its outstanding REIT Shares in REIT
Shares, (ii) subdivides its outstanding REIT Shares, or (iii) combines its
outstanding REIT Shares into a smaller number of REIT Shares, the Conversion
Factor shall be adjusted by multiplying the Conversion Factor by a fraction, the
numerator of which shall be the number of REIT Shares 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 REIT Shares (determined without the above assumption)
issued and outstanding on such date; and (b) in the event that the Company
declares or pays a dividend or other distribution on its outstanding REIT Shares
(other than (A) cash dividends payable in the ordinary course of the Company's
business or (B) dividends payable in REIT Shares that give rise to an adjustment
in the Conversion Factor under subsection (a) hereof) and the Value of the REIT
Shares on the 20th trading day following the record date ("Record Date") for
such dividend or distribution (the "Post-Distribution Value") is less than the
Value of the REIT Shares on the Business Day immediately preceding such Record
Date (the "Pre-Distribution Value"), then the Conversion Factor in effect after
the Record Date shall be adjusted by multiplying the Conversion Factor in effect
prior to the Record Date by a fraction, the numerator of which is the
Pre-Distribution Value and the denominator of which is the Post-Distribution
Value, PROVIDED, HOWEVER, that no adjustment shall be made if (x) with respect
to any cash dividend or distribution with respect to REIT shares, the
Partnership distributes with respect to each Partnership Unit an amount equal to
the amount of such dividend or distribution multiplied by the Conversion Factor
or (y) with respect to any dividend or
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distribution of securities or property other than cash, the Partnership
distributes with respect to each Partnership Unit an amount of securities or
other property equal to the amount distributed with respect to each REIT share
multiplied by the Conversion Ratio or a partnership interest or other security
readily convertible into such securities or other property. 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;
PROVIDED, HOWEVER, that if the Company receives a Notice of Exchange after the
record date, but prior to the effective date of such dividend, distribution,
subdivision or combination, the Conversion Factor shall be determined as if the
Company had received the Notice of Exchange immediately prior to the record date
for such dividend, distribution, subdivision or combination.
"EVENT OF BANKRUPTCY" as to any Person means the filing of a petition for relief
as to such Person as debtor or bankrupt under the Bankruptcy Code of 1978 or
similar provision of law of any jurisdiction (except if such petition is
contested by such Person and has been dismissed within 90 days); insolvency or
bankruptcy of such Person as finally determined by a court proceeding; filing by
such Person of a petition or application to accomplish the same or for the
appointment of a receiver or a trustee for such Person or a substantial part of
his assets; commencement of any proceedings relating to such Person as a debtor
under any other reorganization, arrangement, insolvency, adjustment of debt or
liquidation law of any jurisdiction, whether now in existence or hereinafter in
effect, either by such Person or by another, PROVIDED that if such proceeding is
commenced by another, such Person indicates his approval of such proceeding,
consents thereto or acquiesces therein, or such proceeding is contested by such
Person and has not been finally dismissed within 90 days.
"EXCHANGE AMOUNT" means either the Cash Amount or the REIT Shares Amount, as
selected by the General Partner or the Company in its sole and absolute
discretion pursuant to Section 8.05(b) hereof.
"EXCHANGE RIGHT" has the meaning provided in Section 8.05(a) hereof.
"EXCHANGING PARTNER" has the meaning provided in Section 8.05(a) hereof.
"GENERAL PARTNER" means Ocwen General, Inc., a Virginia corporation, and any
Person who becomes a substitute or additional General Partner as provided
herein, and any of their successors as General Partner.
"GENERAL PARTNERSHIP INTEREST" means a Partnership Interest held by the General
Partner that is a general partnership interest.
"INDEMNITEE" means (i) any Person made a party to a proceeding by reason of its
status as the Company, the General Partner or a director, officer or employee of
the Company, the Partnership or the General Partner, and (ii) such other Persons
(including Affiliates of the Company, General Partner or the Partnership) as the
General Partner may designate from time to time, in its sole and absolute
discretion.
"INDEPENDENT DIRECTOR" means a director of the Company who is not an officer or
employee of the Company, any Affiliate of an officer or employee or any
Affiliate of (i) any lessee of any property of the Company or any Subsidiary of
the Company, (ii) any Subsidiary of the Company, or (iii) any partnership that
is an Affiliate of the Company.
"LIMITED PARTNER" means any Person named as a Limited Partner on EXHIBIT A
attached hereto, and any Person who becomes a Substitute or Additional Limited
Partner, in such Person's capacity as a Limited Partner in the Partnership.
"LIMITED PARTNERSHIP INTEREST" means the ownership interest of a Limited Partner
in the Partnership at any particular time, including the right of such Limited
Partner to any and all benefits to which such Limited Partner may be entitled as
provided in this Agreement and in the Act, together with the obligations of such
Limited Partner to comply with all the provisions of this Agreement and of such
Act.
"LOSS" has the meaning provided in Section 5.01(f) hereof.
"NOTICE OF EXCHANGE" means the Notice of Exercise of Exchange Right
substantially in the form attached as EXHIBIT B hereto.
"NASDAQ" means the Nasdaq Stock Market.
"OFFER" has the meaning set forth in Section 7.01(c) hereof.
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"OFFERING" means the initial offer and sale by the Company and the purchase by
the Underwriters (as defined in the Prospectus) of REIT Shares for sale to the
public.
"ORIGINAL LIMITED PARTNER" means Ocwen Limited, Inc., a Virginia corporation.
"PARTNER" means any General Partner or Limited Partner.
"PARTNER NONRECOURSE DEBT MINIMUM GAIN" has 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).
"PARTNERSHIP INTEREST" means an ownership interest in the Partnership held by
either a Limited Partner or the General Partner and includes any and all
benefits to which the holder of such a Partnership Interest may be entitled as
provided in this Agreement, together with all obligations of such Person to
comply with the terms and provisions of this Agreement.
"PARTNERSHIP MINIMUM GAIN" has the meaning set forth in Regulations Section
1.704-2(d). In accordance with Regulations Section 1.704-2(d), the amount of
Partnership Minimum Gain is determined by first computing, for each Partnership
nonrecourse liability, any gain the Partnership would realize if it disposed of
the property subject to that liability for no consideration other than full
satisfaction of the liability, and then aggregating the separately computed
gains. A Partner's share of Partnership Minimum Gain shall be determined in
accordance with Regulations Section 1.704-2(g)(1).
"PARTNERSHIP RECORD DATE" means the record date established by the General
Partner for the distribution of cash pursuant to Section 5.02 hereof, which
record date shall be the same as the record date established by the Company for
a distribution to its shareholders of some or all of its portion of such
distribution.
"PARTNERSHIP UNIT" means a fractional, undivided share of the Partnership
Interests of all Partners issued hereunder. The allocation of Partnership Units
among the Partners shall be as set forth on EXHIBIT A, as may be amended from
time to time.
"PERCENTAGE INTEREST" means the percentage ownership interest in the Partnership
of each Partner, as determined by dividing the Partnership Units owned by a
Partner by the total number of Partnership Units then outstanding. The
Percentage Interest of each Partner shall be as set forth on EXHIBIT A, as may
be amended from time to time.
"PERSON" means any individual, partnership, corporation, joint venture, trust or
other entity.
"PROFIT" has the meaning provided in Section 5.01(f) hereof.
"PROPERTY" means any office or industrial property or other investment in which
the Partnership holds an ownership interest.
"PROSPECTUS" means the final prospectus delivered to purchasers of REIT Shares
in the Offering.
"REGULATIONS" means the Federal Income Tax Regulations issued under the Code, as
amended and as hereafter amended from time to time. Reference to any particular
provision of the Regulations shall mean that provision of the Regulations on the
date hereof and any successor provision of the Regulations.
"REIT" means a real estate investment trust under Sections 856 through 860 of
the Code.
"REIT EXPENSES" means (i) costs and expenses relating to the formation and
continuity of existence and operation of the Company and any Subsidiaries
thereof, including Ocwen General, Inc. (which Subsidiaries shall, for purposes
hereof, be included within the definition of Company), including taxes, fees and
assessments associated therewith, any and all costs, expenses or fees payable to
any director, officer, or employee of the Company, (ii) costs and expenses
relating to any public offering and registration of securities by the Company
and all statements, reports, fees and expenses incidental thereto, including,
without limitation, underwriting discounts and selling commissions applicable to
any such offering of securities, and any costs and expenses associated with any
claims made by any holders of such securities or any underwriters or placement
agents thereof, (iii) costs and expenses associated with any repurchase of any
securities by the Company, (iv) costs and expenses associated with the
preparation and filing of any periodic or other reports and communications by
the Company under federal, state or local laws or regulations, including filings
with the Commission, (v) costs and expenses associated with compliance by the
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Company with laws, rules and regulations promulgated by any regulatory body,
including the Commission and any securities exchange, (vi) costs and expenses
associated with any 401(k) plan, incentive plan, bonus plan or other plan
providing for compensation for the employees of the Company, (vii) costs and
expenses incurred by the Company relating to any issuing or redemption of
Partnership Interests, and (viii) all other operating or administrative costs of
the Company incurred in the ordinary course of its business on behalf of or in
connection with the Partnership.
"REIT SHARE" means a common share of beneficial interest in the Company (or
successor Entity, as the case may be).
"REIT SHARES AMOUNT" means a number of REIT Shares equal to the product of the
number of Partnership Units offered for exchange by an Exchanging Partner,
multiplied by the Conversion Factor as adjusted to and including the Specified
Exchange Date; PROVIDED THAT in the event the Company issues to all holders of
REIT Shares rights, options, warrants or convertible or exchangeable securities
entitling the shareholders to subscribe for or purchase REIT Shares, or any
other securities or property (collectively, the "rights"), and the rights have
not expired at the Specified Exchange Date, then the REIT Shares Amount shall
also include the rights issuable to a holder of the REIT Shares Amount of REIT
Shares on the record date fixed for purposes of determining the holders of REIT
Shares entitled to rights.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SERVICE" means the Internal Revenue Service.
"SPECIFIED EXCHANGE DATE" means the first business day of the month that is at
least 60 business days after the receipt by the Company of the Notice of
Exchange.
"SHARE INCENTIVE PLANS" means the Ocwen Asset Investment Corp. non-qualified
stock option plan, as amended from time to time, or any stock incentive plan
adopted in the future by the Company.
"SUBSIDIARY" means, with respect to any Person, any corporation or other entity
of which a majority of (i) the voting power of the voting equity securities or
(ii) the outstanding equity interests is owned, directly or indirectly, by such
Person.
"SUBSIDIARY PARTNERSHIP" means any partnership of which the partnership
interests therein are owned by the Company or a wholly-owned subsidiary of the
Company.
"SUBSTITUTE LIMITED PARTNER" means any Person admitted to the Partnership as a
Limited Partner pursuant to Section 9.03 hereof.
"SURVIVING GENERAL PARTNER" has the meaning set forth in Section 7.01(d) hereof.
"TRANSACTION" has the meaning set forth in Section 7.01(c) hereof.
"TRANSFER" has the meaning set forth in Section 9.02(a) hereof.
"VALUE" means, with respect to any security, the average of the daily market
price of such security for the ten consecutive trading days immediately
preceding the date of such valuation. The market price for each such trading day
shall be: (i) if security is listed or admitted to trading on any securities
exchange or NASDAQ, the sale price, regular way, on such day, or if no such sale
takes place on such day, the average of the closing bid and asked prices,
regular way, on such day, (ii) if security is not listed or admitted to trading
on any securities exchange or NASDAQ takes place on such day, the average of the
closing bid and asked prices on such day, as reported by a reliable quotation
source designated by the Company, or (iii) if security is not listed or admitted
to trading on any securities exchange or NASDAQ and no such last reported sale
price or closing bid and asked prices are available, the average of the reported
high bid and low asked prices on such day, as reported by a reliable quotation
source designated by the Company, or if there shall be no bid and asked prices
on such day, the average of the high bid and low asked prices, as so reported,
on the most recent day (not more than ten days prior to the date in question)
for which prices have been so reported; PROVIDED THAT if there are no bid and
asked prices reported during the ten days prior to the date in question, the
value of the security shall be determined by the Company acting in good faith on
the basis of such quotations and other information as it considers, in its
reasonable judgment, appropriate. In the event the security includes any
additional rights, then the value of such rights shall be determined by the
Company acting in
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good faith on the basis of such quotations and other information as it
considers, in its reasonable judgment, appropriate.
ARTICLE II
PARTNERSHIP CONTINUATION AND IDENTIFICATION
2.01. CONTINUATION.
The Partners hereby agree to continue the Partnership pursuant to the
Act and upon the terms and conditions set forth in this Agreement.
2.02. NAME, OFFICE AND REGISTERED AGENT.
The name of the Partnership is Ocwen Partnership, L.P. The specified
office and place of business of the Partnership shall be 1675 Palm Beach
Boulevard, Suite 1000, West Palm Beach, Florida 33401. The General Partner may
at any time change the location of such office, provided the General Partner
gives notice to the Partners of any such change. The initial registered agent is
George C. Howell, III, who is a resident of Virginia and a member of the
Virginia State Bar, and whose business address is Riverfront Plaza, 951 East
Byrd Street in the City of Richmond. The sole duty of the registered agent as
such is to forward to the Partnership any notice that is served on him as
registered agent.
2.03. PARTNERS.
The General Partner of the Partnership is Ocwen General, Inc., a
Virginia corporation. Its principal place of business is the same as that of the
Partnership.
The Limited Partners are those Persons identified as Limited Partners
on Exhibit A hereto, as amended from time to time.
2.04. TERM AND DISSOLUTION.
The term of the Partnership shall continue in full force and effect
until December 31, 2050, except that the Partnership shall be dissolved upon the
first to occur of any of the following events:
The occurrence of an Event of Bankruptcy as to a
General Partner or the dissolution, death, removal or
withdrawal of a General Partner unless the business of the
Partnership is continued pursuant to Section 7.03(b) hereof;
PROVIDED THAT if a General Partner is on the date of such
occurrence a partnership, the dissolution of such General
Partner as a result of the dissolution, death, withdrawal,
removal or Event of Bankruptcy of a partner in such
partnership shall not be an event of dissolution of the
Partnership if the business of such General Partner is
continued by the remaining partner or partners, either alone
or with additional partners, and such General Partner and such
partners comply with any other applicable requirements of this
Agreement;
The passage of 90 days after the sale or other
disposition of all or substantially all of the assets of the
Partnership (PROVIDED THAT if the Partnership receives an
installment obligation as consideration for such sale or other
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disposition, the Partnership shall continue, unless sooner
dissolved under the provisions of this Agreement, until such
time as such note or notes are paid in full);
The exchange of all Limited Partnership Interests
(other than any of such interests held by the General Partner
or Affiliates of the General Partner); or
The election by the General Partner that the Partnership should be
dissolved.
Upon dissolution of the Partnership (unless the business of the
Partnership is continued pursuant to Section 7.03(b) hereof), the General
Partner (or its trustee, receiver, successor or legal representative) shall
amend or cancel the Certificate and liquidate the Partnership's assets and apply
and distribute the proceeds thereof in accordance with Section 5.06 hereof.
Notwithstanding the foregoing, the liquidating General Partner may either (i)
defer liquidation of, or withhold from distribution for a reasonable time, any
assets of the Partnership (including those necessary to satisfy the
Partnership's debts and obligations), or (ii) distribute the assets to the
Partners in kind.
2.05. FILING OF CERTIFICATE AND PERFECTION OF LIMITED PARTNERSHIP.
The General Partner shall execute, acknowledge, record and file at the
expense of the Partnership, the Certificate and any and all amendments thereto
and all requisite fictitious name statements and notices in such places and
jurisdictions as may be necessary to cause the Partnership to be treated as a
limited partnership under, and otherwise to comply with, the laws of each state
or other jurisdiction in which the Partnership conducts business.
2.06. CERTIFICATES DESCRIBING PARTNERSHIP UNITS.
At the request of a Limited Partner, the General Partner, at its
option, may issue a certificate summarizing the terms of such Limited Partner's
interest in the Partnership, including the number of Partnership Units owned and
the Percentage Interest represented by such Partnership Units as of the date of
such certificate. Any such certificate (i) shall be in form and substance as
approved by the General Partner, (ii) shall not be negotiable and (iii) shall
bear a legend to the following effect:
This certificate is not negotiable. The Partnership
Units represented by this certificate are governed by
and transferable only in accordance with the provisions
of the Agreement of Limited Partnership of Ocwen
Partnership, L.P., as amended from time to time.
ARTICLE III
BUSINESS OF THE PARTNERSHIP
The purpose and nature of the business to be conducted by the
Partnership is (i) to conduct any business that may be lawfully conducted by a
limited partnership organized pursuant to the Act, PROVIDED, HOWEVER, that such
business shall be limited to and conducted in such a manner as to permit the
Company at all times to qualify as a REIT, unless the Company otherwise ceases
to qualify as a REIT, (ii) to enter into any partnership, joint venture or other
similar arrangement to engage in any of the foregoing or the ownership of
interests in any entity engaged in any of the foregoing and (iii) to do anything
necessary or incidental to the foregoing. In connection with the foregoing,
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and without limiting the Company's right in its sole and absolute discretion to
cease qualifying as a REIT, the Partners acknowledge that the Company's current
status as a REIT and the avoidance of income and excise taxes on the Company
inures to the benefit of all the Partners and not solely to the Company.
Notwithstanding the foregoing, the Limited Partners agree that the Company may
terminate its status as a REIT under the Code at any time to the full extent
permitted under its Amended and Restated Articles of Incorporation. The General
Partner shall also be empowered to do any and all acts and things necessary or
prudent to ensure that the Partnership will not be classified as a "publicly
traded partnership" for purposes of Section 7704 of the Code.
ARTICLE IV
CAPITAL CONTRIBUTIONS AND ACCOUNTS
4.01. CAPITAL CONTRIBUTIONS.
The General Partner and the Limited Partners have made capital
contributions to the Partnership in exchange for the Partnership Interests set
forth opposite their names on Exhibit A, as amended from time to time.
4.02. ADDITIONAL CAPITAL CONTRIBUTIONS AND ISSUANCES OF ADDITIONAL
PARTNERSHIP INTERESTS.
Except as provided in this Section 4.02 or in Section 4.03, the
Partners shall have no right or obligation to make any additional Capital
Contributions or loans to the Partnership. The General Partner may contribute
additional capital to the Partnership, from time to time, and receive additional
Partnership Interests in respect thereof, in the manner contemplated in this
Section 4.02.
Issuances of Additional Partnership Interests.
GENERAL. The General Partner is hereby authorized to
cause the Partnership to issue such additional Partnership
Interests in the form of Partnership Units for any Partnership
purpose at any time or from time to time, to the Partners
(including the General Partner and the Company) or to other
Persons for such consideration and on such terms and
conditions as shall be established by the General Partner in
its sole and absolute discretion, all without the approval of
any Limited Partners. Any additional Partnership Interests
issued thereby may be issued in one or more classes, or one or
more series of any of such classes, with such designations,
preferences and relative, participating, optional or other
special rights, powers and duties, including rights, powers
and duties senior to Limited Partnership Interests, all as
shall be determined by the General Partner in its sole and
absolute discretion and without the approval of any Limited
Partner, subject to Virginia law, including, without
limitation, (i) the allocations of items of Partnership
income, gain, loss, deduction and credit to each such class or
series of Partnership Interests; (ii) the right of each such
class or series of Partnership Interests to share in
Partnership distributions; and (iii) the rights of each such
class or series of Partnership Interests upon dissolution and
liquidation of the Partnership; PROVIDED, HOWEVER, that no
additional Partnership Interests shall be issued to the
General Partner or the Company unless:
(A) the additional Partnership Interests are
issued in connection with an issuance of REIT Shares
of or other interests in the Company,
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which shares or interests have designations,
preferences and other rights, all such that the
economic interests are substantially similar to the
designations, preferences and other rights of the
additional Partnership Interests issued to the
General Partner or the Company by the Partnership in
accordance with this Section 4.02 and (B) the General
Partner or the Company shall make a Capital
Contribution to the Partnership in an amount equal to
the proceeds raised in connection with the issuance
of such shares of stock of or other interests in the
Company;
the additional Partnership Interests are
issued in exchange for property owned by the Company
or the General Partner with a fair market value, as
determined by the General Partner, in good faith,
equal to the value of the Partnership Interests; or
the additional Partnership Interests are
issued to all Partners in proportion to their
respective Percentage Interests.
Without limiting the foregoing, the General Partner is expressly authorized to
cause the Partnership to issue Partnership Units for less than fair market
value, so long as the General Partner concludes in good faith that such issuance
is in the best interests of the General Partner and the Partnership.
UPON ISSUANCE OF ADDITIONAL SECURITIES. The Company
shall not issue any additional REIT Shares (other than REIT
Shares issued in connection with an exchange pursuant to
Section 8.05 hereof) or rights, options, warrants or
convertible or exchangeable securities containing the right to
subscribe for or purchase REIT Shares (collectively,
"Additional Securities") other than to all holders of REIT
Shares, unless (A) the General Partner shall cause the
Partnership to issue to the General Partner and the Company,
as the Company may designate, Partnership Interests or rights,
options, warrants or convertible or exchangeable securities of
the Partnership having designations, preferences and other
rights, all such that the economic interests are substantially
similar to those of the Additional Securities, and (B) the
Company contributes the proceeds from the issuance of such
Additional Securities and from any exercise of rights
contained in such Additional Securities, directly and through
the General Partner, to the Partnership; PROVIDED, HOWEVER,
that the Company is allowed to issue Additional Securities in
connection with an acquisition of a property to be held
directly by the Company, but if and only if, such direct
acquisition and issuance of Additional Securities have been
approved and determined to be in the best interests of the
Company and the Partnership by a majority of the Independent
Directors. Without limiting the foregoing, the Company is
expressly authorized to issue Additional Securities for less
than fair market value, and to cause the Partnership to issue
to the General Partner and the Company corresponding
Partnership Interests, so long as (x) the General Partner
concludes in good faith that such issuance is in the best
interests of the General Partner, the Company and the
Partnership, including
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without limitation, the issuance of REIT Shares and
corresponding Partnership Units pursuant to an employee share
purchase plan providing for employee purchases of REIT Shares
at a discount from fair market value or employee stock options
that have an exercise price that is less than the fair market
value of the REIT Shares, either at the time of issuance or at
the time of exercise, and (y) the Company contributes all
proceeds from such issuance, directly or through the General
Partner, to the Partnership. For example, in the event the
Company issues REIT Shares for a cash purchase price and
contributes all of the proceeds of such issuance, directly and
through the General Partner, to the Partnership as required
hereunder, the General Partner and the Company, as the Company
may so designate, shall be issued a number of additional
Partnership Units equal to the product of (A) the number of
such REIT Shares issued by the Company, the proceeds of which
were so contributed, multiplied by (B) a fraction, the
numerator of which is 100%, and the denominator of which is
the Conversion Factor in effect on the date of such
contribution.
CERTAIN DEEMED CONTRIBUTIONS OF PROCEEDS OF ISSUANCE OF REIT
SHARES. In connection with any and all issuances of REIT Shares, the Company and
the General Partner, as the Company determines, shall make Capital Contributions
to the Partnership of the proceeds therefrom, PROVIDED THAT if the proceeds
actually received and contributed by the Company, directly or through the
General Partner, are less than the gross proceeds of such issuance as a result
of any underwriter's discount or other expenses paid or incurred in connection
with such issuance, then the General Partner and the Company shall be deemed to
have made Capital Contributions to the Partnership in the aggregate amount of
the gross proceeds of such issuance and the Partnership shall be deemed
simultaneously to have paid such offering expenses in accordance with Section
6.05 hereof and in connection with the required issuance of additional
Partnership Units to the General Partner and the Company for such Capital
Contributions pursuant to Section 4.02(a) hereof.
In the event the Company purchases any REIT Shares or other
shares of any class of the Company's capital stock, then the General Partner
shall cause the Partnership to purchase a number of Partnership Units held,
directly or indirectly, by the Company, as the Company may designate, equal to
the quotient of the number of such REIT Shares or such shares of the Company's
capital stock divided by the Conversion Factor and on the same terms that the
Company exchanged such REIT Shares or such shares of the Company's capital
stock. Moreover, if the Company makes a cash tender offer or other offer to
acquire REIT Shares or other shares of any class of the Company's capital stock,
then the General Partner shall cause the Partnership to make a corresponding
offer to the Company, or the direct or indirect subsidiaries through which the
Company holds Partnership Units, as the Company may designate, to acquire an
equal number of Partnership Units held, directly or indirectly, by the Company.
In the event any REIT Shares or other shares of any class of the Company's
capital stock are acquired by the Company pursuant to such tender or other
offer, the Partnership shall purchase an equivalent number of Partnership Units
held, directly or indirectly, by the Company, as the Company may designate, for
an equivalent purchase price based on the application of the Conversion Factor.
Lastly, if the Company shall repurchase any REIT Shares or any shares of any
class of the
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Company's capital stock pursuant to this section, all costs incurred in
connection with such repurchase shall be reimbursed to the General Partner by
the Partnership pursuant to Section 6.05 hereof.
4.03. ADDITIONAL FUNDING.
If the General Partner determines that it is in the best interests of
the Partnership to provide for additional Partnership funds ("Additional Funds")
for any Partnership purpose, the General Partner may (i) cause the Partnership
to obtain such funds from outside borrowings, or (ii) elect to have the General
Partner or the Company provide such Additional Funds to the Partnership through
loans or otherwise.
4.04. CAPITAL ACCOUNTS.
A separate capital account (a "Capital Account") shall be established
and maintained for each Partner in accordance with Regulations Section
1.704-1(b)(2)(iv). If (i) a new or existing Partner acquires an additional
Partnership Interest in exchange for more than a DE MINIMIS Capital
Contribution, (ii) the Partnership distributes to a Partner more than a DE
MINIMIS amount of Partnership property as consideration for a Partnership
Interest, or (iii) the Partnership is liquidated within the meaning of
Regulation Section 1.704-1(b)(2)(ii)(g), the General Partner shall revalue the
property of the Partnership to its fair market value (as determined by the
General Partner, in its sole and absolute discretion, and taking into account
Section 7701(g) of the Code) in accordance with Regulations Section
1.704-1(b)(2)(iv)(f). When the Partnership's property is revalued by the General
Partner, the Capital Accounts of the Partners shall be adjusted in accordance
with Regulations Sections 1.704-1(b)(2)(iv)(f) and (g), which generally require
such Capital Accounts to 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
pursuant to Section 5.01 if there were a taxable disposition of such property
for its fair market value (as determined by the General Partner, in its sole and
absolute discretion, and taking into account Section 7701(g) of the Code) on the
date of the revaluation.
4.05. PERCENTAGE INTERESTS.
If the number of outstanding Partnership Units increases or decreases
during a taxable year, each Partner's Percentage Interest shall be adjusted by
the General Partner effective as of the effective date of each such increase or
decrease to a percentage equal to the number of Partnership Units held by such
Partner divided by the aggregate number of Partnership Units outstanding after
giving effect to such increase or decrease. If the Partners' Percentage
Interests are adjusted pursuant to this Section 4.05, the Profits and Losses for
the taxable year in which the adjustment occurs shall be allocated between the
part of the year ending on the day when the Partnership's property is revalued
by the General Partner and the part of the year beginning on the following day
either (i) as if the taxable year had ended on the date of the adjustment or
(ii) based on the number of days in each part. The General Partner, in its sole
and absolute discretion, shall determine which method shall be used to allocate
Profits and Losses for the taxable year in which the adjustment occurs. The
allocation of Profits and Losses for the earlier part of the year shall be based
on the Percentage Interests before adjustment, and the allocation of Profits and
Losses for the later part shall be based on the adjusted Percentage Interests.
4.06. NO INTEREST ON CONTRIBUTIONS.
No Partner shall be entitled to interest on its Capital Contribution.
4.07. RETURN OF CAPITAL CONTRIBUTIONS.
No Partner shall be entitled to withdraw any part of its Capital
Contribution or its Capital Account or to receive any distribution from the
Partnership, except as specifically provided in this Agreement. Except as
otherwise provided herein, there shall be no obligation to return to any Partner
or withdrawn Partner any part of such Partner's Capital Contribution for so long
as the Partnership continues in existence.
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4.08. NO THIRD-PARTY BENEFICIARY.
No creditor or other third party having dealings with the Partnership
shall have the right to enforce the right or obligation of any Partner to make
Capital Contributions or loans or to pursue any other right or remedy hereunder
or at law or in equity, it being understood and agreed that the provisions of
this Agreement shall be solely for the benefit of, and may be enforced solely
by, the parties hereto and their respective successors and assigns. None of the
rights or obligations of the Partners herein set forth to make Capital
Contributions or loans to the Partnership shall be deemed an asset of the
Partnership for any purpose by any creditor or other third party, nor may such
rights or obligations be sold, transferred or assigned by the Partnership or
pledged or encumbered by the Partnership to secure any debt or other obligation
of the Partnership or of any of the Partners. In addition, it is the intent of
the parties hereto that no distribution to any Limited Partner shall be deemed a
return of money or other property in violation of the Act. However, if any court
of competent jurisdiction holds that, notwithstanding the provisions of this
Agreement, any Limited Partner is obligated to return such money or property,
such obligation shall be the obligation of such Limited Partner and not of the
General Partner. Without limiting the generality of the foregoing, a deficit
Capital Account of a Partner shall not be deemed to be a liability of such
Partner nor an asset or property of the Partnership.
ARTICLE V
PROFITS AND LOSSES; DISTRIBUTIONS
5.01. ALLOCATION OF PROFIT AND LOSS.
GENERAL. Profit and Loss of the Partnership for each fiscal year of the
Partnership shall be allocated among the Partners in accordance with their
respective Percentage Interests.
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 to the Partner that bears
the "economic risk of loss" of such deduction in accordance with Regulations
Section 1.704-2(i)(1), (iii) if there is a net decrease in Partnership Minimum
Gain within the meaning of Regulations Section 1.704-2(f)(1) for any Partnership
taxable year, then, subject to the exceptions set forth in Regulations Section
1.704-2(f)(2),(3), (4) and (5), 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 within the meaning of
Regulations Section 1.704-2(i)(4) for any Partnership taxable year, then,
subject to the exceptions set forth in Regulations Section 1.704(2)(g), 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.
QUALIFIED INCOME OFFSET. If a Partner receives in any taxable year an
adjustment, allocation, or distribution described in subparagraphs (4), (5), or
(6) of Regulations Section 1.704-1(b)(2)(ii)(d) that causes or increases a
deficit balance in such Partner's Capital Account
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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 deficit
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 a Partner in accordance with this Section 5.01(c), to the extent
permitted by Regulations Section 1.704-1(b), 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 5.01(c).
CAPITAL ACCOUNT DEFICITS. Loss shall not be allocated to a Limited
Partner to the extent that such allocation would cause a deficit in such
Partner's Capital Account (after reduction to reflect the items described in
Regulations Section 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 5.01(d), 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 each Partner under
this Section 5.01(d).
ALLOCATIONS BETWEEN TRANSFEROR AND TRANSFEREE. If a Partner transfers
any part or all of its Partnership Interest, the distributive shares of the
various items of Profit and Loss allocable among the Partners during such fiscal
year of the Partnership shall be allocated between the transferor and the
transferee Partner either (i) as if the Partnership's fiscal year had ended on
the date of the transfer, or (ii) based on the number of days of such fiscal
year that each was a Partner without regard to the results of Partnership
activities in the respective portions of such fiscal year in which the
transferor and the transferee were Partners. The General Partner, in its sole
and absolute discretion, shall determine which method shall be used to allocate
the distributive shares of the various items of Profit and Loss between the
transferor and the transferee Partner.
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 of income, gain and expense that are specially allocated pursuant
to Sections 5.01(b), 5.01(c), or 5.01(d). 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
Section 5.01, except as otherwise required by Section 704(c) of the Code and
Regulations Section 1.704-1(b)(4). The General Partner shall have the authority
to elect the method to be used by the Partnership for allocating items of
income, gain, and expense as required by Section 704(c) of the Code including a
method that may result in a Partner receiving a disproportionately larger share
of the Partnership tax depreciation deductions, and such election shall be
binding on all Partners.
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5.02. DISTRIBUTION OF CASH.
The Partnership shall distribute cash on a quarterly (or, at the
election of the General Partner, more frequent) basis, in an amount determined
by the General Partner in its sole and absolute discretion, to the Partners who
are Partners on the Partnership Record Date with respect to such quarter (or
other distribution period) in accordance with their respective Percentage
Interests on the Partnership Record Date; PROVIDED, HOWEVER, that if a new or
existing Partner acquires an additional Partnership Interest in exchange for a
Capital Contribution on any date other than a Partnership Record Date, the cash
distribution attributable to such additional Partnership Interest relating to
the Partnership Record Date next following the issuance of such additional
Partnership Interest shall be reduced in the proportion to (i) the number of
days that such additional Partnership Interest is held by such Partner bears to
(ii) the number of days between such Partnership Record Date and the immediately
preceding Partnership Record Date.
Notwithstanding any other provision of this Agreement, the General
Partner is authorized to take any action that it determines to be necessary or
appropriate to cause the Partnership to comply with any withholding requirements
established under the Code or any other federal, state or local law including,
without limitation, pursuant to Sections 1441, 1442, 1445 and 1446 of the Code.
To the extent that the Partnership is required to withhold and pay over to any
taxing authority any amount resulting from the allocation or distribution of
income to the Partner or assignee (including by reason of Section 1446 of the
Code), either (i) if the actual amount to be distributed to the Partner equals
or exceeds the amount required to be withheld by the Partnership, the amount
withheld shall be treated as a distribution of cash in the amount of such
withholding to such Partner, or (ii) if the actual amount to be distributed to
the Partner is less than the amount required to be withheld by the Partnership,
the amount required to be withheld shall be treated as a loan (a "Partnership
Loan") from the Partnership to the Partner on the day the Partnership pays over
such amount to a taxing authority. A Partnership Loan shall be repaid through
withholding by the Partnership with respect to subsequent distributions to the
applicable Partner or assignee. In the event that a Limited Partner (a
"Defaulting Limited Partner") fails to pay any amount owed to the Partnership
with respect to the Partnership Loan within 15 days after demand for payment
thereof is made by the Partnership on the Limited Partner, the General Partner,
in its sole and absolute discretion, may elect to make the payment to the
Partnership on behalf of such Defaulting Limited Partner. In such event, on the
date of payment, the General Partner shall be deemed to have extended a loan (a
"General Partner Loan") to the Defaulting Limited Partner in the amount of the
payment made by the General Partner and shall succeed to all rights and remedies
of the Partnership against the Defaulting Limited Partner as to that amount.
Without limitation, the General Partner shall have the right to receive any
distributions that otherwise would be made by the Partnership to the Defaulting
Limited Partner until such time as the General Partner Loan has been paid in
full, and any such distributions so received by the General Partner shall be
treated as having been received by the Defaulting Limited Partner and
immediately paid to the General Partner.
Any amounts treated as a Partnership Loan or a General Partner Loan
pursuant to this Section 5.02(b) shall bear interest at the lesser of (i) the
base rate on corporate loans at large United States money center commercial
banks, as published from time to time in THE WALL STREET JOURNAL, or (ii) the
maximum lawful rate of interest on such
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obligation, such interest to accrue from the date the Partnership or the General
Partner, as applicable, is deemed to extend the loan until such loan is repaid
in full.
In no event may a Partner receive a distribution of cash with respect
to a Partnership Unit if such Partner is entitled to receive a cash dividend as
the holder of record of a REIT Share for which all or part of such Partnership
Unit has been or will be exchanged.
5.03. REIT DISTRIBUTION REQUIREMENTS.
The General Partner shall use its reasonable efforts to cause the
Partnership to distribute amounts sufficient to enable the Company to pay
shareholder dividends that will allow the Company to (i) meet its distribution
requirement for qualification as a REIT as set forth in Section 857 of the Code
and (ii) avoid any federal income or excise tax liability imposed by the Code.
5.04. DISTRIBUTIONS IN KIND.
Subject to Subsection (b) hereof, no Partner shall be entitled to
demand property other than cash in connection with any distributions by the
Partnership.
If 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 Original Limited Partner has the right to redeem a
portion of its 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 Original
Limited Partner. Such fair market value will be determined by the General
Partner, but will be subject to the review of the Independent Directors.
5.05. LIMITATIONS ON RETURN OF CAPITAL CONTRIBUTIONS.
Notwithstanding any of the provisions of this Article V, no Partner
shall have the right to receive and the General Partner shall not have the right
to make, a distribution that includes a return of all or part of a Partner's
Capital Contributions, unless after giving effect to the return of a Capital
Contribution, the sum of all Partnership liabilities, other than the liabilities
to a Partner for the return of his Capital Contribution, does not exceed the
fair market value of the Partnership's assets.
5.06. DISTRIBUTIONS UPON LIQUIDATION.
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 in accordance with their respective
positive Capital Account balances. For purposes of the preceding sentence, the
Capital Account of each Partner shall be determined after all adjustments made
in accordance with Sections 5.01 and 5.02 resulting from Partnership operations
and from all sales and dispositions of all or any part of the Partnership's
assets. 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.
5.07. SUBSTANTIAL ECONOMIC EFFECT.
It is the intent of the Partners that the allocations of Profit and
Loss under the Agreement have substantial economic effect (or be consistent with
the Partners' interests in the Partnership in the case of the allocation of
losses attributable to nonrecourse debt) within the meaning of Section 704(b) of
the Code as interpreted by the Regulations
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promulgated pursuant thereto. Article V and other relevant provisions of this
Agreement shall be interpreted in a manner consistent with such intent.
ARTICLE VI
RIGHTS, OBLIGATIONS AND
POWERS OF THE GENERAL PARTNER
6.01. MANAGEMENT OF THE PARTNERSHIP.
Except as otherwise expressly provided in this Agreement, the General
Partner shall have full, complete and exclusive discretion to manage and control
the business of the Partnership for the purposes herein stated, and shall make
all decisions affecting the business and assets of the Partnership. Subject to
the restrictions specifically contained in this Agreement, the powers of the
General Partner shall include, without limitation, the authority to take the
following actions on behalf of the Partnership:
to acquire, purchase, own, operate, lease and dispose of any
real property and any other property or assets including, but not
limited to notes and mortgages, that the General Partner determines are
necessary or appropriate or in the best interests of the business of
the Partnership;
to construct buildings and make other improvements on the
properties owned or leased by the Partnership;
to authorize, issue, sell, redeem or otherwise purchase any
Partnership Interests or any securities (including secured and
unsecured debt obligations of the Partnership, debt obligations of the
Partnership convertible into any class or series of Partnership
Interests, or options, rights, warrants or appreciation rights relating
to any Partnership Interests) of the Partnership;
to borrow or lend money for the Partnership, issue or receive
evidences of indebtedness in connection therewith, refinance, increase
the amount of, modify, amend or change the terms of, or extend the time
for the payment of, any such indebtedness, and secure such indebtedness
by mortgage, deed of trust, pledge or other lien on the Partnership's
assets;
to pay, either directly or by reimbursement, for all operating
costs and general administrative expenses of the Partnership to third
parties or to the General Partner or its Affiliates as set forth in
this Agreement,
to guarantee or become a comaker of indebtedness of the Company
or any Subsidiary thereof, refinance, increase the amount of, modify,
amend or change the terms of, or extend the time for the payment of,
any such guarantee or indebtedness, and secure such guarantee or
indebtedness by mortgage, deed of trust, pledge or other lien on the
Partnership's assets;
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to use assets of the Partnership (including, without
limitation, cash on hand) for any purpose consistent with this
Agreement, including, without limitation, payment, either directly or
by reimbursement, of all operating costs and general administrative
expenses of the Company, the General Partner, the Partnership or any
Subsidiary of either, to third parties or to the General Partner as set
forth in this Agreement;
to lease all or any portion of any of the Partnership's assets,
whether or not the terms of such leases extend beyond the termination
date of the Partnership and whether or not any portion of the
Partnership's assets so leased are to be occupied by the lessee, or, in
turn, subleased in whole or in part to others, for such consideration
and on such terms as the General Partner may determine;
to prosecute, defend, arbitrate, or compromise any and all
claims or liabilities in favor of or against the Partnership, on such
terms and in such manner as the General Partner may reasonably
determine, and similarly to prosecute, settle or defend litigation with
respect to the Partners, the Partnership, or the Partnership's assets;
PROVIDED, HOWEVER, that the General Partner may not, without the
consent of all of the Partners, confess a judgment against the
Partnership that is in excess of $20,000 or is not covered by
insurance;
to file applications, communicate, and otherwise deal with any
and all governmental agencies having jurisdiction over, or in any way
affecting, the Partnership's assets or any other aspect of the
Partnership business;
to make or revoke any election permitted or required of the
Partnership by any taxing authority;
to maintain such insurance coverage for public liability, fire
and casualty, and any and all other insurance for the protection of the
Partnership, for the conservation of Partnership assets, or for any
other purpose convenient or beneficial to the Partnership, in such
amounts and such types, as it shall determine from time to time;
to determine whether or not to apply any insurance proceeds for
any property to the restoration of such property or to distribute the
same;
to establish one or more divisions of the Partnership, to hire
and dismiss employees of the Partnership or any division of the
Partnership, and to retain legal counsel, accountants, consultants,
real estate brokers, and such other persons, as the General Partner may
deem necessary or appropriate in connection with the Partnership
business and to pay therefor such reasonable remuneration as the
General Partner may deem reasonable and proper;
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to retain other services of any kind or nature in connection
with the Partnership business, and to pay therefor such remuneration as
the General Partner may deem reasonable and proper;
to negotiate and conclude agreements on behalf of the
Partnership with respect to any of the rights, powers and authority
conferred upon the General Partner;
to maintain accurate accounting records and to file promptly
all federal, state and local income tax returns on behalf of the
Partnership;
to distribute Partnership cash or other Partnership assets in
accordance with this Agreement;
to form or acquire an interest in, and contribute property to,
any further limited or general partnerships, joint ventures or other
relationships that it deems desirable (including, without limitation,
the acquisition of interests in, and the contributions of property to,
its Subsidiaries and any other Person in which it has an equity
interest from time to time);
to establish Partnership reserves for working capital, capital
expenditures, contingent liabilities, or any other valid Partnership
purpose; and
to merge, consolidate or combine the Partnership with or into
another person (to the extent permitted by applicable law);
to do any and all acts and things necessary or prudent to
ensure that the Partnership will not be classified as a "publicly
traded partnership" for purposes of Section 7704 of the Code; and
to take such other action, execute, acknowledge, swear to or
deliver such other documents and instruments, and perform any and all
other acts that the General Partner deems necessary or appropriate for
the formation, continuation and conduct of the business and affairs of
the Partnership (including, without limitation, all actions consistent
with allowing the Company at all times to qualify as a REIT unless the
Company voluntarily terminates its REIT status) and to possess and
enjoy all of the rights and powers of a general partner as provided by
the Act.
Except as otherwise provided herein, to the extent the duties of the
General Partner require expenditures of funds to be paid to third parties, the
General Partner shall not have any obligations hereunder except to the extent
that partnership funds are reasonably available to it for the performance of
such duties, and nothing herein contained shall be deemed to authorize or
require the General Partner, in its capacity as such, to expend its individual
funds for payment to third parties or to undertake any individual liability or
obligation on behalf of the Partnership.
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6.02. DELEGATION OF AUTHORITY.
The General Partner may delegate any or all of its powers, rights and
obligations hereunder, and may appoint, employ, contract or otherwise deal with
any Person for the transaction of the business of the Partnership, which Person
may, under supervision of the General Partner, perform any acts or services for
the Partnership as the General Partner may approve.
6.03. INDEMNIFICATION AND EXCULPATION OF INDEMNITEES.
The Partnership shall indemnify an Indemnitee from and against any and
all losses, claims, damages, liabilities, joint or several, expenses (including
reasonable legal fees and expenses), judgments, fines, settlements, and other
amounts arising from any and all claims, demands, actions, suits or proceedings,
civil, criminal, administrative or investigative, that relate to the operations
of the Partnership as set forth in this Agreement in which any Indemnitee may be
involved, or is threatened to be involved, as a party or otherwise, unless it is
established that: (i) the act or omission of the Indemnitee was material to the
matter giving rise to the proceeding and either was committed in bad faith or
was the result of active and deliberate dishonesty; (ii) the Indemnitee actually
received an improper personal benefit in money, property or services; or (iii)
in the case of any criminal proceeding, the Indemnitee had reasonable cause to
believe that the act or omission was unlawful. The termination of any proceeding
by judgment, order or settlement does not create a presumption that the
Indemnitee did not meet the requisite standard of conduct set forth in this
Section 6.03(a). The termination of any proceeding by conviction or upon a plea
of nolo contendere or its equivalent, or an entry of an order of probation prior
to judgment, creates a rebuttable presumption that the Indemnitee acted in a
manner contrary to that specified in this Section 6.03(a). Any indemnification
pursuant to this Section 6.03 shall be made only out of the assets of the
Partnership.
The Partnership shall reimburse an Indemnitee for reasonable expenses
incurred by an Indemnitee who is a party to a proceeding in advance of the final
disposition of the proceeding upon receipt by the Partnership of (i) a written
affirmation by the Indemnitee of the Indemnitee's good faith belief that the
standard of conduct necessary for indemnification by the Partnership as
authorized in this Section 6.03 has been met, and (ii) a written undertaking by
or on behalf of the Indemnitee to repay the amount if it shall ultimately be
determined that the standard of conduct has not been met.
The indemnification provided by this Section 6.03 shall be in addition
to any other rights to which an Indemnitee or any other Person may be entitled
under any agreement, pursuant to any vote of the Partners, as a matter of law or
otherwise, and shall continue as to an Indemnitee who has ceased to serve in
such capacity.
The Partnership may purchase and maintain insurance, on behalf of the
Indemnitees and such other Persons as the General Partner shall determine,
against any liability that may be asserted against or expenses that may be
incurred by such Person in connection with the Partnership's activities,
regardless of whether the Partnership would have the power to indemnify such
Person against such liability under the provisions of this Agreement.
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For purposes of this Section 6.03, the Partnership shall be deemed to
have requested an Indemnitee to serve as fiduciary of an employee benefit plan
whenever the performance by it of its duties to the Partnership also imposes
duties on, or otherwise involves services by, it to the plan or participants or
beneficiaries of the plan; excise taxes assessed on an Indemnitee with respect
to an employee benefit plan pursuant to applicable law shall constitute fines
within the meaning of this Section 6.03; and actions taken or omitted by the
Indemnitee with respect to an employee benefit plan in the performance of its
duties for a purpose reasonably believed by it to be in the interest of the
participants and beneficiaries of the plan shall be deemed to be for a purpose
which is not opposed to the best interests of the Partnership.
In no event may an Indemnitee subject the Limited Partners to personal
liability by reason of the indemnification provisions set forth in this
Agreement.
An Indemnitee shall not be denied indemnification in whole or in part
under this Section 6.03 because the Indemnitee had an interest in the
transaction with respect to which the indemnification applies if the transaction
was otherwise permitted by the terms of this Agreement.
The provisions of this Section 6.03 are for the benefit of the
Indemnitees, their heirs, successors, assigns and administrators and shall not
be deemed to create any rights for the benefit of any other Persons.
6.04. LIABILITY OF THE GENERAL PARTNER.
Notwithstanding anything to the contrary set forth in this Agreement,
the General Partner shall not be liable for monetary damages to the Partnership
or any Partners for losses sustained or liabilities incurred as a result of
errors in judgment or of any act or omission if the General Partner acted in
good faith. The General Partner shall not be in breach of any duty that the
General Partner may owe to the Limited Partners or the Partnership or any other
Persons under this Agreement or of any duty stated or implied by law or equity
provided the General Partner, acting in good faith, abides by the terms of this
Agreement.
The Limited Partners expressly acknowledge that the General Partner is
acting on behalf of the Partnership, the Company and the Company's shareholders
collectively, that the General Partner is under no obligation to consider the
separate interests of the Limited Partners (including, without limitation, the
tax consequences to Limited Partners or the tax consequences of same, but not
all, of the Limited Partners) in deciding whether to cause the Partnership to
take (or decline to take) any actions. In the event of a conflict between the
interests of the shareholders of the Company on one hand and the Limited
Partners on the other, the General Partner shall endeavor in good faith to
resolve the conflict in a manner not adverse to either the shareholders of the
Company or the Limited Partners; PROVIDED, HOWEVER, that for so long as the
Company, directly or the General Partner owns a controlling interest in the
Partnership, any such conflict that the General Partner, in its sole and
absolute discretion, determines cannot be resolved in a manner not adverse to
either the shareholders of the Company or the Limited Partners shall be resolved
in favor of the shareholders. The General Partner shall not be liable for
monetary damages for losses sustained, liabilities incurred, or benefits not
derived by Limited
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Partners in connection with such decisions, PROVIDED that the General Partner
has acted in good faith.
Subject to its obligations and duties as General Partner set forth in
Section 6.01 hereof, the General Partner may exercise any of the powers granted
to it under this Agreement and perform any of the duties imposed upon it
hereunder either directly or by or through its agents. The General Partner shall
not be responsible for any misconduct or negligence on the part of any such
agent appointed by it in good faith.
Notwithstanding any other provisions of this Agreement or the Act, any
action of the General Partner on behalf of the Partnership or any decision of
the General Partner to refrain from acting on behalf of the Partnership,
undertaken in the good faith belief that such action or omission is necessary or
advisable in order (i) to protect the ability of the Company to continue to
qualify as a REIT or (ii) to prevent the Company from incurring any taxes under
Section 857, Section 4981, or any other provision of the Code, is expressly
authorized under this Agreement and is deemed approved by all of the Limited
Partners.
Any amendment, modification or repeal of this Section 6.04 or any
provision hereof shall be prospective only and shall not in any way affect the
limitations on the General Partner's liability to the Partnership and the
Limited Partners under this Section 6.04 as in effect immediately prior to such
amendment, modification or repeal with respect to matters occurring, in whole or
in part, prior to such amendment, modification or repeal, regardless of when
claims relating to such matters may arise or be asserted.
6.05. REIMBURSEMENT OF GENERAL PARTNER.
Except as provided in this Section 6.05 and elsewhere in this Agreement
(including the provisions of Articles 5 and 6 regarding distributions, payments,
and allocations to which it may be entitled), the General Partner shall not be
compensated for its services as general partner of the Partnership.
The General Partner shall be reimbursed on a monthly basis, or such
other basis as the General Partner may determine in its sole and absolute
discretion, for all REIT Expenses and Administrative Expenses.
6.06. OUTSIDE ACTIVITIES.
The Partners and any officer, director, employee, agent, trustee,
Affiliate, Subsidiary, or shareholder of any Partner shall be entitled to and
may have business interests and engage in business activities in addition to
those relating to the Partnership, including business interests and activities
substantially similar or identical to those of the Partnership. Neither the
Partnership nor any of the Limited Partners shall have any rights by virtue of
this Agreement in any such business ventures, interest or activities. None of
the Limited Partners nor any other Person shall have any rights by virtue of
this Agreement or the partnership relationship established hereby in any such
business ventures, interests or activities, and the General Partner shall have
no obligation pursuant to this Agreement to offer any interest in any such
business ventures, interests and activities to the Partnership or any Limited
Partner, even if such opportunity is of a character which, if presented to the
Partnership or any Limited Partner, could be taken by such Person.
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6.07. EMPLOYMENT OR RETENTION OF AFFILIATES.
Any Affiliate of the General Partner may be employed or retained by the
Partnership and may otherwise deal with the Partnership (whether as a buyer,
lessor, lessee, manager, furnisher of goods or services, broker, agent, lender
or otherwise) and may receive from the Partnership any compensation, price, or
other payment therefor which the General Partner determines to be fair and
reasonable.
The Partnership may lend or contribute to its Subsidiaries or other
Persons in which it has an equity investment, and such Persons may borrow funds
from the Partnership, on terms and conditions established in the sole and
absolute discretion of the General Partner. The foregoing authority shall not
create any right or benefit in favor of any Subsidiary or any other Person.
The Partnership may transfer assets to joint ventures, other
partnerships, corporations or other business entities in which it is or thereby
becomes a participant upon such terms and subject to such conditions as the
General Partner deems are consistent with this Agreement and applicable law.
Except as expressly permitted by this Agreement, neither the General
Partner nor any of its Affiliates shall sell, transfer or convey any property
to, or purchase any property from, the Partnership, directly or indirectly,
except pursuant to transactions that are on terms that are fair and reasonable
to the Partnership.
6.08. GENERAL PARTNER PARTICIPATION.
The General Partner agrees, on behalf of the Company that all business
activities of the Company shall generally be conducted through the Partnership
or one or more Subsidiary Partnerships, unless otherwise determined by the
Independent Directors.
6.09. TITLE TO PARTNERSHIP ASSETS.
Title to Partnership assets, whether real, personal or mixed and
whether tangible or intangible, shall be deemed to be owned by the Partnership
as an entity, and no Partner, individually or collectively, shall have any
ownership interest in such Partnership assets or any portion thereof. Title to
any or all of the Partnership assets may be held in the name of the Partnership,
the General Partner or one or more nominees, as the General Partner may
determine, including Affiliates of the General Partner. The General Partner
hereby declares and warrants that any Partnership assets for which legal title
is held in the name of the General Partner or any nominee or Affiliate of the
General Partner shall be held by the General Partner for the use and benefit of
the Partnership in accordance with the provisions of this Agreement; PROVIDED,
HOWEVER, that the General Partner shall use its best efforts to cause beneficial
and record title to such assets to be vested in the Partnership as soon as
reasonably practicable. All Partnership assets shall be recorded as the property
of the Partnership in its books and records, irrespective of the name in which
legal title to such Partnership assets is held.
6.10. [INTENTIONALLY OMITTED].
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ARTICLE VII
CHANGES IN GENERAL PARTNER
7.01. TRANSFER OF THE GENERAL PARTNER'S PARTNERSHIP INTEREST.
The General Partner shall not transfer all or any portion of its
General Partnership Interest or withdraw as General Partner except as provided
in or in connection with a transaction contemplated by Section 7.01(c), (d) or
(e).
The General Partner agree that the Percentage Interest for it and the
Company will at all times be in the aggregate, at least 1%.
Except as otherwise provided in Section 6.04(b) or Section 7.01(d) or
(e) hereof, the Company shall not engage in any merger, consolidation or other
combination with or into another Person or sale of all or substantially all of
its assets, (other than in connection with a change in the Company's state of
incorporation or organizational form) in each case which results in a change of
control of the Company (a "Transaction"), unless:
the consent of Limited Partners (other than the General Partner
or any Subsidiary) holding more than 50% of the Percentage Interests of
the Limited Partners (other than those held by the General Partner or
any Subsidiary) is obtained;
as a result of such Transaction all Limited Partners will
receive for each Partnership Unit an amount of cash, securities, or
other property equal to the product of the Conversion Factor and the
greatest amount of cash, securities or other property paid in the
Transaction to a holder of one REIT Share in consideration of one REIT
Share, PROVIDED THAT if, in connection with the Transaction, a
purchase, tender or exchange offer ("Offer") shall have been made to
and accepted by the holders of more than 50% of the outstanding REIT
Shares, each holder of Partnership Units shall be given the option to
exchange its Partnership Units for the greatest amount of cash,
securities, or other property which a Limited Partner would have
received had it (A) exercised its Exchange Right and (B) sold, tendered
or exchanged pursuant to the Offer the REIT Shares received upon
exercise of the Exchange Right immediately prior to the expiration of
the Offer; or
the Company is the surviving entity in the Transaction and
either (A) the holders of REIT Shares do not receive cash, securities,
or other property in the Transaction or (B) all Limited Partners (other
than the General Partner or any Subsidiary) receive an amount of cash,
securities, or other property (expressed as an amount per REIT Share)
that is no less than the product of the Conversion Factor and the
greatest amount of cash, securities, or other property (expressed as an
amount per REIT Share) received in the Transaction by any holder of
REIT Shares.
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Notwithstanding Section 7.01(c), the Company or the General Partner may
merge with or into or consolidate with another entity if immediately after such
merger or consolidation (i) substantially all of the assets of the successor or
surviving entity (the "Survivor"), other than Partnership Units held by the
Company or the General Partner, are contributed, directly or indirectly, to the
Partnership as a Capital Contribution in exchange for Partnership Units with a
fair market value equal to the value of the assets so contributed as determined
by the Survivor in good faith and (ii) the Survivor expressly agrees to assume
all obligations of the General Partner or the Company, as appropriate,
hereunder. Upon such contribution and assumption, the Survivor shall have the
right and duty to amend this Agreement as set forth in this Section 7.01(d). The
Survivor shall in good faith arrive at a new method for the calculation of the
Cash Amount, the REIT Shares Amount and Conversion Factor for a Partnership Unit
after any such merger or consolidation so as to approximate the existing method
for such calculation as closely as reasonably possible. Such calculation shall
take into account, among other things, the kind and amount of securities, cash
and other property that was receivable upon such merger or consolidation by a
holder of REIT Shares or options, warrants or other rights relating thereto, and
to which a holder of Partnership Units could have acquired had such Partnership
Units been exchanged immediately prior to such merger or consolidation. Such
amendment to this Agreement shall provide for adjustment to such method of
calculation, which shall be as nearly equivalent as may be practicable to the
adjustments provided for with respect to the Conversion Factor. The Survivor
also shall in good faith modify the definition of REIT Shares and make such
amendments to Section 8.05 hereof so as to approximate the existing rights and
obligations set forth in Section 8.05 as closely as reasonably possible. The
above provisions of this Section 7.01(d) shall similarly apply to successive
mergers or consolidations permitted hereunder.
In respect of any transaction described in the preceding Paragraph, the
Company is required to use its commercially reasonable efforts to structure such
transaction to avoid causing the Limited Partners to recognize a gain for
federal income tax purposes by virtue of the occurrence of or their
participation in such transaction, provided such efforts are consistent with the
exercise of the Board of Directors' fiduciary duties to the shareholders of the
Company under applicable law.
Notwithstanding Section 7.01(c),
a General Partner may transfer all or any portion of
its General Partnership Interest to (A) a wholly-owned
Subsidiary of such General Partner or (B) the owner of all of
the ownership interests of such General Partner, and following
a transfer of all of its General Partnership Interest, may
withdraw as General Partner; and
the Company may engage in a transaction not required
by law or by the rules of any national securities exchange on
which the REIT Shares are listed to be submitted to the vote
of the holders of the REIT Shares.
7.02. ADMISSION OF A SUBSTITUTE OR ADDITIONAL GENERAL PARTNER.
A Person shall be admitted as a substitute or additional General
Partner of the Partnership only if the following terms and conditions are
satisfied:
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the Person to be admitted as a substitute or additional General Partner
shall have accepted and agreed to be bound by all the terms and provisions of
this Agreement by executing a counterpart thereof and such other documents or
instruments as may be required or appropriate in order to effect the admission
of such Person as a General Partner, and a certificate evidencing the admission
of such Person as a General Partner shall have been filed for recordation and
all other actions required by Section 2.05 hereof in connection with such
admission shall have been performed;
if the Person to be admitted as a substitute or additional General
Partner is a corporation or a partnership it shall have provided the Partnership
with evidence satisfactory to counsel for the Partnership of such Person's
authority to become a General Partner and to be bound by the terms and
provisions of this Agreement; and
counsel for the Partnership shall have rendered an opinion (relying on
such opinions from other counsel and the state or any other jurisdiction as may
be necessary) that the admission of the person to be admitted as a substitute or
additional General Partner is in conformity with the Act, that none of the
actions taken in connection with the admission of such Person as a substitute or
additional General Partner will cause (i) the Partnership to be classified other
than as a partnership for federal income tax purposes, or (ii) the loss of any
Limited Partner's limited liability.
7.03. EFFECT OF BANKRUPTCY, WITHDRAWAL, DEATH OR DISSOLUTION OF A
GENERAL PARTNER.
Upon the occurrence of an Event of Bankruptcy as to a General Partner
(and its removal pursuant to Section 7.04(a) hereof) or the death, withdrawal,
removal or dissolution of a General Partner (except that, if a General Partner
is on the date of such occurrence a partnership, the withdrawal, death,
dissolution, Event of Bankruptcy as to, or removal of a partner in, such
partnership shall be deemed not to be a dissolution of such General Partner if
the business of such General Partner is continued by the remaining partner or
partners), the Partnership shall be dissolved and terminated unless the
Partnership is continued pursuant to Section 7.03(b) hereof. The merger of the
General Partner with or into any entity that is admitted as a substitute or
successor General Partner pursuant to Section 7.02 hereof shall not be deemed to
be the withdrawal, dissolution or removal of the General Partner.
Following the occurrence of an Event of Bankruptcy as to a General
Partner (and its removal pursuant to Section 7.04(a) hereof) or the death,
withdrawal, removal or dissolution of a General Partner (except that, if a
General Partner is on the date of such occurrence a partnership, the withdrawal,
death, dissolution, Event of Bankruptcy as to, or removal of a partner in, such
partnership shall be deemed not to be a dissolution of such General Partner if
the business of such General Partner is continued by the remaining partner or
partners), the Limited Partners, within 90 days after such occurrence, may elect
to continue
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the business of the Partnership for the balance of the term specified in Section
2.04 hereof by selecting, subject to Section 7.02 hereof and any other
provisions of this Agreement, a substitute General Partner by consent of a
majority in interest of the Limited Partners. If the Limited Partners elect to
continue the business of the Partnership and admit a substitute General Partner,
the relationship with the Partners and of any Person who has acquired an
interest of a Partner in the Partnership shall be governed by this Agreement.
7.04. REMOVAL OF A GENERAL PARTNER.
Upon the occurrence of an Event of Bankruptcy as to, or the dissolution
of, a General Partner, such General Partner shall be deemed to be removed
automatically; provided, however, that if a General Partner is on the date of
such occurrence a partnership, the withdrawal, death, dissolution, Event of
Bankruptcy as to or removal of a partner in such partnership shall be deemed not
to be a dissolution of the General Partner if the business of such General
Partner is continued by the remaining partner or partners. The Limited Partners
may not remove the General Partner, with or without cause.
If a General Partner has been removed pursuant to this Section 7.04 and
the Partnership is continued pursuant to Section 7.03 hereof, such General
Partner shall promptly transfer and assign its General Partnership Interest in
the Partnership to the substitute General Partner approved by a majority in
interest of the Limited Partners in accordance with Section 7.03(b) hereof and
otherwise admitted to the Partnership in accordance with Section 7.02 hereof. At
the time of assignment, the removed General Partner shall be entitled to receive
from the substitute General Partner the fair market value of the General
Partnership Interest of such removed General Partner as reduced by any damages
caused to the Partnership by such General Partner. Such fair market value shall
be determined by an appraiser mutually agreed upon by the General Partner and a
majority in interest of the Limited Partners within 10 days following the
removal of the General Partner. In the event that the parties are unable to
agree upon an appraiser, the removed General Partner and a majority in interest
of the Limited Partners each shall select an appraiser. Each such appraiser
shall complete an appraisal of the fair market value of the removed General
Partner's General Partnership Interest within 30 days of the General Partner's
removal, and the fair market value of the removed General Partner's General
Partnership Interest shall be the average of the two appraisals; PROVIDED,
HOWEVER, that if the higher appraisal exceeds the lower appraisal by more than
20% of the amount of the lower appraisal, the two appraisers, no later than 40
days after the removal of the General Partner, shall select a third appraiser
who shall complete an appraisal of the fair market value of the removed General
Partner's General Partnership Interest no later than 60 days after the removal
of the General Partner. In such case, the fair market value of the removed
General Partner's General Partnership Interest shall be the average of the two
appraisals closest in value.
The General Partnership Interest of a removed General Partner, during
the time after default until transfer under Section 7.04(b), shall be converted
to that of a special Limited Partner; PROVIDED, HOWEVER, such removed General
Partner shall not have any rights to participate in the management and affairs
of the Partnership, and shall not be entitled to any portion of the income,
expense, profit, gain or loss allocations or cash distributions allocable or
payable, as the case may be, to the Limited Partners. Instead, such removed
General Partner shall receive and be entitled only to retain distributions or
allocations of such items that it would have been entitled to
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receive in its capacity as General Partner, until the transfer is effective
pursuant to Section 7.04(b).
All Partners shall have given and hereby do give such consents, shall
take such actions and shall execute such documents as shall be legally necessary
and sufficient to effect all the foregoing provisions of this Section.
ARTICLE VIII
RIGHTS AND OBLIGATIONS
OF THE LIMITED PARTNERS
8.01. MANAGEMENT OF THE PARTNERSHIP.
The Limited Partners shall not participate in the management or control
of Partnership business nor shall they transact any business for the
Partnership, nor shall they have the power to sign for or bind the Partnership,
such powers being vested solely and exclusively in the General Partner.
8.02. POWER OF ATTORNEY.
Each Limited Partner hereby irrevocably appoints the General Partner
its true and lawful attorney-in-fact, who may act for each Limited Partner and
in its name, place and stead, and for its use and benefit, to sign, acknowledge,
swear to, deliver, file or record, at the appropriate public offices, any and
all documents, certificates, and instruments as may be deemed necessary or
desirable by the General Partner to carry out fully the provisions of this
Agreement and the Act in accordance with their terms, which power of attorney is
coupled with an interest and shall survive the death, dissolution or legal
incapacity of the Limited Partner, or the transfer by the Limited Partner of any
part or all of its Partnership Interest.
8.03. LIMITATION ON LIABILITY OF LIMITED PARTNERS.
No Limited Partner shall be liable for any debts, liabilities,
contracts or obligations of the Partnership. A Limited Partner shall be liable
to the Partnership only to make payments of its Capital Contribution, if any, as
and when due hereunder. After its Capital Contribution is fully paid, no Limited
Partner shall, except as otherwise required by the Act, be required to make any
further Capital Contributions or other payments or lend any funds to the
Partnership.
8.04. OWNERSHIP BY LIMITED PARTNER OF CORPORATE GENERAL PARTNER OR
AFFILIATE.
No Limited Partner shall at any time, either directly or indirectly,
own any stock or other interest in the General Partner or in any Affiliate
thereof, if such ownership by itself or in conjunction with other stock or other
interests owned by other Limited Partners would, in the opinion of counsel for
the Partnership, jeopardize the classification of the Partnership as a
partnership for federal income tax purposes. The General Partner shall be
entitled to make such reasonable inquiry of the Limited Partners as is required
to establish compliance by the Limited Partners with the provisions of this
Section.
8.05. EXCHANGE RIGHT.
Subject to Sections 8.05(b), 8.05(c), 8.05(d), 8.05(e) and 8.05(f) and
the provisions of any agreements between the Partnership and one or more Limited
Partners with respect to Partnership Units held by them, each Limited Partner,
other than the Company, shall have the right (the "Exchange Right") to require
the Partnership to redeem on a Specified Exchange Date all or a portion of the
Partnership Units held by such Limited Partner at an exchange price equal to and
in the form of the Cash Amount to be paid by the Partnership,
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PROVIDED that such Partnership Units shall have been outstanding for at least
one year. The Exchange Right shall be exercised pursuant to a Notice of Exchange
delivered to the Partnership (with a copy to the General Partner) by the Limited
Partner who is exercising the Exchange Right (the "Exchanging Partner");
PROVIDED, HOWEVER, that the Partnership shall not be obligated to satisfy such
Exchange Right if the Company and/or the General Partner elects to purchase the
Partnership Units subject to the Notice of Exchange pursuant to Section 8.05(b);
and PROVIDED, FURTHER, that no Limited Partner may deliver more than two Notices
of Exchange during each calendar year. A Limited Partner may not exercise the
Exchange Right for less than 1,000 Partnership Units or, if such Limited Partner
holds less than 1,000 Partnership Units, all of the Partnership Units held by
such Partner. The Exchanging Partner shall have no right, with respect to any
Partnership Units so exchanged, to receive any distribution paid with respect to
Partnership Units if the record date for such distribution is on or after the
Specified Exchange Date.
Notwithstanding the provisions of Section 8.05(a), a Limited Partner
that exercises the Exchange Right shall be deemed to have offered to sell the
Partnership Units described in the Notice of Exchange to the General Partner and
the Company, and either of the General Partner or the Company (or both) may, in
its sole and absolute discretion, elect to purchase directly and acquire such
Partnership Units by paying to the Exchanging Partner either the Cash Amount or
the REIT Shares Amount, as elected by the General Partner or the Company (in its
sole and absolute discretion), on the Specified Exchange Date, whereupon the
General Partner or the Company shall acquire the Partnership Units offered for
exchange by the exchanging Partner and shall be treated for all purposes of this
Agreement as the owner of such Partnership Units. If the General Partner and/or
the Company shall elect to exercise its right to purchase Partnership Units
under this Section 8.05(b) with respect to a Notice of Exchange, they shall so
notify the Exchanging Partner within five Business Days after the receipt by the
General Partner of such Notice of Exchange. Unless the General Partner and/or
the Company (in its sole and absolute discretion) shall exercise its right to
purchase Partnership Units from the Exchanging Partner pursuant to this Section
8.05(b), neither the General Partner nor the Company shall have any obligation
to the Exchanging Partner or the Partnership with respect to the Exchanging
Partner's exercise of the Exchange Right. In the event the General Partner or
the Company shall exercise its right to purchase Partnership Units with respect
to the exercise of a Exchange Right in the manner described in the first
sentence of this Section 8.05(b), the Partnership shall have no obligation to
pay any amount to the Exchanging Partner with respect to such Exchanging
Partner's exercise of such Exchange Right, and each of the Exchanging Partner,
the Partnership, and the General Partner or the Company, as the case may be,
shall treat the transaction between the General Partner or the Company, as the
case may be, and the Exchanging Partner for federal income tax purposes as a
sale of the Exchanging Partner's Partnership Units to the General Partner or the
Company, as the case may be. Each Exchanging Partner agrees to execute such
documents as the General Partner may reasonably require in connection with the
issuance of REIT Shares upon exercise of the Exchange Right.
Notwithstanding the provisions of Section 8.05(a) and 8.05(b), a
Limited Partner shall not be entitled to exercise the Exchange Right if the
delivery of REIT Shares to such Partner on the Specified Exchange Date by the
General Partner or the Company pursuant to
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Section 8.05(b) (regardless of whether or not the General Partner or the Company
would in fact exercise its rights under Section 8.05(b)) would (i) result in
such Partner or any other person owning, directly or indirectly, REIT Shares in
excess of the Ownership Limitation (as defined in the Amended and Restated
Articles of Incorporation) and calculated in accordance therewith, except as
provided in the Amended and Restated Articles of Incorporation, (ii) result in
REIT Shares being owned by fewer than 100 persons (determined without reference
to any rules of attribution), except as provided in the Amended and Restated
Articles of Incorporation, (iii) result in the Company being "closely held"
within the meaning of Section 856(h) of the Code, (iv) cause the Company to own,
directly or constructively, 10% or more of the ownership interests in a tenant
of the General Partner's, the Partnership's, or a Subsidiary Partnership's, real
property, within the meaning of Section 856(d)(2)(B) of the Code, or (v) cause
the acquisition of REIT Shares by such Partner to be "integrated" with any other
distribution of REIT Shares for purposes of complying with the registration
provisions of the Securities Act of 1933, as amended (the "Securities Act"). The
General Partner or the Company, in their sole and absolute discretion, may waive
the restriction on exchange set forth in this Section 8.05(c); PROVIDED,
HOWEVER, that in the event such restriction is waived, the Exchanging Partner
shall be paid the Cash Amount.
Any Cash Amount to be paid to an Exchanging Partner pursuant to this
Section 8.05 shall be paid on the Specified Exchange Date; PROVIDED, HOWEVER,
that the Company or the General Partner may elect to cause the Specified
Exchange Date to be delayed for up to an additional 180 days to the extent
required for the Company to cause additional REIT Shares to be issued to provide
financing to be used to make such payment of the Cash Amount. Notwithstanding
the foregoing, the Company and the General Partner agree to use their best
efforts to cause the closing of the acquisition of exchanged Partnership Units
hereunder to occur as quickly as reasonably possible.
Notwithstanding any other provision of this Agreement, the General
Partner shall place appropriate restrictions on the ability of the Limited
Partners to exercise their Exchange Rights as and if deemed necessary to ensure
that the Partnership does not constitute a "publicly traded partnership" under
section 7704 of the Code. If and when the General Partner determines that
imposing such restrictions is necessary, the General Partner shall give prompt
written notice thereof (a "Restriction Notice") to each of the Limited Partners,
which notice shall be accompanied by a copy of an opinion of counsel to the
Partnership which states that, in the opinion of such counsel, restrictions are
necessary in order to avoid the Partnership being treated as a "publicly traded
partnership" under section 7704 of the Code.
8.06. REGISTRATION.
Subject to the terms of any agreement between the Company or the
General Partner and one or more Limited Partners with respect to Partnership
Units held by them:
SHELF REGISTRATION OF THE COMMON STOCK. Within two weeks prior or
subsequent to the first date upon which the Partnership Units owned by any
Limited Partner may be exchanged (or such later date as may be required under
applicable provisions of the Securities Act), the Company agrees to file with
the Securities and Exchange Commission (the
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"Commission"), a shelf registration statement on Form S-3 under Rule 415 of the
Securities Act (a "Registration Statement"), or any similar rule that may be
adopted by the Commission, with respect to all of the shares of Common Stock
that may be issued upon exchange of such Partnership Units pursuant to Section
8.05 hereof ("Exchange Shares"). The Company will use its best efforts to have
the Registration Statement declared effective under the Securities Act. The
Company need not file a separate Registration Statement, but may file one
Registration Statement covering Exchange Shares issuable to more than one
Limited Partner. The Company further agrees to supplement or make amendments to
each Registration Statement, if required by the rules, regulations or
instructions applicable to the registration form utilized by the Company or by
the Securities Act or rules and regulations thereunder for such Registration
Statement.
LISTING ON SECURITIES EXCHANGE. If the Company shall list or maintain
the listing of any shares of Common Stock on any securities exchange or national
market system, it will at its expense and as necessary to permit the
registration and sale of the Exchange Shares hereunder, list thereon, maintain
and, when necessary, increase such listing to include such Exchange Shares.
REGISTRATION NOT REQUIRED. Notwithstanding the foregoing, the Company
shall not be required to file or maintain the effectiveness of a registration
statement relating to Exchange Shares after the first date upon which, in the
opinion of counsel to the Company, all of the Exchange Shares covered thereby
could be sold by the holders thereof in any period of three months pursuant to
Rule 144 under the Securities Act, or any successor rule thereto.
ARTICLE IX
TRANSFER OF LIMITED PARTNERSHIP INTERESTS
9.01. PURCHASE FOR INVESTMENT.
Each Limited Partner hereby represents and warrants to the General
Partner, to the Company and to the Partnership that the acquisition of his
Partnership Interests is made as a principal for his account for investment
purposes only and not with a view to the resale or distribution of such
Partnership Interest.
Each Limited Partner agrees that he will not sell, assign or otherwise
transfer his Partnership Interest or any fraction thereof, whether voluntarily
or by operation of law or at judicial sale or otherwise, to any Person who does
not make the representations and warranties to the General Partner set forth in
Section 9.01(a) above and similarly agree not to sell, assign or transfer such
Partnership Interest or fraction thereof to any Person who does not similarly
represent, warrant and agree.
9.02. RESTRICTIONS ON TRANSFER OF LIMITED PARTNERSHIP INTERESTS.
Subject to the provisions of 9.02(b), (c) and (d), no Limited Partner
may offer, sell, assign, hypothecate, pledge or otherwise transfer all or any
portion of his Limited Partnership Interest, or any of such Limited Partner's
economic rights as a Limited Partner,
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whether voluntarily or by operation of law or at judicial sale or otherwise
(collectively, a "Transfer") without the consent of the General Partner, which
consent may be granted or withheld in its sole and absolute discretion. Any such
purported transfer undertaken without such consent shall be considered to be
null and void ab initio and shall not be given effect. The General Partner may
require, as a condition of any Transfer to which it consents, that the
transferor assume all costs incurred by the Partnership in connection therewith.
No Limited Partner may withdraw from the Partnership other than as a
result of a permitted Transfer (I.E., a Transfer consented to as contemplated by
clause (a) above or clause (c) below or a Transfer pursuant to 9.05 below) of
all of his Partnership Units pursuant to this Article IX or pursuant to an
exchange of all of his Partnership Units pursuant to 8.05. Upon the permitted
Transfer or redemption of all of a Limited Partner's Partnership Units, such
Limited Partner shall cease to be a Limited Partner.
Subject to 9.02(d), (e) and (f) below, a Limited Partner may Transfer,
with the consent of the General Partner, all or a portion of his Partnership
Units to (i) a parent or parent's spouse, natural or adopted descendant or
descendants, spouse of such descendant, or brother or sister, or a trust created
by such Limited Partner for the benefit of such Limited Partner and/or any such
person(s), of which trust such Limited Partner or any such person(s) is a
trustee, (ii) a corporation controlled by a Person or Persons named in (i)
above, or (iii) if the Limited Partner is an entity, its beneficial owners.
No Limited Partner may effect a Transfer of its Limited Partnership
Interest, in whole or in part, if, in the opinion of legal counsel for the
Partnership, such proposed Transfer would require the registration of the
Limited Partnership Interest under the Securities Act of 1933, as amended, or
would otherwise violate any applicable federal or state securities or blue sky
law (including investment suitability standards).
No Transfer by a Limited Partner of its Partnership Units, in whole or
in part, may be made to any Person if (i) in the opinion of legal counsel for
the Partnership, the transfer would result in the Partnership's being treated as
an association taxable as a corporation (other than a qualified REIT subsidiary
within the meaning of Section 856(i) of the Code), (ii) in the opinion of legal
counsel for the Partnership, it would adversely affect the ability of the
Company to continue to qualify as a REIT or subject the Company to any
additional taxes under Section 857 or Section 4981 of the Code, or (iii) such
transfer is effectuated through an "established securities market" or a
"secondary market (or the substantial equivalent thereof)" within the meaning of
Section 7704 of the Code.
No transfer of any Partnership Units may be made to a lender to the
Partnership or any Person who is related (within the meaning of Regulations
Section 1.752-4(b)) to any lender to the Partnership whose loan constitutes a
nonrecourse liability (within the meaning of Regulations Section 1.752-1(a)(2)),
without the consent of the General Partner, which may be withheld in its sole
and absolute discretion, PROVIDED THAT as a condition to such consent the lender
will be required to enter into an arrangement with the Partnership and the
General Partner to exchange or redeem for the Cash Amount any Partnership Units
in which a security interest is
31
<PAGE>
held simultaneously with the time at which such lender would be deemed to be a
partner in the Partnership for purposes of allocating liabilities to such lender
under Section 752 of the Code.
Any Transfer in contravention of any of the provisions of this Article
IX shall be void and ineffectual and shall not be binding upon, or recognized
by, the Partnership.
Prior to the consummation of any Transfer under this Article IX, the
transferor and/or the transferee shall deliver to the General Partner such
opinions, certificates and other documents as the General Partner shall request
in connection with such Transfer.
9.03. ADMISSION OF A SUBSTITUTE LIMITED PARTNER.
Subject to the other provisions of this Article IX, an assignee of the
Limited Partnership Interest of a Limited Partner (which shall be understood to
include any purchaser, transferee, donee, or other recipient of any disposition
of such Limited Partnership Interest) shall be deemed admitted as a Limited
Partner of the Partnership only with the consent of the General Partner and upon
the satisfactory completion of the following:
The assignee shall have accepted and agreed to be bound by the
terms and provisions of this Agreement by executing a counterpart or an
amendment thereof, including a revised EXHIBIT A, and such other
documents or instruments as the General Partner may require in order to
effect the admission of such Person as a Limited Partner.
To the extent required, an amended Certificate evidencing the
admission of such Person as a Limited Partner shall have been signed,
acknowledged and filed for record in accordance with the Act.
The assignee shall have delivered a letter containing the
representation set forth in Section 9.01(a) hereof and the agreement
set forth in Section 9.01(b) hereof.
If the assignee is a corporation, partnership or trust, the
assignee shall have provided the General Partner with evidence
satisfactory to counsel for the Partnership of the assignee's authority
to become a Limited Partner under the terms and provisions of this
Agreement.
The assignee shall have executed a power of attorney containing
the terms and provisions set forth in Section 8.02 hereof.
The assignee shall have paid all legal fees and other expenses
of the Partnership and the General Partner and filing and publication
costs in connection with its substitution as a Limited Partner.
32
<PAGE>
The assignee has obtained the prior written consent of the
General Partner to its admission as a Substitute Limited Partner, which
consent may be given or denied in the exercise of the General Partner's
sole and absolute discretion.
For the purpose of allocating Profits and Losses and distributing cash
received by the Partnership, a Substitute Limited Partner shall be treated as
having become, and appearing in the records of the Partnership as, a Partner
upon the filing of the Certificate described in Section 9.03(a)(ii) hereof or,
if no such filing is required, the later of the date specified in the transfer
documents or the date on which the General Partner has received all necessary
instruments of transfer and substitution.
The General Partner shall cooperate with the Person seeking to become a
Substitute Limited Partner by preparing the documentation required by this
Section and making all official filings and publications. The Partnership shall
take all such action as promptly as practicable after the satisfaction of the
conditions in this Article IX to the admission of such Person as a Limited
Partner of the Partnership.
9.04. RIGHTS OF ASSIGNEES OF PARTNERSHIP INTERESTS.
Subject to the provisions of Sections 9.01 and 9.02 hereof, except as
required by operation of law, the Partnership shall not be obligated for any
purposes whatsoever to recognize the assignment by any Limited Partner of its
Partnership Interest until the Partnership has received notice thereof.
Any Person who is the assignee of all or any portion of a Limited
Partner's Limited Partnership Interest, but does not become a Substitute Limited
Partner and desires to make a further assignment of such Limited Partnership
Interest, shall be subject to all the provisions of this Article IX to the same
extent and in the same manner as any Limited Partner desiring to make an
assignment of its Limited Partnership Interest.
9.05. EFFECT OF BANKRUPTCY, DEATH, INCOMPETENCE OR TERMINATION OF A
LIMITED PARTNER.
The occurrence of an Event of Bankruptcy as to a Limited Partner, the
death of a Limited Partner or a final adjudication that a Limited Partner is
incompetent (which term shall include, but not be limited to, insanity) shall
not cause the termination or dissolution of the Partnership, and the business of
the Partnership shall continue if an order for relief in a bankruptcy proceeding
is entered against a Limited Partner, the trustee or receiver of his estate or,
if he dies, his executor, administrator or trustee, or, if he is finally
adjudicated incompetent, his committee, guardian or conservator, shall have the
rights of such Limited Partner for the purpose of settling or managing his
estate property and such power as the bankrupt, deceased or incompetent Limited
Partner possessed to assign all or any part of his Partnership Interest and to
join with the assignee in satisfying conditions precedent to the admission of
the assignee as a Substitute Limited Partner.
9.06. JOINT OWNERSHIP OF INTERESTS.
A Partnership Interest may be acquired by two individuals as joint
tenants with right of survivorship, provided that such individuals either are
married or are related and share the same home as tenants in common. The written
consent or vote of both owners of any such jointly held Partnership Interest
shall be required to constitute the action of the owners of such Partnership
Interest; provided, however, that the written consent of only one joint owner
will
33
<PAGE>
be required if the Partnership has been provided with evidence satisfactory to
the counsel for the Partnership that the actions of a single joint owner can
bind both owners under the applicable laws of the state of residence of such
joint owners. Upon the death of one owner of a Partnership Interest held in a
joint tenancy with a right of survivorship, the Partnership Interest shall
become owned solely by the survivor as a Limited Partner and not as an assignee.
The Partnership need not recognize the death of one of the owners of a
jointly-held Partnership Interest until it shall have received notice of such
death. Upon notice to the General Partner from either owner, the General Partner
shall cause the Partnership Interest to be divided into two equal Partnership
Interests, which shall thereafter be owned separately by each of the former
owners.
ARTICLE X
BOOKS AND RECORDS; ACCOUNTING; TAX MATTERS
10.01. BOOKS AND RECORDS.
At all times during the continuance of the Partnership, the Partners
shall keep or cause to be kept at the Partnership's specified office true and
complete books of account in accordance with generally accepted accounting
principles, including: (a) a current list of the full name and last known
business address of each Partner, (b) a copy of the Certificate of Limited
Partnership and all certificates of amendment thereto, (c) copies of the
Partnership's federal, state and local income tax returns and reports, (d)
copies of the Agreement and any financial statements of the Partnership for the
three most recent years and (e) all documents and information required under the
Act. Any Partner or its duly authorized representative, upon paying the costs of
collection, duplication and mailing, shall be entitled to inspect or copy such
records during ordinary business hours.
10.02. CUSTODY OF PARTNERSHIP FUNDS; BANK ACCOUNTS.
All funds of the Partnership not otherwise invested shall be deposited
in one or more accounts maintained in such banking or brokerage institutions as
the General Partner shall determine, and withdrawals shall be made only on such
signature or signatures as the General Partner may, from time to time,
determine.
All deposits and other funds not needed in the operation of the
business of the Partnership may be invested by the General Partner in investment
grade instruments (or investment companies whose portfolio consists primarily
thereof), government obligations, certificates of deposit, bankers' acceptances
and municipal notes and bonds. The funds of the Partnership shall not be
commingled with the funds of any other Person except for such commingling as may
necessarily result from an investment in those investment companies permitted by
this Section 10.02(b).
10.03. FISCAL AND TAXABLE YEAR.
The fiscal and taxable year of the Partnership shall be the calendar
year.
10.04. ANNUAL TAX INFORMATION AND REPORT.
Within 75 days after the end of each fiscal year of the Partnership,
the General Partner shall furnish to each person who was a Limited Partner at
any time during such year the tax information necessary to file such Limited
Partner's individual tax returns as shall be reasonably required by law.
34
<PAGE>
10.05. TAX MATTERS PARTNER; TAX ELECTIONS; SPECIAL BASIS ADJUSTMENTS.
The General Partner shall be the Tax Matters Partner of the Partnership
within the meaning of Section 6231(a)(7) of the Code. As Tax Matters Partner,
the General Partner shall have the right and obligation to take all actions
authorized and required, respectively, by the Code for the Tax Matters Partner.
The General Partner shall have the right to retain professional assistance in
respect of any audit of the Partnership by the Service and all out-of-pocket
expenses and fees incurred by the General Partner on behalf of the Partnership
as Tax Matters Partner shall constitute Partnership expenses. In the event the
General Partner receives notice of a final Partnership adjustment under Section
6223(a)(2) of the Code, the General Partner shall either (i) file a court
petition for judicial review of such final adjustment within the period provided
under Section 6226(a) of the Code, a copy of which petition shall be mailed to
all Limited Partners on the date such petition is filed, or (ii) mail a written
notice to all Limited Partners, within such period, that describes the General
Partner's reasons for determining not to file such a petition.
All elections required or permitted to be made by the Partnership under
the Code or any applicable state or local tax law shall be made by the General
Partner in its sole and absolute discretion.
In the event of a transfer of all or any part of the Partnership
Interest of any Partner, the Partnership, at the option of the General Partner,
may elect pursuant to Section 754 of the Code to adjust the basis of the
Properties. Notwithstanding anything contained in Article V of this Agreement,
any adjustments made pursuant to Section 754 shall affect only the successor in
interest to the transferring Partner and in no event shall be taken into account
in establishing, maintaining or computing Capital Accounts for the other
Partners for any purpose under this Agreement. Each Partner will furnish the
Partnership with all information necessary to give effect to such election.
10.06. REPORTS TO LIMITED PARTNERS.
As soon as practicable after the close of each fiscal quarter (other
than the last quarter of the fiscal year), the General Partner shall cause to be
mailed to each Limited Partner a quarterly report containing financial
statements of the Partnership, or of the Company if such statements are prepared
solely on a consolidated basis with the Company, for such fiscal quarter,
presented in accordance with generally accepted accounting principles. As soon
as practicable after the close of each fiscal year, the General Partner shall
cause to be mailed to each Limited Partner an annual report containing financial
statements of the Partnership, or of the Company if such statements are prepared
solely on a consolidated basis with the Company, for such fiscal year, presented
in accordance with generally accepted accounting principles. The annual
financial statements shall be audited by accountants selected by the General
Partner.
Any Partner shall further have the right to a private audit of the
books and records of the Partnership, provided such audit is made for
Partnership purposes, at the expense of the Partner desiring it and is made
during normal business hours.
35
<PAGE>
ARTICLE XI
AMENDMENT OF AGREEMENT; MERGER
The General Partner's consent shall be required for any amendment to
this Agreement. The General Partner, without the consent of the Limited
Partners, may amend this Agreement in any respect or merge or consolidate the
Partnership with or into any other partnership or business entity (as defined in
ss. 17-211 of the Act) in a transaction pursuant to Section 7.01(c), (d) or (e)
hereof; PROVIDED, HOWEVER, that the following amendments and any other merger or
consolidation of the Partnership shall require the consent of Limited Partners
(other than the Company) holding more than 50% of the Percentage Interests of
the Limited Partners (other than the Company):
any amendment affecting the operation of the Conversion Factor or the
Exchange Right (except as provided in Section 8.05(d) or 7.01(d) hereof) in a
manner adverse to the Limited Partners;
any amendment that would adversely affect the rights of the Limited
Partners to receive the distributions payable to them hereunder, other than with
respect to the issuance of additional Partnership Units pursuant to Section 4.02
hereof;
any amendment that would alter the Partnership's allocations of Profit
and Loss to the Limited Partners, other than with respect to the issuance of
additional Partnership Units pursuant to Section 4.02 hereof; or
any amendment that would impose on the Limited Partners any obligation
to make additional Capital Contributions to the Partnership.
ARTICLE XII
GENERAL PROVISIONS
12.01. NOTICES.
All communications required or permitted under this Agreement shall be
in writing and shall be deemed to have been given when delivered personally or
upon deposit in the United States mail, registered, postage prepaid return
receipt requested, to the Partners at the addresses set forth in EXHIBIT A
attached hereto; PROVIDED, HOWEVER, that any Partner may specify a different
address by notifying the General Partner in writing of such different address.
Notices to the Partnership shall be delivered at or mailed to its specified
office.
12.02. SURVIVAL OF RIGHTS.
Subject to the provisions hereof limiting transfers, this Agreement
shall be binding upon and inure to the benefit of the Partners and the
Partnership and their respective legal representatives, successors, transferees
and assigns.
12.03. ADDITIONAL DOCUMENTS.
Each Partner agrees to perform all further acts and execute, swear to,
acknowledge and deliver all further documents which may be reasonable,
necessary, appropriate or desirable to carry out the provisions of this
Agreement or the Act.
36
<PAGE>
12.04. SEVERABILITY.
If any provision of this Agreement shall be declared illegal, invalid,
or unenforceable in any jurisdiction, then such provision shall be deemed to be
severable from this Agreement (to the extent permitted by law) and in any event
such illegality, invalidity or unenforceability shall not affect the remainder
hereof.
12.05. ENTIRE AGREEMENT.
This Agreement and exhibits attached hereto constitute the entire
Agreement of the Partners and supersede all prior written agreements and prior
and contemporaneous oral agreements, understandings and negotiations with
respect to the subject matter hereof.
12.06. PRONOUNS AND PLURALS.
When the context in which words are used in the Agreement indicates
that such is the intent, words in the singular number shall include the plural
and the masculine gender shall include the neuter or female gender as the
context may require.
12.07. HEADINGS.
The Article headings or sections in this Agreement are for convenience
only and shall not be used in construing the scope of this Agreement or any
particular Article.
12.08. COUNTERPARTS.
This Agreement may be executed in several counterparts, each of which
shall be deemed to be an original copy and all of which together shall
constitute one and the same instrument binding on all parties hereto,
notwithstanding that all parties shall not have signed the same counterpart.
12.09. GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with
the laws of the Commonwealth of Virginia.
IN WITNESS WHEREOF, the parties hereto have hereunder affixed their
signatures to this Second Amended and Restated Agreement of Limited Partnership,
all as of the date first above written.
OCWEN GENERAL, INC.
By: /s/ William C. Erbey
---------------------------------
Name: William C. Erbey
Title: Chief Executive Officer
37
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT A
---------
AGREED VALUE OF
CASH CAPITAL PARTNERSHIP PERCENTAGE
PARTNER CONTRIBUTION CONTRIBUTION UNITS INTEREST
- ------- ------------ --------------- ----- --------
GENERAL PARTNER:
<S> <C> <C> <C>
Ocwen General, Inc. $ 3,005,191 189,650 .9826%
1675 Palm Beach Lakes Blvd.
Suite 1000
West Palm Beach, FL 33401
LIMITED PARTNERS:
Ocwen Limited, Inc. $297,513,897 18,775,350 97.2816%
1675 Palm Beach Lakes Blvd.
Suite 1000
West Palm Beach, FL 33401
Investors Mortgage Insurance Holding $ 6,080,060 335,000 1.7358%
Company
1675 Palm Beach Lakes Blvd.
Suite 1000
West Palm Beach, FL 33401
TOTAL: $306,599,148 19,300,000 100.00%
</TABLE>
<PAGE>
EXHIBIT B
---------
NOTICE OF EXERCISE OF EXCHANGE RIGHT
In accordance with Section 8.05 of the Amended and Restated Agreement
of Limited Partnership (the "Agreement") of Ocwen Partnership, L.P., the
undersigned hereby irrevocably (i) presents for exchange ________ Partnership
Units in Ocwen Partnership, L.P. in accordance with the terms of the Agreement
and the Exchange Right referred to in Section 8.05 thereof, (ii) surrenders such
Partnership Units and all right, title and interest therein, and (iii) directs
that the Cash Amount or REIT Shares Amount (as defined in the Agreement) as
determined by the General Partner deliverable upon exercise of the Exchange
Right be delivered to the address specified below, and if REIT Shares (as
defined in the Agreement) are to be delivered, such REIT Shares be registered or
placed in the name(s) and at the address(es) specified below.
Dated:________ __, _____
Name of Limited Partner:
------------------------------
(Signature of Limited Partner)
------------------------------
(Mailing Address)
------------------------------
(City) (State) (Zip Code)
Signature Guaranteed by:
------------------------------
If REIT Shares are to be issued, issue to:
Please insert social security or identifying number:
Name:
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table presents selected consolidated financial data of
Ocwen Asset Investment Corp. and its subsidiaries ("OAIC" or the "Company") at
the date and for the period indicated.
The selected balance sheet data at December 31, 1997 and operations data
for the period from May 14, 1997 to December 31, 1997 have been derived from the
financial statements audited by Price Waterhouse LLP, independent certified
public accountants. The selected consolidated financial data should be read in
conjunction with, and is qualified in its entirety by reference to, the
information in the consolidated Financial Statements and related notes set forth
elsewhere herein.
For the Period
May 14, 1997
to
December 31, 1997
-----------------
OPERATIONS DATA:
Interest income ........................................... $ 13,461,715
Income on investments in real estate, net ................. 1,481,633
Other operating income .................................... 12,665
-------------
Total income ........................................... 14,956,013
Operating expenses ........................................ 3,155,065
-------------
Income before minority interest ........................... 11,800,948
Minority interest in net income of operating partnership .. (9,430)
-------------
Net income ............................................. $ 11,791,518
=============
Earnings per share:
Basic .................................................. $ 0.62
=============
Diluted ................................................ $ 0.60
=============
Weighted average common shares outstanding:
Basic .................................................. 19,108,789
=============
Diluted ................................................ 19,564,770
=============
BALANCE SHEET DATA:
Total assets ............................................ $ 288,003,341
Cash and cash equivalents ............................... 48,677,123
Securities available for sale, at market value .......... 146,026,907
Loan portfolio .......................................... 15,831,479
Discount loan portfolio ................................. 26,978,888
Investment in real estate ............................... 45,430,039
Minority interest ....................................... 2,941,541
Shareholders' equity .................................... 271,258,267
OTHER DATA:
Average assets .......................................... $ 289,215,300
Average equity .......................................... 284,260,200
Return on average assets ................................ 6.56%
Return on average equity ................................ 6.67%
Funds from operations ................................... $ 11,970,606
1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion of the Company's consolidated financial
condition, results from operations, and capital resources and liquidity should
be read in conjunction with the Consolidated Financial Information and the
Consolidated Financial Statements and related notes included elsewhere herein.
GENERAL
The Company is a newly formed corporation that has elected to be taxed
as a real estate investment trust ("REIT") under the Internal Revenue Code of
1986, as amended (the "Code"), and that specializes in opportunistic real estate
investments. At December 31, 1997, the Company had invested $234.3 million or
83% of the $283.7 million of net proceeds received from the sale of 19,125,000
shares of its common stock in May 1997. Of this amount, $146 million or 62% was
invested in mortgage-related securities, $45.4 million or 19% was invested in
real estate, $27 million or 12% was invested in commercial discount mortgage
loans and $15.9 million or 7% was invested in other mortgage loans.
RECENT TRANSACTIONS
During the months of January and February 1998, the Company completed
the acquisition of five pools of residential loans with an aggregate unpaid
principal balance of approximately $10.9 million. The loans have a weighted
average coupon rate of 8.13%.
On January 12, 1998, the Company closed an $11.6 million mezzanine
construction loan, which had an initial draw of $1.6 million, for a 160 unit
apartment rental project located in San Francisco, California with on-site
parking and commercial space on the first floor.
On January 15, 1998, in order to match-fund the Company's asset base
with anticipated borrowings and thereby minimize the impact on the Company from
changes in net interest income due to changes in 1-month London InterBank
Offered Rate ("LIBOR"), the Company placed a 5 year, $100.0 million notional
swap. The terms of the swap call for the Company to pay a fixed rate of 5.75%
and receive 1-month LIBOR on $100.0 million.
On January 23, 1998, the Company purchased for $13.7 million, a
16-story, 124,688 square foot office property located at 690 Market Street, San
Francisco, California. The building is 83% leased with 41% of the building
becoming available by the end of 1998. The Company anticipates investing an
additional $4.3 million to reposition the building for re-leasing.
On January 30, 1998, the Company purchased a $51.6 million investment
in a subordinate interest-only strip supported by a pool of 6,309 subprime
mortgage loans. Ocwen Federal Bank FSB (the "Bank") will special service any
loans that become 60 days delinquent. The average balance of the loan is
approximately $95,000 and the geographical concentration is mainly in
California, Florida, Illinois, Massachusetts and Washington.
On February 17, 1998, the Company sold 175,000 shares of common stock
for cash in an aggregate amount of approximately $3.1 million to certain
officers and directors of the Company and Ocwen Financial Corporation ("Ocwen").
In connection with this stock issuance, a subsidiary of Ocwen sold a like number
of shares of the Company's common stock and invested in a like number of limited
partnership units in the Company's operating partnership in order to comply with
the stock ownership restrictions imposed on REITs under the Code.
On February 27, 1998, the Company closed a $30.3 million commercial
real estate construction loan which had an initial draw of $13.2 million. The
loan facilitated the acquisition of a 12-story, 155,000 gross square foot,
office building located in the Tribeca area of Manhattan, New York, and will
finance its conversion to contain 52 large luxury loft-style residential
condominiums with a parking garage. The loan has a five year term. The Company
also receives prepaid interest upon closing of the loan, and a fixed exit fee
when the loan is repaid in full.
On March 6, 1998, OAIC executed a definitive purchase agreement for the
acquisition of an existing 536,000 square foot, 22 story Class A- office
building located at 225 Bush Street in the financial district of San Francisco,
California for $100.2 million. OAIC expects to make an additional investment of
approximately $10.5 million to fund closing costs and commissions, construction
costs associated with mechanical systems and cosmetic upgrades, and tenant
2
<PAGE>
improvements and leasing commissions. Current rents in the building average
$18.30 per square foot, and OAIC estimates the average current market rent to
approximate $32 to $35 per square foot. As a result of the nearly 60% turnover
of the rental space in 1998 and 1999, OAIC expects its funds from operations
during 1998 will provide a modest return on this investment. As is typical of
many of OAIC's commercial real estate investments, future releasing of this
property at market rates is anticipated to provide stronger contributions to
funds from operations thereafter and to meet OAIC's desired return parameters
over the expected holding period of the investment. This transaction is subject
to various terms and conditions of closing and performance, and as a result,
there can be no assurance that this transaction will be consummated.
On March 17, 1998, OAIC executed a definitive agreement with a Wall
Street firm concerning the acquisition of subordinate interest only securities
("Sub IO") for approximately $14.3 million plus closing costs (such transaction
constitutes the result of negotiations pursuant to the letter of intent
announced by OAIC and Aames Financial Corporation in January 1998). The
transaction is subject to various terms and conditions of closing and
performance, and as a result, there can be no assurance that this transaction
will be consummated.
On March 19, 1998, the Company announced the declaration of its first
quarter 1998 cash dividend of $0.25 per share, payable to shareholders of record
on March 30, 1998 with payment on April 16, 1998.
On March 26, 1998, the Company closed the acquisition of $8.3 million
of Sub IOs issued from a securitization of sub-prime residential mortgage loans.
RESULTS OF OPERATIONS
The Company completed an initial public offering on May 14, 1997 and
commenced operations thereon. Net income for the period from May 14, 1997 to
December 31, 1997 amounted to $11.8 million. Diluted earnings per weighted
average common share were $0.60 for the period.
The Company is engaged in a variety of real estate and mortgage-related
investment activities, investing primarily in mortgage-related securities,
commercial real estate, commercial discount loans and commercial and residential
loans. The following table presents the contribution by investment activity to
the Company's net income before minority interest for the period from May 14,
1997 to December 31, 1997.
<TABLE>
<CAPTION>
Amount %
----------- -----------
<S> <C> <C>
Mortgage-related securities and other short-term investments.. $ 9,948,788 84%
Commercial real estate ....................................... 1,375,733 12
Commercial discount loans .................................... 394,391 3
Commercial and residential loans ............................. 82,036 1
----------- ---
$11,800,948 100%
=========== ===
</TABLE>
INTEREST INCOME. Interest income for the period from May 14, 1997 to
December 31, 1997 amounted to $13.5 million. The following table sets forth the
total amount of interest income generated from interest-earning assets and the
resultant annualized yields. The average balance is based on average daily
balances for the reported period.
<TABLE>
<CAPTION>
For the Period from May 14, 1997 to December 31, 1997
-----------------------------------------------------
Average Interest Annualized
Balance Income Yield
-------------- --------------- ----------------
<S> <C> <C> <C>
Repurchase agreements and interest-earning
deposits ................................. $ 155,756,900 $ 5,538,946 5.72%
Securities available for sale............... 76,423,400 6,362,909 13.39
Loans....................................... 4,294,000 311,157 11.65
Discount loans.............................. 16,453,200 1,248,703 12.20
-------------- --------------
Total.................................... $ 252,927,500 $ 13,461,715 8.56%
============== ===============
</TABLE>
OPERATING INCOME. Operating income is comprised primarily of $1.5
million in income earned on investments in real estate during the period from
May 14, 1997 to December 31, 1997. Such income represents rental income, net of
operating expenses and depreciation, and $890,000 of income realized from the
early termination of a lease by a tenant, generated from the Company's
investment in two office buildings located in California and a retail shopping
center located in Florida.
3
<PAGE>
OPERATING EXPENSES. The following table sets forth the principal
components of the Company's operating expenses during the period from May 14,
1997 to December 31, 1997.
Management fees.......................................... $ 1,796,311
Due diligence............................................ 326,025
Foreign currency loss.................................... 568,565
Other .................................................. 464,164
--------------
Total................................................. $ 3,155,065
==============
Management fees totaling $1.8 million for the period from May 14, 1997
to December 31, 1997 were comprised solely of a base management fee (1% per
annum of average invested assets) earned by Ocwen Capital Corporation ("OCC"), a
wholly-owned subsidiary of Ocwen, pursuant to the terms of a management
agreement entered into between the Company and Ocwen. OCC advises the Company on
various facets of its business and manages its day-to-day operations, subject to
the supervision of the Company's Board of Directors. See Note 1 to the
Consolidated Financial Statements. In addition, the Company incurred due
diligence expense in connection with its asset acquisitions. Foreign currency
loss for the period is a result of the strengthening U.S. dollar versus the
Canadian dollar and relates to the Company's investment in a Canadian commercial
discount loan. See "Discount Loan Portfolio" and Notes 1 and 6 to the
Consolidated Financial Statements. Other expenses were comprised of auditing
fees, insurance premiums and other miscellaneous expenses.
FUNDS FROM OPERATIONS
Most industry analysts, including the Company, consider Funds from
Operations ("FFO") an appropriate supplementary measure of operating performance
of a REIT. However, FFO does not represent cash provided by operating activities
in accordance with generally accepted accounting principles ("GAAP") and should
not be considered an alternative to net income as an indication of the results
of the Company's performance or to cash flows as a measure of liquidity. In
1995, the National Association of Real Estate Investment Trusts ("NAREIT")
established new guidelines clarifying its definition of FFO and requested that
REITs adopt this new definition beginning in 1996. The following table computes
FFO under the NAREIT definition. FFO consists of net income applicable to common
shareholders (computed in accordance with generally accepted accounting
principles) excluding gains (losses) from debt restructuring and sales of
property (including furniture and equipment) plus real estate related
depreciation and amortization (excluding amortization of deferred financing
costs) and after adjustments for unconsolidated partnerships and joint ventures.
For the period from May 14, 1997 to December 31, 1997, the Company's
FFO was $12.0 million or $0.61 per diluted weighted average common share. The
following table sets forth the calculation of the Company's FFO for the period.
Net income............................................... $ 11,791,518
Add: Real estate related depreciation.................... 179,088
-------------
FFO ..................................................... $ 11,970,606
=============
Diluted weighted average shares outstanding.............. 19,564,770
=============
4
<PAGE>
CHANGES IN FINANCIAL CONDITION
The following table sets forth information relating to certain of the
Company's assets and liabilities at December 31, 1997.
ASSETS:
Interest earning deposits................................. $ 48,346,076
Securities available for sale, at market value............ 146,026,907
Loan portfolio............................................ 15,831,479
Discount loan portfolio, net.............................. 26,978,888
Investment in real estate, net............................ 45,430,039
Total assets.............................................. 288,003,341
LIABILITIES AND SHAREHOLDERS' EQUITY:
Dividends and distributions payable...................... 7,458,750
Total liabilities......................................... 13,803,533
Minority interest......................................... 2,941,541
Shareholders' equity...................................... 271,258,267
GENERAL. Total assets amounted to $288.0 million at December 31, 1997
and consisted primarily of $48.3 million of interest earning deposits, $146.0
million of securities available for sale, $15.8 million of loans held in
portfolio, $27.0 million of discount loans and $45.4 million of investments in
real estate. These assets are the result of the Company's investment of the
$283.7 million of proceeds received from its initial public offering in May
1997. Total liabilities amounted to $13.8 million at December 31, 1997 and were
primarily comprised of declared but unpaid dividends of $7.5 million, $2.8
million payable in connection with the acquisition of a pool of single family
loans and unpaid management fees due OCC of $728,000.
REPURCHASE AGREEMENTS AND INTEREST EARNING DEPOSITS. At December 31,
1997 total interest earning deposits amounted to $48.3 million or 17% of total
assets and were comprised of deposits at various banks, including $16,000 on
deposit in an account at the Bank.
Although the Company had no repurchase agreements at December 31, 1997,
it enters into such agreements from time to time. In these transactions, the
Company purchases securities from a counterparty and agrees to sell the
securities back to the counterparty at a specified future date. Repurchase
agreements are carried at the amounts at which the securities will be
subsequently resold to the counterparty plus accrued interest, as specified in
the respective agreements. The securities purchased are held in custody for the
benefit of the Company. All of the transactions are in United States agency or
investment grade securities. The Company's exposure to credit risks associated
with the non-performance of counterparties in fulfilling their contractual
obligations can be directly impacted by market fluctuations, which may impair
the counterparties' ability to satisfy their obligations. The Company monitors
the market value of the underlying securities relative to the amounts due under
the agreements and, when necessary, requires prompt additional collateral or
reduction in loan balance to ensure that the market value remains sufficient to
protect itself in the event of default by the counterparty.
The Company earned interest income of $5.5 million during the period
May 14, 1997 to December 31, 1997 from its investment in interest earning
deposits and repurchase agreements. Of this amount, $5.1 million was earned from
investments in repurchase agreements. Given the Company's investment of cash and
cash equivalents received in connection with its initial public offering in
other types of assets over the course of the reporting period, operating results
for the period presented are unlikely to be indicative of the results that may
be expected for future periods.
5
<PAGE>
SECURITIES AVAILABLE FOR SALE. The Company's investment in
mortgage-related securities available for sale of $146.0 million at December 31,
1997 is net of $7.3 million of net unrealized losses which was included in
shareholders' equity. The Company's securities available for sale were comprised
of the following at December 31, 1997:
Mortgage-related securities:
Single-family residential:
FHLMC interest only................................ $ 21,177,964
FNMA interest only................................. 22,573,132
AAA-rated interest only............................ 729,372
Subordinates....................................... 9,444,067
---------------
Total............................................ 53,924,535
---------------
Multi-family residential and commercial:
AAA-rated interest only............................ 865,747
A-rated interest only.............................. 480,188
Non-rated interest only............................ 4,802,873
Subordinates....................................... 85,953,564
---------------
Total............................................ 92,102,372
---------------
Total.......................................... $ 146,026,907
===============
The $146.0 million of securities available for sale at December 31,
1997 is the result of purchases of $166.3 million, offset in part by $6.7
million of principal payments and maturities, $6.3 million of net premium
amortization and net unrealized losses of $7.3 million.
The Company's investments in interest only and inverse interest-only
securities (together, "IOs"), which had an aggregate amortized cost and fair
value of $60.8 million and $50.6 million at December 31, 1997, respectively,
exhibit considerably more price volatility than mortgages or ordinary mortgage
pass-through securities, due in part to the uncertain cash flows that result
from changes in the prepayment rates of the underlying mortgages. In the case of
IOs, increased prepayments of the underlying mortgages as a result of a decrease
in market interest rates or other factors can result in loss of all or part of
the purchase price of such security. During January and February 1998, the
Company recorded a charge of $2.5 million against its interest only securities
portfolio. The charge resulted from increases in projected prepayment speeds
during this period and a resulting shortening of the weighted average lives of
certain individual securities in the portfolio. As a result, a determination was
made to write down the recorded investment in those securities where the
reduction in fair value was considered to be other than temporary. The Company
believes that the current low levels of interest rates, and the inverted shape
of the yield curve, are relatively short-term phenomena. To the extent that
longer term interest rates increase or the relationship between short-term and
long-term rates revert to their historical spreads, the value of the portfolio
should recover. To the extent that the current environment persists, or that
rates decrease further, additional impairment losses may be recognized. See Note
4 to the Consolidated Financial Statements.
LOAN PORTFOLIO. The Company's investment in loans amounted to $15.8
million at December 31, 1997 as follows:
Single-family residential............................ $ 6,465,080
Multi-family residential............................. 3,455,000
Commercial real estate:
Office............................................ 33,058,000
Hotel............................................. 20,952,000
--------------
Total loans...................................... 63,930,080
Deferred origination fees............................ (458,925)
Undisbursed loan proceeds........................... (47,639,676)
Allowance for loan losses............................ --
--------------
Loans, net......................................... $ 15,831,479
==============
During the reporting period, the Company acquired 48 single family
residential loans with an aggregate unpaid principal balance of $6.8 million
with the intent of accumulating such loans, executing a securitization, and
effectively retaining a subordinate interest. In addition, the Company
originated one multi-family residential loan in the amount of $3.5 million, of
which $1.4 million had been funded at December 31, 1997, two hotel acquisition
and renovation loans in
6
<PAGE>
the aggregate amount of $21.0 million, of which $8.4 million had been funded at
December 31, 1997, and one office building renovation and construction loan in
the amount of $33.0 million which had not been funded at December 31, 1997. At
December 31, 1997 all loans were current with the exception of four single
family residential loans having an unpaid principal balance of approximately
$269,000 which were greater than 89 days past due. Substantially all of the
above loans are serviced by the Bank. See Note 5 to the Consolidated Financial
Statements.
DISCOUNT LOAN PORTFOLIO. The following table sets forth the composition
of the Company's $27.0 million investment in discount loans at December 31,
1997.
Commercial real estate loans:
Office ........................................... $ 11,892,814
Retail............................................ 30,635,968
------------
Total unpaid principal balance................. 42,528,782
Allowance for loan losses......................... --
Unaccreted discount............................... (15,549,894)
------------
Discount loans, net............................ $ 26,978,888
============
The $27.0 million of discount loans at December 31, 1997 is the result
of three acquisitions. During June 1997 the Company acquired a 13.83% pari passu
interest in four subperforming commercial loans with an aggregate unpaid
principal balance of $10.5 million. The loans are collateralized by three office
buildings located in New York, New York and one shopping center in Yorktown, New
York. The Bank acquired the remaining interest in these loans. During September
1997 the Company acquired a Canadian commercial loan with an unpaid principal
balance of $27.6 million, ($38.3 million Canadian). The loan is collateralized
by a 395,000 square foot shopping center located in Halifax, Nova Scotia,
Canada. During November 1997 the Company acquired two loans secured by a 195,445
square foot shopping center in Havre, Montana and a 43,205 square foot Dayton,
Ohio office building with an aggregate unpaid principal balance of $6.6 million.
All of the Company's discount loans are serviced by the Bank. See Note 6 to the
Consolidated Financial Statements.
The following table sets forth certain information relating to the
payment status of loans in the Company's discount loan portfolio at December 31,
1997.
Past due less than 31 days............................ $ 7,964,105
Past due 31 days to 89 days........................... --
Past due 90 days or more.............................. 34,564,677
--------------
$ 42,528,782
==============
ALLOWANCE FOR LOAN LOSSES. The Company's policy is to maintain an
allowance for loan losses on its loan and discount loan portfolios at a level
which management considers adequate to provide for potential losses based upon
an evaluation of known and inherent risks. At December 31, 1997, no allowance
for loan losses had been provided.
INVESTMENT IN REAL ESTATE. The Company's $45.4 million net investment
in real estate at December 31, 1997 is net of $179,088 of accumulated
depreciation and is the result of the acquisition of two office buildings in
California and one shopping center in Florida, as follows:
<TABLE>
<CAPTION>
Date Acquired Property Location Square Feet Acquisition Cost
------------- --------------- ----------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
09/03/97 10 U.N. Plaza San Francisco, CA 68,560 $ 9,095,341
09/23/97 450 Sansome St. San Francisco, CA 123,099 17,246,713
11/10/97 Cortez Plaza Bradenton, FL 289,686 19,267,073
--------------
$ 45,609,127
==============
</TABLE>
The Company's strategy is to renovate and reposition the facilities and
target full floor tenants with five to ten year lease terms. The Company
estimates that over the next twelve months approximately $4.4 million in capital
improvements, tenant improvements and leasing commissions will be spent to
renovate and reposition the above properties. Repositioning is intended to
result in rents that are considerably greater than the current rents being
achieved at the sites. See Note 7 to the Consolidated Financial Statements.
7
<PAGE>
DIVIDENDS AND DISTRIBUTIONS PAYABLE. At December 31, 1997, dividends
payable totaled $7.5 million and represents declared but unpaid dividends on
common stock.
MINORITY INTEREST. At December 31, 1997, minority interest totaled $2.9
million and represents Ocwen's ownership of 160,000 units in the Ocwen
Partnership, L.P. ("Operating Partnership"). See Note 1 to the Consolidated
Financial Statements.
SHAREHOLDERS' EQUITY. Shareholders' equity increased to $271.3 million
from May 14, 1997 to December 31, 1997. The increase in shareholders' equity
during this period was attributable to net proceeds of $283.7 million from the
issuance of 19,125,000 shares of common stock in May 1997 and net income of
$11.8 million earned during the period, offset in part by net unrealized losses
on securities available for sale of $7.3 million, the repurchase of 160,000
shares of the Company's common stock for $3.0 million and dividends declared on
common stock of $13.9 million.
CAPITAL RESOURCES AND LIQUIDITY
Liquidity is a measurement of the Company's ability to meet potential
cash requirements, including ongoing commitments to repay borrowings, fund
investments, engage in loan acquisition and lending activities and for other
general business purposes. Additionally, to maintain its status as a REIT under
the Code, the Company must distribute annually at least 95% of its taxable
income. The primary sources of funds for liquidity consist of the proceeds from
the Company's initial public offering, net income, reverse repurchase agreements
and other secured borrowings, maturities and principal payments on loans and
securities and proceeds from loan resolutions thereof.
Cash and cash equivalents were $48.7 million at December 31, 1997. The
Company's operating activities provided cash flows of $21.1 million during the
period from May 14, 1997 to December 31, 1997. During the foregoing period, cash
resources from operating activities were provided primarily by net income. The
Company's investing activities used cash flows of $249.6 million during the
period from May 14, 1997 to December 31, 1997. During the foregoing period, cash
flows from investing activities were used primarily to purchase securities
available for sale, discount loans, loans and investments in real estate. The
Company's financing activities provided cash flows of $277.2 million during the
period from May 14, 1997 to December 31, 1997 and consisted of $283.7 million
net proceeds from the issuance of common stock, net of $6.5 million of dividends
paid during the period.
The Company expects to meet its short-term liquidity requirements
generally through its working capital and net cash provided by operating and
financing activities. In addition, the Company has contractual relationships
with five brokerage firms pursuant to which it could obtain funds from reverse
repurchase agreements and has $146.0 million of unencumbered mortgage-related
securities which could be pledged to secure such borrowings. The Company also
believes that its net cash provided by operating activities will be sufficient
to allow the Company to make the distributions necessary for continued benefit
from qualification as a REIT.
At December 31, 1997, the Company had $ 74.3 million of outstanding
commitments. In addition, the Company has subsequently engaged in additional
acquisition activities, including the performance of due diligence with respect
to a variety of other investment opportunities. See Note 11 to the Consolidated
Financial Statements. At December 31, 1997, the Company had invested
approximately 83% of the net proceeds received from its initial public offering.
The Company expects to meet certain long-term liquidity requirements such as
property and security acquisitions and loan originations by obtaining various
third-party borrowings and has entered into discussions with respect to
obtaining such borrowings. Additionally, as discussed above, the Company intends
to execute a securitization of its loan portfolio and use the proceeds for
further acquisitions. The Company believes that such new, as well as its
existing, sources of liquidity, including third-party borrowings currently being
pursued, will be adequate to fund planned activities for the foreseeable future,
although there can be no assurances in this regard. In the event the Company was
unable to effect such third-party borrowings or securitization, its liquidity
could be constrained and the impact on its results of operations, financial
condition and FFO could be significant.
MARKET CONDITIONS
Recently, the competitive conditions of some of the markets in which
the Company operates have changed due to the significant amount of capital made
available in the marketplace. This competition is particularly notable in the
subordinated commercial mortgage-backed securities ("CMBS") market for new
issuances. New issuances have reduced
8
<PAGE>
subordination levels with spreads declining by approximately 200 basis points in
the noninvestment grade and unrated tranches. The Company believes that
investment in a new issue CMBS at this time does not meet its return objectives.
Therefore, the Company is focusing on seasoned or special situation subordinates
which meet its return objectives, taking advantage of Ocwen's special servicing
capabilities. In addition, the Company has purchased pools of residential loans
for securitization, and is pursuing investments in Sub IOs in CMBS backed by
subprime residential mortgage loans.
INFLATION
Inflation has remained relatively low during the past few years and has
had a minimal impact on the operating performance of the properties.
Nonetheless, certain of the tenants' leases contain provisions designed to
lessen the impact of inflation. Such provisions include clauses enabling the
Company to receive percentage rentals based on tenants' gross sales, which
generally increase as prices rise, and/or escalation clauses, which generally
increase rental rates during the terms of the leases. In addition, many of the
leases are for terms of less than ten years, which may enable the Company to
replace existing leases with new leases at higher base and/or percentage rentals
if rents of the existing leases are below the then-existing market rate. Office
and retail space in the properties is generally leased to tenants under lease
terms which provide for the tenants to pay for increases in operating expenses
in excess of specified amounts. See Note 11 to the Consolidated Financial
Statements.
However, inflation may have a negative impact on some of the Company's
other operating items. Interest and general and administrative expenses may be
adversely affected by inflation as these specified costs could increase at a
rate higher than rents. Also, for tenant leases with stated rent increases,
inflation may have a negative effect as the stated rent increases in these
leases could be lower than the increase in inflation at any given time.
RECENT ACCOUNTING DEVELOPMENTS
For information relating to the effects on the Company of the adoption
of recent accounting standards, see Note 1 to the Consolidated Financial
Statements.
REIT STATUS
The Company has qualified and intends to continue to qualify as a REIT
under Sections 856 through 860 of the Internal Revenue Code. Qualification for
treatment as a REIT requires the Company to meet certain criteria, including
certain requirements regarding the nature of its ownership, assets, income and
distributions of taxable income. A REIT will generally not be subject to federal
income taxation on that portion of its income that is distributed to its
shareholders if it distributes at least 95 percent of its taxable income and
meets certain other income and asset tests. The Company has until the filing of
its tax return to satisfy the distribution requirement. Since the Company plans
to distribute 100% of its taxable income, no provision has been made for federal
income taxes for the Company and its subsidiaries in the accompanying
consolidated financial statements. As taxable income is finalized and the tax
return is filed, an additional distribution may be required which may be
significant. The Company may be subject to tax at normal corporate rates on net
income or capital gains not distributed.
The Company intends to conduct its business so as not to become
regulated as an investment company under the Investment Company Act of 1940 (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 interpretation
by the staff of the Securities and Exchange Commission ("SEC"), 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. Therefore, the type and amount of assets the Company may acquire may be
limited by the Investment Company Act.
YEAR 2000 DATE CONVERSION
OCC, as well as Ocwen and its other subsidiaries which provide
management services to the Company, have begun to coordinate the identification,
evaluation, and implementation of changes to computer systems and applications
necessary to achieve a year 2000 date conversion with no effect on customers or
disruption to business operations. These
9
<PAGE>
actions are necessary to ensure that the systems and applications will recognize
and process the year 2000 and beyond. Major areas of potential business impact
have been identified and dimensioned, and initial conversion efforts are
underway. Ocwen also is communicating with customers, financial institutions and
others with which it does business to identify and coordinate year 2000
conversion issues. Ocwen expects its year 2000 conversion will be completed on a
timely basis, and the cost of achieving year 2000 compliance will be immaterial
and borne by Ocwen. The Company does not expect to incur any costs in connection
with achieving year 2000 compliance.
FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED HEREIN ARE NOT, AND CERTAIN STATEMENTS
CONTAINED IN FUTURE FILINGS BY THE COMPANY WITH THE SECURITIES AND EXCHANGE
COMMISSION, IN THE COMPANY'S PRESS RELEASES OR IN THE COMPANY'S OTHER PUBLIC OR
SHAREHOLDER COMMUNICATIONS, MAY NOT BE BASED ON HISTORICAL FACTS AND ARE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED, INCLUDING THE CONSUMMATION AND EXPECTED BENEFITS OF THE IDENTIFIED
TRANSACTIONS. THESE FORWARD-LOOKING STATEMENTS MAY BE IDENTIFIED BY REFERENCE TO
A FUTURE PERIOD(S), OR BY THE USE OF FORWARD-LOOKING TERMINOLOGY, SUCH AS "MAY,"
"WILL," "BELIEVE," "ESTIMATE," "EXPECT," "COMMITMENT," "ANTICIPATE," "CONSIDER,"
"CONTINUE," "ENCOURAGE," "INTEND," "PLAN," "PRESENT," "PROPOSE," "PROSPECT," OR
SIMILAR TERMS, VARIATIONS OF THOSE TERMS, OR NEGATIVES OF ANY SUCH TERMINOLOGY.
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN FORWARD-LOOKING
STATEMENTS DUE TO A VARIETY OF FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE
RELATED TO THE INTERNATIONAL, NATIONAL, REGIONAL OR LOCAL ECONOMIC ENVIRONMENT,
PARTICULARLY IN THE MARKET AREAS IN WHICH THE COMPANY OPERATES, COMPETITIVE
PRODUCTS AND PRICING, FISCAL AND MONETARY POLICIES OF THE U.S., CANADIAN OR
OTHER GOVERNMENTS, CHANGES IN GOVERNMENT REGULATIONS AFFECTING REAL ESTATE
INVESTMENT TRUSTS, CHANGES IN PREVAILING INTEREST AND CURRENCY EXCHANGE RATES,
CHANGES IN FACTORS INHERENT TO THE VALUATION AND PRICING OF VARIOUS SECURITIES
INCLUDING THE IMPACT OF CHANGES IN PREPAYMENT SPEEDS ON MORTGAGE LOANS, THE
EFFECTIVENESS OF THE SERVICING OF LOANS UNDERLYING VARIOUS SECURITIES, THE
COURSE OF NEGOTIATIONS WITH RESPECT TO VARIOUS TRANSACTIONS, THE ABILITY OF
PARTIES TO AGREE TO MATERIAL TERMS OF A TRANSACTION, THE ABILITY TO SATISFY OR
FULFILL AGREED UPON TERMS AND CONDITIONS OF CLOSING OR PERFORMANCE (INCLUDING
BOARD APPROVALS, AS NECESSARY OR AGREED UPON), THE OCCURRENCE OF MATERIAL
ADVERSE CHANGES IN THE BUSINESS OF ANY PARTY TO A TRANSACTION, THE TIMING OF
TRANSACTION CLOSINGS, UNSATISFACTORY DUE DILIGENCE RESULTS, BORROWER FAILURE TO
SATISFY CLOSING CONDITIONS, THE ABILITY TO SECURITIZE MORTGAGE LOANS IN MUTUALLY
ACCEPTABLE TERMS, ACQUISITIONS AND THE INTEGRATION OF ACQUIRED BUSINESSES,
CREDIT RISK MANAGEMENT, ASSET/LIABILITY MANAGEMENT, THE FINANCIAL AND SECURITIES
MARKETS, THE AVAILABILITY OF AND COSTS ASSOCIATED WITH TIMELY SOURCES OF
LIQUIDITY ON MUTUALLY ACCEPTABLE TERMS AND OTHER FACTORS GENERALLY UNDERSTOOD TO
AFFECT THE REAL ESTATE ACQUISITION MORTGAGE AND LEASING MARKETS AND SECURITY
INVESTMENTS. THE COMPANY DOES NOT UNDERTAKE, AND SPECIFICALLY DISCLAIMS ANY
OBLIGATION, TO PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS WHICH MAY BE MADE
TO ANY FORWARD-LOOKING STATEMENTS TO REFLECT THE OCCURRENCE OF ANTICIPATED OR
UNANTICIPATED EVENTS OR CIRCUMSTANCES AFTER THE DATE OF SUCH STATEMENTS.
10
<PAGE>
REPORT OF MANAGEMENT
The management of Ocwen Asset Investment Corp. is responsible for the
preparation and fair presentation of the financial statements and other
financial information contained in this annual report. The accompanying
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles applied on a consistent basis
and include amounts based on management's best estimates and judgments.
Nonfinancial information included in this annual report has also been
prepared by management and is consistent with the consolidated
financial statements. In the opinion of management, the consolidated
financial statements fairly reflect the Company's financial position,
results of operations and cash flows.
To assure that financial information is reliable and assets are
safeguarded, management has established and maintains an effective
system of internal accounting controls and procedures that provide
reasonable assurance as to the integrity and reliability of the
financial statements, the protection of assets against loss from
unauthorized use or disposition and the prevention and detection of
errors and irregularities on a timely basis.
Price Waterhouse LLP conducts its audit of the consolidated financial
statements in accordance with generally accepted auditing standards.
Such standards include the evaluation of internal accounting controls
to establish a basis for developing the scope of its examination of the
consolidated financial statements. In addition to the use of
independent certified public accountants, Ocwen maintains a
professional staff of internal auditors who conduct financial,
procedural and special audits of the Company. To ensure their
independence, both Price Waterhouse LLP and the internal auditors have
direct access to the Audit Committee of the Board of Directors.
The Audit Committee, which consists solely of independent directors of
the Company, makes recommendations to the Board of Directors concerning
the appointment of the independent certified public accountants and
meets with Price Waterhouse LLP and the internal auditors to discuss
the results of their audits, the Company's internal accounting controls
and financial reporting matters.
/s/ William C. Erbey /s/ Mark S. Zeidman
---------------------------------------- ----------------------------
William C. Erbey Mark S. Zeidman
Chairman and Chief Executive Officer Senior Vice President and
Chief Financial Officer
11
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Ocwen Asset Investment Corp.
In our opinion, the accompanying consolidated statements of financial condition
and the related consolidated statements of operations, of changes in
shareholders' equity and of cash flows present fairly, in all material respects,
the financial position of Ocwen Asset Investment Corp. (the "Company") and its
subsidiaries at December 31, 1997 and the results of their operations and their
cash flows for the period from May 14, 1997 to December 31, 1997, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatements. 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
audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
- --------------------------------
Price Waterhouse LLP
Fort Lauderdale, Florida
January 26, 1998
12
<PAGE>
OCWEN ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 1997
ASSETS:
Cash and amounts due from depository institutions ............ $ 331,047
Interest earning deposits .................................... 48,346,076
Securities available for sale, at market value ............... 146,026,907
Loan portfolio, net .......................................... 15,831,479
Discount loan portfolio, net ................................. 26,978,888
Investment in real estate, net ............................... 45,430,039
Deposits on pending asset acquisitions ....................... 1,000,000
Principal and interest receivable ............................ 2,518,272
Other assets ................................................. 1,540,633
-------------
$ 288,003,341
=============
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Dividends and distributions payable ........................ $ 7,458,750
Accrued expenses, payables and other liabilities ........... 6,344,783
-------------
Total liabilities ....................................... 13,803,533
-------------
Minority interest ............................................ 2,941,541
-------------
COMMITMENTS AND CONTINGENCIES (NOTE 11)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; 25,000,000 shares
authorized; 0 shares issued and outstanding .............. --
Common Stock, $.01 par value; 200,000,000 shares authorized;
19,125,000 shares issued; 18,965,000 shares outstanding .. 191,250
Additional paid-in capital ................................. 283,496,750
Distributions in excess of earnings ........................ (2,107,331)
Unrealized loss on securities available for sale ........... (7,327,890)
Treasury stock at cost (160,000 shares) .................... (2,994,512)
-------------
Total shareholders' equity .............................. 271,258,267
-------------
$ 288,003,341
=============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
13
<PAGE>
OCWEN ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM MAY 14, 1997 TO DECEMBER 31, 1997
Interest income:
Repurchase agreements and interest earning deposits ...... $ 5,538,946
Securities available for sale ............................ 6,362,909
Loans .................................................... 311,157
Discount loans ........................................... 1,248,703
------------
13,461,715
------------
Operating income:
Investments in real estate, net .......................... 1,481,633
Other .................................................... 12,665
------------
1,494,298
------------
Operating expenses:
Management fees .......................................... 1,796,311
Due diligence ............................................ 326,025
Foreign currency loss .................................... 568,565
Other .................................................... 464,164
------------
3,155,065
------------
Income before minority interest .............................. 11,800,948
Minority interest in net income of operating partnership ..... (9,430)
------------
Net income ............................................... $ 11,791,518
============
Earnings per share:
Basic .................................................... $ 0.62
============
Diluted .................................................. $ 0.60
============
Weighted average shares outstanding:
Basic .................................................... 19,108,789
============
Diluted .................................................. 19,564,770
============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
14
<PAGE>
<TABLE>
<CAPTION>
OCWEN ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM MAY 14, 1997 TO DECEMBER 31, 1997
Unrealized
loss on
Common Stock Additional Distributions securities
---------------------- Treasury paid-in- in excess available
Shares Amount stock capital of earnings for sale Total
---------- ---------- ----------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock ........ 19,125,000 $ 191,250 $ -- $283,496,750 $ -- $ -- $283,688,000
Repurchase of common stock ...... (160,000) -- (2,994,512) -- -- -- (2,994,512)
Net income ...................... -- -- -- -- 11,791,518 -- 11,791,518
Dividends ....................... -- -- -- -- (13,898,849) -- (13,898,849)
Change in unrealized loss on
securities available for sale.. -- -- -- -- -- (7,327,890) (7,327,890)
---------- ---------- ----------- ------------ ------------- ----------- -------------
Balance at December 31, 1997 .... 18,965,000 $ 191,250 $(2,994,512) $283,496,750 $ (2,107,331) $(7,327,890) $271,258,267
========== ========== =========== ============ ============= =========== ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
15
</TABLE>
<PAGE>
OCWEN ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM MAY 14, 1997 TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities:
Net income ....................................................... $ 11,791,518
Adjustments to reconcile net income to net cash provided by
operating activities:
Premium amortization (discount accretion), net ................ 6,236,654
Depreciation .................................................. 179,088
Foreign exchange loss ......................................... 568,565
Increase in interest receivable ............................... (2,518,272)
Increase in other assets ...................................... (1,540,633)
Increase in accrued expenses, payables and other liabilities .. 6,344,783
Minority interest in earnings ................................. 9,430
-------------
Net cash provided by operating activities .......................... 21,071,133
-------------
Cash flows from investing activities:
Purchase of securities available for sale ........................ (166,334,140)
Maturities and principal payments received on securities available
for sale ...................................................... 6,654,881
Purchase of loans ................................................ (16,091,515)
Purchase of discount loans ....................................... (28,465,429)
Principal payments received on discount loans .................... 932,366
Principal payments received on loans ............................. 333,454
Investment in real estate ........................................ (45,609,127)
Deposits on pending asset acquisitions ........................... (1,000,000)
-------------
Net cash used by investing activities .............................. (249,579,510)
-------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of offering costs .... 283,688,000
Dividend payments on common stock ................................ (6,502,500)
Treasury stock acquisition ....................................... (2,994,512)
Proceeds from sale of operating partnership units ............... 2,994,512
-------------
Net cash provided by financing activities .......................... 277,185,500
-------------
Net increase in cash and cash equivalents .......................... 48,677,123
Cash and cash equivalents at beginning of period ................... --
-------------
Cash and cash equivalents at end of period ......................... $ 48,677,123
=============
Reconciliation of cash and cash equivalents at end of period:
Cash and amounts due from depository institutions ................ $ 331,047
Interest earning deposits ........................................ 48,346,076
-------------
$ 48,677,123
=============
Supplemental schedule of non-cash financing activities:
Common stock dividends and distributions declared but not paid ... $ 7,458,750
=============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
16
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 ORGANIZATION
Ocwen Asset Investment Corp. ("OAIC" or the "Company") is a newly
formed corporation that has elected to be taxed as a Real Estate Investment
Trust ("REIT") under the Internal Revenue Code of 1986 (the "Code"). As such,
OAIC will generally not be subject to federal income taxation on that portion of
its income that is distributed to shareholders if it distributes at least 95% of
its taxable income to its shareholders by the due date of its federal income tax
return and complies with various other requirements.
The Company was incorporated in the Commonwealth of 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. On May 14, 1997, the Company completed an
initial public offering ("IPO") with the sale of 19,125,000 shares of common
stock, par value $.01 per share, at a price of $16.00 per share (before
underwriting and offering expenses), and commenced operations thereon.
The Company's consolidated financial statements include the accounts of
OAIC and its subsidiaries. OAIC directly owns two qualified REIT subsidiaries,
Ocwen General Partner, Inc. ("General Partner") and Ocwen Limited, Inc.
("Limited Partner"). General Partner and Limited Partner own 1% and 98.2%,
respectively of Ocwen Partnership, L.P. ("Operating Partnership"). Additionally,
through General Partner and Limited Partner, the Company established additional
partnerships in Florida and California for real estate investment purposes. The
minority interest at December 31, 1997 represents a 0.8% interest (160,000
units) in the Operating Partnership held by Investors Mortgage Insurance Holding
Company ("IMI"), a wholly owned subsidiary of Ocwen Financial Corporation
("Ocwen"). IMI also owns 1,715,000 shares, or 9.0%, of the Company's outstanding
common stock and has 1,912,500 options (25% of which vest each year over the
next four years) to purchase, at the election of the Company, either shares of
the Company or an equivalent number of units in the operating partnership at an
exercise price of $16.00 per share.
The Company has entered into a management agreement with Ocwen Capital
Corporation ("OCC"), a wholly owned subsidiary of Ocwen, under which OCC advises
the Company on various facets of its business and manages its day-to-day
operations, subject to the supervision of the Company's Board of Directors. For
its services, OCC receives a base management fee of 1% per annum of average
invested assets, as defined in the related agreement, payable quarterly. In
addition, OCC is entitled to receive incentive compensation in an amount equal
to 25% of the dollar amount by which Funds From Operations ("FFO"), as adjusted,
exceeds certain defined levels.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The Company's consolidated financial statements include the accounts of
OAIC and its subsidiaries as described in Note 1 above. All significant
intercompany transactions and balances have been eliminated.
SECURITIES AVAILABLE FOR SALE
Securities available for sale are carried at market value with the net
unrealized gains or losses reported as a separate component of shareholders'
equity. Unrealized losses on securities that reflect a decline in value which is
other than temporary, if any, are charged to earnings. At disposition, the
realized net gain or loss is included in earnings on a specific identification
basis. The amortization of premiums and accretion of discounts are computed
using the interest method after considering actual and estimated prepayment
rates, if applicable. Actual prepayment experience is periodically reviewed and
effective yields
17
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
are recalculated when differences arise between prepayments originally
anticipated and amounts actually received plus anticipated future prepayments.
LOAN PORTFOLIO
Loans held for investment are stated at amortized cost, less any
allowance for loan losses, because the Company has the ability and the intent to
hold them to maturity. Interest income is accrued as it is earned. Loans are
placed on non-accrual status after being delinquent greater than 89 days, or
earlier if the borrower is deemed by management to be unable to continue
performance. When a loan is placed on non-accrual status, interest accrued but
not received is reversed. While a loan is on non-accrual status, interest is
recognized only as cash is received. Loans are returned to accrual status only
when the loan is reinstated and ultimate collectibility of future interest is no
longer in doubt. Loan origination fees and certain direct loan origination costs
are deferred and recognized over the lives of the related loans as a yield
adjustment and included in interest income using the interest method applied on
a loan-by-loan basis. Gains and losses on disposal of such assets are computed
on a specific identification basis.
DISCOUNT LOAN PORTFOLIO
Certain mortgage loans, for which the borrower is not current as to
principal and interest payments or for which there is a reason to believe the
borrower will be unable to continue to make its scheduled principal and interest
payments, are acquired at a discount. The acquisition cost for a pool of loans
is allocated to each loan within the pool based upon the Company's pricing
methodology. For those commercial real estate loans which are current and the
Company believes will remain current, the remaining unamortized discount is
accreted into interest income as a yield adjustment using the interest method
over the contractual maturity of the loan. For all other loans, interest is
reported as cash is received. Gains on the repayment and discharging of loans
are reported as interest income. In situations where the collateral is
foreclosed upon, the loans are transferred to real estate owned upon receipt of
title to the property and accretion of the related discount is discontinued.
ALLOWANCE FOR LOAN LOSSES
The allowance for estimated loan losses is maintained at a level that
management, based upon evaluation of known and inherent risks in the portfolio,
considers adequate to provide for potential losses. Management's periodic
evaluation of the allowance for estimated loan losses is based upon an analysis
of the portfolio, historical loss experience, economic conditions and trends,
collateral values and other relevant factors. Future adjustments to the
allowance may be necessary if economic conditions and trends, collateral values
and other relevant factors differ substantially from the assumptions used in
making the evaluation.
INVESTMENT IN REAL ESTATE
Investment in real estate is recorded at cost less accumulated
depreciation (which is less than the net realizable value of the property). The
Company reviews its investment in real estate for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable.
Depreciation is computed on a straight line basis over the estimated
useful lives of the assets as follows:
Buildings and improvements 39 years
Tenant improvements Lesser of lease term or useful life
Furniture, fixtures and equipment 7 years
18
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
Expenditures for repairs and maintenance are charged to operations as
incurred. Significant renovations are capitalized. Fees and costs incurred in
the successful negotiation of leases are deferred and amortized on a
straight-line basis over the terms of the respective leases. Rental revenue is
reported on a straight-line basis over the terms of the respective leases.
FOREIGN CURRENCY TRANSACTIONS
The Company's investment in foreign assets is translated into U.S.
dollars at current exchange rates, and related revenues and expenses are
translated at average exchange rates for the period. Resulting translation
adjustments are reflected in the results of operations. Transaction gains and
losses that arise from exchange rate fluctuations on transactions denominated in
a currency other than U.S. dollars are included in the results of operations as
incurred.
INCOME TAXES
The Company qualifies as a REIT under Sections 856 through 860 of the
Code of 1986, as amended. A REIT will generally not be subject to federal income
taxation on that portion of its income that is distributed to shareholders if it
distributes at least 95% of its taxable income by the due date of its federal
income tax return and complies with certain other requirements. Accordingly, no
provision has been made for federal income taxes for the Company and its
subsidiaries in the accompanying consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include
non-interest earning deposits, interest earning deposits and all highly liquid
investments purchased with an original maturity date of three months or less.
BASIC AND DILUTED EARNINGS PER SHARE
Basic earnings per share is calculated based upon the weighted average
number of shares of common stock outstanding during the year. Diluted earnings
per share is calculated based upon the weighted average number of shares of
common stock outstanding and all dilutive potential common shares outstanding
during the year. The computation of diluted earnings per share includes the
impact of the exercise of the outstanding options to purchase common stock and
assumes that the proceeds from such issuance are used to repurchase common
shares at fair value.
RISKS AND UNCERTAINTIES
In the normal course of business, the Company encounters primarily two
significant types of economic risk: credit and market. Credit risk is the risk
of default on the company's loan portfolio that results from a borrowers'
inability or unwillingness to make contractually required payments. Market risk
reflects changes in the value of securities available for sale and investments
in real estate due to changes in interest rates or other market factors,
including the rate of prepayments of principal, the value of the collateral
underlying loans and the valuation of real estate held by the Company.
Additionally, the Company encounters significant tax risks. 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 shareholders
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 shareholders, which in turn could have an adverse
impact on the value of, and trading prices for, the Company's common stock.
19
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
Unless entitled to relief under certain Code provisions, the Company
could also be disqualified from taxation as a REIT for the four taxable years
following the year during which OAIC ceased to qualify as a REIT.
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change in the near or
medium term relate to the determination of the allowance for losses on loans and
discount loans.
RECENT ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" during 1997. SFAS No. 125 (i) sets forth the
criteria for (a) determining when to recognize financial and servicing assets
and liabilities; and (b) accounting for transfers of financial assets as sales
or borrowings; and (ii) requires (a) liabilities and derivatives related to a
transfer of financial assets to be recorded at fair value; (b) servicing assets
and retained interests in transferred assets carrying amounts be determined by
allocating carrying amounts based on fair value; (c) amortization of servicing
assets and liabilities be in proportion to net servicing income; (d) impairment
measurement based on fair value; and (e) pledged financial assets to be
classified as collateral. SFAS No. 125 provides implementation guidance for
assessing isolation of transferred assets and for accounting for transfers of
partial interests, servicing of financial assets, securitizations, transfers of
sales-type and direct financing lease receivables, securities lending
transactions, repurchase agreements including "dollar rolls", "wash sales", loan
syndications and participations, risk participations in banker's acceptances,
factoring arrangements, transfers of receivables with recourse and
extinguishments of liabilities. In December 1996, the FASB issued SFAS No. 127,
"Deferral of the Effective Date of FASB Statement No. 125", which delayed
implementation of certain provisions of SFAS No. 125.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share."
SFAS No. 128 simplifies the calculation of earnings per share ("EPS"), and makes
them comparable to international standards. Under SFAS No. 128, the Company is
required to present both basic and diluted EPS on the face of its statements of
operations. Basic EPS, which replaces primary EPS required by APB 15 for
entities with complex capital structures, excludes common stock equivalents and
is computed by dividing income available to common shareholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
gives effect to all dilutive potential common shares that were outstanding
during the period. SFAS No. 128 is effective for financial statements for both
interim and annual periods ending after December 15, 1997. The Company adopted
SFAS No. 128 effective December 31, 1997.
In February 1997, the FASB also issued SFAS No. 129, "Disclosure of
Financial Information About Capital Structure" ("SFAS No. 129"). SFAS No. 129
supersedes capital structure disclosure requirements found in previous
accounting pronouncements and consolidates them into one statement for ease of
retrieval and greater visibility for non-public entities. These disclosures are
required for financial statements for periods ending after December 15, 1997. As
SFAS No. 129 makes no changes to previous accounting pronouncements as those
pronouncements applied to OAIC, adoption of SFAS No. 129 will have no impact on
the Company's results of operations and financial condition.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 requires the inclusion of comprehensive income, either in
a separate statement for comprehensive income, or as part of a combined
statement of income and comprehensive income in a full-set of general-
20
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
purpose financial statements. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances, excluding those resulting from investments by and
distributions to owners. SFAS No. 130 requires that comprehensive income be
presented beginning with net income, adding the elements of comprehensive income
not included in the determination of net income, to arrive at comprehensive
income. SFAS No. 130 also requires that an enterprise display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of financial
position. SFAS No. 130 is effective for the Company's fiscal year beginning
January 1, 1998. SFAS No. 130 requires the presentation of information already
contained in the Company's financial statements and therefore is not expected to
have an impact on the Company's financial position or results of operation.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for the reporting of information about operating segments by public
business enterprises in their annual and interim financial reports issued to
shareholders. SFAS No. 131 requires that a public business enterprise report
financial and descriptive information, including profit or loss, certain
specific revenue and expense items, and segment assets, about its reportable
operating segments. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision-maker in deciding how to
allocate resources and in assessing performance. SFAS No. 131 is effective for
the Company's financial statements for periods beginning after December 15,
1997. SFAS No. 131 is a disclosure requirement and therefore is not expected to
have an effect on the Company's financial position or results of operations.
NOTE 3 FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all of the Company's assets are considered financial
instruments. For the majority of the Company's financial instruments,
principally loans, fair values are not readily available since there are no
available trading markets as characterized by current exchanges between willing
parties. Accordingly, fair values can only be derived or estimated using various
valuation techniques, such as computing the present value of estimated future
cash flows using discount rates commensurate with the risks involved. However,
the determination of estimated future cash flows is inherently subjective and
imprecise. In addition, for those financial instruments with option-related
features, prepayment assumptions are incorporated into the valuation techniques.
It should be noted that minor changes in assumptions or estimation methodologies
can have a material effect on these derived or estimated fair values.
The fair values reflected below are indicative of the interest rate
environments as of December 31, 1997 and do not take into consideration the
effects of interest rate fluctuations. In different interest rate environments,
fair value results can differ significantly, especially for certain fixed-rate
financial instruments and non-accrual assets. In addition, the fair values
presented do not attempt to estimate the value of the Company's anticipated
future business activities. In other words, they do not represent the Company's
value as a going concern. Furthermore, the differences between the carrying
amounts and the fair values presented may not be realized because, except as
indicated, the Company generally intends to hold these financial instruments to
maturity and realize their recorded values.
Reasonable comparability of fair values among institutions is difficult
due to the wide range of permitted valuation techniques and numerous estimates
that must be made in the absence of secondary market prices. This lack of
objective pricing standards introduces a degree of subjectivity to these derived
or estimated fair values. Therefore, while disclosure of estimated fair values
of financial instruments is required, readers are cautioned in using this data
for purposes of evaluating the financial condition of the Company.
21
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
The carrying amounts and the estimated fair values of the Company's
financial instruments at December 31, 1997 are as follows:
Carrying Fair
Amount Value
------------ ------------
Cash and cash equivalents .................. $ 48,677,123 $ 48,677,123
Securities available for sale .............. 146,026,907 146,026,907
Loan portfolio, net ........................ 15,831,479 15,831,479
Discount loan portfolio .................... 26,978,888 26,978,888
The methodologies used and key assumptions made to estimate fair value,
the estimated fair values determined and recorded carrying values follow:
CASH AND CASH EQUIVALENTS
Cash and cash equivalents have been valued at their carrying amounts as
these are reasonable estimates of fair value given the relatively short period
of time between origination of the instruments and their expected realization.
MORTGAGE-RELATED SECURITIES
For mortgage-related securities, fair value equals quoted price, if
available. For securities for which a quoted market price is not available, fair
value is estimated using quoted market prices for similar instruments.
LOANS AND DISCOUNT LOANS
The fair value of performing whole loans is estimated based upon quoted
market prices for similar whole loan pools. The fair value of the discount loan
portfolio is estimated based upon current market yields at which recent pools of
similar mortgages have traded taking into consideration the timing and amount of
expected cash flows.
22
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 4 SECURITIES AVAILABLE FOR SALE
The amortized cost, fair value and gross unrealized gains and losses on
the Company's securities available for sale are as follows at the period ended
December 31, 1997:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Mortgage-related securities:
Single-family residential:
FHLMC interest only ......... $ 26,010,872 $ 215,892 $ (5,048,800) $ 21,177,964
FNMA interest only .......... 27,289,844 183,774 (4,900,486) 22,573,132
Other AAA-rated interest only 1,090,760 -- (361,388) 729,372
Subordinates ................ 8,668,663 806,723 (31,319) 9,444,067
------------- ------------- ------------- -------------
63,060,139 1,206,389 (10,341,993) 53,924,535
------------- ------------- ------------- -------------
Multi-family and commercial:
AAA-rated interest only ..... 913,182 -- (47,435) 865,747
A-rated interest only ....... 503,707 -- (23,519) 480,188
Non-rated interest only ..... 4,975,589 -- (172,716) 4,802,873
Subordinates ................ 83,902,180 2,536,277 (484,893) 85,953,564
------------- ------------- ------------- -------------
90,294,658 2,536,277 (728,563) 92,102,372
------------- ------------- ------------- -------------
$ 153,354,797 $ 3,742,666 $ (11,070,556) $ 146,026,907
============= ============= ============= =============
</TABLE>
A profile of the maturities of securities available for sale at
December 31, 1997 follows. Securities are included based on their
weighted-average maturities, reflecting anticipated future prepayments based on
a consensus of dealers in the market.
Amortized Cost Fair Value
-------------- ------------
Due within one year ................. $ -- $ --
Due after 1 through 5 years ......... 79,455,456 70,323,551
Due after 5 through 10 years ........ 57,361,874 58,753,733
Due after 10 years .................. 16,537,467 16,949,623
------------ ------------
$153,354,797 $146,026,907
============ ============
Premiums amortized against and discounts accreted to income during the
period from May 14, 1997 to December 31, 1997 are as follows:
Premiums amortized against interest income ........... $ 8,033,504
Discounts accreted to interest income ................ (1,709,044)
-----------
Net premium amortization ........................ $ 6,324,460
===========
During January and February 1998, the Company recorded a charge of $2.5
million against its portfolio of interest-only and inverse interest-only
securities (together, "IOs"). The charge results from increases in projected
prepayment speeds during this period and a resulting shortening of the weighted
average lives of certain individual securities in the portfolio. As a result, a
determination was made to write down the recorded investment in those securities
where the reduction in fair value was considered to be other than temporary. The
Company believes that the current low levels of interest rates, and the inverted
shape of the yield curve, are relatively short-term phenomena. To the extent
that longer term interest rates increase or the relationship between short-term
and long-term rates revert to their historical spreads, the value of the
portfolio should recover. To the extent that the current environment persists,
or that rates decrease further, additional impairment losses may be recognized.
23
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 5 LOAN PORTFOLIO
The Company's loan portfolio consisted of the following at December 31,
1997:
Single-family residential ................................. $ 6,465,080
Multi-family residential .................................. 3,455,000
Commercial real estate:
Office ................................................. 33,058,000
Hotel .................................................. 20,952,000
------------
Total loans ........................................... 63,930,080
Deferred origination fees ................................. (458,925)
Loans in process .......................................... (47,639,676)
Allowance for loan losses ................................. --
------------
Loans, net .............................................. $ 15,831,479
============
The following table represents a summary of the Company's
non-performing loans at December 31, 1997.
NON-PERFORMING LOANS:
Single-family residential ............................. $ 268,689
Multi-family .......................................... --
Commercial ............................................ --
------------
$ 268,689
============
If non-accrual loans had been current in accordance with their original
terms, additional interest income of approximately $5,603 for the period from
May 14, 1997 to December 31, 1997 would have been earned. No interest has been
accrued on loans greater than 89 days past due.
At December 31, 1997, the Company had no investment in impaired loans
as defined in accordance with SFAS No. 114, and as amended by SFAS No. 118.
The following table sets forth the geographic distribution of
properties securing the Company's loans at December 31, 1997:
<TABLE>
<CAPTION>
Single-family Multi-family Commercial
Residential Residential Real Estate Total
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Georgia........... 1,954,863 -- -- 1,954,863
New York.......... -- 3,455,000 -- 3,455,000
South Carolina.... 3,520,770 -- -- 3,520,770
Delaware.......... -- -- 13,300,000 13,300,000
Massachusetts..... $ -- $ -- $ 40,710,000 $ 40,710,000
Other............. 989,447 -- -- 989,447
--------------- --------------- --------------- ---------------
Total............. $ 6,465,080 $ 3,455,000 $ 54,010,000 $ 63,930,080
=============== =============== =============== ===============
</TABLE>
24
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 6 DISCOUNT LOAN PORTFOLIO
The Company has acquired, through private sales and auctions, mortgage
loans at a discount because the borrowers are either not current as to principal
and interest payments or there is doubt as to the borrowers' ability to pay in
full the contractual principal and interest. The Company estimates the amounts
it will realize through foreclosure, collection or other resolution efforts and
the length of time required to complete the collection process in determining
the amounts it will bid to acquire such loans.
The resolution alternatives applied to the discount loan portfolio are
(i) the borrower brings the loan current in accordance with original or modified
terms; (ii) the borrower repays the loan or a negotiated amount; (iii) the
borrower agrees to a deed-in-lieu of foreclosure, in which case it is classified
as real estate owned and held for sale by the Company and (iv) the Company
forecloses on the loan and the property is either acquired at the foreclosure
sale by a third party or by the Company, in which case it is classified as real
estate owned and held for sale. The Company periodically reviews the discount
loan portfolio performance to ensure that nonperforming loans are carried at the
lower of amortized cost or net realizable value of the underlying collateral and
the remaining unaccreted discount is adjusted accordingly. Upon receipt of title
to the property, the loans are transferred to real estate owned.
The Company's discount loan portfolio consists of the following at
December 31, 1997:
LOAN TYPE:
Commercial real estate loans:
Office ............................................ $ 11,892,814
Retail ............................................ 30,635,968
------------
Total unpaid principal balance .................. 42,528,782
Unaccreted discount ............................... (15,549,894)
Allowance for loan losses ......................... --
------------
Discount loans, net ............................. $ 26,978,888
============
LOAN STATUS:
Current ........................................... $ 7,964,105
Past due 31 to 89 days ............................ --
Past due 90 days or more .......................... 34,564,677
------------
$ 42,528,782
============
The following table sets forth the activity in the Company's gross
discount loan portfolio for the period from May 14, 1997 to December 31, 1997:
Principal balance at beginning of period ............. $ --
Acquisitions ......................................... 44,686,413
Resolutions and repayments ........................... (1,281,846)
Foreign currency loss (1) ............................ (875,785)
------------
Principal balance at end of period ................... $ 42,528,782
============
(1) The $875,785 represents the gross foreign currency loss related to the
unpaid principal balance which, net of $307,220 related to the discount
on loans, resulted in a net foreign currency loss of $568,565 for the
period from May 14, 1997 to December 31, 1997.
25
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
The following table sets forth the geographic distribution of
properties securing the Company's discount loans at December 31, 1997:
Canada ............................................... $26,762,692
New York ............................................. 9,208,805
Montana .............................................. 3,873,276
Ohio ................................................. 2,684,009
-----------
Total ............................................. $42,528,782
===========
NOTE 7 INVESTMENT IN REAL ESTATE
The investments in real estate at December 31, 1997 represent
acquisitions of two commercial office properties in San Francisco, California
and a shopping plaza in Bradenton, Florida. The investments have been recorded
on the books of OAIC California Partnership, L.P. and OAIC Florida Partnership,
L.P, respectively, and include:
Land ................................................. $ 5,250,105
Office buildings ..................................... 21,741,968
Retail ............................................... 18,602,922
Building improvements ................................ 14,132
------------
..................................................... 45,609,127
Accumulated depreciation ............................. (179,088)
------------
Investment in real estate net ..................... $ 45,430,039
============
NOTE 8 SHAREHOLDERS' EQUITY
On May 14, 1997, the Company completed its initial public offering of
17,250,000 shares, including over-allotments, for an initial public offering
price of $16.00 per share, before underwriting discounts and commissions.
Additionally, upon the closing of the offering 1,875,000 shares of common stock
were sold to IMI at the initial public offering price, net of underwriting
discounts and commissions. The total net proceeds from the sale of the above
shares was $283,688,000.
On December 8, 1997 IMI sold to the Company 160,000 shares of the
Company's common stock and invested in an equivalent number of units in the
Operating Partnership. As a result of this sale, IMI's direct ownership interest
in the Company amounted to 9.0% at December 31, 1997. The change in ownership
structure resulted in IMI holding a 0.8% minority interest in the Operating
Partnership.
The Company adopted a non-qualified stock option plan (the "Option
Plan"), which provides 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). 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 as an incentive for
OCC to enhance the value of Company's stock.
At the closing of the initial public offering, the Company granted to
OCC 1,912,500 options under the Option Plan at an exercise price per share equal
to the initial offering price of the common stock. The options vest one quarter
each year upon the first four anniversaries of the closing date of the initial
public offering. The options terminate on the tenth anniversary of the closing
date of the initial public offering.
26
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
The Company has recorded $103,578 of compensation expense related to
the stock options granted to OCC. The compensation expense is based on the
estimated fair value of the options which was determined using the Black-Scholes
option-pricing model. The fair value of the options was estimated using the
following assumptions:
Expected dividend yield .............................. 15.625%
Expected stock price volatility ...................... 17.910%
Risk-free interest rate .............................. 5.391%
Expected life of options ............................. 4 years
NOTE 9 BASIC AND DILUTED EARNINGS PER SHARE
The Company is required to present both basic and diluted EPS on the
face of its statement of operations. Basic EPS, which replaced primary EPS
required by APB 15, is calculated by dividing net income by the weighted average
number of common shares outstanding during the year. Diluted EPS is calculated
by dividing net income by the weighted average number of shares of common stock
outstanding and the dilutive potential common shares related to outstanding
stock options. The following is a reconciliation of the calculation of basic EPS
to diluted EPS for the period from May 14, 1997 to December 31, 1997.
Net income ........................................... $11,791,518
===========
BASIC EPS:
Weighted average shares of common stock .............. 19,108,789
===========
Basic EPS ........................................... $ 0.62
===========
DILUTED EPS:
Weighted average shares of common stock .............. 19,108,789
Effect of dilutive securities:
Stock options .................................. 455,981
-----------
19,564,770
===========
Diluted EPS .......................................... $ 0.60
===========
NOTE 10 TAXATION
The Company qualifies as a REIT under Sections 856 through 860 of the
Code, as amended. A REIT will generally not be subject to federal income
taxation on that portion of its income that is distributed to its shareholders
if it distributes at least 95 percent of its taxable income and meets certain
other income and asset tests. The Company has until the filing of its tax return
to satisfy the distribution requirement. Since the Company plans to distribute
100% of its taxable income, no provision has been made for federal income taxes
for the Company and its subsidiaries in the accompanying consolidated financial
statements. As taxable income is finalized and the tax return is filed, an
additional distribution may be required.
27
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 11 COMMITMENTS AND CONTINGENCIES
Noncancelable operating leases with tenants expire on various dates
through 2028. The future minimum rental income (base rent) to be received under
leases existing as of December 31, 1997, are as follows:
1998 ................................................. $ 3,966,128
1999 ................................................. 3,684,755
2000 ................................................. 3,267,164
2001 ................................................. 2,569,014
2002 ................................................. 1,839,674
Thereafter ........................................... 14,747,152
Office and retail space in the properties is generally leased to
tenants under lease terms which provide for the tenants to pay for increases in
operating expenses in excess of specified amounts. The above future minimum
lease payments do not include specified payments for tenant reimbursements of
operating expenses.
At December 31, 1997, outstanding commitments totaled $74.3 million and
included $14.0 million related to the purchase of an office building, $60.3
million related to the origination of three real estate loans with initial
fundings of approximately $10.0 million.
Neither the Company nor the Operating Partnership is currently involved
in any material litigation nor, to the Company's knowledge, is any material
litigation currently threatened against the Company or the Operating
Partnership.
NOTE 12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth the quarterly financial information for
the period from May 14, 1997 to December 31, 1997.
<TABLE>
<CAPTION>
Quarters Ended For the Period
----------------------------- May 14, 1997
December 31, September 30, to
1997 1997 June 30, 1997
----------- ------------- -------------
<S> <C> <C> <C>
Interest income.............................. $ 5,466,971 $ 5,511,937 $2,482,807
Operating income............................. 1,427,260 67,038 --
Operating expenses........................... (1,503,779) (1,228,703) (422,583)
----------- ----------- ----------
Income before minority interest.............. 5,390,452 4,350,272 2,060,224
Minority interest in net income of operating
partnership ................................ (9,430) -- --
----------- ----------- ----------
Net income................................... $ 5,381,022 $ 4,350,272 $2,060,224
=========== =========== ==========
Earnings per share:
Basic....................................... $ 0.28 $ 0.23 $ 0.11
Diluted..................................... $ 0.28 $ 0.22 $ 0.11
</TABLE>
28
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
SHAREHOLDER INFORMATION
PRICE RANGE OF THE COMPANY'S COMMON STOCK
The Company's common stock began trading on The NASDAQ Stock Market's
National Market ("NASDAQ") on May 14, 1997 under the symbol "OAIC". The
following table sets forth for the indicated periods the high and low bid prices
for the common stock, as traded on such market.
1997 HIGH LOW
----------------------------------------------- --------- ---------
Second quarter (from May 14)................... $ 20.1250 $ 17.8750
Third quarter.................................. 24.8750 19.7500
Fourth quarter................................. 24.0000 17.5000
The foregoing market quotations reflect inter-dealer prices, without retail
mark-up, mark-down, or commissions and may not necessarily represent actual
transactions.
At the close of business on February 27, 1998, the Company's common
stock price was $19.94.
The Company currently qualifies as a REIT. To obtain the tax benefits
of a REIT, the Company is required each year to distribute to its shareholders
at least 95% of its taxable income after certain adjustments by the due date of
its federal income tax return. Future distributions paid by the Company will be
at the discretion of the Board of Directors and will depend on the actual cash
flow of the Company, its financial condition, capital requirements, the annual
REIT distribution requirements and such other factors as the Board of Directors
of the Company deem relevant. During the period from May 14, 1997 to December
31, 1997, the Company declared dividends totaling $13.9 million.
NUMBER OF HOLDERS OF COMMON STOCK
At February 27, 1998, 18,965,000 shares of Company common stock were
outstanding and held by approximately 76 holders of record.
29
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
CORPORATE INFORMATION
Corporate Headquarters
Ocwen Asset Investment Corp.
The Forum, Suite 1000
1675 Palm Beach Lakes Blvd.
West Palm Beach, Florida 33401
(561) 681-8000
Annual Meeting
The Annual Meeting of OAIC Shareholders will be held on May 14, 1998 at:
1675 Palm Beach Lakes Blvd.
West Palm Beach, Florida 33401
Investor Relations
All investor inquiries may be directed to or copies of OAIC Form 10-K may be
obtained from:
Investor Relations
Ocwen Asset Investment Corp.
The Forum, Suite 1003
1675 Palm Beach Lakes Blvd.
West Palm Beach, Florida 33401
(561) 681-8400
Listing
The common stock of Ocwen Asset Investment Corp. is listed on the NASDAQ. Its
symbol is "OAIC".
Registrar and Transfer Agent
Transfer Agent for Stock
The Bank of New York
Shareholder Relations Department 11E
P.O. Box 11258
Church Street Station
New York, NY 10286
(800) 524-4458
Send certificates for transfer and address change notices to:
The Bank of New York
Receive and Deliver Department 11W
P.O. Box 11002
Church Street Station
New York, NY 10286
30
List of Subsidiaries
Ocwen General, Inc., a Virginia corporation
Ocwen Limited, Inc., a Virginia corporation
Ocwen Partnerhsip, L.P., a Virginia limited partnership
Ocwen Florida General, Inc., a Florida corporation
OAIC Florida Partnership, L.P., a Florida limited partnership
OAIC California Partnership, L.P., a California limited partnership
OAIC Halifax Partnership, Limited Partnership, a Florida limited partnership
OAIC Bush Street, LLC, a Delaware limited liability company
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information from Ocwen Asset Investment
Corp's consolidated statement of financial condition and statement of operations
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001033643
<NAME> Ocwen Asset Investment Corp.
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 48,677,123 <F1>
<SECURITIES> 146,026,907
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 288,003,341
<CURRENT-LIABILITIES> 13,803,533
<BONDS> 0
0
0
<COMMON> 191,250
<OTHER-SE> 271,067,017
<TOTAL-LIABILITY-AND-EQUITY> 288,003,341
<SALES> 0
<TOTAL-REVENUES> 14,956,013<F2>
<CGS> 0
<TOTAL-COSTS> 2,690,901<F3>
<OTHER-EXPENSES> 464,164
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 11,791,518
<INCOME-TAX> 0
<INCOME-CONTINUING> 11,791,518
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,791,518
<EPS-PRIMARY> 0.62
<EPS-DILUTED> 0.60
<FN>
<F1> Tag 11 includes Cash and Amounts due from depository institutions of
$331,047 and Interest-earning Deposits of $48,346,076.
<F2> Tag 28 includes Interest income on Repurchase agreements and Interest
earning deposits of $5,538,946, Securities Available For Sale of
$6,362,909, Loans of $311,157 and Discount Loans of $1,248,703, and
operating income of $1,494,298.
<F3> Tag 30 includes Management Fees of $1,796,311 and Loan expenses of
$894,590.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information from Ocwen Asset Investment
Corp's consolidated statement of financial condition and statement of operations
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<CIK> 0001033643
<NAME> Ocwen Asset Investment Corp.
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 220,021,903<F1>
<SECURITIES> 58,545,498
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 288,308,879
<CURRENT-LIABILITIES> 776,846
<BONDS> 0
0
0
<COMMON> 191,250
<OTHER-SE> 287,340,783
<TOTAL-LIABILITY-AND-EQUITY> 288,308,879
<SALES> 0
<TOTAL-REVENUES> 2,482,807<F2>
<CGS> 0
<TOTAL-COSTS> 388,921<F3>
<OTHER-EXPENSES> 33,662
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 2,060,224
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,060,224
<EPS-PRIMARY> .11<F4>
<EPS-DILUTED> .11<F5>
<FN>
<F1> Tag 11 includes Cash and Amounts due from depository institutions of
$503,606 Interest-earning Deposits of $19,518,297, and Repurchase
Agreements of $200,000,000.
<F2> Tag 28 includes Interest income on Repurchase agreements and Interest
earning deposits of $1,397,128, Securities Available For Sale of
$1,005,184, and Discount Loans of $80,495.
<F3> Tag 30 includes Management Fees of $341,000 and Loan expenses of $47,921.
<F4> Tag 41 EPS-Primary has been restated in accordance with SFAS No. 128,
"Earnings per Share."
<F5> Tag 42 EPS-Diluted has been restated in accordance with SFAS No. 128,
"Earnings per Share."
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information from Ocwen Asset Investment
Corp's consolidated statement of financial condition and statement of operations
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<CIK> 0001033643
<NAME> Ocwen Asset Investment Corp.
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 138,472,627<F1>
<SECURITIES> 89,520,700
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 291,831,251
<CURRENT-LIABILITIES> 6,629,437
<BONDS> 0
0
0
<COMMON> 191,250
<OTHER-SE> 285,010,564
<TOTAL-LIABILITY-AND-EQUITY> 291,831,251
<SALES> 0
<TOTAL-REVENUES> 8,061,782<F2>
<CGS> 0
<TOTAL-COSTS> 1,346,726<F3>
<OTHER-EXPENSES> 304,560
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,410,496
<INCOME-TAX> 0
<INCOME-CONTINUING> 6,410,496
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,410,496
<EPS-PRIMARY> .34<F4>
<EPS-DILUTED> .33<F5>
<FN>
<F1> Tag 11 includes Cash and Amounts due from depository institutions of
$10,850 Interest-earning Deposits of $8,461,777 and Repurchase Agreements
of $130,000,000.
<F2> Tag 28 includes Interest income on Repurchase agreements and Interest
earning deposits of $4,150,857, Securities Available For Sale of
$3,497,356 Loans of $5,565, and Discount Loans of $340,966 and operating
income of $67,038.
<F3> Tag 30 includes Management Fees of $1,060,914 and Loan expenses of
$285,812.
<F4> Tag 41 EPS-Primary has been restated in accordance with SFAS No. 128,
"Earnings per Share."
<F5> Tag 42 EPS-Diluted has been restated in accordance with SFAS No. 128,
"Earnings per Share."
</FN>
</TABLE>
