UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 001-14043
OCWEN ASSET INVESTMENT CORP.
----------------------------
(Exact name of registrant as specified in its charter)
Virginia 65-0736120
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
The Forum, Suite 1000
---------------------
1675 Palm Beach Lakes Boulevard, West Palm Beach, Florida 33401
---------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(561) 682-8000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
There were 18,965,000 shares of Common Stock, $.01 par value, outstanding on
October 7,1999.
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OCWEN ASSET INVESTMENT CORP.
FORM 10-Q
I N D E X
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PART I - FINANCIAL INFORMATION Page
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Item 1. Interim Consolidated Financial Statements (unaudited).......... 3
Consolidated Statements of Financial Condition................. 3
Consolidated Statements of Operations.......................... 4
Consolidated Statements of Comprehensive Income (Loss)......... 5
Consolidated Statements of Changes in Shareholders' Equity..... 6
Consolidated Statements of Cash Flows.......................... 7
Notes to Consolidated Financial Statements..................... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 43
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................... 47
Signature............................................................... 49
2
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<CAPTION>
OCWEN ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, December 31,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS:
Cash and amounts due from depository institutions ............ $ 3,331,593 $ 3,484,929
Interest-bearing deposits .................................... 36,394,259 49,880,276
Repurchase agreements ........................................ 34,382,497 --
------------- -------------
Securities available for sale, at fair value ................. 212,406,246 351,153,971
Commercial and multi-family loan portfolio, net .............. 80,197,527 65,282,965
Residential loan portfolio, net .............................. 5,474,771 8,058,445
Match funded residential loans, net .......................... 124,874,602 173,609,873
Discount loan portfolio, net ................................. 5,479,723 5,618,022
Investment in real estate, net ............................... 215,865,194 208,058,721
Principal and interest receivable ............................ 2,843,296 7,475,795
Other assets ................................................. 20,111,803 15,702,816
------------- -------------
Total assets ............................................... $ 741,361,511 $ 888,325,813
============= =============
LIABILITIES:
Securities sold under agreements to repurchase ............... $ 42,594,164 $ 138,611,824
Securities sold short ....................................... 33,272,188 --
Obligations outstanding under lines of credit ................ 37,608,370 34,472,404
Obligations outstanding under lines of credit - secured by
real estate ................................................ 145,482,325 142,556,880
Dividends and distributions payable .......................... 17,034,461 --
11.5% Redeemable Notes due 2005 ............................. 143,000,000 143,000,000
Bonds - match funded loan agreement ......................... 113,074,841 163,403,966
Accrued expenses, payables and other liabilities ............. 20,014,882 21,190,288
------------- -------------
Total liabilities .......................................... 552,081,231 643,235,362
------------- -------------
Minority interest ............................................... 21,000,661 23,914,058
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Commitments and Contingencies (Note 12)
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;
18,965,000 shares issued and outstanding ................... 189,650 189,650
Additional paid-in capital ................................... 294,492,203 294,492,203
Cumulative dividends declared ................................ (51,828,846) (36,277,546)
Accumulated deficit .......................................... (68,671,313) (46,394,403)
Accumulated other comprehensive income:
Unrealized (loss) gain on securities available for sale .... (3,749,761) 11,038,151
Cumulative translation adjustment .......................... (2,152,314) (1,871,662)
------------- -------------
Total other accumulated comprehensive income (loss) ...... (5,902,075) 9,166,489
------------- -------------
Total shareholders' equity ............................... 168,279,619 221,176,393
------------- -------------
$ 741,361,511 $ 888,325,813
============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
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3
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<CAPTION>
OCWEN ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest bearing deposits .................... $ 207,516 $ 713,966 $ 1,028,339 1,009,614
Repurchase agreements ........................ 80,648 -- 80,648 --
Securities held for trading .................. -- -- 106,892
Securities available for sale ................ 10,206,148 13,806,940 35,908,207 29,990,157
Commercial and multi-family loans ............ 2,381,253 1,512,508 6,250,607 3,786,210
Match funded residential loans ............... 2,437,981 -- 8,765,332 --
Residential loans ............................ 114,251 3,862,725 391,802 6,475,756
Discount loans ............................... 489,779 393,132 748,497 1,719,330
------------ ------------ ------------ ------------
15,917,576 20,289,271 53,173,432 43,087,959
------------ ------------ ------------ ------------
INTEREST EXPENSE:
Securities sold under agreements to repurchase 1,473,096 3,082,025 6,154,263 7,048,840
Securities sold short ........................ 251,891 -- 251,891 --
Obligations outstanding under lines of credit 785,199 3,828,297 2,097,709 6,102,066
11.5% Redeemable Notes...................... 4,111,250 3,687,347 12,376,650 3,687,347
Bonds-match funded loan agreements ........... 2,103,660 -- 6,880,040 --
------------ ------------ ------------ ------------
725,096 10,597,669 27,760,553 16,838,253
------------ ------------ ------------ ------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN
LOSSES........................................ 7,192,480 9,691,602 25,412,879 26,249,706
Provision for loan losses .................... 597,750 350,682 1,076,841 556,731
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES ..................................... 6,594,730 9,340,920 24,336,038 25,692,975
------------ ------------ ------------ ------------
REAL ESTATE-OPERATING INCOME:
Rental income ................................ 8,244,755 8,035,170 24,394,358 14,584,661
Other ........................................ 26,793 1,508 52,232 28,343
------------ ------------ ------------ ------------
8,271,548 8,036,678 24,446,590 14,613,004
------------ ------------ ------------ ------------
REAL ESTATE-OPERATING EXPENSES:
Rental operation ............................. 4,294,104 3,626,054 13,157,121 6,901,905
Depreciation and amortization ................ 1,352,441 1,159,652 3,806,345 2,222,573
Interest ..................................... 2,796,180 2,707,478 8,148,717 4,396,581
------------ ------------ ------------ ------------
8,442,725 7,493,184 25,112,183 13,521,059
------------ ------------ ------------ ------------
REAL ESTATE INCOME (EXPENSE), NET .............. (171,177) 543,494 (665,593) 1,091,945
------------ ------------ ------------ ------------
OTHER EXPENSES:
Management fees .............................. 1,415,407 1,576,379 4,470,498 4,110,011
Due diligence expenses ....................... -- 567,981 122,745 935,625
Foreign currency gain ........................ -- -- -- (116,953)
Other ........................................ 3,963,921 1,067,996 7,567,711 1,644,090
------------ ------------ ------------ ------------
5,379,328 3,212,356 12,160,954 6,572,773
------------ ------------ ------------ ------------
LOSSES ON SECURITIES, DERIVATIVES AND REAL
ESTATE ....................................... (4,219,906) (15,646,384) (35,582,326) (32,723,429)
------------ ------------ ------------ ------------
LOSS BEFORE MINORITY INTEREST .................. (3,175,681) (8,974,326) (24,072,835) (12,511,282)
Minority interest in net loss (income) of
consolidated Subsidiary....................... (150,146) 720,513 1,795,925 399,359
------------ ------------ ------------ ------------
NET LOSS BEFORE EXTRAORDINARY ITEMS .......... $ (3,325,827) $ (8,253,813) (22,276,910) (12,111,923)
============ ============ ============ ============
Extraordinary gain on repurchase of debt ..... -- $ 615,047 -- 615,047
------------ ------------ ------------ ------------
NET LOSS ..................................... $ (3,325,827) $ (7,638,766) (22,276,910) (11,496,876)
============ ============ ============ ============
BASIC LOSS PER SHARE:
Before extraordinary item .................... $ (0.18) $ (0.43) $ (1.17) $ (0.64)
------------ ------------ ------------ ------------
Extraordinary item ........................... $ -- $ 0.03 $ -- $ 0.03
------------ ------------ ------------ ------------
NET LOSS ..................................... $ (0.18) $ (0.40) $ (1.17) $ (0.61)
============ ============ ============ ============
DILUTED LOSS PER SHARE:
Before extraordinary item .................... $ (0.18) $ (0.43) $ (1.17) $ (0.64)
------------ ------------ ------------ ------------
Extraordinary item ........................... $ -- $ 0.03 $ -- $ 0.03
------------ ------------ ------------ ------------
NET LOSS ..................................... $ (0.18) $ (0.40) $ (1.17) $ (0.61)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic ........................................ $ 18,965,000 $ 18,965,000 $ 18,965,000 $ 18,965,000
============ ============ ============ ============
Diluted ...................................... $ 18,965,000 $ 18,965,000 $ 18,965,000 $ 18,965,000
============ ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
4
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<CAPTION>
OCWEN ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net loss ........................................... $ (3,325,827) $ (7,638,766) $(22,276,910) $(11,496,876)
Other comprehensive income:
Unrealized loss on securities available for sale.. (20,115,491) (13,800,335) (14,787,912) (6,391,224)
Unrealized foreign currency translation
adjustment ..................................... (735,818) (916,525) (280,652) (1,968,491)
------------ ------------ ------------ ------------
Other comprehensive loss ......................... (20,851,309) (14,716,860) (15,068,564) (8,359,715)
------------ ------------ ------------ ------------
Comprehensive loss ................................. $(24,177,136) $(22,355,626) $(37,345,474) $(19,856,591)
============ ============ ============ ============
Disclosure of reclassification adjustment:
Unrealized holding losses arising during the
period ......................................... $(24,335,397) $(27,376,733) $(50,370,238) $(37,044,667)
Add: Adjustment for losses included in net loss.. 4,219,906 13,576,398 35,582,326 30,653,443
------------ ------------ ------------ ------------
Net unrealized losses on
securities ..................................... $(20,115,491) $(13,800,335) $(14,787,912) $ (6,391,224)
============ ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
5
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<CAPTION>
OCWEN ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND THE YEAR ENDED DECEMBER 31, 1998
Accumulated
Common Stock Additional Cumulative Retained other
---------------------- paid-in dividends earnings comprehensive
Shares Amount capital declared (deficit) income(loss) Total
----------- ---------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 ........ 18,965,000 $ 189,650 $ 280,503,838 $ (13,898,849)$ 11,791,518 $ (7,327,890)$ 271,258,267
Capital contribution ................ -- -- 13,988,365 -- -- -- 13,988,365
Net loss ............................ -- -- -- -- (58,185,921) -- (58,185,921)
Dividends ........................... -- -- -- (22,378,697) -- -- (22,378,697)
Change in unrealized gain (loss) on
securities available for sale ..... -- -- -- -- -- 18,366,041 18,366,041
Change in cumulative translation
adjustment ........................ -- -- -- -- -- (1,871,662) (1,871,662)
----------- ---------- ------------- ------------- ------------- ------------- -------------
Balance at December 31, 1998 ........ 18,965,000 189,650 294,492,203 (36,277,546) (46,394,403) 9,166,489 221,176,393
Net loss ............................ -- -- -- -- (22,276,910) -- (22,276,910)
Dividends ........................... -- -- -- (15,551,300) -- -- (15,551,300)
Change in unrealized loss on
securities available for sale ..... -- -- -- -- -- (14,787,912) (14,787,912)
Change in cumulative translation
adjustment ........................ -- -- -- -- -- (280,652) (280,652)
----------- ---------- ------------- ------------- ------------- ------------- -------------
Balance at September 30, 1999........ 18,965,000 $ 189,650 $ 294,492,203 $ (51,828,846)$ (68,671,313)$ (5,902,075)$ 168,279,619
=========== ========== ============= ============= ============= ============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
6
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<CAPTION>
OCWEN ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months
Ended September 30,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................................. $ (22,276,910) $ (11,496,876)
Adjustments to reconcile net loss to net cash provided by
Operating activities:
Premium amortization (discount accretion), net ....................... 25,520,705 7,992,956
Depreciation ......................................................... 3,806,345 2,222,573
Foreign exchange gain ................................................ -- (116,953)
Extraordinary gain on extinguishment of debt ......................... -- (615,047)
Provision for loan losses ............................................ 1,076,841 556,731
Net losses on securities ............................................. 35,582,326 32,723,429
Decrease (increase) in interest receivable ........................... 4,632,499 (3,449,149)
Increase in other assets ............................................. (5,558,065) (20,108,845)
Increase accrued expenses, payables and other liabilities ............ (1,175,406) (1,071,622)
(Decrease) in minority interest in earnings (losses) ................. (1,795,925) (399,359)
------------- -------------
Net cash provided by operating activities ................................... 39,812,410 6,237,838
------------- -------------
Cash flows from investing activities:
Purchase of securities available for sale ................................. -- (357,494,324)
Increase in repurchase agreements ....................................... (34,382,497) --
Maturities and principal payments received on securities available for sale 16,125,781 30,388,130
Principal payments received from discount loans ........................... 138,300 973,325
Principal payments received from loans .................................... 57,208,565 20,344,923
Proceeds from sale of securities .......................................... 48,516,666 39,408,287
Purchase of discount loans .............................................. -- (10,031)
Payments received from sale of loans .................................... -- 111,109
Purchase/originations of loans ............................................ (22,151,922) (257,818,817)
Investment in real estate ................................................. (11,612,818) (149,017,946)
Deposits on pending asset acquisitions .................................... -- 996,500
------------- -------------
Net cash provided by (used by) investing activities ......................... 53,842,075 (672,118,844)
------------- -------------
Cash flows from financing activities:
Dividend payments on common stock ......................................... -- (22,378,697)
Proceeds from sale of securities to affiliates ............................ -- 13,957,595
Proceeds from issuance of notes ......................................... -- 150,000,000
Repurchase of notes ..................................................... -- (6,309,944)
Proceeds received from sale of operating partnership units ................ -- 27,593,302
Principal payments on bonds ............................................... (50,329,125) --
Increase in securities sold under agreements to repurchase ................ (96,017,660) 143,058,656
Increase in securities sold short ....................................... 33,272,188 --
Increase in obligations outstanding under lines of credit ................. 6,061,411 331,581,165
------------- -------------
Net cash (used by) provided by financing activities ......................... (107,013,186) 637,502,077
------------- -------------
Net decrease in cash and cash equivalents ................................... (13,358,701) (28,378,929)
Change in cumulative translation adjustment ................................. (280,652) (1,968,491)
Cash and cash equivalents at beginning of period ............................ 53,365,205 48,677,123
------------- -------------
Cash and cash equivalents at end of period .................................. $ 39,725,852 $ 18,329,703
============= =============
Reconciliation of cash and cash equivalents at end of period:
Cash and amounts due from depository institutions ......................... $ 3,331,593 $ 3,135,888
Interest earning deposits ................................................. 36,394,259 15,193,815
------------- -------------
Total .................................................................. $ 39,725,852 $ 18,329,703
============= =============
Supplemental schedule of non-cash financing activities:
Interest paid ............................................................. 13,663,610 16,204,823
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
7
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OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
================================================================================
NOTE 1 ORGANIZATION
On October 7, 1999, Ocwen Acquisition Company ("Acquisition Sub"), a
Virginia corporation and an indirect wholly-owned subsidiary of Ocwen Financial
Corporation ("OCN") merged with and into Ocwen Asset Investment Corp., a
Virginia corporation, ("OAC" or the "Company") in accordance with the Agreement
of Merger (the "Merger Agreement") dated as of July 25, 1999 among OAC, OCN, and
Acquisition Sub. On October 20, 1999, the Company merged into Small Commercial
Properties Corporation I ("SCP"), a Florida corporation and an indirect
wholly-owned subsidiary of OCN. Immediately thereafter, SCP changed its name to
Ocwen Asset Investment Corp. In accordance with the Merger Agreement, OAC
shareholders (except for OCN or its subsidiaries) received 0.71 shares of OCN
stock for each outstanding share of OAC common stock. As a result of the merger,
on October 20, 1999 OAC ceased to qualify as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). This
report does not give effect to these transactions as they occurred after
September 30, 1999.
The Company's consolidated financial statements include the accounts of
the Company and its subsidiaries. The Company directly owns two qualified REIT
subsidiaries, Ocwen General, Inc. (the "General Partner") and Ocwen Limited,
Inc. (the "Limited Partner"). General Partner and Limited Partner own 0.9% and
90.4%, respectively, of Ocwen Partnership, L.P. (the "Operating Partnership").
Additionally, through the General Partner and Limited Partner, the Company
established additional partnerships in Florida and California for real estate
investment purposes. The minority interest at September 30, 1999 represents a
8.7% interest (1,808,733 units) in the Operating Partnership held by Investors
Mortgage Insurance Holding Company ("IMIHC"), a wholly-owned subsidiary of OCN.
On September 30, 1998, IMIHC also owned 1,540,000 shares, or 8.12%, of the
outstanding Common Stock.
The Company has entered into a management agreement with Ocwen Capital
Corporation ("OCC"), a wholly-owned subsidiary of OCN, 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 quarterly base management fee of 0.25% per quarter
on Average Invested Assets. The term "Average Invested Assets" for any period
means the average of the aggregate book value of the assets of the Company,
including the assets of all of its direct and indirect subsidiaries, before
reserves for depreciation or bad debts or other similar noncash reserves,
computed by taking the daily average of such values during such period;
provided, however, effective January 1, 1998, with respect to residential loans,
the phrase means average net equity invested. In addition, OCC is entitled to
receive an annual incentive fee in an amount equal to 25% of the dollar amount
by which Funds From Operations ("FFO"), as adjusted, exceeds certain defined
levels per the management agreement. During the three months and nine months
ended September 30, 1999 and 1998, OCC earned from the Company $1.4 million and
$1.6 million and $4.5 million and $4.1 million, respectively, in base management
fees. No incentive compensation has ever been paid.
The Company also has entered into servicing agreements with Ocwen
Federal Bank, FSB (the "Bank"), a wholly-owned subsidiary of OCN, for the
servicing of all of the Company's mortgage loans. In addition, the Bank in its
capacity as servicer or special servicer receives fees from certain
mortgage-backed securities in which the Company owns a subordinate or residual
interest. As a special servicer, the Bank provides asset management and
resolution services with respect to defaulted mortgage loans subject to the
Company's right to direct the foreclosure, the management and disposal of
foreclosed properties and all other actions that a servicer may take in
connection with a defaulted loan. During the three months and nine months ended
September 30, 1999, the Bank earned from the Company $0.7 million and $2.1
million, respectively, in servicing fees.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Company and its
subsidiaries follow United States generally accepted accounting principles
("GAAP"). The policies which materially affect the determination of the
Company's financial position, results of operations and cash flows are
summarized below.
In the opinion of management, the accompanying financial statements
contain all adjustments, consisting of normal recurring accruals, necessary for
a fair presentation of the Company's financial condition at September 30, 1999
and December 31, 1998, the results of its operations for the three and nine
months ended September 30, 1999 and 1998, its comprehensive income for the three
and nine months ended September 30, 1999 and 1998, its cash flows for the nine
months ended September 30, 1999 and 1998, and its changes in stockholders'
8
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OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
================================================================================
equity for the nine months ended September 30, 1999. The results of operations
and other data for the nine month period ended September 30, 1999 are not
necessarily indicative of the results that may be expected for any other interim
periods or the entire year ending December 31, 1999. The unaudited consolidated
financial statements presented herein should be read in conjunction with the
audited consolidated financial statements and related notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1998.
Certain reclassifications have been made to the prior period's consolidated
financial statements to conform to the September 30, 1999 presentation.
PRINCIPLES OF CONSOLIDATION
The Company's consolidated financial statements include the accounts of
OAC and its subsidiaries as described in Note 1 above. All significant
intercompany transactions and balances have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with 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 valuation of
securities available for sale and determination of the allowance for losses on
loans and discount loans.
REPURCHASE AGREEMENTS
The Company enters into purchases of securities under agreements to
resell (repurchase agreements). Interest earned on repurchase agreements is
reported as interest income. At September 30, 1999, repurchase agreements
amounted to $34.4 million.
SHORT SALES
The Company has sold short U.S. Treasury bonds. Short sales are stated
at fair value. Gains and losses are recognized in the statements of operations.
SECURITIES AVAILABLE FOR SALE
Securities are classified as available for sale when in management's
judgement they may be sold in response to or in anticipation of changes in
interest rates and resulting prepayment risk, or other factors. Available for
sale securities are carried at fair value. Unrealized gains and losses on these
securities, along with any unrealized gains and losses on related risk
management instruments, are reported as a separate component of accumulated
other comprehensive income in shareholders' equity. Securities that the Company
has the positive intent and ability to hold to maturity are classified as
held-to-maturity and are carried at amortized cost. At September 30, 1999 and
1998, the Company had no securities classified as held-to-maturity. Interest and
dividend income on securities, including amortization of premiums and accretion
of discounts, are reported in earnings. Interest income is recognized using the
interest method. The specific identification method is used to determine
realized gains and losses on sales of securities, which are reported in
earnings. The carrying value of individual securities is reduced through
write-downs in earnings to reflect other-than-temporary impairments in value.
LOAN PORTFOLIO
Loans are generally reported at the principal amount outstanding, net
of the allowance for loan losses, purchase premium or discount, and any net
deferred loan fees. Interest income is recognized using the interest method or
on a basis approximating a level yield over the term of the loan. Loans are
placed on nonaccrual status when the loan is past due 90 days or more. Interest
accrued but not collected at the date a loan is placed on nonaccrual status is
reversed against interest income. In addition, the amortization of net deferred
loan fees is suspended when a loan is placed on nonaccrual status. Interest
income on nonaccrual loans is recognized only to the extent received in cash.
However, where there is doubt regarding the ultimate collectibility of the loan
principal, cash receipts, whether designated as principal or interest, are
thereafter applied to reduce the carrying value of the loan. Loans are restored
to accrual status only when interest and principal payments are brought current
and future payments are reasonably assured.
9
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OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
================================================================================
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
discount loans is allocated on a relative fair value basis to each loan within
the pool. The Company believes that it is able to reasonably estimate the
amounts and timing of collections on all of its discounted loans. For those
commercial real estate loans which are current and for which the Company
believes that collecting the acquisition amount of the loan and discount is
probable, the discount is accreted into interest income as a yield adjustment
using the interest method over the contractual maturity of the loan. For those
commercial discount loans that become nonperforming, the Company ceases
accretion of the discount. Gains on the repayment or discharge of the discount
loans, including any remaining discount, are reported as interest income.
Discount loans are reported at their outstanding principal balance net
of any charge-offs and premiums or discounts. The Company periodically evaluates
loans in the discount loan portfolio for impairment. Individually identified
impaired loans are measured based on one of the following: the present value of
payments expected to be received (using a discount rate that equates the
Company's estimate of expected future cash flows to the acquisition price),
observable market prices, or the estimated fair value of the collateral (for
loans that are solely dependent on the collateral for repayment). If the
recorded investment in the impaired loan exceeds the measure of estimated fair
value, a valuation allowance is established as a component of the allowance for
loan losses. At September 30, 1999, the Company did not have any impaired loans.
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 inherent 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. 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
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 AND TRANSLATION
The Company's investment in foreign assets are translated into U.S.
dollars at current exchange rates, and related revenues and expenses are
translated at average exchange rates for the period. 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.
The assets, liabilities and results of operations of the Company's
foreign subsidiaries which have functional currencies other than the U.S. dollar
are translated into U.S. dollars at current exchange rates for assets and
liabilities and average exchange rates for the period for the results of
operations. Resulting translation adjustments are included as a separate
component of accumulated other comprehensive income in shareholders' equity as
cumulative translation adjustments.
10
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
================================================================================
INCOME TAXES
Through October 20, 1999, the Company qualified as a REIT under
Sections 856 through 860 of the Code. 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 through September 30, 1999.
As a result of the acquisition of the Company by OCN on October 7,
1999, the Company no longer qualifies as a REIT under the provisions of the
Code.
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.
Cash flows associated with hedges of identifiable transactions or events are
classified in the same category as the cash flows from the item being hedged.
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 period. 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 period. 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. Common Stock equivalents would be excluded from the
diluted calculation if a net loss was incurred for the period as they would be
antidilutive.
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 OAC did
not qualify as a REIT in any taxable year, OAC 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 OAC 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. 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 OAC ceased to qualify as a REIT.
RECENT ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
which amends FASB Statements No. 52 and 107, and supersedes FASB Statements No.
80, 105 and 119. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. SFAS No. 133 requires an entity to
recognize all derivatives as either assets or liabilities in the statement of
financial condition and measure those instruments at fair value. SFAS No. 133 is
11
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
================================================================================
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Subsequently, FASB issued SFAS No. 137 "Accounting for Derivative Instruments
and Hedging Activities- Deferral of the Effective Date of SFAS No. 133 an
amendment of SFAS No. 133," which defers the effective date of SFAS No. 133 for
fiscal years beginning after June 15, 2000. Earlier application of SFAS No. 133
is encouraged but is permitted only as of the beginning of any fiscal quarter
that begins after issuance of SFAS No. 133. The Company has not yet determined
the impact on its results of operations, financial position or cash flows as a
result of implementing SFAS No. 133.
NOTE 3 RISK MANAGEMENT INSTRUMENTS
The Company enters into derivatives, particularly interest rate swaps,
to hedge interest rate exposures arising from mismatches between assets and
liabilities. Under interest rate swaps, the Company agrees with other parties to
exchange, at specified intervals, the difference between fixed-rate and
floating-rate interest amounts calculated by reference to an agreed notional
principal amount and the London Interbank Offered Rate ("LIBOR"). The terms of
these interest rate swaps allow the Company to receive a floating rate of
interest equal to LIBOR and to pay fixed interest rates.
The interest rate swaps are used to hedge current LIBOR rate debt
incurred to fund the Company's acquisitions of real estate and subordinate and
residual securities. None of the Company's interest rate swaps are held for
trading purposes. As of September 30, 1999, the Company held interest rate swaps
with a notional amount of approximately $200.8 million. The fair value of the
interest rate swaps are not recognized in the consolidated financial statements.
To qualify for hedge accounting the interest rate swap must meet two
criteria:
o the Company is exposed to interest rate risk as the result of a debt
it has incurred; and
o the interest rate swap reduces the Company's exposure to such risk.
If an interest rate swap does not qualify as a hedge, it is accounted
for as a trading asset at fair value, with any gain or loss included as a
component of current income.
The Company is exposed to credit loss if: (i) the counterparties to the
interest rate swap do not perform and (ii) the floating interest rate received
by the Company exceeds the fixed interest rate paid by it. All of the
counterparties have long-term debt ratings of A+ or above by Standard and Poor's
and A1 or above by Moody's. Although a swap generally may not be sold or
transferred without the consent of the counterparty, management does not believe
that this consent would be withheld. Although none of the Company's interest
rate swaps are exchange-traded, there are a number of financial institutions
which enter into these types of transactions as part of their day-to-day
activities.
The following table indicates the interest rate swaps outstanding at
September 30, 1999, pursuant to which the Company receives payments from a
counterparty based on a floating rate of interest equal to LIBOR and agrees to
pay a fixed rate of interest to such party on a specified notional amount.
Notional LIBOR Floating Rate at
Maturity Amount Index Fixed Rate End of Period Fair Value
-------- ---------- ------- ---------- ---------------- ----------
(Dollars In Thousands)
2003 $ 100,000 1-month 5.75% 5.38% $ 1,665
2001 17,000 1-month 6.00 5.37 (10)
2001 75,000 1-month 6.00 5.38 (42)
2002 8,780 1-month 6.04 5.37 27
---------- ---------
$ 200,780 $ 1,640
========== =========
At September 30, 1999, the Company had foreign currency futures
contracts to hedge currency exposure in connection with its investment in
residual interests backed by residential mortgage loans originated in the United
Kingdom, which are held by a wholly-owned subsidiary of the Company. Currency
futures contracts are commitments to either purchase or sell foreign currency at
a future date for a specified price. At September 30, 1999, the fair value of
the British Pounds futures contracts was $(0.8) million. In addition, the
12
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
================================================================================
Company entered into foreign currency futures contracts to hedge its exposure in
connection with its investment in the shopping center located in Halifax, Nova
Scotia, which is held by a wholly-owned subsidiary of the Company. At September
30, 1999, the fair value of the Canadian currency contract was $(0.2) million.
Gains and losses on these foreign currency futures contracts are recorded in the
Consolidated Statement of Financial Condition offsetting the item being hedged.
The fair value of the interest rate swaps and the foreign currency
futures contracts represent the estimated amount that the Company would receive
or pay to terminate these agreements taking into account current interest and
exchange rates. Market quotes are available for these agreements.
13
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
================================================================================
NOTE 4 SECURITIES AVAILABLE FOR SALE
The following table sets forth the amortized cost, fair value and gross
unrealized gains and losses on the Company's securities available for sale at
the dates indicated.
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
JULY 31, 1999 Cost Gains Losses Value
------------- ------------- ------------- -------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Mortgage-related securities:
Single family residential:
Subprime residuals.................. $ 156,172 $ 14,266 $ -- $ 170,438
Subordinates........................ 8,947 343 9,290
------------- ------------- ------------- -------------
165,119 14,609 179,728
------------- ------------- ------------- -------------
Multi-family and commercial:
Non-rated interest only............. 3,152 379 -- 3,531
Non-rated principal only............ 276 184 -- 460
Subordinates........................ 95,024 2,257 -- 97,281
------------- ------------- ------------- -------------
98,452 2,820 -- 101,272
------------- ------------- ------------- -------------
$ 263,571 $ 17,429 $ -- $ 281,000
============= ============= ============= =============
Gross Gross
Amortized Unrealized Unrealized Fair
AUGUST 31, 1999 Cost Gains Losses Value
------------- ------------- ------------- -------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Mortgage-related securities:
Single family residential:
Subprime residuals.................. $ 150,038 $ 12,119 $ -- $ 162,157
Subordinates........................ 8,828 253 9,081
------------- ------------- ------------- -------------
158,866 12,372 171,238
------------- ------------- ------------- -------------
Multi-family and commercial:
Non-rated interest only............. 3,140 281 -- 3,421
Non-rated principal only............ 276 196 -- 472
Subordinates........................ 62,781 2,271 -- 65,052
------------- ------------- ------------- -------------
66,197 2,748 -- 68,945
------------- ------------- ------------- -------------
$ 225,063 $ 15,120 $ -- $ 240,183
============= ============= ============= =============
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
======================================================================================================================
Gross Gross
Amortized Unrealized Unrealized Fair
SEPTEMBER 30, 1999 Cost Gains Losses Value
------------- ------------- ------------- -------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Mortgage-related securities:
Single family residential:
Subprime residuals.................. $ 143,370 $ $ (3,281) $ 140,089
Subordinates........................ 6,670 -- (363) 6,307
------------- ------------- ------------- -------------
150,040 -- (3,644) 146,396
------------- ------------- ------------- -------------
Multi-family and commercial:
Non-rated interest only............. 3,125 (272) 2,853
Non-rated principal only............ 276 (30) 246
Subordinates........................ 62,715 197 -- 62,911
------------- ------------- ------------- -------------
66,116 197 (302) 66,010
------------- ------------- ------------- -------------
$ 216,156 $ 197 $ (3,946) $ 212,406
============= ============= ============== =============
</TABLE>
During the three months and nine months ended September 30, 1999, the
Company recorded impairment charges of $5.9 million and $27.3 million,
respectively, against its portfolio of securities available for sale. The losses
were primarily recorded against subprime residuals, reflecting continued market
illiquidity for these instruments.
NOTE 5 LOAN PORTFOLIO
The following table sets forth the components of the Company's loan
portfolio at the dates indicated.
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- --------------
<S> <C> <C>
Single family residential.............. $ 6,209,446 $ 8,419,265
Multi-family residential............... 30,401,865 20,544,269
Commercial real estate:
Office............................... 30,975,076 24,123,894
Hotel................................ 19,300,560 21,304,912
-------------- --------------
Total loans........................ 86,886,947 74,392,340
Deferred fees.......................... (285,727) (409,254)
Allowance for loan losses.............. (928,922) (641,676)
-------------- --------------
Loans, net........................... $ 85,672,298 $ 73,341,410
============== ==============
</TABLE>
The following table represents a summary of the Company's
non-performing loans (past due 90 days or more) at the dates indicated.
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- --------------
Non-performing loans: (Dollars in Thousands)
<S> <C> <C>
Single family residential............. $ 3,457 $ 4,165
Multi-family.......................... 3,035 --
Commercial............................ -- --
-------------- --------------
$ 6,492 $ 4,165
============== ==============
</TABLE>
If non-accrual loans had been current in accordance with their original
terms, additional interest income of approximately $0.2 million for the three
months ended September 30, 1999 would have been earned. No interest has been
accrued on loans greater than 89 days past due.
15
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
================================================================================
For the three months and the nine months ended September 30, 1999 and
1998, the Company had no investment in impaired loans as defined in accordance
with SFAS No. 114, as amended by SFAS No. 118.
The following table sets forth certain information at September 30,
1999 regarding the dollar amount of loans maturing in the Company's loan
portfolio based on scheduled contractual amortization, as well as the dollar
amount of loans which have fixed or adjustable interest rates. Loan balances
have not been reduced for (i) undisbursed loan proceeds, unearned discounts and
the allowance for loan losses or (ii) nonperforming loans.
<TABLE>
<CAPTION>
Maturing in
--------------------------------------------------------------------------
After One Year After Five Years
One Through Five Through Ten After Ten
Year or Less Years Years Years Total
------------ ------------ ------------ ------------ ------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Single family residential loans....... $ 866 $ 1,837 $ 1,362 $ 2,144 $ 6,209
Multi-family residential loans........ 30,402 -- -- -- 30,402
Commercial real estate................ 50,276 -- -- -- 50,276
------------ ------------ ------------ ------------ ------------
Total.............................. $ 81,544 $ 1,837 $ 1,362 $ 2,144 $ 86,887
============ ============ ============ ============ ============
</TABLE>
Scheduled contractual principal repayments may not reflect the actual
maturities of loans because of prepayments and, in the case of conventional
mortgage loans, due-on-sale clauses. The average life of mortgage loans,
particularly fixed-rate loans, tends to increase when current mortgage loan
rates are substantially higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgages are substantially higher
than current mortgage loan rates.
The following table sets forth the activity in the Company's gross loan
portfolio during the periods indicated.
<TABLE>
<CAPTION>
For the Nine For the
Months Ended Year Ended
September 30, December 31,
1999 1998
--------------- ---------------
<S> <C> <C>
Balance at beginning of period............ $ 74,392,340 $ 16,290,404
Originations:
Single family residential loans........ -- --
Multi-family residential loans......... 9,857,596 19,186,936
Commercial real estate loans........... 12,294,326 37,005,198
--------------- ---------------
Total loans originated.............. 22,151,922 56,192,134
--------------- ---------------
Purchases:
Single family residential loans........ -- 211,378,718
Secured borrowing (match funded loans).... -- (183,470,633)
Principal repayments, net................. (9,657,315) (25,998,283)
--------------- ---------------
Net increase in loan portfolio............ 12,494,607 58,101,936
--------------- ---------------
Balance at end of period.................. $ 86,886,947 $ 74,392,340
=============== ===============
</TABLE>
NOTE 6 MATCH FUNDED RESIDENTIAL LOANS
On November 13, 1998, the Company securitized and transferred to OAC
Mortgage Residential Securities, Inc., a real estate mortgage investment conduit
(the "Trust"), $173.6 million (1,808 mortgage loans) of its residential loan
portfolio. On that date, the Trust issued two classes of notes secured by the
related group of mortgage loans. At September 30, 1999, Loan Group I consisted
of approximately 768 mortgage loans with an aggregate principal balance of
approximately $63.5 million and original terms of up to 30 years and which are
16
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
================================================================================
secured by first liens on single family residential properties. Loan Group II
consisted of approximately 521 mortgage loans with an aggregate principal
balance of approximately $61.3 million and original terms of up to 30 years and
which are secured by first or second liens on single family residential
properties. Upon the transfer, the Company received approximately $173.9 million
of proceeds. The transfer did not qualify as a sale under FASB 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." Accordingly, the amount of proceeds from the transfer are reported
as a liability in the consolidated statement of financial condition. During the
three months and nine months ended September 30, 1999, the Company recorded a
provision for loan losses against the match funded residential loans of $0.3
million and $0.8 million, respectively.
NOTE 7 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 investment in real estate 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 investment in real estate and held for sale. Upon receipt of title
to the property, the loans are transferred to investment in real estate.
At September 30, 1999, the Company's discount loan portfolio consisted
of the following:
(Dollars In Thousands)
LOAN TYPE:
Commercial real estate loans:
Office.................................. $ 7,014
Retail.................................. --
-----------
Total discount loans.................. 7,014
Discount (1)............................ (1,534)
-----------
Discount loans, net................... $ 5,480
===========
(1) Discount generally represents the difference between the purchase price
of discounted loans and their contractual face amount at the date of
acquisition.
NOTE 8 INVESTMENT IN REAL ESTATE
The investment in real estate at September 30, 1999 was comprised of
four commercial office properties in San Francisco, California; an office
building in Jacksonville, Florida; and three shopping plazas located in (i)
Bradenton, Florida; (ii) Halifax, Nova Scotia; and (iii) Havre, Montana. The
following table sets forth the Company's investment in real estate at the dates
indicated:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- -------------
<S> <C> <C>
Office buildings................................ $ 174,616,120 $ 174,587,772
Retail.......................................... 33,541,248 32,328,623
Building improvements........................... 7,594,386 1,223,185
Tenant improvements and lease commissions....... 7,662,718 3,682,602
Furniture and fixtures.......................... 33,747 --
-------------- -------------
223,448,219 211,822,182
Accumulated depreciation........................ (7,583,025) (3,763,461)
-------------- -------------
Investment in real estate, net................ $ 215,865,194 $ 208,058,721
============== =============
</TABLE>
17
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
================================================================================
NOTE 9 SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE, SECURITIES SOLD SHORT,
AND OBLIGATIONS OUTSTANDING UNDER LINES OF CREDIT
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE. Securities sold under
agreements to repurchase were $42.6 million, with a weighted average interest
rate of 8.87%, at September 30, 1999, compared to $138.6 million with a weighted
average rate of 7.97% at December 31, 1998. These obligations are secured by
certain of the Company's investments in subordinated interests in commercial
mortgage-backed securities, residual interests in subprime residential loan
securitizations, and U.K. mortgage loan residual securities.
The following table summarizes the maturity dates of OAC's securities
sold under agreements to repurchase and the fair value of the related collateral
securities as of September 30, 1999:
<TABLE>
<CAPTION>
Outstanding Commercial Securities Residential Securities
Maturity Date Borrowing Fair Value Fair Value
------------- ----------- --------------------- ----------------------
(Dollars in Millions)
<S> <C> <C> <C>
Within 1 month .......... $ 34.1 $ 56.1 $ 2.6
More than 1 year ........ 8.5 -- 34.1
----------- ----------- ------------
Total ................... $ 42.6 $ 56.1 $ 36.7
=========== =========== ============
</TABLE>
Mortgage-related securities which are subject to repurchase agreements
which secure indebtedness periodically are revalued by the lender. A decline in
value of the securities may result in the lender periodically requiring the
Company to (i) provide additional collateral to secure the indebtedness or (ii)
deny an extension of the maturity of the debt. Although to date the Company has
had adequate cash, cash equivalents, and other unencumbered assets to meet calls
for additional collateral, to repay a portion of the related indebtedness, and
to meet its other operating and financing requirements, including its current
capital expenditure plans, there can be no assurance that sufficient levels of
such assets will continue to be available.
The Company periodically enters into sales of securities under
agreements to repurchase the same securities. Obligations to repurchase
securities sold are reflected as a liability in the accompanying consolidated
statement of financial condition. Interest expense with respect to these
obligations for the three months and the nine months ended September 30, 1999
was $1.5 million and $6.2 million, respectively.
SECURITIES SOLD SHORT. The company enters into short-term sales of
securities under agreements to purchase (securities sold short). The amounts
advanced under short sales are carried at fair value on the balance sheet.
Interest incurred on securities sold short are reported as interest expense in
the statement of operations. At September 30, 1999, securities sold short
amounted to $33.3 million.
OBLIGATIONS OUTSTANDING UNDER LINES OF CREDIT. Obligations outstanding
under lines of credit amounted to $37.6 million at September 30, 1999. The
borrowings are pursuant to a three year agreement, which is collateralized by
commercial loans. The weighted average interest rate at September 30, 1999 was
7.07%. Interest expense during the three months and the nine months ended
September, 1999 was $0.8 million and $2.1 million, respectively. See Note 1 to
"--OBLIGATIONS OUTSTANDING UNDER LINES OF CREDIT-REAL ESTATE" below.
18
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
================================================================================
OBLIGATIONS OUTSTANDING UNDER LINES OF CREDIT - REAL ESTATE. Obligations
outstanding under lines of credit secured by real estate amounted to $145.5
million at September 30, 1999. These borrowings have a three-year term and an
interest rate that floats in accordance with LIBOR. Set forth below is
information regarding OAC's indebtedness relating to its investment in real
estate at September 30, 1999:
<TABLE>
<CAPTION>
Property Principal Amount Interest Rate Maturity Date
------------------------ ------------------ ---------------- ----------------
(Dollars In Millions)
<S> <C> <C> <C>
Bush Street Property.... $ 75.0 LIBOR plus 1.75% April, 2001 (2)
Other................... $ 70.5(1) LIBOR plus 1.75% June, 2001 (2)
</TABLE>
1) Represents the portion of the outstanding balance under a $200
million loan that is secured by real estate. As of September 30,
1999, OAC's investments in Cortez Plaza, 450 Sansome Street, 10
U.N. Plaza, Prudential Plaza and 690 Market Street secured this
loan, and an additional $41.0 million was borrowed and secured by
commercial mortgage loans under this line of credit.
2) Subject to certain conditions, the Company may extend the maturity
date by one year.
Interest expense during the three months and nine months ended
September 30, 1999 was $2.8 million and $8.1 million, respectively.
NOTE 10 11.5% REDEEMABLE NOTES AND BONDS-MATCH FUNDED LOAN AGREEMENTS
In July, 1998, the Company completed the issuance of $150 million of
11.5% Redeemable Notes due 2005 (the "Old Notes") which were resold to
"qualified institutional buyers" in reliance on Rule 144A under the Securities
Act of 1933, as amended (the "Securities Act"). The Company completed an
exchange offer on March 15, 1999 whereby holders exchanged Old Notes for New
Notes with materially identical terms, except that the New Notes were registered
under the Securities Act. Old Notes and New Notes are herein referred to
together as the "Notes". Interest on the Notes is payable semi-annually on
January 1 and July 1, beginning January 1, 1999, at a rate per annum of 11.5%.
The Notes will mature on July 1, 2005 and will be redeemable, at the option of
the Company, in whole or part, on or after July 1, 2002, at the redemption
prices specified below (expressed as percentages of the principal amount
thereof), in each case, together with accrued and unpaid interest, if any,
thereon to the date of redemption, upon not less than 30 nor more than 60 days'
notice, if redeemed during the twelve-month period beginning on July 1 of the
years indicated below:
YEAR REDEMPTION RATE
---------------------------------------- ---------------
2002.................................... 105.750%
2003.................................... 102.875
2004 and thereafter..................... 100.000
During the first 36 months after the date of original issue of the
Notes, the Company may use the net proceeds of one or more offerings of its
common stock to redeem up to 25% of the aggregate principal amount of the Notes
at a redemption price of 111.50% of the principal amount thereof, plus accrued
and unpaid interest to the date of redemption, provided that, after any such
redemption, the aggregate principal amount of the Notes outstanding must equal
at least $112.5 million. On September 30, 1998, the Company repurchased in the
open market $7.0 million of the $150.0 million outstanding Notes. At September
30, 1999, the outstanding balance of the Notes was $143.0 million. Interest
expense on the Notes for the three months and nine months ended September 30,
1999 was $4.1 million and $12.4 million, respectively.
Concerning the Bonds-Match Loan Agreements, on November 13, 1998, the
Company securitized and transferred to the Trust $173.6 million of its
residential loan portfolio. Upon the transfer, the Company received
approximately $173.4 million of proceeds. The transfer did not qualify as a sale
under FAS 125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." Accordingly, the amount of proceeds from the
transfer are reported as a liability in the consolidated statement of Financial
Condition. For more information on the Company's residential loan portfolio
securitization, see Note 6 above.
19
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
================================================================================
At September 30, 1999, bonds-match funded loan agreements amounted to
$113.1 million and with a weighted average interest rate of 6.75%. Interest
expense for the three months and nine months ended September 30, 1999 was $2.1
million and $6.9 million, respectively.
NOTE 11 TAXATION
For 1998, the Company has qualified 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% 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. On August 23, 1999, the Company declared a
cash dividend of $0.82 or $15.5 million to shareholders of record on August 30,
1999, paid October 7, 1999. In addition, OAC will be subject to a 4%
nondeductible excise tax on the amount, if any, by which certain distributions
paid by it with respect to any calendar year are less than the sum of (i) 85% of
its ordinary income for that year, (ii) 95% of its capital gain net income for
that year and (iii) 100% of its undistributed taxable income from prior years.
OAC has incurred and paid a nondeductible excise tax for 1999.
As a result of the acquisition of the Company by OCN on October 7,
1999, the Company failed to qualify as a REIT as of October 20, 1999 and will
record an income tax provision in the fourth quarter.
NOTE 12 COMMITMENTS AND CONTINGENCIES
At September 30, 1999, the Company had $36.3 million in outstanding
commitments to fund construction, multi-family and commercial loans. The
following table details the amounts committed at such date.
September 30, 1999
-----------------------------------------------------
(Dollars In Thousands)
Multi-family...................... $ 14,883
Hotels............................ 19,343
Offices........................... 2,083
-------------
Total committed amount.......... $ 36,309
=============
On April 20, 1999, a complaint was filed on behalf of a putative class
of public shareholders of the Company in the Circuit Court of the Fifteenth
Judicial Circuit, Palm Beach County, Florida against OCN and the Company. On
April 23, 1999, a complaint was filed on behalf of putative classes of public
shareholders of the company in the Circuit Court of the Fifteenth Judicial
Circuit, Palm Beach County, Florida against the Company and certain directors of
the Company. The plaintiffs in both complaints sought to enjoin consummation of
the acquisition of the Company by OCN. The cases were consolidated, and on
September 13, 1999 a consolidated amended complaint was filed. The injunction
was denied, and on October 14, 1999, OCN was dismissed as a party. Plaintiffs'
remaining claims are for damages for alleged breaches of common law fiduciary
duties.
On June 3, 1999, Walton Street Capital, L.L.C. ("Walton") filed suit
against the Company and the Operating Partnership in the Circuit Court of Cook
County, Illinois. Walton has alleged that the Company committed an anticipatory
breach of contract with respect to the proposed sale by the Company of all of
its interest in its commercial mortgage-backed securities portfolio to Walton.
Walton has claimed damages in an amount in excess of $20 million. The Company
believes this suit is without merit and intends to vigorously defend against the
same.
The Company is subject to various other pending legal proceedings.
Management is of the opinion that the resolution of these claims will
not have a material effect on the results of operations or financial condition
of the Company.
20
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
================================================================================
GENERAL
The Company was formed as a Virginia corporation in the first quarter
of 1997, and had elected to be taxed as a REIT under Sections 856 through 860 of
the Code. See "Recent Developments" regarding OAC's change in tax status,
ownership structure and domicile. The Company's primary investments have been:
o Commercial and residential subordinate and residual interests in
collateralized mortgage obligations and other mortgage-related
securities (collectively, "mortgage-related securities"); and
o Underperforming or otherwise distressed commercial and
multi-family real property, including properties acquired by
mortgage lenders at foreclosure or through deed-in-lieu thereof.
The Company also has invested, by way of purchase or origination, in
other real estate related assets including:
o Commercial, multifamily and single-family mortgage loans,
including construction and renovation loans and mezzanine loans,
which comprise the Company's loan portfolio; and
o Nonperforming and subperforming mortgage loans, which generally
are purchased at a discount to their aggregate unpaid principal
amount and comprise the Company's discount loan portfolio.
RECENT OPERATING LOSSES; DISCONTINUANCE OF INVESTMENT ACTIVITIES
The Company reported a net loss of $3.3 million or $(0.18) per fully
diluted share for the three months ended September 30, 1999. These losses were
primarily attributable to $5.9 million of losses on its securities available for
sale portfolio which were comprised of a writedown of its residential subprime
and residual mortgage-backed securities. During the first and second quarters of
1999, the Company reported $8.3 million and $23.9 million, respectively, of
losses on subordinates and residual interests in mortgage related securities. In
1998 the Company reported $65.1 million of losses on subordinate and residual
securities and $17.1 million of losses in conjunction with the Company's AAA-
rated portfolio of agency interest only and inverse floating rate interest only
classes of mortgage-related securities backed by single family residential
loans. Losses in these periods are attributable, in varying degrees, to
increased prepayment speeds on underlying mortgage loans, widening spreads on
mortgage-related securities and declining market liquidity for mortgage-related
securities. Moreover, as a result of these conditions, during the past year
there has been a general "flight to quality" by investors, with the result that
the market for the subordinate and residual mortgage-related securities has been
substantially reduced or eliminated. These factors have adversely affected the
operations and financial condition of numerous companies in the financial
service, REIT and mortgage-backed security sectors, including the Company.
As a result of the foregoing developments, particularly as they relate
to the Company's subordinate and residual mortgage-related securities, the
Company has been receiving requests from its lenders to pledge additional
collateral or post additional cash margins (referred to herein collectively as
"collateral") pursuant to the terms of its loan agreements, which it has been
able to meet as of the date hereof. The Company has decided that, for the
foreseeable future, it does not plan to acquire any additional assets or fund
any additional loans (beyond those which are currently committed), and it will
work to accelerate the stabilization of its existing assets and increase its
overall liquidity position.
RECENT DEVELOPMENTS
On September 30, 1999 the company entered into an agreement to sell
MRAC 1996-C2 classes K, L1, and L2. This transaction settled on October 5, 1999
and resulted in proceeds, net of financing to the Company of $ 6.1 million. See
"Financial Condition-Securities Available for Sale" below for more detail on
these commercial mortgage-backed securities.
On October 7, 1999, Ocwen Acquisition Company ("Acquisition Sub"), a
Virginia corporation and an indirect wholly-owned subsidiary of OCN merged with
and into the Company in accordance with the Agreement of Merger (the "Merger
Agreement") dated as of July 25, 1999 among the Company, OCN, and Acquisition
Sub. Under the terms of the Merger Agreement, each outstanding share (other than
those held by OCN and its wholly-owned subsidiaries) of common stock, par value
$0.01 per share, of the Company was converted into .71 shares of OCN common
stock.
Also on October 7, 1999, the Company paid a cash dividend of $0.82 per
share, or $15.5 million, to shareholders of record on August 30, 1999. As a
result of the acquisition of the company by OCN on October 7, 1999, the Company
no longer qualifies as a REIT under the provisions of the Code.
21
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
================================================================================
On October 20, 1999, the Company merged into Small Commercial
Properties Corporation I ("SCP"), a Florida corporation and an indirect
wholly-owned subsidiary of OCN. Immediately thereafter, SCP changed its name to
Ocwen Asset Investment Corp.
On November 1, 1999, the Company sold, for $2.9 million, a pool of 36
residential loans with an unpaid principal balance of $3.3 million.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998
GENERAL. Net loss for the quarter ended September 30, 1999 was $3.3
million, or $(0.18) per diluted share, compared to a net loss of $7.6 million,
or $(0.40) per diluted share, for the three months ended September 30, 1998. The
loss for the three months ended September 30, 1999 was primarily due to
impairment losses on securities, derivatives and real estate of $4.2 million.
The losses on the securities available for sale portfolio during the third
quarter of 1999 were taken against residential subprime bonds, reflecting
continuing market illiquidity for these instruments. The Company prices its
securities portfolio at fair value each month based on the lower of
broker/dealer marks or internal values. Net loss for the nine months ended
September 30, 1999 was $22.3 million compared to a net loss of $11.5 million for
the same period a year ago.
INTEREST INCOME. Interest income decreased $4.4 million to $15.9 million
for the three months ended September 30, 1999 from $20.3 million for the
comparable period ended 1998. This decrease was primarily due to a decrease in
interest income of $3.6 million on the securities available for sale portfolio,
which resulted from higher than expected losses in the residential securities
portfolio, along with the sale of some securities. Interest income was further
reduced by a decrease of $1.4 million on interest from residential loans
(including match funded loans), which resulted from a decrease in the average
balances of these loan portfolios. Total interest earning assets yielded 12.86%
at September 30, 1999, a 1.48% increase over the yield at September 30, 1998.
Interest income for the nine months ended September 30, 1999 was $ 53.2 million
compared to $ 43.1 million for the same period a year ago.
INTEREST EXPENSE. Interest expense for the three months ended September
30, 1999 decreased $1.4 million to $8.7 million as compared to the same period a
year ago. This decrease was primarily due to a $3.0 million decrease in interest
expense associated with the pay down of obligations outstanding under lines of
credit and a $1.6 million decrease in interest incurred from securities sold
under agreements to repurchase due to the sale of securities. However, this
decrease was mitigated in part by a $2.1 million increase in interest expense
related to the bonds-match funded loan agreements. Interest expense does not
include the expense associated with the borrowings secured by investments in
real estate, which is included in determining the operations of the Company's
real estate. See " -Real Estate Income (Expense), Net" below. Interest expense
for the nine months ended September 30, 1999 was $27.8 million compared to $16.8
million for the same period a year ago.
NET INTEREST INCOME. Net interest income represents the difference
between income on interest-earning assets and expense on interest-bearing
liabilities. Net interest income depends upon the relative amount of
interest-earning assets and interest-bearing liabilities, and the interest rate
earned or paid on them.
The following table sets forth certain information relating to the
Company's consolidated statements of financial condition and consolidated
statement of operations for the periods indicated and reflects the average yield
on assets and average cost of liabilities for the periods indicated. Such yields
and costs are derived by dividing income or expense by the average balance of
assets or liabilities, respectively, for the periods shown. Average balances are
derived from average daily balances. The yields include amortization of fees
which are considered adjustments to yields.
22
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
For the Three Months Ended September 30,
------------------------------------------------------------------------
(Dollars In Thousands) 1999 1998
----------------------------------- ----------------------------------
Average Annualized Average Annualized
Balance Interest Yield/Rates Balance Interest Yield/Rates
----------- ---------- ----------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits........................ $ 18,309 $ 208 4.54% $ 54,861 $ 714 5.16%
Repurchase agreements.......................... 6,737 80 4.75 -- -- --
Securities available for sale................... 246,903 10,206 16.53 412,265 13,807 13.29
Commercial and multi-family loan portfolio, net. 80,253 2,381 11.87 50,323 1,512 11.92
Match funded residential loans, net............. 131,278 2,438 7.43 -- -- --
Residential loan portfolio, net................. 6,134 114 7.43 181,545 3,863 8.44
Discount loans, net............................. 5,616 490 34.90 8,527 393 18.29
---------------------------------- -------------------------------
Total interest-earning assets................. $ 495,230 $ 15,917 12.86% $ 707,521 $ 20,289 11.38%
---------------------------------- -------------------------------
Interest-bearing liabilities:
Securities sold under agreements to repurchase.. $ 59,908 $ 1,473 9.84% $ 163,253 $ 3,082 7.49%
Securities sold short........................... 17,143 252 5.00 -- -- --
Obligations outstanding under lines of credit... 43,382 785 7.24 189,414 3,828 8.02
11.5% Redeemable Notes due 2005................. 143,000 4,111 11.50 128,255 3,687 11.50
Bonds match funded.............................. 118,751 2,104 7.09 -- -- --
---------------------------------- -------------------------------
Total interest-bearing liabilities............ $ 382,184 $ 8,725 9.13% $ 480,922 $ 10,597 8.74%
---------------------------------- -------------------------------
Net interest income/spread (1)..................... $ 7,192 3.73% $ 9,692 2.64%
========== =========
Net interest margin (2)............................ 5.81% 5.43%
For the Nine Months Ended September 30,
------------------------------------------------------------------------
(Dollars In Thousands) 1999 1998
----------------------------------- ----------------------------------
Average Annualized Average Annualized
Balance Interest Yield/Rates Balance Interest Yield/Rates
----------- ---------- ----------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits........................ $ 33,306 $ 1,028 4.12% $ 26,375 $ 1,010 5.12%
Repurchase agreements............................ 2,250 80 4.74 -- -- --
Securities held for trading...................... -- -- -- 28,702 107 .50
Securities available for sale.................... 289,102 35,908 16.56 285,298 29,990 14.05
Commercial and multi-family loan portfolio, net.. 75,028 6,251 11.11 38,815 3,786 13.04
Match funded residential loans, net.............. 147,457 8,765 7.93 -- -- --
Residential loan portfolio, net.................. 6,644 392 7.87 108,017 6,476 8.02
Discount loans, net.............................. 5,617 749 17.78 14,845 1,719 15.48
---------------------------------- -------------------------------
Total interest-earning assets.................. $ 559,404 $ 53,173 12.67% $ 502,052 $ 43,088 11.47%
---------------------------------- -------------------------------
Interest-bearing liabilities:
Securities sold under agreements to repurchase... $ 92,496 $ 6,154 8.87% $ 126,071 $ 7,049 7.48%
Securities sold short........................... 5,714 252 5.88 -- -- --
Obligations outstanding under lines of credit.... 39,545 2,098 7.07 108,514 6,102 7.52
11.5% Redeemable Notes due 2005.................. 143,000 12,377 11.54 42,752 3,687 11.50
Bonds match funded............................... 135,974 6,880 6.75 -- -- --
---------------------------------- -------------------------------
Total interest-bearing liabilities............. $ 416,729 $ 27,761 8.88% $ 277,337 $ 16,838 8.12%
---------------------------------- -------------------------------
Net interest income/spread (1)...................... $ 25,412 3.79% $ 26,250 3.35%
========== =========
Net interest margin (2)............................. 6.06% 6.99%
</TABLE>
(1) Interest rate spread represents the difference between the average rate on
interest-earning assets and the average cost of interest-bearing
liabilities.
(2) Net interest income divided by average interest-earning assets.
23
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
================================================================================
PROVISION FOR LOAN LOSSES. The provision for loan losses during the
three months ended September 30, 1999 increased $0.2 million to $0.6 million
from $0.4 million during the three months ended September 30, 1998, which
reflected the Company's evaluation of current economic conditions, a credit
review of loans, an analysis of specific loan situations and the size and
composition of the commercial and multi-family loan portfolio. Provision for
loan losses for the nine months ended September 30, 1999 was $1.1 million
compared to $0.6 million for the same period a year ago.
REAL ESTATE INCOME (EXPENSE), NET. Real estate income (expense), net
decreased $0.7 million to a loss of $0.2 million for the three months ended
September 30, 1999, compared to the same period in 1998. This decrease was
primarily due to a $0.6 million increase in rental operation expense, a $0.2
million increase in depreciation and amortization expense, and a $0.1 million
increase in interest expense offset by a $0.2 million increase in rental income.
These increases in real estate operating income and expenses, compared to the
same period in 1998, were largely the result of an increase in the Company's
investment in real estate, and obtaining financing on these investments.
Expenses related to buildings and improvements are amortized over 39 years,
while expenditures for repairs and maintenance are charged to operations as
incurred. Real estate income (expense), net for the nine months ended September
30, 1999 was a loss of $0.7 million compared to net income of $1.1 million for
the same period a year ago.
OTHER EXPENSES. Other expenses increased $2.2 million to $5.4 million
for the quarter ended September 30, 1999, compared to the same period in 1998.
This increase was largely due to a $2.9 million increase in other expenses
(which consisted generally of servicing, accounting, audit, legal, excise tax,
bond amortization, and merger expenses), which was offset in part by a $0.7
million decrease in due diligence expense. The management fees payable by the
Company to OCC totaled $1.4 million during the quarter ended September 30, 1999
compared to $1.6 million during the quarter ended September 30, 1998. Other
expenses for the nine months ended September 30, 1999 were $12.2 million
compared to $6.6 million for the same period a year ago.
LOSSES ON SECURITIES, DERIVATIVES, AND REAL ESTATE. During the 1999
third quarter, the Company incurred net losses of $4.2 million on securities,
derivatives, and real estate which were comprised of a $5.9 million writedown of
its residential subprime and residual mortgage- backed securities, and a $1.6
million writedown in real estate holdings, offset in part by a $3.2 million gain
on a sale of securities. For the nine months ended September 30, 1999, net
losses on securities, derivatives, and real estate available for sale were $35.6
million, compared to $32.7 million for the same period a year ago.
The Company's losses on its investments in mortgage-related securities
during the first half of 1999 were attributable to increased prepayment speeds
on underlying mortgage loans, widening spreads on mortgage-related securities
and declining market liquidity for mortgage-related securities.
MINORITY INTEREST IN NET LOSS (INCOME) OF CONSOLIDATED SUBSIDIARY.
Minority interest in net loss (income) of consolidated subsidiary was $(0.2)
million during the quarter ended September 30, 1999 compared to $0.7 million
during the same period in 1998. This minority interest represented the portion
of the Operating Partnership's loss attributed to the limited partnership
interest owned by IMIHC. The Company has a 91.3% ownership interest in the
Operating Partnership. Minority interest in net loss (income) of consolidated
subsidiary for the nine months ended September 30, 1999 was $1.8 million
compared to $0.4 million for the same period a year ago.
FINANCIAL CONDITION
SECURITIES AVAILABLE FOR SALE. The Company's investment in securities
available for sale at September 30, 1999 decreased by $138.8 million to $212.4
million from $351.2 million at December 31, 1998.
At September 30, 1999, the Company's securities available for sale portfolio was
$212.4 million and consisted of:
o Non-investment grade and unrated subordinate commercial mortgage-backed
securities having an amortized cost of $66.1 million and a fair value
of $66.0 million,
o Unrated residential subprime residuals having an amortized cost of
$143.4 million and a fair value of $140.1 million, and o Unrated
subordinate residential mortgage-backed securities having an amortized
cost of $6.7 million and a fair value of $6.3 million.
24
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
================================================================================
The Company's unrated subprime residual portfolio of $212.4 million consisted
of:
o $65.1 million of seasoned residuals (securitized between 1994 and 1997)
with overcollateralization reserves funded at approximately $121.3
million, and
o $40.9 million of unseasoned residuals (securitized in 1998) with
overcollateralization reserves funded at approximately $29.6 million.
The following table sets forth the fair value and composition of the
Company's securities available for sale at the dates indicated.
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(Dollars In Thousands)
<S> <C> <C>
Mortgage-related securities:
Single family residential:
Subordinates..................................... $ 6,307 $ 15,390
Subprime residuals............................... 140,089 218,724
---------- ----------
Total single family residential.............. 146,396 234,114
Multi-family residential and commercial:
AAA-rated interest-only.......................... -- 441
A-rated interest-only............................ -- 222
Non-rated interest-only.......................... 2,853 3,135
Non-rated principal-only......................... 246 276
Subordinates..................................... 62,911 112,966
---------- ----------
Total multi-family residential and commercial.. 66,010 117,040
---------- ----------
Total mortgage-related securities.............. $ 212,406 $ 351,154
========== ==========
</TABLE>
The following tables detail the Company's securities available for sale
portfolio at September 30, 1999, and its estimates of expected yields on such
securities, taking into consideration expected prepayment and loss rates
together with other factors.
Included in the tables are the following terms:
ACTUAL DELINQUENCY - Represents the total unpaid principal balance of
loans more than 30 days delinquent at the indicated date as a percentage of the
unpaid principal balance of the collateral at such date.
ACTUAL LIFE-TO-DATE CPR - The Constant Prepayment Rate is used to
measure the average prepayment rate for the underlying mortgage pool(s) over the
period of time lapsed since the issuance of the securities through the date
indicated and is calculated as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Actual Life-to-Date CPR = 100 x [(1 - Final Aggregate Balance actual ) 12 ]
[( ------------------------------------- ) --------------- ]
[( Final Aggregate Balance scheduled ) months in period ]
</TABLE>
ACTUAL LIFE-TO-DATE LOSSES - Represents cumulative losses expressed as
a percentage of the unpaid balance of the original collateral at the indicated
date.
CLASS DESIGNATION LETTER - Refers to the credit rating designated by
the rating agency for each securitization transaction. Classes designated "A"
have a superior claim on payment to those rated "B", which are superior to those
rated "C." Additionally, multiple letters have a superior claim to designations
with fewer letters. Thus, for example, "BBB" is superior to "BB," which in turn
is superior to "B." The lower class designations in any securitization will
receive interest payments subsequent to senior classes and will experience
losses prior to any senior class. The lowest potential class designation is not
rated ("NR") which, if included in a securitization, will always receive
interest last and experience losses first. IO securities receive the excess
interest remaining after the interest payments have been made on all senior
classes of bonds based on their respective principal balances. There is no
principal associated with IO securities and they are considered liquidated when
the particular class they are contractually tied to is paid down to zero.
25
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
Principal only ("PO") securities receive excess principal payments after the
principal has been made on all classes of bonds based on their respective
payment schedules. There is no interest associated with PO securities and they
are sold at a discount. The return on PO securities is earned through the
receipt of the payments and the collection of the discounted amount.
CLASS SIZE - Represents the percentage size of a particular class
relative to the total outstanding balance of all classes.
COLLATERAL BALANCE - represents, in the case of residuals, the unpaid
principal balance of the collateral of the entire securities at the indicated
date and, in the case of subordinates, the outstanding principal balance of the
entire securitization at the indicated date.
ISSUE DATE - Represents the date on which the indicated securities were
issued.
OVER-COLLATERIZATION LEVEL - For residual interests in residential
mortgage-backed securities, over-collaterization ("OC") is the amount by which
the collateral balance exceeds the sum of the bond principal amounts. OC is
achieved by applying monthly a portion of the interest payments of the
underlying mortgages toward the reduction of the class certificate principal
amounts, causing them to amortize more rapidly than the aggregate loan balance.
The OC percentage, expressed as a percentage of the outstanding collateral
balance, represents the first tier of loss protection afforded to the
non-residual holders. The OC percentage also determines whether the
over-collaterization target has been satisfied as of a specific date, such that
cash flows to the residual holder are warranted. To the extent not consumed by
losses on more highly rated bonds, OC is remitted to the residual holders.
Reserve funds ("RF") are actual cash reserves expressed as a percentage of the
original collateral balance at issuance.
RATING - Represents the rating, if any, on the security or securities
by the indicated rating agencies.
SECURITIZATION - Series description.
SECURITY - Represents the name of the class associated with each
securitization held by the Company. This has no relationship to a formal rating
but is for identification purposes (although the names are usually in
alphabetical or numeric order from the highest rated to the lowest rated).
SUBORDINATION LEVEL - Represents the credit support for each
mortgage-backed security by indicating the percentage of outstanding bonds whose
right to receive payment is subordinate to the referenced security. The
subordinate classes must experience a complete loss before any additional losses
would affect the particular referenced security.
WEIGHTED AVERAGE DSCR - Represents debt service coverage ratio, which
is calculated by dividing cash flow available for debt service by debt service.
WEIGHTED AVERAGE LTV- Represents the ratio of the loan amount to the
value of the underlying collateral.
YIELD TO MATURITY - Yield to maturity represents a measure of the
average rate of return that is earned on a security if held to maturity.
26
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
The following tables details the Company's securities available for sale
portfolio at September 30, 1999:
<TABLE>
<CAPTION>
OVER
CLASS COLLATERIZATION
ISSUE DESIGNATION RATING COLLATERAL BALANCE LEVEL AT PRODUCT TYPE AT:
SECURITIZATION SECURITY DATE LETTER AGENCIES ISSUANCE 9/30/99 9/30/99 9/30/99
- -------------- -------- ---- ------ -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RESIDENTIAL MORTGAGE
BACKED SECURITIES (Dollars In Thousands)
RESIDUALS:
SASCO 1998-2(1) X Jan-98 NR S&P, Fitch $600,052 $ 361,811 1.45% OC 26% Fixed, 68% 2/28 ARM
SASCO 1998-3(1) X Mar-98 NR S&P, Fitch 769,671 470,928 2.86% OC 10% Fixed, 76% 2/28 ARM
MLMI 1998-FF1(2) X Jun-98 NR S&P, Fitch 198,155 123,559 2.41% OC 9% 1/29 ARM, 88% 2/28 ARM
PANAM 1997-1(3) X Dec-97 NR S&P, Moody's 113,544 64,825 7.12% OC 26% 6mo ARM, 66% 2/28 ARM
Prepay Pen.
LHELT 1998-2(4) X Jun-98 NR Moody's, Fitch 209,225 140,587 5.60% OC 42% Fixed, 37% 2/28 ARM
EQUICON 1994-2(5) B Fix, B-2 Oct-94 NR S&P, Moody's, 78,846 20,089 6.11% OC 100% Fixed
Fitch
QS Fix, QS-2 NR
B Var., B-2 NR 32,306 4,297 24.44% OC 100% 6mo ARM
EQUICON 1995-1(5) B Fix, B-2 May-95 NR S&P, Moody's, 70,024 15,077 12.48% OC 100% Fixed
Fitch
B Var., B-2 NR 40,519 6,165 18.06% OC 100% 6mo ARM
EQUICON 1995-2(5) B Fix, B-2 Oct-95 NR S&P, Moody's 79,288 21,168 15.28% OC 100% Fixed
B Var., B-2 NR 39,667 6,629 14.65% OC 100% 6mo ARM
ACCESS 1996-1(6) B Fix, B-2 Feb-96 NR S&P, Moody's 120,015 34,750 6.92% OC 100% Fixed
B Var., B-2 NR 55,362 9,983 14.48% OC 100% 6mo ARM
ACCESS 1996-2(6) B-I, B-1 May-96 NR S&P, Moody's 142,259 44,411 12.90% OC 100% Fixed
BI-S, BI-S-1 NR
B-II, B-1 NR 68,345 11,807 15.07% OC 100% ARM
BII-S, NR
BII-S-1
ACCESS 1996-3(6) B-I, B-1 Aug-96 NR S&P, Moody's 107,712 35,078 14.66% OC 100% Fixed
BI-S, BI-S-1 NR
B-II, B-1 NR 99,885 17,884 24.69% OC 100% ARM
BII-S, NR
BII-S-1
ACCESS 1996-4(6) B, B-1 Nov-96 NR S&P, Moody's 239,778 63,476 20.34% OC 51% Fixed, 49% ARM
B-S, B-S-1 NR
ACCESS 1997-1(6) B, B-1 Feb-97 NR S&P, Moody's 276,442 93,517 21.42% OC 57% Fixed, 43% ARM
B-S, B-S-1 NR
ACCESS 1997-2(6) B, B-1 May-97 NR S&P, Moody's 185,197 65,195 14.91% OC 52% Fixed, 48% ARM
B-S, B-S-1 NR
ACCESS 1997-3(6) B, B-1 Oct-97 NR S&P, Moody's 199,884 76,460 10.14% OC 49% Fixed, 51% ARM
B-S, B-S-1 NR
OCWEN 98 - OAC-1 N/A Nov-98 NR S&P, Moody's 182,178 124,467 14.84% OC 25% Fixed, 71% 1/1 CMT
CMR1(8) Deferred Apr-96 NR S&P, Duff 47,802(9) 21,325(10) 9.80% RF 100% Amortizing
Comp
CMR2(8) Deferred Nov-96 NR S&P, Duff, Fitch 106,692(9) 46,919(10) 10.19% RF 89.70% Amort 10.30% IO
Comp mortgages
CMR3(8) Deferred Nov-96 NR S&P, Duff, Fitch 195,610(9) 88,232(10) 14.11% RF 72.86% Amort 27.14% IO
Comp mortgages
CMR4(8) Deferred Feb-97 NR S&P, Duff, Fitch 108,630(9) 56,522(10) 6.94% RF 89.21% Amort 10.79% IO
Comp mortgages
CMR6(8) Deferred May-97 NR S&P, Duff, Fitch 91,442(9) 47,221(10) 7.30% RF 95.48% Amort 4.52% IO
Comp mortgages
</TABLE>
27
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
OVER
CLASS COLLATERIZATION
ISSUE DESIGNATION RATING COLLATERAL BALANCE LEVEL AT PRODUCT TYPE AT:
SECURITIZATION SECURITY DATE LETTER AGENCIES ISSUANCE 9/30/99 9/30/99 9/30/99
- -------------- -------- ---- ------ -------- ---------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SUBORDINATES: (Dollars In Thousands)
SBMS 1997-HUD1(11) B5 Apr-97 B2, n.a. Moody's, DCR 326,147 203,366 2.82% 97% Fixed
B6 Apr-97 NR -- -- None
ORMBS 1998-R1(12) B4 Mar-98 NR Moody's, DCR 565,411 493,665 None 98% Fixed
GECMS 1994-12(13) B4 Mar-94 NR Moody's, Fitch, 516,732 235,985 None 100% Fixed
S&P
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED ACTUAL ACTUAL ACTUAL
AVERAGE AVERAGE DELINQUENCY LIFE TO DATE LIFE TO DATE YIELD TO
INTEREST RATE LTV AT: AT: CPR AT: LOSSES AT: MATURITY AT:
SECURITIZATION SECURITY AT: 9/30/99 9/30/99 9/30/99: 9/30/99 9/30/99 PURCHASE 9/30/99
-------------- -------- ----------- ------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars In Thousands)
RESIDENTIAL MORTGAGE
BACKED SECURITIES
RESIDUALS:
SASCO 1998-2 X 10.27% 74.04% 14.02% 25.70% $2,740 16.00% 7.92%
SASCO 1998-3(1) X 9.85 75.98 10.42 27.48 2,440 17.04 7.59
MLMI 1998-FF1(2) X 9.39 77.93 9.17 29.35 177 18.57 12.15
PANAM 1997-1(3) X 10.15 82.32 19.59 27.49 1,995 22.45 3.59
Prepay Pen. 25.69 21.79
LHELT 1998-2(4) X 10.04 75.95 13.65 25.31 152 18.55 18.88
EQUICON 1994-2(5) B Fix, B-2 9.95 72.11 19.27 34.90 1,103 18.00 100.76
QS Fix, QS-2
B Var., B-2 10.75 81.57 18.00 32.77
EQUICON 1995-1(5) B Fix, B-2 11.99 70.68 29.46 32.63 2,615 18.00 27.19
B Var., B-2 11.24 76.67 18.00 86.99
EQUICON 1995-2(5) B Fix, B-2 10.80 76.42 33.67 35.99 2,213 18.00 0.00
B Var., B-2 11.21 73.20 18.00 75.33
ACCESS 1996-1(6) B Fix, B-2 10.85 75.67 32.67 34.72 2,908 18.00 25.40
B Var., B-2 11.15 78.44 18.00 29.06
ACCESS 1996-2(6) B-I, B-1 11.03 76.63 33.34 36.34 3,869 18.00 17.54
BI-S, BI-S-1
B-11, B-1 11.28 78.50 18.00 15.21
BII-S,
BII-S-1
ACCESS 1996-3(6) B-I, B-1 11.45 78.25 37.02 38.89 2,916 18.00 20.74
BI-S, BI-S-1
B-II, B-1 11.60 80.40 18.00 16.31
BII-S,
BII-S-1
ACCESS 1996-4(6) B, B-1 11.76 78.47 39.23 40.26 3,614 18.00 14.87
B-S, B-S-1
ACCESS 1997-1(6) B, B-1 11.48 81.29 39.42 38.61 5,776 18.00 14.10
B-S, B-S-1
ACCESS 1997-2(6) B, B-1 11.43 80.61 33.87 40.70 2,378 18.00 10.42
B-S, B-S-1
ACCESS 1997-3(6) B, B-1 11.35 81.56 33.76 41.60 1,729 18.00 16.83
B-S, B-S-1
OCWEN 98-OAC-1(7) N/A 8.64 80.12 6.86 33.42 143 N/A N/A
CMR1(8) Deferred Comp 13.39 N/A 38.70 21.75 734 18.00 54.47
</TABLE>
28
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED ACTUAL ACTUAL ACTUAL
AVERAGE AVERAGE DELINQUENCY LIFE TO DATE LIFE TO DATE YIELD TO
INTEREST RATE LTV AT: AT: CPR AT: LOSSES AT: MATURITY AT:
SECURITIZATION SECURITY AT: 9/30/99 9/30/99 9/30/99: 9/30/99 9/30/99 PURCHASE 9/30/99
-------------- -------- ----------- ------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CMR2(8) Deferred Comp 12.52 N/A 30.37 22.49 1193 18.00 52.44
CMR3(8) Deferred Comp 13.56 N/A 16.94 18.61 2,742 18.00 22.86
CMR4(8) Deferred Comp 13.93 N/A 35.65 20.74 1,418 18.00 29.49
CMR6(8) Deferred Comp 13.58 N/A 35.29 23.15 859 18.00 30.60
SUBORDINATES:
SBMS 1997-HUD1(11) B5 9.80 105.31 11.09 15.69 10,694 16.87 21.01
B6 22.86 26.60
ORMBS 1998-R1(12) B4 8.93 120.57 23.44 8.48 17,721 13.75 (23.50)
GECMS 1994-12(13) B4 6.81 46.30 0.85 8.30 0 19.37 21.21
</TABLE>
ISSUERS:
(1) Structured Asset Securities Corp.
(2) Merrill Lynch Mortgage Investors, Inc.
(3) Pan American Bank, FSB.
(4) Lehman Home Equity Loan Trust.
(5) Equicon Mortgage Loan Trust.
(6) Access Financial Mortgage Loan Trust.
(7) Ocwen Residential Mortgage-Backed Securities.
(8) City Mortgage Receivable.
(9) Dollar equivalent of amounts in British pounds at the rate of exchange that
prevailed a the time of issuance.
(10) Dollar equivalent of amounts in British pounds at the rate of exchange at
9/30/99.
(11) Salomon Brothers Mortgage Securities.
(12) Ocwen Mortgage Loan Trust.
(13) GE Capital Mortgage Services, Inc.
(14) Not available.
<TABLE>
<CAPTION>
CLASS SUBORDINATION
DESIGNATION LEVEL AT
SECURITIZATION SECURITY ISSUE DATE LETTER RATING AGENCIES ISSUANCE 9/30/99
- ------------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL MORTGAGE
BACKED SECURITIES
<S> <C> <C> <C> <C> <C> <C>
NASC 1996 MD-V(1) B-2 Apr-96 B S&P, Duff, Fitch 0.00% 0.00%
BTC 1997-S1(3) E, F Dec-97 BB/B S&P, Fitch 19.00 33.62
Equity NR 0.00 0.00
</TABLE>
29
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
Actual Actual
Weighted Weighted Life to Life to
Average Average Actual Date Date Class Size % Yield to Collateral
DSCR at LTV at Delinquency CPR at losses, at of Total as of Maturity at Balance at
Securitization Security Issuance Issuance 9/30/99 9/30/99 9/30/99 Issuance 9/30/99 Purchase 9/30/99 Issuance 9/30/99
- -------------- -------- -------- -------- ------- ------- ---------- -------- ------- -------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMMERCIAL MORTGAGE
BACKED SECURITIES
NASC 1996 MD-V(1) B-2 1.69 62.0% 0.0% 0.0% $ 0 4.36% 4. 51% 9.90% 9.98% $773,693 747,307
BTC 1997-S1(3) E, F 1.27 106.0% 23.6% 48.37% $ 11,932 14.50 38.89 8.36 8.50 $303,946 113,039
Equity 19.00 33.62 21.19 26.52
</TABLE>
ISSUERS:
(1) Nomura Asset Securities Corporation
(3) BTC Mortgage Investors Trust 1997-S1
The following table sets forth the principal amount of mortgage loans
by the geographic location of the property securing the mortgages that underlie
the Company's securities available for sale portfolio at September 30, 1999.
<TABLE>
<CAPTION>
Description California Florida Texas New York Maryland Other (1)
----------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential properties $ 499,436 $ 231,797 $ 137,428 $ 90,887 $ 104,397 $4,419,353
Commercial properties 33,859 60,861 -- 71,197 61,578 632,851
---------- ---------- ---------- ---------- ---------- ----------
Total ................ $ 533,295 $ 292,658 $ 137,428 $ 162,084 $ 165,975 $5,052,204
========== ========== ========== ========== ========== ==========
Percentage (2) ....... 8.40% 4.61% 2.17% 2.56% 2.62% 79.64%
========== ========== ========== ========== ========== ==========
</TABLE>
(1) No other individual state makes up more than 5% of the total.
(2) Based on a percentage of the total unpaid principal balance of the
underlying loans.
(3) Excludes $287.0 million unpaid principal balance related to residential
mortgage loans originated in the United Kingdom.
30
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
The following table summarizes information relating to the Company's
mortgage-related securities available for sale at September 30, 1999.
<TABLE>
<CAPTION>
ANTICIPATED ANTICIPATED
ORIGINAL UNLEVERAGED WEIGHTED
ANTICIPATED YIELD TO AVERAGE
RATING/ AMORTIZED PERCENT YIELD TO MATURITY AT REMAINING
DESCRIPTION COST FAIR VALUE OWNED MATURITY 9/30/99 (2) COUPON LIFE (3)
----------- ---- ---------- ----- -------- ----------- ------ --------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
SINGLE FAMILY RESIDENTIAL
Unrated residuals.................. $143,369,973 $140,089,552 100.00% 17.58% 15.37% 0.00% 3.37%
B-rated subordinates............... 2,603,796 2,603,796 100.00 16.87 21.01 7.75 2.47
Unrated subordinates............... 4,066,521 3,703,176 51.40 15.92 15.08 6.89 1.50
------------ ------------
Total single family........... 150,040,290 146,396,524
------------ ------------
MULTI-FAMILY/COMMERCIAL
BB-rated subordinates.............. 39,773,972 41,410,051 86.93 8.24 8.50 7.37 3.67
B-rated subordinates............... 18,689,861 16,075,062 77.61 10.32 10.53 8.10 1.78
Unrated subordinates............... 4,250,538 5,425,584 100.00 15.65 26.52 0.00 3.59
Unrated IOs (1).................... 3,125,410 2,853,155 100.00 12.79 16.02 7.23 3.57
Unrated POs (1).................... 275,934 245,869 100.00 12.31 13.40 0.00 12.55
------------ ------------
Total multi-family/commercial. 66,115,715 66,009,721
------------ ------------
Total mortgage related
securities.................. $216,156,005 $212,406,245
============ ============
</TABLE>
(1) These securities relate to the same mortgage-related security,
thus giving the Company both the principal and interest
components to the particular class.
(2) Changes in the September 30, 1999 anticipated yield to
maturity from that originally anticipated are primarily the
result of changes in prepayment assumptions and to a lesser
extent loss assumptions.
(3) Equals the weighted average duration based off of September
30, 1999 book value.
The following table sets forth the property types of the Company's
commercial mortgage-backed securities at September 30, 1999, based upon the
principal amount.
Percentage
Property type Invested
------------------------------ ----------
Retail........................ 30.00%
Multi-family.................. 6.00
Hotel......................... 25.00
Office........................ 2.00
Industrial.................... 5.00
Mixed use..................... 1.00
Other......................... 31.00
---------
Total......................... 100.00%
=========
Subordinate and residual interests in mortgage-related securities
provide credit support to the more senior classes of the mortgage-related
securities. Principal from the underlying mortgage loans generally is allocated
first to the senior classes, with the most senior class having a priority right
to the cash flow from the mortgage loans until its payment requirements are
satisfied. To the extent that there are defaults and unrecoverable losses on the
underlying mortgage loans, resulting in reduced cash flows, the most subordinate
security will be the first to bear this loss. Because subordinate and residual
interests generally have no credit support, to the extent there are realized
losses on the mortgage loans comprising the mortgage collateral for such
securities, the Company may not recover the full amount or, indeed, any of its
initial investment in such subordinate and residual interests. The Company
generally owns the most subordinate classes of the securities in which it
invests and therefore will be the first to bear any credit losses.
The Company determines the present value of anticipated cash flows of
its mortgage-related securities utilizing valuation assumptions appropriate at
the time of each acquisition or securitization transaction. The significant
valuation assumptions include the anticipated prepayment speeds and the
anticipated credit losses related to the underlying mortgages. In order to
determine the present value of this estimated excess cash flow, the Company
currently applies a discount rate of 18% to the projected cash flows on the
unrated classes of securities. The annual prepayment rate of the securitized
loans is a function of full and partial prepayments and defaults. The Company
makes assumptions as to the prepayment rates of the underlying loans, which the
Company believes are reasonable, in estimating fair values of the subordinate
securities and residual securities retained. During the third quarter of 1999,
31
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
the Company utilized proprietary prepayment curves generated by the Company
(reaching an approximate range of annualized rates of 8%-56%). In its estimates
of annual loss rates, the Company utilizes assumptions that it believes are
reasonable. The Company estimates annual losses of between 0.60% and 4.72% of
the underlying loans.
The credit risk of mortgage-related securities is affected by the
nature of the underlying mortgage loans. In this regard, the risk of loss on
securities backed by commercial and multi-family loans and single family
residential loans made to borrowers who, because of prior credit problems, the
absence of a credit history or other factors, are unable or unwilling to qualify
as borrowers under guidelines established by the Federal Home Loan Mortgage
Corporation ("FHLMC") and the Federal National Mortgage Association ("FNMA") for
purchases of loans by such agencies, generally involve more risk than securities
backed by single family residential loans which conform to the requirements
established by FHLMC and FNMA for their purchase by such agencies.
Subordinate and residual interests are affected by the rate and timing
of payments of principal (including prepayments, repurchase, defaults and
liquidations) on the mortgage loans underlying a series of mortgage-related
securities. The rate of principal payments may vary significantly over time
depending on a variety of factors, such as the level of prevailing mortgage loan
interest rates and economic, demographic, tax, legal and other factors.
Prepayments on the mortgage loans underlying a series of mortgage-related
securities are generally allocated to the more senior classes of
mortgage-related securities. Although in the absence of defaults or interest
shortfalls all subordinates receive interest, amounts otherwise allocable to
residuals generally are used to make payments on more senior classes or to fund
a reserve account for the protection of senior classes until
overcollateralization or the balance in the reserve account reaches a specified
level. In periods of declining interest rates, rates of prepayments on mortgage
loans generally increase, and if the rate of prepayments is faster than
anticipated, then the yield on subordinates will be positively affected and the
yield on residuals will be negatively affected. Continued market illiquidity on
subprime residential mortgage-backed securities was a significant factor in the
$4.2 million loss in the third quarter of 1999.
The Company marks its securities portfolio to fair value at the end of
each month based upon broker/dealer marks, subject to an internal review
process. For those securities which do not have an available market quotation,
the Company requests market values and underlying assumptions from the various
broker/dealers that underwrote, are currently financing the securities or have
had prior experience with the type of securities. Because the Company's
subordinate and residual securities are not readily marketable, trades can be
infrequent (and under some market conditions, non-existent) and most
broker/dealers do not have the securities modeled. In these circumstances the
market value is typically available from only a small group of broker/dealers,
and in most cases from only one broker/dealer. When valuations are obtained from
two or more broker/dealers, the average dealer mark is utilized. As of each
reporting period, the Company evaluates whether and to what extent any
unrealized loss is to be recognized as other than temporary. (See Note 2 to the
Consolidated Financial Statements above.) As a result there can be no assurance
that the Company will not take additional write-downs to the securities
available for sale portfolio in subsequent periods.
For additional information on commercial mortgage-backed securities,
see "Recent Developments" above.
COMMERCIAL AND MULTI-FAMILY LOAN PORTFOLIO. The Company's investment in
commercial and multi-family loans amounted to $80.2 million at September 30,
1999, a $14.9 million increase over the $65.3 million investment at December 31,
1998. See Note 5 to the Consolidated Financial Statements.
The following table sets forth the composition of the Company's
commercial and multi-family loan portfolio by type of loan at the dates
indicated.
September 30, December 31,
1999 1998
------------ ------------
Multi-family residential loans ............. $ 30,401,865 $ 20,544,269
Commercial real estate and land loans:
Hotels ................................ 19,300,560 21,304,912
Office buildings ...................... 30,975,076 24,123,894
------------ ------------
Total ................................ 80,677,501 65,973,075
Deferred fees .............................. (16,040) (48,434)
Allowance for loan losses .................. (463,934) (641,676)
------------ ------------
Commercial and multi-family loans, net. $ 80,197,527 $ 65,282,965
============ ============
32
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
The Company maintains an allowance for loan losses at a level which
management considers adequate to provide for potential losses based upon an
evaluation of known and inherent risks. At September 30, 1999, the Company had
an allowance for loan losses in the amount of $0.5 million on the commercial and
multi-family loan portfolio.
The following table sets forth certain information regarding the loans
in the Company's commercial and multi-family loan portfolio at September 30,
1999.
<TABLE>
<CAPTION>
STABILIZED
LOAN AMOUNT RATIO OF LOAN PER DEBT
LOAN OUTSTANDING TYPE OF LOAN TO UNIT/SQUARE COVERAGE COUPON
LOAN LOCATION AMOUNT AT 9/30/99 LOAN COST FOOT RATIO(1) RATE SIZE
- --------------- ---------------- --------------------- --------- -------- ----------- ---------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars In Thousands)
MULTI-FAMILY
RESIDENTIAL:
Fourth & Harrision San Francisco, CA $11,550 $ 8,847 Construction 85% 72 1.22 9.630% 160 units
241 Church Street New York, NY 30,280 18,520 Conversion 88 582 N/A 9.000 52 units
459 Washington
Street New York, NY 3,455 3,035 Conversion 61 314 N/A 10.500 11 units
COMMERCIAL:
Hawthorn Suites
Hotel Schaumburg, IL 7,629 3,183 Construction 65 56 1.59 8.750 136 suites
Thompson Street
Hotel New York, NY 17,715 3,577 Construction 80 209 1.66 10.000 100 rooms
Wyndham Garden
Hotel Wilmington, DE 13,300 12,540 Renovation 67 61 2.2 8.650 291 rooms
Landmark III-GTE Burlington, MA 33,058 30,975 Renovation 85 114 1.18 9.250 291,007 sq.ft.
-------- -------
$116,987 $80,677
======== =======
</TABLE>
(1) Represents the net income of the stabilized property divided
by debt service required by the loan.
RESIDENTIAL LOAN PORTFOLIO. The Company's investment in residential
loans decreased to $5.5 million at September 30, 1999 from an investment of $8.1
million at December 31, 1998. At September 30, 1999, $3.5 million of the
residential loan portfolio was past due 90 days or more, compared to $4.2
million at December 31, 1998. During the third quarter of 1999, the Company
recorded a provision for loan losses of $0.3 million.
DISCOUNT LOAN PORTFOLIO. Nonperforming and subperforming mortgage loans
may presently be in default or may have a greater than normal risk of future
defaults and delinquencies, compared to newly-originated, high-quality loans of
comparable type, size and geographic concentration. Returns on an investment of
this type depend on the borrower's ability to make required payments or, in the
event of default, the ability of the loan's servicer to foreclose and liquidate
the mortgage loan. There can be no assurance that the Company will be able to
liquidate a defaulted mortgage loan successfully (through sale of the security
property or otherwise) or in a timely fashion.
At September 30, 1999, the Company's net discount loan portfolio
amounted to $5.5 million compared to $5.6 million at December 31, 1998. All of
the Company's discount loan portfolio is secured by first mortgage liens on real
estate.
33
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
At September 30, 1999, the Company's discount loans consisted of a
13.83% participation interest in a loan pool, which had an outstanding principal
balance of $7.0 million. The collateral for the loans consists of two office
buildings located in midtown Manhattan, New York. The loans are serviced by the
Bank, which holds the remaining interest in these loans.
The following table sets forth the activity in the Company's gross
discount loan portfolio during the periods indicated:
For the Nine
Months Ended For the Year Ended
September 30, December 31,
1999 1998
------------- ------------------
(Dollars In Thousands)
Balance at beginning of period ............... $ 6,858,836 $ 42,528,782
Principal adjustments ........................ 293,750 --
Resolutions and repayments(1) ................ (138,300) (2,349,969)
Loans transferred to investment
in real estate ............................. -- (33,436,930)
Foreign exchange gain (loss) ................. -- 116,953
------------ ------------
Balance at end of period ..................... $ 7,014,286 $ 6,858,836
============ ============
(1) 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, as well as principal payments on loans which have been brought
current in accordance with their original or modified terms (whether
pursuant to forbearance agreements or otherwise) or on other loans
which have not been resolved.
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 on discount loans. Upon receipt of title to property securing a
discount loan, the loans are transferred to investment in real estate.
INVESTMENT IN REAL ESTATE. At September 30, 1999, and December 31,
1998, the Company's investments in real estate consisted of eight properties
which had an aggregate carrying value of $215.9 million and $208.1 million,
respectively. Four of the properties currently owned by the Company with an
aggregate carrying value of approximately $149.1 million are located in San
Francisco, California. Three of these properties are located in the financial
district of San Francisco, and one property is located in the adjacent civic
center district of San Francisco. The Company believes that the office market in
San Francisco, particularly the financial district, is characterized by limited
new supply and significant barriers to entry. Low vacancy rates, coupled with
lack of new construction, are leading to increased rental rates. Government
regulation of development in conjunction with local construction costs and a
lack of developable land provide significant barriers to entry to this area. The
Company believes that its investments in real estate in San Francisco are well
located and benefit from their proximity to the majority of the city's office,
retail and hotel accommodations.
The Company's earthquake insurance relating to its four properties in
San Francisco is in the aggregate amount of $50 million, which is the probable
maximum loss estimated to be sustained in the event the most powerful earthquake
recorded in California were to occur at the properties, as determined by an
independent structural engineer. In the event of such probable maximum loss of
$50 million, such damage would be insured, less a deductible of approximately 5%
of total value at risk. In the event of a more catastrophic earthquake or
damages in excess of $50 million, the Company would not be insured for such
losses.
34
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
The Company's net investment in real estate increased to $215.9 million
at September 30, 1999 from $208.1 million at December
31, 1998 and is comprised of the following properties:
<TABLE>
<CAPTION>
Date Book Value at
Acquired Property Location Square Feet Property Type September 30, 1999
----------- ----------------------- ----------------------- ----------- ------------- ------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
04/08/98 225 Bush Street........ San Francisco, CA 570,637 Office Bldg. $ 106,606
09/23/97 450 Sansome Street..... San Francisco, CA 130,437 Office Bldg. 20,982
01/23/98 690 Market Street...... San Francisco, CA 124,692 Office Bldg. 15,545
09/03/97 10 U.N. Plaza.......... San Francisco, CA 71,636 Office Bldg. 11,495
07/22/98 841 Prudential Drive... Jacksonville, FL 550,000 Office Bldg. 32,840
11/10/97 Cortez Plaza........... Bradenton, FL 289,686 Shopping Ctr. 19,397
04/09/98 7075 Bayers Road....... Halifax, Nova Scotia 402,529 Shopping Ctr. 15,554
10/01/98 Holiday Village........ Havre, MT 223,355 Shopping Ctr. 1,029
Accumulated depreciation
and amortization (7,583)
-------------
$ 215,865
=============
</TABLE>
Set forth below is a brief description of each of the Company's
investments in real estate at September 30, 1999.
225 BUSH STREET. In April 1998, the Company acquired an existing
570,637 square foot, 22-story office building located at 225 Bush Street in the
financial district of San Francisco for $100.2 million. Bush Street was
originally constructed in 1923 and brought up to 1992 building code seismic
standards during 1992-94. Originally built as the world headquarters of Chevron
of USA, Inc. ("Chevron"), it was sold in 1994 as Chevron sought to relocate its
executive offices. The Company is projecting to make an additional investment of
approximately $27.3 million, from the date of acquisition throughout its
ownership period, to make tenant improvements, leasing commissions, and to
upgrade mechanical, HVAC, electrical, fire, and life/safety systems under the
Americans with Disabilities Act of 1990 (the "ADA"), as well as upgrades and
improvements to the ground floor retail and annex entrance lobby. Approximately
$9.0 million of the capital budget will be spent for tenant improvements and
other upgrades to the premises as a result of a new 10 year lease executed in
August 1999 with XOOM.com for approximately 187,000 square feet. As of September
30, 1999, the Bush Street Property was 98% leased.
450 SANSOME STREET. In September 1997, the Company acquired a 130,437
square foot, 16-story office building located at 450 Sansome Street in the
financial district of San Francisco. The Company purchased this property for
$17.2 million. The property was built in 1967 and upgraded in certain respects
in 1989 and 1990. The property was acquired from a lender who had taken title
through foreclosure. Average rent per square foot was approximately $18.00 at
the date of acquisition. The Company has to date renovated the entrance lobby,
elevator cabs, life safety systems, and certain building systems on four floors,
completed improvements required for compliance with the ADA, as well as paid
tenant improvements and leasing commissions. The building was fully leased as of
September 30, 1999 with average contract rents of $24.78 per square foot.
690 MARKET STREET. In January 1998, the Company acquired a 124,692
square foot, 16-story, office building located at 690 Market Street in the
financial district of San Francisco. The property was purchased for $13.7
million. The property was originally constructed in 1888 and has undergone
numerous renovations. At the date of acquisition existing rents averaged $14.06
per square foot. Since the date of acquisition, the Company has executed new
leases totaling approximately 35,000 square feet, which increased building
occupancy to 88% as of September 30, 1999, and average rents have increased to
approximately $24.60 per square foot. The Company is projecting to invest
approximately $7.0 million in structural upgrades, a sprinkler system and ADA
upgrades, deferred maintenance, tenant improvements and leasing commissions from
the date at acquisition through its ownership period.
10 UNITED NATIONS PLAZA. In September 1997, the Company acquired a
71,636 square foot, six-story, office building located at 10 United Nations
Plaza in the Civic Center district of San Francisco. The Company purchased this
property, which was built in 1982, for $9.1 million. At the date of acquisition,
the property was substantially leased and the average rent per square foot was
$13.76. The building was 57% leased as of September 30, 1999 at average rents of
approximately $24.19 per square foot. The remaining space is currently being
marketed. The Company has invested approximately $2.5 million in this property
35
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
to fund improvements to enhance the appearance of the lobby and hallways,
install ADA upgrades, fund deferred maintenance and tenant improvements, and pay
leasing commissions.
PRUDENTIAL BUILDING. In July 1998, the Company purchased the Prudential
Building, a 550,000 square foot, 22 story office building located in the central
business district of Jacksonville, Florida for an aggregate purchase price of
$36.0 million, plus closing costs. The purchase price was funded with cash on
hand and advances from a line of credit. Simultaneously with this closing, the
Company also leased 98% of the building back to the Prudential Insurance Co. of
America and sold two adjacent parking areas to a neighboring hospital for
approximately $4.1 million. The Prudential lease has a term of four years with
options to vacate the premises during the term of the lease, as well as three
subsequent five-year extension options. On August 6, 1999, Prudential Healthcare
was sold to Aetna.
CORTEZ PLAZA. In November 1997, the Company purchased Cortez Plaza, a
289,686 square foot shopping center located in Bradenton, Florida, a suburb of
Tampa. The Company purchased this property, which was built in 1956 and
renovated in 1988, for $18.4 million. In a separate transaction, the fee simple
title to a large portion of the shopping center that had been subject to a
ground lease was purchased simultaneously for $0.7 million, which resulted in a
total investment in this property of $19.3 million. By simultaneously acquiring
fee simple title to a ground lease that encumbered a large part of the shopping
center's parking lot, the Company believes that it immediately improved the
value and marketability of the project. As of September 30, 1999, the shopping
center was 94.2% leased with national and regional tenants, including Publix,
PetSmart, Circuit City, Walgreens, Montgomery Ward (which has come out of
bankruptcy and affirmed their lease) and BankAmerica, comprising 75% of the
leaseable area. Below market leases covering approximately 2.2% of the center
expire during the remainder of 1999 and 2000.
BAYER'S ROAD SHOPPING CENTRE. In April 1998, the Company acquired the
Bayers Road Shopping Centre, which is located at 7075 Bayers Road in Halifax,
Nova Scotia. The property was acquired by foreclosure on the loans secured by
the property, which were acquired by the Company at a discount in September
1997. The property contains 402,529 square feet of space, which consists
primarily of retail space but also includes some office space and storage space.
The original buildings were built in 1956 and were enclosed and expanded in
several phases between 1971 and 1987. Major tenants of the property currently
include of Zellers, Lawton's and Mark's Work Warehouse. The property was
approximately 69% leased at September 30, 1999. The Company currently is
implementing a major renovation plan establishing the second level as a
community shopping center anchored with both national and regional
value-oriented retailers, while filling the lower level with service providers,
discount retailers and entertainment uses. The third level would remain office
space. In August 1999, the Company purchased the neighboring IGA Store for $1.9
million as part of the major renovation plan to demolish the IGA Store in order
to increase visibility to the Shopping Centre.
HOLIDAY VILLAGE SHOPPING CENTRE. In October 1998, the Company acquired
the Holiday Village Shopping Centre, which is located at 1753 Highway 2 West in
Havre, Montana. The property was acquired by foreclosure on the loan secured by
the property, which was acquired by the Company at a discount in November 1997.
The property contains 223,355 square feet of retail space. The original building
was built in 1978. The major tenant at the property currently is Herberger's.
The property was approximately 51% leased at September 30, 1999. The Company
currently is developing a leasing plan to stabilize the property that will
include leasing one of the vacant anchor spaces to a national or regional anchor
tenant and lease the balance of the in-line space to local and regional tenants.
36
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
The following table sets forth the cost of improvements for each
investment in real estate through September 30, 1999.
<TABLE>
<CAPTION>
Rents due
Budgeted Actual Cost and
Initial Cost of of Book accrued at Total
Cost to Improvements Improvements Impairment Value at Accumulated end of Rental
Property Company for 1999 to Date Writedown Sales 09/30/99 Depreciation period Income
- ----------------------- ------------ ------------ ------------ ----------- ----------- ----------- ----------- ------------ --------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
225 Bush Street..... $ 101,632 $ 6,514 $ 4,974 $ -- $ -- $ 106,606 $ 3,642 $ 949 $ 8,581
450 Sansome Street.. 17,205 3,988 3,777 -- -- 20,982 878 167 2,069
690 Market Street... 13,707 5,014 1,838 -- -- 15,545 557 47 1,904
10 U.N. Plaza....... 9,080 3,414 2,415 -- -- 11,495 452 148 274
841 Prudential Dr... 32,827 484 13 -- -- 32,840 723 1,963 6,257
Cortez Plaza........ 19,244 1,354 153 -- -- 19,397 792 323 2,387
7075 Bayers Road.... 15,219 12,755 4,237 (3,902) -- 15,554 497 172 2,580
Holiday Village..... 1,791 350 839 (1,601) -- 1,029 42 35 342
Park Center I....... 1,534 -- -- -- (1,534) -- -- -- --
---------- ---------- ---------- --------- --------- ---------- ---------- --------- --------
Total............ $ 212,239 $ 33,873 $ 18,246 $ (5,503) $ (1,534) $ 223,448 $ 7,583 $ 3,804 $ 24,394
========== ========== ========== ========= ========= ========== ========== ========= ========
</TABLE>
The following table sets forth a summary schedule of the total lease
expirations for the Company's investments in real estate for leases in place as
of September 30, 1999, assuming that none of the tenants exercise renewal
options or termination rights, if any, at or prior to the scheduled expirations.
<TABLE>
<CAPTION>
Percentage of Average Base Percentage of
Aggregate Annualized Rent per Aggregate
Number of Square Footage Portfolio Base Rent of Square Foot of Portfolio
Year of Lease Leases of Expiring Leased Square Expiring Expiring Annualized
Expiration(1) Expiring Leases Feet Leases(2) Leases(3) Base Rent
------------- -------- -------------- ------------- ------------ -------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
1999 34 125,059 6.99% $ 325,472 2.60 2.12%
2000(4) 45 172,168 9.63% 1,161,519 6.75 7.59%
2001 49 148,399 8.30% 1,909,767 12.87 12.46%
2002 54 604,892 33.82% 5,263,647 8.70 34.33%
2003 20 54,113 3.03% 1,013,332 18.73 6.61%
2004 19 92,908 5.19% 600,674 6.47 3.92%
2005 3 27,546 1.54% 66,484 2.41 0.43%
2006 9 117,223 6.55% 474,424 4.05 3.09%
2007 4 91,683 5.13% 769,962 8.40 5.02%
2008 7 138,776 7.76% 1,813,263 13.07 11.83%
2009 & beyond(5) 10 215,732 12.06% 1,931,931 8.96 12.60%
----- ---------- ------ ----------- ------
254 1,788,499 100.00% $15,330,475 100.00%
===== ========== ====== =========== ======
</TABLE>
(1) Lease year runs from January 1 to December 31 for all years except for
1999, in which the lease year is October 1 to December 31, 1999.
(2) Annualized base rent is calculated based on the amount of rent
scheduled from January 1 of the listed year to the lease expiration,
except for 1999 in which the amount is based on the rent schedule from
October 1 to the lease expiration.
(3) Average base rent per square foot is calculated using the annualized
base rent divided by the square footage.
(4) In October 1999, tenant IGA exercised a termination option effective
April 30, 2000 at Bayers Road Shopping Center, which requires IGA to
pay termination fees following expiration of the lease agreement.
(5) On August 13, 1999, XOOM.com, a new tenant, executed a 10 year lease at
225 Bush Street for approximately 187,000 square feet. However, the
table only includes space that was occupied on September 30, 1999. As
of September 30, 1999, XOOM.com physically occupied 24,157 square feet.
The remaining square footage is under construction with occupancy
scheduled during the first quarter of 2000.
The Company regularly engages in negotiations with existing tenants to
extend leases due to expire as well as to enter into new leases with other
interested parties. Square footage involved in such negotiations may vary from a
small sub-tenancy to substantially all the available space at any given
property.
37
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
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 September 30, 1999, are as follows:
(Dollars In Thousands)
1999.................................. $ 6,631
2000.................................. 24,877
2001.................................. 22,938
2002.................................. 17,258
2003.................................. 11,532
Thereafter............................ 51,349
---------
Total $ 134,585
=========
INDEBTEDNESS-GENERAL. The Company's investments in real estate,
subordinate and residual interests in mortgage-related securities and other
assets, such as single family residential loans, generally depend upon
short-term borrowings such as repurchase agreements and warehouse
facilities/lines of credit with financial institutions or institutional lenders
to finance the Company's acquisition of such assets on a short-term basis in the
case of repurchase agreements and on a one to three-year basis in the case of
warehouse facilities/lines of credit. There can be no assurance that such
financing will continue to be available on terms reasonably satisfactory to the
Company. The inability of the Company to arrange additional borrowings such as
repurchase agreements and warehouse facilities/lines of credit or to repay,
extend or replace existing borrowings when they expire would have a material
adverse effect on the Company's business, financial condition and results of
operations and on the Company's outstanding securities. See Note 9 to the
Consolidated Financial Statements above, which is hereby incorporated by
reference.
At September 30, 1999, the Company had total consolidated indebtedness
of $552.1 million, of which all but $143.0 million of outstanding Notes was
secured indebtedness, as well as $20.0 million of other liabilities. This
consolidated indebtedness consisted of: (i) $42.6 million of repurchase
agreements, of which $34.1 million was scheduled to mature in one year; (ii)
lines of credit aggregating $37.6 million, which mature in 2001 (subject to
extension by the Company under certain conditions until 2002) and are secured by
real estate, loans and/or securities; (iii) $143.0 million of outstanding
Redeemable Notes, which mature in 2005; (iv) $113.1 million of match funded
indebtedness which is secured by $124.9 million of match funded residential
loans, net, which was incurred in November 1998 as a result of the
securitization of 1,808 first and second single family residential mortgage
loans and the retention by the Company of an approximately $9.6 million
non-investment grade security in the special purpose entity which was
established to effect the securitization; and (v) $33.3 million of securities
sold short, which consisted of ten year treasury bonds. See Note 6 to the
Consolidated Financial Statements above.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE. Securities sold under
agreements to repurchase decreased $96.0 million to $42.6 million at September
30, 1999, from $138.6 million at December 31, 1998. This decrease was due to
certain repurchase agreements with the Company's lenders which require all
cashflows from the bonds to be used to pay down outstanding debt and the
repricing of the repurchase agreements as the collateral amortizes, and the
scheduled maturity of certain other repurchase agreements. These obligations are
secured by certain of the Company's investments in subordinated interests in
commercial mortgage-backed securities, residual interests in subprime
residential loan securitizations, and U.K. mortgage loan residual securities.
SECURITIES SOLD SHORT. Securities sold short amounted to $33.3 million
at September 30, 1999, and consisted of the short sale of a ten year US treasury
bond due November 15, 2005. There were no open short sale positions at September
30, 1998.
OBLIGATIONS OUTSTANDING UNDER LINES OF CREDIT. Obligations outstanding
under lines of credit increased $3.1 million to $37.6 million at September 30,
1999, from $34.5 million at December 31, 1998. The borrowing is pursuant to a
three year agreement, which is collateralized by commercial loans.
OBLIGATIONS OUTSTANDING UNDER LINES OF CREDIT - REAL ESTATE.
Obligations outstanding under lines of credit secured by real estate increased
$2.9 million to $145.5 million at September 30, 1999 from $142.6 million at
December 31, 1998. These borrowings have a three-year term and an interest rate
that floats in accordance with LIBOR.
MINORITY INTEREST. At September 30, 1999, minority interest totaled
$21.0 million and represented OCN's ownership through IMIHC of 1,808,733 units
in the Operating Partnership.
38
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
SHAREHOLDERS' EQUITY. Shareholders' equity decreased by $52.9 million
from $221.2 million at December 31, 1998 to $168.3 million at September 30,
1999. The decrease was due to a net loss of $22.3 million, partially offset by a
cumulative currency translation adjustment of $0.3 million and a $14.8 million
unrealized loss on securities available for sale and the declaration of a
dividend of $.82 per share or $15.5 million to shareholders.
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 previously had to distribute annually at least 95% of its
taxable income. The primary sources of funds for liquidity during the third
quarter of 1999 consisted of cash provided by operating activities, principal
payments received from loans, sales of securities available for sale, increases
in obligations outstanding under lines of credit, and principal and interest
payments received on the Company's securities portfolio.
The Company's operating activities provided cash flows of $11.7 million
during the third quarter of 1999. At the same time, the Company's investing
activities provided cash flows of $7.3 million during the third quarter of 1999.
During the third quarter of 1999, cash provided by investing activities
primarily consisted of principal payments on securities available for sale of
$6.1 million, principal payments on loans of $57.2 million and proceeds from
sale of securities of $35.8 million. The Company's financing activities used
cash flows of $10.8 million during the third quarter of 1999 and primarily
consisted of repayments of $31.3 million on borrowings collateralized by
securities sold under agreements to repurchase, and principal payments of $11.1
million on bonds-match funded loan agreements.
At September 30, 1999, OAC's total closed transactions since the IPO,
net of repayments, were $680.6 million. Of this amount, $644.3 million has been
funded and the remaining $36.3 million is to be funded over the construction and
renovation periods, which range from two to 18 months. In addition, for 1999,
the Company has budgeted $33.9 million of capital expenditures on its
investments in real estate in order to reposition such properties in the market.
Based upon its current balance of cash and cash equivalents, and
projected cashflows from operations, potential cash inflows from the sale or
refinancing of assets, and its available lines of credit, the Company believes
that its sources of funds will be adequate for the purpose of meeting its short
term and long term liquidity requirements. However, there can be no assurance
that this will be the case. Material increases in interest expense or operating
expenses, collateral calls on its secured financings, the inability of the
Company to renew or replace maturing sources of financing, and the inability to
sell assets to raise additional cash, among other factors, generally would
negatively impact the Company's liquidity. On the other hand, sales of assets,
increases in operating cash flows and in the valuation of its securities
portfolio, and the execution of new financing transactions, would generally
positively affect the Company's liquidity. See also "Recent Developments",
"Indebtedness-General", and "Other Trends and Contingencies."
OTHER TRENDS AND CONTINGENCIES
Fluctuations in interest rates will continue to impact the Company's
net interest income to the extent the Company's fixed rate assets are funded by
variable rate debt or the Company's variable rate assets reprice on a different
schedule, or in relation to a different index than its floating rate debt. At
September 30, 1999, the Company had interest rate swap agreements with a
notional amount of $200.8 million and a fair value of $1.6 million in order to
limit partially the adverse effects of rising interest rates on the remaining
floating-rate debt. For a tabular presentation of these agreements and other
information, see Note 3 to the Consolidated Financial Statements above. When the
Company's swap agreements expire, the Company will have interest rate risk to
the extent interest rates increase on any floating-rate borrowings unless the
swaps are replaced or other steps are taken to mitigate this risk.
The Company's ability to raise additional debt is dependent upon, among
other things, the value of unencumbered assets, which are inherently linked to
prevailing interest rates and changes in the credit of the underlying assets. At
September 30, 1999, the Company had unencumbered residential loans and
securities having a fair value totaling approximately $125.1 million ($109.7
million of subordinate and residual mortgage-backed securities, $9.9 million of
commercial mortgage-backed securities, and $5.5 million of residential loans).
Mortgage-related securities which are subject to repurchase agreements,
as well as loans and real estate which secure other indebtedness, periodically
are revalued by the lender, and a decline in such value may result in the lender
requiring the Company to provide additional collateral to secure the
indebtedness. Although to date the Company has had adequate cash, cash
equivalents and other unencumbered assets to meet calls for additional
39
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
collateral, to repay a portion of the related indebtedness, or to meet its other
operating and financing requirements, including its current capital expenditure
plans, there can be no assurance that sufficient levels of such assets will
continue to be available.
The Company's decision to discontinue future investment activities
effectively means that the Company's future profitability, and its ability to
meet its indebtedness obligations, will be dependent on its existing assets.
Circumstances which result in decreased income from the Company's assets,
including without limitation market and economic conditions which adversely
affect leasing income from the Company's investments in real estate, payments on
its loans, and yield on its securities, could adversely affect the ability of
the Company to meet its indebtedness obligations, as could market and economic
conditions which increase the cost of the Company's variable rate or short-term
liabilities, as noted above.
If the Company is unable to fund additional collateral needs or to
repay, renew or replace maturing indebtedness on terms reasonably satisfactory,
the Company would be required to sell, under adverse market conditions, a
portion of its assets, and could incur losses as a result. Furthermore, an
extremely limited market for subordinate and residual interests in
mortgage-related securities currently exists and there can be no assurance that
a liquid market for such securities will fully develop. Therefore, the Company's
ability to dispose of such securities promptly in such situations may be
limited. Nevertheless, the Company continues to evaluate opportunities to sell
individual securities or groups of securities as they arise.
The indenture under which the Redeemable Notes were issued (the
"Indenture") prohibits the Company from incurring or issuing debt, other than
certain permitted indebtedness ("Permitted Indebtedness"), if certain financial
tests are not satisfied. One such test requires that the ratio of adjusted FFO
to adjusted fixed charges for the previous four fiscal quarters exceeds 1.25 to
1.00. Given that FFO for the four quarters ended September 30, 1999 was $(67.5)
million, the Company does not expect this financial test to be satisfied for
some time to come. Permitted Indebtedness, the incurrence of which is not
limited under the Indenture, includes: (i) up to $150 million of debt that may
be incurred under certain warehouse lines of credit or mortgage loan repurchase
agreements; (ii) match funded debt that may be incurred by a special purpose,
bankruptcy remote subsidiary of the Company; (iii) renewals or refinancings of
existing debt structured to meet certain conditions; (iv) debt that may be
incurred in hedge transactions; (v) up to $10 million of capital lease and
purchase money financing; and (vi) up to $50 million of additional debt. The
Company believes that it can meet its financing needs from sources of Permitted
Indebtedness during 1999, although there can be no assurance that this will be
the case.
In addition to payment and, in the case of the Company's secured
indebtedness, collateralization requirements, the Company is subject to various
other covenants in the agreements evidencing its indebtedness, including the
maintenance of specified amounts of equity. At September 30, 1999, the Company
was in compliance with all obligations under the agreements evidencing its
indebtedness with respect to the Company's equity and the Operating
Partnership's equity, as defined in the applicable agreement. In recent months,
various lenders have agreed to decrease the amount of net worth required to
satisfy the financial covenants in the applicable indebtedness agreements.
However, there can be no certainty that additional operating losses will not
result in the Company's violation of certain minimum net worth covenants in the
future. In the event of a default in such covenants, the lender generally would
be able to accelerate repayment of the indebtedness and pursue other available
remedies, which could result in defaults on other indebtedness of the Company,
unless the applicable lender or lenders allowed the Company to remain in
violation of the agreements. Were a default to be declared, the Company would
not be able to continue to operate without the consent of its lenders. In
addition to the Merger, the Company currently is considering various
alternatives to enhance its ability to meet its payment and other obligations
under its indebtedness and the funding requirements discussed above, including
the sale of certain assets and the potential tax and other consequences
associated therewith. There can be no certainty that the Company will have
sufficient liquidity to meet these obligations on a short-term or long-term
basis.
YEAR 2000 DATE CONVERSION
A critical business issue is whether existing application software
programs and operating systems can accommodate the year 2000 change date value.
Many existing application software products in the marketplace were designed to
accommodate only two-digit date entries. Beginning in the year 2000, these
systems and products will need to be able to accept four-digit entries to
distinguish years beginning with 2000 from prior years. As a result, computer
systems and software used by many companies may need to be upgraded to comply
with such Year 2000 requirements.
40
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
The Company is dependent upon data processing systems and software to
conduct its business. The data processing systems and software include those
developed, purchased and maintained by OCC, as well as OCN and its other
subsidiaries, which provide management services to the Company. The Company does
not own nor maintain computer equipment or software.
OCN has established a project plan to achieve Year 2000 readiness of
its mission critical and non-mission critical systems, including hardware
infrastructure and software applications. During 1998, OCN substantially
completed the systems identification and evaluation phases of the project, as
well as remediation and validation of its mission critical systems. During 1999,
OCN is focusing on any remaining validation tasks, including remediation and
validation of its non-mission critical systems and end-to-end testing with third
parties.
The Company could experience disruptions across all business segments
as a result of year 2000 systems failures at government agencies, utilities,
telecommunications providers, couriers and financial services vendors, among
others. Concerning specific Company business functions, data acquired from
third-parties might contain year 2000 incompatible components, which could
impact the timeliness of third-party loan servicing functions such as payment
processing or loan resolution. In addition, loans previously acquired by the
Company could experience increased borrower or tenant defaults stemming from
year 2000 related business shortfalls, dislocations or delays. Such risks could
also impact the value of the Company's portfolio of mortgage-backed securities,
as these are dependent upon the underlying pool of mortgage loans. There can be
no assurance that such risks, if realized individually or collectively, would
not have a material adverse effect on the Company's business, results of
operations or financial condition.
FUNDS FROM OPERATIONS
The Company generally considers FFO to be a useful financial
performance measure of the operating performance of a REIT because such measure
does not recognize: (i) depreciation and amortization of real estate assets as
operating expenses, which management believes are not meaningful in evaluating
income-producing real estate because such real estate historically has not
depreciated; and (ii) gains/losses from debt restructuring and sales of
property. In addition, FFO, together with net income and cash flow, provides
investors with an additional basis to evaluate the ability of a REIT to incur
and service debt and to fund acquisitions and other capital expenditures. FFO
does not represent cash provided by operating activities in accordance with GAAP
and should not be considered an alternative to net income as an indication of
the results of the Company's performance or to cash flows as a measure of
liquidity. For a discussion of the Company's operating, investing and financing
activities under GAAP, see "-Capital Resources and Liquidity" above. In 1995,
NAREIT established new guidelines clarifying its definition of FFO and requested
that REITs adopt this new definition beginning in 1996. As defined, FFO consists
of net income applicable to common shareholders (computed in accordance with
GAAP) 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. Since other
REITs may calculate FFO in a different manner, there can be no assurance that
the Company's FFO is comparable with the FFO reported by other entities. FFO
differs from cash made available to holders of the Common Stock, which is based
on the Company's net taxable income.
FFO for the three months and the nine months ended September 30, 1999
was ($5.2) million and ($22.5) million compared to $(7.1) million and $4.1
million for the comparable periods in 1998.
41
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
The following table reconciles FFO and net income during the periods
indicated.
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------------------- ---------------------------------
1999 1998 1999 1998
------------- ------------- -------------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Net loss income................................ $ (3,326) $ (7,639) $ (22,277) $ (11,497)
Depreciation and amortization............... 1,352 1,160 3,806 2,223
Loss on sale of IO portfolio................ -- -- -- 13,957
Gain on sale of securities.................. (3,194) -- (4,045) --
Extraordinary gain on repurchase of debt.... -- (615) -- (615)
------------- ------------- -------------- -------------
FFO............................................ $ (5,168) $ (7,094) $ (22,516) $ (4,068)
============= ============= ============== =============
</TABLE>
REIT STATUS
The Company has qualified through calendar 1998 as a REIT under
Sections 856 through 860 of 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 generally will 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% of its taxable income and meets certain other income and asset
tests. The Company, on October 7, 1999, satisfied the distribution requirement
by paying a cash dividend of $0.82 per share, or $15.5 million.
As a result of the acquisition of the Company by OCN on October 7,
1999, the Company failed to qualify as a REIT as of October 20, 1999 and will
record an income tax provision in the fourth quarter.
For further discussion on the Company's status as a REIT, see "Recent
Developments" above and Note 11 to the Consolidated Financial Statements.
RISK OF LOSS OF INVESTMENT COMPANY ACT EXEMPTION
The Company believes that it is not, and intends to conduct its
operations so as not to become, regulated as an investment company under the
Investment Company Act of 1940, as amended (the "Investment Company Act"). Under
the Investment Company Act, an investment company is required to register with
the Commission and is subject to extensive, restrictive and potentially adverse
regulations. Section 3(c)(5) of the Investment Company Act exempts entities,
however, that are "primarily engaged in...[the business of]... purchasing or
otherwise acquiring mortgages and other liens on and interests in real estate"
("Qualifying Interests"). Under current interpretations by the staff of the
Commission, qualifying for this exemption requires the Company, among other
things, to maintain at least 55% of its assets in Qualifying Interests and to
maintain an additional 25% in Qualifying Interests or other real estate-related
assets. The Company's investments in real estate and mortgage loans generally
constitute Qualifying Interests, and the Company believes that subordinate and
residual interests in mortgage-related securities constitute Qualifying
Interests when the Company acquires the right to direct the foreclosure upon any
defaulted loan which backs such securities and to take all other actions that a
servicer generally may take in connection with a defaulted loan.
At September 30, 1999, the Company believes that its Qualifying
Interests, including subordinate and residual interests, comprised over 83% of
the Company's total assets and over 87% when combined with other real-estate
related assets. As a result, the Company believes that it was and is not
required to register as an investment company under the Investment Company Act.
The Company does not intend, however, to seek an exemptive order, no-action
letter or other form of interpretive guidance from the Commission on this
position, and if the Commission were to take a different position, the Company
could be required either (i) to change the manner in which it conducts its
operations in order to avoid investment company registration or (ii) to register
as an investment company, either of which could have a material adverse effect
on the Company and its securities, could subject the Company to monetary
penalties and injunctive relief in an action brought by the Commission, could
cause the Company to be unable to enforce contracts with third parties and could
cause third parties to seek recission of relevant transactions.
With the consummation of the Merger on October 7, 1999, the Company has
also qualified for the "private investment Company" exemption under Section
3(c)(1) of the Investment Company Act. As a result, even if the company at some
future date fails to meet the requirements of Section 3(c)(5), the Company would
be exempt from regulation as an investment company.
42
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
================================================================================
Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, commodity prices, and equity prices. The
primary market risk to which the Company is exposed is interest rate risk, which
is highly sensitive to many factors, including governmental monetary and tax
policies, domestic and international economic and political considerations, and
other factors beyond the control of the Company. Changes in the general level of
interest rates can affect the Company's net interest income, which is the
difference between the interest income earned on interest-earning assets and the
interest expense incurred in connection with its interest-bearing liabilities,
by affecting the spread between the Company's interest-earning assets and
interest-bearing liabilities. Changes in the level of interest rates also can
affect, among other things, the ability of the Company to originate and acquire
loans, the value of the Company's mortgage-related securities and other
interest-earning assets, and its ability to realize gains from the sale of such
assets.
The Company may utilize a variety of financial instruments, including
interest rate swaps, caps, floors, and other interest rate contracts, in order
to limit the effects of interest rates on its operations. The use of these types
of derivatives to hedge interest-earning assets and/or interest-bearing
liabilities carries certain risks, including the risk that losses on a hedge
position will reduce the funds available for payments to holders of securities
and, indeed, that such losses may exceed the amount invested in such
instruments. A hedge may not perform its intended purpose of offsetting losses
or increased costs. Moreover, with respect to certain of the instruments used as
hedges, the Company is exposed to the risk that the counterparties with which
the Company trades may cease making markets and quoting prices in such
instruments, which may render the Company unable to enter into an offsetting
transaction with respect to an open position. If the Company anticipates that
the income from any such hedging transaction will not be qualifying income for
REIT income test purposes, the Company may conduct part or all of its hedging
activities through a to-be-formed corporate subsidiary that is fully subject to
federal corporate income taxation. The profitability of the Company may be
adversely affected during any period as a result of changing interest rates.
The following table quantifies the potential changes in net interest
income and net portfolio value should interest rates go up or down (shocked) by
100 to 400 basis points, assuming the yield curves of the rate shocks will be
parallel to each other. Net portfolio value is calculated as the sum of the
value of off-balance sheet instruments and the present value of cash in-flows
generated from interest-earning assets net of cash out-flows in respect of
interest-bearing liabilities. The cash flows associated with the loan portfolios
and securities available for sale are calculated based on prepayment and default
rates that vary by asset. Projected losses, as well as prepayments, are
generated based upon the actual experience with the subject pool, as well as
similar, more seasoned pools. To the extent available, loan characteristics such
as loan-to-value ratio, interest rate, credit history, prepayment penalty term
and product types are used to produce the projected loss and prepayment
assumptions that are included in the cash flow projections of the securities.
When interest rates are shocked, these projected loss and prepayment
assumptions are further adjusted. For example, under current market conditions,
a 100 basis point decline in the market interest rate is estimated to result in
a 200 basis point increase in the prepayment rate of a typical subprime
residential loan. Most commercial and multi-family loans are not subject to
prepayments as a result of prepayment penalties and contractual terms that
prohibit prepayments during specified periods. However, for those commercial and
multi-family loans where prepayments are not currently precluded by contract,
declines in interest rates are associated with steep increases in prepayment
speeds in computing cash flows. A risk premium is then calculated for each
asset, which, when added to the interest rate being modeled, results in a matrix
of discount rates that are applied to the cash flows computed by the model.
Since the net portfolio value consists of both fixed and adjustable components,
an inverse relationship between the market value of the net portfolio and net
interest income is possible. This could happen if more assets reprice during the
first year. In this case, more liabilities would be funded at the new lower
rates over a longer period of time during the year. The base interest rate
scenario assumes interest rates at September 30, 1999. Actual results could
differ significantly from those estimated in the table.
43
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
================================================================================
Projected Percentage Change In
- --------------------------------------------------------------------------------
Change in Interest Rate Net Interest Income (1) Net Portfolio Value
- --------------------------------------------------------------------------------
-400 Basis Points (33.73)% (2.91)%
-300 Basis Points (25.30) (1.95)
-200 Basis Points (16.87) (1.23)
-100 Basis Points (8.43) (0.30)
Base Interest Rate 0.0 0.0
+100 Basis Points 8.43 0.77
+200 Basis Points 16.87 3.78
+300 Basis Points 25.30 5.87
+400 Basis Points 33.73 7.55
(1) Represents the estimated percentage change in net interest income over the
next twelve months, assuming that balances are rolled over and reinvested
at the shocked level of interest rate. For purposes of this calculation,
net interest income includes interest expense associated with the
investments in real estate.
ASSET AND LIABILITY MANAGEMENT
Asset and liability management involves managing the timing and
magnitude of the repricing of assets and liabilities. It is the objective of the
Company to attempt to control risks associated with interest rate movements. In
general, management's strategy is to match asset and liability balances within
maturity categories to limit the Company's exposure to earnings variations and
variations in the value of assets and liabilities as interest rates change over
time.
The Company utilizes a variety of off-balance sheet financing
techniques to assist it in the management of interest rate risk. These
techniques may include interest rate futures and interest rate swaps, pursuant
to which the parties exchange the difference between fixed-rate and
floating-rate interest payments on a specified principal amount (referred to as
the "notional amount") for a specified period without the exchange of the
underlying principal amount. Interest rate swaps are utilized by the Company to
protect against the increase in borrowing cost from floating rate debt or a
short-term, fixed-rate liability, such as reverse repurchase agreements, in an
increasing interest-rate environment. At September 30, 1999, the Company was a
party to interest rate swap agreements with an aggregate notional amount of
$200.8 million. See Note 4 to the Consolidated Financial Statements above.
Methods for evaluating interest rate risk include an analysis of the
Company's interest rate sensitivity "gap," which is defined as the difference
between interest-earning assets and interest-bearing liabilities maturing or
repricing within a given time period. A gap is considered positive when the
amount of interest-rate sensitive assets exceeds the amount of interest-rate
sensitive liabilities. A gap is considered negative when the amount of
interest-rate sensitive liabilities exceeds interest-rate sensitive assets.
During a period of rising interest rates, a negative gap would tend to adversely
affect net interest income, while a positive gap would tend to result in an
increase in net interest income. During a period of falling interest rates, a
negative gap would tend to result in an increase in net interest income, while a
positive gap would tend to affect net interest income adversely. Since different
types of assets and liabilities with the same or similar maturities may react
differently to changes in overall market rates or conditions, changes in
interest rates may affect net interest income positively or negatively even if
an institution were perfectly matched in each maturity category.
44
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
================================================================================
The following table sets forth the estimated maturity or repricing of
the Company's interest-earning assets and interest-bearing liabilities at
September 30, 1999. The amounts of assets and liabilities shown within a
particular period were determined in accordance with the contractual terms of
the assets and liabilities, except: (i) adjustable-rate loans, and securities
are included in the period in which their interest rates are first scheduled to
adjust and not in the period in which they mature, (ii) fixed-rate
mortgage-related securities reflect estimated prepayments, which were estimated
based on analyses of broker estimates, the results of a prepayment model
utilized by the Company and empirical data, (iii) non-performing discount loans
reflect the estimated timing of resolutions which result in repayment to the
Company, and (iv) fixed-rate loans reflect scheduled contractual amortization,
with no estimated prepayment. Management believes that these assumptions
approximate actual experience and considers them reasonable; however, the
interest rate sensitivity of the Company's assets and liabilities in the table
could vary substantially if different assumptions were used or actual experience
differs from the historical experience on which the assumptions are based.
<TABLE>
<CAPTION>
September 30, 1999
More than 1
Within 4 to 12 Year to 3 Years
3 Months Months 3 Years and Over Total
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Rate-Sensitive Assets: (Dollars In Thousands)
Interest-earning cash........................ $ 36,394 $ -- $ -- $ -- $ 36,394
Repurchase agreements........................ 34,383 -- -- -- 34,383
Securities available for sale................ 7,820 20,463 41,371 142,752 212,406
Loan portfolio, net (1)...................... 80,614 450 1,025 3,583 85,672
Match funded loan agreements................. 3,925 11,107 25,211 84,632 124,875
Discount loan portfolio, net (1)............. 5,480 -- -- -- 5,480
------------ ------------ ------------ ---------- ----------
Total rate-sensitive assets................ 168,616 32,020 67,607 230,967 499,210
------------ ------------ ------------ ---------- ----------
Rate-Sensitive Liabilities:
Securities sold under agreements
to repurchase.............................. 42,594 -- -- -- 42,594
Bonds-match funded loan agreements........... 113,075 -- -- -- 113,075
Obligations outstanding under lines of credit 183,091 -- -- -- 183,091
Notes, debentures and other
interest-bearing.obligations............... -- -- -- 176,272 176,272
------------ ------------ ------------ ---------- ----------
Total rate-sensitive liabilities........... 338,760 -- -- 176,272 515,032
Interest rate sensitivity gap before
Off-balance sheet financial instruments.... (170,144) 32,020 67,607 54,695 (15,822)
Off-Balance Sheet Financial Instruments:
Interest rate swaps.......................... 214,780 -- (100,780) (114,000) --
Futures contracts.......................... 14,000 -- -- (14,000) --
Net-off-balance sheets..................... 228,780 -- (100,780) (128,000) --
Interest rate sensitivity gap.................. 58,636 32,020 (33,173) (73,305) $ (15,822)
------------ ------------ ------------- ------------- ==========
Cumulative interest rate sensitivity gap....... $ 58,636 $ 90,656 $ 57,483 $ (15,822)
============ ============ ============ ============
Cumulative interest rate sensitivity gap as a
percentage of total rate-sensitive assets.... 11.75% 18.16% 11.51% (3.17)%
</TABLE>
(1) Balances have not been reduced for non-performing loans.
As of September 30, 1999, the cumulative volume of assets maturing or
repricing within one year exceeded liabilities by $32.0 million, or 18.16% of
assets, implying moderate current-year income sensitivity to movements in the
level of interest rates.
45
<PAGE>
FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED HEREIN ARE NOT 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. THESE FORWARD-LOOKING STATEMENTS MAY BE IDENTIFIED BY
REFERENCE TO A FUTURE PERIOD(S) OR BY THE USE OF FORWARD-LOOKING TERMINOLOGY
SUCH AS "ANTICIPATE," "BELIEVE," "COMMITMENT," "CONSIDER," "CONTINUE,"
"ESTIMATE," "EXPECT," "FORESEE," "INTEND," "MAY," "PLAN," "WHETHER," "WILL,"
"WOULD," FUTURE OR CONDITIONAL VERB TENSES, SIMILAR TERMS, VARIATIONS ON SUCH
TERMS OR NEGATIVES OF SUCH TERMS. ALTHOUGH OAC BELIEVES THE ANTICIPATED RESULTS
OR OTHER EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON
REASONABLE ASSUMPTIONS, ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
INDICATED IN SUCH STATEMENTS DUE TO RISKS, UNCERTAINTIES AND CHANGES WITH
RESPECT TO A VARIETY OF FACTORS, INCLUDING, BUT NOT LIMITED TO, INTERNATIONAL,
NATIONAL, REGIONAL OR LOCAL ECONOMIC ENVIRONMENTS, GOVERNMENT FISCAL AND
MONETARY, PREVAILING INTEREST OR CURRENCY EXCHANGE RATES, EFFECTIVENESS OF
INTEREST RATE, CURRENCY EXCHANGE RATE AND OTHER HEDGING STRATEGIES, LAWS AND
REGULATIONS AFFECTING REAL ESTATE INVESTMENT TRUSTS, INVESTMENT COMPANIES AND
REAL ESTATE (INCLUDING CAPITAL REQUIREMENTS, INCOME AND PROPERTY TAXATION,
ACCESS FOR DISABLED PERSONS AND ENVIRONMENTAL COMPLIANCE), UNCERTAINTY OF
FOREIGN LAWS, COMPETITIVE PRODUCTS, PRICING AND CONDITIONS (INCLUDING FROM
COMPETITORS THAT HAVE SIGNIFICANTLY GREATER RESOURCES THAN OAC), CREDIT,
PREPAYMENT, BASIS, DEFAULT, SUBORDINATION AND ASSET/LIABILITY RISKS, LOAN
SERVICING EFFECTIVENESS, SATISFACTORY DUE DILIGENCE RESULTS, SATISFACTION OR
FULFILLMENT OF AGREED UPON TERMS AND CONDITIONS OF CLOSING OR PERFORMANCE,
TIMING OF TRANSACTION CLOSINGS, THE DECISION TO CURTAIL EACH BUSINESS LINE AND
DISCONTINUE INVESTMENT ACTIVITY, AVAILABILITY OF AND COSTS ASSOCIATED WITH
OBTAINING ADEQUATE AND TIMELY SOURCES OF LIQUIDITY, DEPENDENCE ON EXISTING
SOURCES OF FUNDING, ABILITY TO REPAY OR REFINANCE INDEBTEDNESS (AT MATURITY OR
UPON ACCELERATION), TO MEET COLLATERAL CALLS BY LENDERS (UPON RE-VALUATION OF
THE UNDERLYING ASSETS OR OTHERWISE), TO GENERATE REVENUES SUFFICIENT TO MEET
DEBT SERVICE PAYMENTS AND OTHER OPERATING EXPENSES AND TO SECURITIZE WHOLE
LOANS, TAXABLE INCOME EXCEEDING CASH FLOW, SIZE OF, NATURE OF AND YIELDS
AVAILABLE WITH RESPECT TO THE SECONDARY MARKET FOR MORTGAGE LOANS AND FINANCIAL,
SECURITIES AND SECURITIZATION MARKETS IN GENERAL, ALLOWANCES FOR LOAN LOSSES,
GEOGRAPHIC CONCENTRATIONS OF ASSETS (TEMPORARY OR OTHERWISE), TIMELY LEASING OF
UNOCCUPIED SQUARE FOOTAGE (GENERALLY AND UPON LEASE EXPIRATION), CHANGES IN REAL
ESTATE MARKET CONDITIONS (INCLUDING LIQUIDITY, VALUATION, REVENUES, RENTAL
RATES, OCCUPANCY LEVELS AND COMPETING PROPERTIES), ADEQUACY OF INSURANCE
COVERAGE IN THE EVENT OF A LOSS, KNOWN OR UNKNOWN ENVIRONMENTAL CONDITIONS,
EXTERNAL MANAGEMENT, CONFLICTS OF INTEREST, YEAR 2000 COMPLIANCE, OTHER FACTORS
GENERALLY UNDERSTOOD TO AFFECT THE REAL ESTATE ACQUISITION, MORTGAGE AND LEASING
MARKETS, SECURITIES INVESTMENTS AND RAPID GROWTH COMPANIES, AND OTHER RISKS
DETAILED FROM TIME TO TIME IN OAC'S REPORTS AND FILINGS WITH THE SEC, INCLUDING
ITS REGISTRATION STATEMENTS ON FORMS S-3, S-4 AND S-11 AND ITS PERIODIC REPORTS
ON FORMS 10-Q, 8-K AND 10-K. SPECIFIC REFERENCE IS MADE TO EXHIBIT 99.2 INCLUDED
WITH THE FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 AND FILED WITH THE SEC,
FOR A DESCRIPTION OF MATERIAL RISKS FACED BY THE COMPANY AND ITS SECURITIES
HOLDERS. GIVEN THESE UNCERTAINTIES, READERS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON SUCH STATEMENTS. OAC DOES NOT UNDERTAKE TO REVISE, AND SPECIFICALLY
DISCLAIMS ANY OBLIGATION, TO PUBLICLY RELEASE THE RESULT 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.
46
<PAGE>
- --------------------------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Amended and Restated Bylaws (2)
4.1 Form of Common Stock certificate (1)
4.2 Form of Indenture between the Company and Norwest Bank
Minnesota, National Association, as Trustee thereunder
for the 11.5% Redeemable Notes due 2005 (3)
10.1 First Amended and Restated Management Agreement (4)
10.2 Form of Registration Rights Agreement dated (1)
10.3 Third Amended and Restated Agreement of Limited
Partnership of Ocwen Partnership L.P. (4)
10.4 Form of Stock Option Plan (1)
10.5 Loan Agreement, dated as of April 7, 1998 between OAIC
Bush Street, LLC and Salomon Brothers Realty Corp. (5)
10.6 Loan Agreement, dated as of April 24, 1998 between OAC
and Greenwich Financial Products Inc. (4)
10.7 Amended and Restated Loan Agreement, dated as of June 10,
1998, by and among, inter alia, OAIC California
Partnership, L.P., OAIC California partnership II, L.P.,
Salomon Brothers Realty Corp. and LaSalle National Bank
(4)
10.8 Extension of First Amended and Restated Management
Agreement (7)
10.9 Compensation and Indemnification Agreement, dated as of
May 6, 1999, between the Company and the independent
committee of the Board of Directors (7)
10.10 Agreement of Merger, dated as of July 25, 1999, among
OCN, Ocwen Acquisition Company and the Registrant (6)
10.11 First Amendment to Loan Agreement and Guaranty, dated as
of July 9, 1999, made by and among OAIC Bush Street, LLC,
Salomon Brothers Realty Corp, and Ocwen Partnership,
L.P., and La Salle Bank National Association (filed
herewith)
10.12 Second Amendment to Guarantee of Payment, dated as of
July 9, 1999, made by and between Salomon Brothers Realty
Corp. and Ocwen Partnership, L.P. (filed herewith)
10.13 Indemnity agreement, dated August 24, 1999, among OCN,
and the Company's directors (filed herewith)
27 Financial Data Schedule for the period ended September
30, 1998 (filed herewith)
99.1 Investment Guidelines (4)
99.2 Risk Factors (2)
------------------------------------------------------------------
(1) Incorporated by reference to the Company's Registration
Statement on Form S-11 (File No. 333-21965), as amended,
declared affective by the Commission on May 14, 1997.
(2) Incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended December 31, 1998.
(3) Incorporated by reference to the Company's Registration
Statement on Form S-4 (File No. 333-64047), as amended,
as declared effective by the Commission on February 12,
1999.
(4) Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June
30, 1998.
(5) Incorporated by reference to the Current Report on Form
8-K filed by the Company with the Commission on April 23,
1998.
(6) Incorporated by reference to Exhibit 2.1 to OCN's current
Report on Form 8-K filed with the Commission on July 26,
1999.
(7) Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended
September 30, 1999.
47
<PAGE>
- --------------------------------------------------------------------------------
(b) Reports on Form 8-K filed during the quarter ended September 30,
1999.
(1) A Form 8-K filed on July 26, 1999 announcing a definitive
Merger Agreement between the Company and OCN.
(2) A Form 8-K filed on July 28, 1999, which contained a news
release announcing the Company's financial results for
the three months ended June 30, 1999.
(3) A Form 8-K filed on August 19, 1999, announcing the
setting of the record and meeting dates for shareholders
relating to the proposed acquisition of the Registrant by
OCN.
(4) A Form 8-K filed on August 24, 1999, announcing the
declaration of a cash dividend of $0.82 per share to
shareholders of record on August 30, 1999.
(5) A Form 8-K filed on September 10, 1999, announcing a
lease agreement between the Company and XOOM.com.
48
<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/ MARK S. ZEIDMAN
------------------------------------------------------
Mark S. Zeidman
Senior Vice President and Chief Financial Officer
(On behalf of the Registrant and as its
principal financial officer)
Date: November 15, 1999
49
FIRST AMENDMENT TO LOAN AGREEMENT AND GUARANTY
This First Amendment to Loan Agreement and Guaranty (this "AMENDMENT"),
dated as of July 9, 1999, is made by and among OAIC BUSH STREET, LLC, a Delaware
limited liability company (the "BORROWER"), SALOMON BROTHERS REALTY CORP., a New
York corporation (the "LENDER"), and OCWEN PARTNERSHIP, L.P., a Virginia limited
partnership (the "GUARANTOR") (each, a "PARTY" and collectively, the "PARTIES")
and LASALLE BANK NATIONAL ASSOCIATION, a national banking association (the
"COLLATERAL AGENT").
R E C I T A L S :
The Lender, the Borrower and the Collateral Agent are parties to a Loan
Agreement, dated as of April 7, 1998 (the "LOAN AGREEMENT"), pursuant to which
the Lender agreed, subject to the terms and conditions set forth in the Loan
Agreement, to make a loan to the Borrower as provided in the Loan Agreement.
Terms used but not defined herein shall have the respective meanings ascribed to
such terms in the Loan Agreement, as amended hereby.
As a condition to the effectiveness of the Loan Agreement, the
Guarantor, as a 100% beneficial owner of the Borrower, has made the Guaranty of
Payment in favor of the Lender, dated as of April 8, 1998, pursuant to which the
Guarantor guaranteed the repayment of a portion of the Loan to the Lender (the
"GUARANTY").
The Parties wish to amend the Loan Agreement and the Guaranty as
provided herein.
NOW, THEREFORE, in consideration of good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the Parties hereto
agree as follows, effective as of the date hereof:
SECTION 1. AMENDMENTS.
1.1 The Loan Agreement is hereby amended by deleting Section
2.1(c) thereof in its entirety.
1.2 Section 11(b) of the Guaranty is hereby amended by replacing the
amount of "$200 million" with "$175 million".
SECTION 2. COVENANTS, REPRESENTATIONS AND WARRANTIES OF THE BORROWERS.
2.1 Except as expressly amended by Section 1 hereof, the Loan
Agreement and the Guaranty remain unaltered and in full force and effect. Each
Party hereby reaffirms all terms and covenants made in the Loan Documents as
amended hereby.
2.2 Each of the Borrower and the Guarantor hereby represents and
warrants to the Lender that (a) this Amendment constitutes the legal, valid and
binding obligation of the Borrower and the Guarantor, enforceable against the
Borrower and the Guarantor in accordance with its terms, and (b) the execution
and delivery by the Borrower and the Guarantor of this Amendment has been duly
<PAGE>
authorized by all requisite limited partnership or limited liability company, as
applicable, action on the part of each of the Borrower and the Guarantor and
will not violate any provision of the organizational documents of any of the
Borrower and the Guarantor.
2.3 Each of the Borrower and the Guarantor hereby represents and
warrants to the Lender that, as of the date hereof, to the best of such
Borrower's or Guarantor's, as applicable, knowledge, no Event of Default has
occurred and is continuing, and that no Event of Default will occur as a result
of the execution, delivery and performance by the Borrower or Guarantor of this
Amendment.
2.4 Each of the Borrower and Guarantor hereby agrees that a breach of
any of the representations and warranties made herein shall constitute an Event
of Default under Section 7.1 of the Loan Agreement, subject to the notice and
cure provisions provided therein.
SECTION 3. EFFECT UPON LOAN DOCUMENTS.
3.1 Except as specifically set forth herein, the Loan Documents shall
remain in full force and effect and are hereby ratified and confirmed. All
references to the "Loan Agreement" in the Loan Documents shall mean and refer to
the Loan Agreement as modified and amended hereby.
3.2 The execution, delivery and effectiveness of this Amendment shall
not operate as a waiver of any right, power or remedy of the Lender under the
Loan Documents, or any other document, instrument or agreement executed and/or
delivered in connection therewith.
SECTION 4. GOVERNING LAW.
THIS AMENDMENT SHALL BE CONSTRUED, INTERPRETED AND GOVERNED BY THE LAW
OF THE STATE OF NEW YORK, WITHOUT REFERENCE TO ITS CONFLICT OF LAWS PRINCIPLES.
SECTION 5. COUNTERPARTS.
This Amendment may be executed in any number of counterparts, and all
such counterparts shall together constitute the same agreement.
[REST OF PAGE INTENTIONALLY LEFT BLANK]
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto caused this Amendment to be
executed as of the day and year first above written.
LENDER:
SALOMON BROTHERS REALTY CORP., a New York corporation
By: /s/ JOHN A. CAVANAUGH
---------------------
Name: John A. Cavanaugh
Title: Authorized Agent
BORROWER:
OAIC BUSH STREET, LLC, a Delaware limited liability company
By: Ocwen Partnership, L.P., a Virginia limited partnership,
its sole member
By: Ocwen General, Inc., its general partner
By: /s/ RICHARD DELGADO
------------------------------
Name: Richard Delgado
Title: Vice President & Treasurer
GUARANTOR:
OCWEN PARTNERSHIP, L.P. a Virginia limited partnership
By: Ocwen General, Inc., its general partner
By: /s/ MARK ZEIDMAN
----------------
Name: Mark Zeidman
Title: CFO
3
<PAGE>
COLLATERAL AGENT:
LASALLE BANK NATIONAL ASSOCIATION.,
a national banking association
By: /s/ THOMAS F. QUINLAN, JR.
--------------------------
Name: Thomas F. Quinlan, Jr.
Title: Trust Officer
4
SECOND AMENDMENT TO GUARANTY OF PAYMENT
This Second Amendment to Guaranty of Payment (this "Amendment"), dated
as of July 9, 1999, is made by and between SALOMON BROTHERS REALTY CORP., a New
York corporation (the "LENDER"), and OCWEN PARTNERSHIP, L.P., a Virginia limited
partnership (the "GUARANTOR") (each, a "PARTY" and collectively, the "PARTIES").
R E C I T A L S :
The Lender, OAIC CALIFORNIA PARTNERSHIP, L.P., a California limited
partnership, OAIC CALIFORNIA PARNTERSHIP II, L.P., a California limited
partnership, OCWEN FLORIDA PARTNERSHIP, LIMITED PARNTERSHIP, a Florida limited
partnership, OAIC MORTGAGE HOLDINGS, LLC, a Delaware limited liability company
and OAIC JACKSONVILLE, LLC, a Delaware limited liability company (collectively,
the "BORROWERS") are parties to a Loan Agreement, dated as of April 30, 1998 (as
amended, the "LOAN AGREEMENT"), pursuant to which the Lender agreed, subject to
the terms and conditions set forth in the Loan Agreement, to make advances in
the amount of up to $200,000,000 to the Borrowers as provided in the Loan
Agreement. Terms used but not defined herein shall have the respective meanings
ascribed to such terms in the Loan Agreement, as modified, supplemented and in
effect from time to time.
As a condition to the effectiveness of the Loan Agreement, the
Guarantor, as a 100% beneficial owner of the Borrowers, has made the Guaranty of
Payment in favor of the Lender, dated as of April 30, 1998, as amended by the
Amendment to the Guaranty of Payment, dated June 10, 1998 (the "GUARANTY").
The Parties wish to further amend the Guaranty as provided herein.
NOW, THEREFORE, in consideration of good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the Parties hereto
agree as follows, effective as of the date hereof:
SECTION 1. AMENDMENT.
1.1 Section 11(b) of the Guaranty is hereby amended by replacing the
amount of "$200 million" with "$175 million".
SECTION 2. COVENANTS, REPRESENTATIONS AND WARRANTIES OF THE BORROWERS.
2.1 Except as expressly amended by Section 1 hereof, the Guaranty
remains unaltered and in full force and effect. Each Party hereby reaffirms all
terms and covenants made in the Guaranty as amended hereby.
2.2 The Guarantor hereby represents and warrants to the Lender that
(a) this Amendment constitutes the legal, valid and binding obligation of the
Guarantor, enforceable against the Guarantor in accordance with its terms, and
<PAGE>
(b) the execution and delivery by the Guarantor of this Amendment has been duly
authorized by all requisite limited partnership or limited liability company, as
applicable, action on the part of the Guarantor and will not violate any
provision of the organizational documents of any the Guarantor.
2.3 The Guarantor hereby represents and warrants to the Lender that,
as of the date hereof, to the best of the Guarantor's knowledge, no Event of
Default has occurred and is continuing, and that no Event of Default will occur
as a result of the execution, delivery and performance by the Guarantor of this
Amendment.
2.4 The Guarantor hereby agrees that a breach of any of the
representations and warranties made herein shall constitute an Event of Default
under Section 7.1 of the Loan Agreement, subject to the notice and cure
provisions provided therein.
SECTION 3. EFFECT UPON LOAN DOCUMENTS.
3.1 Except as specifically set forth herein, the Loan Documents shall
remain in full force and effect and are hereby ratified and confirmed. All
references to the "Loan Agreement" in the Loan Documents shall mean and refer to
the Loan Agreement as modified and amended hereby.
3.2 The execution, delivery and effectiveness of this Amendment shall
not operate as a waiver of any right, power or remedy of the Lender under the
Loan Documents, or any other document, instrument or agreement executed and/or
delivered in connection therewith.
SECTION 4. GOVERNING LAW.
THIS AMENDMENT SHALL BE CONSTRUED, INTERPRETED AND GOVERNED BY THE LAW
OF THE STATE OF NEW YORK, WITHOUT REFERENCE TO ITS CONFLICT OF LAWS PRINCIPLES.
SECTION 5. COUNTERPARTS.
This Amendment may be executed in any number of counterparts, and all
such counterparts shall together constitute the same agreement.
[REST OF PAGE INTENTIONALLY LEFT BLANK]
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto caused this Amendment to be
executed as of the day and year first above written.
LENDER:
SALOMON BROTHERS REALTY CORP., a New York corporation
By: /s/ JOHN A. CAVANAUGH
---------------------
Name: John A. Cavanaugh
Title: Authorized Agent
GUARANTOR:
OCWEN PARNTERSHIP, L.P. a Virginia limited partnership
By: Ocwen General, Inc., its general partner
By: /s/ MARK ZEIDMAN
----------------
Name: Mark Zeidman
Title: CFO
3
AGREEMENT
This AGREEMENT is made and entered into as of the 24th day of
August, 1999 (the "Agreement") among OCWEN FINANCIAL CORPORATION, a Florida
corporation ("Ocwen Financial"), and STUART L. SILPE, PETER M. SMALL and WILLIAM
C. ERBEY (each, a "Director" and together, the "Directors").
WITNESSETH, in consideration of the mutual promises set forth
herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto do hereby agree
as follows:
1. INDEMNITY. (a) Ocwen Financial hereby agrees to hold
harmless and indemnify each Director, jointly and severally, with respect to any
liability, loss, damage, claim, settlement, cost or Expense whatsoever in any
way relating to, resulting from or arising out of, directly or indirectly, the
declaration of, payment of, or failure to pay, the dividend of $.82 per common
share ("1998 REIT Dividend") declared by the Board of Directors of OAC on or
about August 23, 1999 with respect to the outstanding common stock, par value
$.01 per share ("OAC Common Stock"), of Ocwen Asset Investment Corp. ("OAC"),
provided however that Ocwen Financial shall not be liable under this Agreement
to make any payment of amounts otherwise indemnifiable hereunder (or any payment
called for by paragraph 2 below) if and to the extent that a Director has
otherwise indefeasibly actually received payment with respect thereto as a
result of the Restated and Amended Articles of Incorporation of OAC, the Bylaws
of OAC, any directors' and officers' liability or other insurance policy or any
employment, indemnity or other agreement, each as amended from time to time
(collectively, the "Existing Indemnification Arrangements"). To the extent that
any such indefeasible actual payment from the Existing Indemnification
Arrangements only partly indemnifies any such Director for any such liability,
loss, damage, claim, settlement, cost or Expense, Ocwen Financial shall still
indemnify such Director for any such liability, loss, damage, claim, settlement,
cost or Expense as to which such Director has not actually and indefeasibly
received payment from the Existing Indemnification Arrangements.
(b) Within ten days after the receipt by Ocwen Financial of a
statement or statements from such Director requesting such indemnification,
whether prior to or after final disposition of the Proceeding in question, and
notwithstanding any other provision of this Agreement, Ocwen Financial shall
make payment for any liability, loss, damage, claim, settlement, cost or
Expenses arising from such Proceeding, to such Director that are not paid to
such Director under any of the Existing Indemnification Arrangements. Within ten
days after the receipt by Ocwen Financial of a statement or statements from such
Director requesting such advance or advances, from time to time, whether prior
to or after final disposition of the Proceeding in question, and notwithstanding
any other provision of this Agreement, Ocwen Financial shall advance all
Expenses arising from such Proceeding, to such Director that are not advanced to
such Director under any of the Existing Indemnification Arrangements. Such
statement or statements shall reasonably evidence the Expense, liability, loss,
damage, claim, cost or settlement incurred by the Director and shall include or
be preceded or accompanied by a written affirmation by such Director that such
<PAGE>
advance or payment was not indefeasibly and actually made under any of the
Existing Indemnification Arrangements, and a written undertaking by or on behalf
of such Director to repay any Expenses advanced or payments made if such
Director indefeasibly receives such payment for such Expenses or liabilities,
losses, damages, claims, settlements or costs pursuant to any of the Existing
Indemnification Arrangements. Any undertakings to repay pursuant to this Section
1(b) shall be unlimited, unsecured general obligations of the Director and shall
be interest free; any advances made pursuant to this Section 1(b) shall be
unsecured and interest free.
(c) Without the consent of Ocwen Financial, which will not be
unreasonably withheld, a Director will not enter into a settlement of any
Proceeding as to which settlement such Director seeks payment from Ocwen
Financial under this Agreement. Ocwen Financial will not be required to pay the
settlement of a Proceeding unless the consent of Ocwen Financial to such
settlement is obtained, which consent will not be unreasonably withheld. If the
Director seeks payment under this Agreement with respect to a Proceeding, such
Director will tender the defense of such Proceeding to Ocwen Financial and Ocwen
Financial will assume such defense. Ocwen Financial will consult with such
Director concerning the choice of counsel for such defense and such counsel
shall be reasonably acceptable to such Director.
2. CONTRIBUTION. If the indemnification provided for in this
Agreement is unavailable to or insufficient to hold harmless a Director in
respect of any liability, loss, damage, claim, settlement, cost or Expense with
respect to any Proceeding, then Ocwen Financial shall contribute to the amount
paid or payable by such Director the full amount of any such deficiency.
3. REMEDIES. (a) In the event that (i) the advancement of
Expenses provided for in this Agreement is not timely made or (ii) payment of
indemnification is not made pursuant to this Agreement within (10) days after
receipt by Ocwen Financial of a written request therefor, such Director shall be
entitled to an adjudication in an appropriate court of the Commonwealth of
Virginia, or in any other court of competent jurisdiction, of his entitlement to
such indemnification.
(b) In the event that a Director, pursuant to this Section 3,
seeks a judicial adjudication of his rights under, or to recover damages for
breach of, or otherwise to enforce the terms of, this Agreement with respect to
indemnification or advancement of Expenses, Ocwen Financial shall pay on his
behalf, in advance and promptly upon receipt of request for payment therefor
(but in no event later than 10 days after receipt of such notice), any and all
Expenses incurred by him in such judicial adjudication, regardless of whether
such Director ultimately is determined to be entitled to such indemnification or
advancement of Expenses hereunder.
(c) Ocwen Financial shall be precluded from asserting in any
judicial proceeding commenced pursuant to this Section 3 that this Agreement and
the procedures and presumptions of this Agreement are not valid, binding and
enforceable and shall stipulate in any such court that Ocwen Financial is bound
by all the provisions of this Agreement.
2
<PAGE>
4. OTHER. In the event of any payment under this Agreement,
Ocwen Financial shall be subrogated to the extent of such payment to all of the
rights of recovery of a Director, including under the Existing Indemnification
Agreements, and such Director shall execute all papers required and take all
action necessary to secure such rights, including execution of such documents as
are necessary to enable Ocwen Financial to bring suit to enforce such rights.
5. SEVERABILITY. If any provision or provisions of this
Agreement shall be held by a court of competent jurisdiction to be invalid,
void, illegal or otherwise unenforceable for any reason whatsoever: (a) the
validity, legality and enforceability of the remaining provisions of this
Agreement (including, without limitation, each portion of any section of this
Agreement containing any such provision held to be invalid, illegal or
unenforceable, that is not itself invalid, illegal or unenforceable) shall not
in any way be affected or impaired thereby and shall remain enforceable to the
fullest extent permitted by law; and (b) to the fullest extent possible, the
provisions of this Agreement (including, without limitation, each portion of any
section of this Agreement containing any such provision held to be invalid,
illegal or unenforceable, that is not itself invalid, illegal or unenforceable)
shall be construed so as to give effect to the intent manifested thereby.
6. DEFINITIONS. (a) "Expenses" shall include all attorneys'
fees, court costs, transcript costs, fees of experts, witness fees, travel
expenses, duplicating costs, printing and binding costs, telephone charges,
postage, delivery service fees, and all other disbursements or expenses of the
types customarily incurred in connection with prosecuting, defending, preparing
to prosecute or defend, investigating, participating, or being or preparing to
be a witness in a Proceeding.
(b) "Proceeding" includes any threatened, pending or completed
action, suit, arbitration, alternate dispute resolution mechanism,
investigation, inquiry, administrative hearing or any other actual, threatened
or completed proceeding, whether brought by or in the right of OAC or otherwise
and whether civil, criminal, administrative or investigative, in which a
Director was, is or will be involved as a party or otherwise, (i) by reason of
the fact that such Director approved, authorized or ratified the 1998 REIT
Dividend, or (ii) involving any other matter or otherwise in any way relating
to, resulting from or arising out of, directly or indirectly, the declaration
of, payment of, or failure to pay, the 1998 REIT Dividend.
7. NOTICES. Each Director agrees promptly to notify Ocwen
Financial in writing upon being served with any summons, citation, subpoena,
complaint, indictment, information or other similar document relating to the
1998 REIT Dividend or matter which may be subject to indemnification or
advancement of Expenses hereunder; provided, that the failure to so notify Ocwen
Financial shall not relieve Ocwen Financial of any obligation which it may have
to such Director under this Agreement or otherwise, except to the extent that
Ocwen Financial suffers material detriment as a result of such failure.
8. GENERAL. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and understandings, oral, written and implied,
between the parties hereto with respect to the subject matter hereof. All
agreements and obligations of Ocwen Financial contained herein shall continue
3
<PAGE>
during the period a Director is serving as a director of OAC and shall continue
thereafter whenever and so long as such Director shall be subject to any
Proceeding without regard to when such Proceeding shall be initiated. This
Agreement shall be binding upon and inure to the benefit of and be enforceable
by the parties hereto and their respective successors (including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business or assets of Ocwen Financial), assigns,
spouses, heirs, executors and personal and legal representatives. No supplement,
modification, termination or amendment of this Agreement shall be binding unless
executed in writing by the parties hereto. No waiver of any of the provisions of
this Agreement shall be deemed or shall constitute a waiver of any other
provisions hereof (whether or not similar) nor shall such waiver constitute a
continuing waiver. This Agreement may be executed in one or more counterparts,
each of which shall for all purposes be deemed to be an original but all of
which together shall constitute one and the same Agreement. The parties agree
that this Agreement shall be governed by, and construed and enforced in
accordance with, the laws of the Commonwealth of Virginia without application of
the conflict of laws principles thereof.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
OCWEN FINANCIAL CORPORATION
/s/ STUART L. SILPE
----------------------------
Stuart L. Silpe By: /s/ JOHN R. ERBEY
-------------------------------
Name: John R. Erbey
/s/ PETER M. SMALL Title: Senior Managing Director
----------------------------
Peter M. Small
/s/ WILLIAM C. ERBEY
----------------------------
William C. Erbey
4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Financial Condition at September 30, 1999 and the
Consolidated Statement of Operations for the Nine Months Ended September 30,
1999 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 39,726
<SECURITIES> 212,406
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 741,362
<CURRENT-LIABILITIES> 20,015
<BONDS> 532,066
190
0
<COMMON> 0
<OTHER-SE> 168,280
<TOTAL-LIABILITY-AND-EQUITY> 741,362
<SALES> 0
<TOTAL-REVENUES> 79,416
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 72,855
<LOSS-PROVISION> 1,077
<INTEREST-EXPENSE> 27,761
<INCOME-PRETAX> (22,277)
<INCOME-TAX> 0
<INCOME-CONTINUING> (22,277)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,277)
<EPS-BASIC> (1.17)
<EPS-DILUTED> (1.17)
</TABLE>
