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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 28, 1999
REGISTRATION NO. 333-64047
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------------
OCWEN ASSET INVESTMENT CORP.
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(Exact name of Registrant as specified in its charter)
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VIRGINIA 6798 65-0736120
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(State or other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
Incorporator or organization) Classification Code Number) Identification Number)
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1675 PALM BEACH LAKES BLVD.
WEST PALM BEACH, FLORIDA 33401
(561) 682-8000
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(Address, including zip code, and telephone number, including
area code, of Registrants' principal executive offices)
WILLIAM C. ERBEY
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
OCWEN ASSET INVESTMENT CORP.
1675 PALM BEACH LAKES BLVD.
WEST PALM BEACH, FLORIDA 33401
(561) 682-8000
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(Name, address, including zip code, and telephone number,
including area code, of agents for service)
COPY TO:
GERARD L. HAWKINS, ESQ.
KENNETH B. TABACH, ESQ.
ELIAS, MATZ, TIERNAN & HERRICK L.L.P.
734 15TH STREET, N.W.
WASHINGTON, D.C. 20005
Approximate Date of Commencement of Proposed Sale to the Public:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
in connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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Information contained herein is subject to completion or amendment. A
Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor offers
to buy be accepted prior to the time the Registration Statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any jurisdiction in which such offer, solicitation or sale would be unlawful
prior to the registration or qualification under the securities laws of any such
jurisdiction.
SUBJECT TO COMPLETION, DATED JANUARY 28, 1999
PROSPECTUS
OCWEN ASSET INVESTMENT CORP.
OFFER TO EXCHANGE ITS
11 1/2% REDEEMABLE NOTES DUE 2005
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, FOR ANY AND ALL OF
ITS OUTSTANDING 11 1/2% REDEEMABLE NOTES DUE 2005
RESOLD PURSUANT TO RULE 144A
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON _______ __, 1999, UNLESS EXTENDED
--------------------
Ocwen Asset Investment Corp. (the "Company"), a Virginia corporation,
hereby offers, upon the terms and subject to the conditions set forth in this
Prospectus and in the accompanying Letter of Transmittal (which together
constitute the "Exchange Offer"), to exchange up to $142.5 million aggregate
principal amount of its 11 1/2% Redeemable Notes due 2005 (the "New Notes")
which have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), for a like aggregate principal amount of its outstanding 11
1/2% Redeemable Notes due 2005 which have been resold to certain "qualified
institutional buyers" ("QIBs") in reliance on, and subject to the restrictions
imposed pursuant to, Rule 144A under the Securities Act (the "Old Notes"), of
which there are $142.5 million aggregate principal amount outstanding as of the
date hereof. Outstanding 11 1/2% Redeemable Notes due 2005 which were
concurrently issued with the Old Notes and have been resold in reliance on, and
subject to the restrictions imposed pursuant to, Regulation S under the
Securities Act (the "Regulation S Notes"), of which there are $500,000 aggregate
principal amount outstanding as of the date hereof, are not eligible to
participate in the Exchange Offer.
The terms of the New Notes are identical in all material respects to the
terms of the Old Notes, except that (i) the New Notes have been registered
under the Securities Act and therefore will not be subject to certain
restrictions on transfer under federal securities laws applicable to the Old
Notes and (ii) the holders of New Notes will not be entitled to registration
rights that holders of Old Notes have, except under limited circumstances. See
"Description of New Notes" and "Description of Old Notes." The New Notes are
being offered for exchange in order to satisfy certain obligations of the
Company under the Registration Rights Agreement, dated July 14, 1998 (the
"Registration Rights Agreement"), among the Company and Lehman Brothers, Inc.,
Morgan Stanley & Co., Inc., J.C. Bradford & Co. and Piper Jaffray Inc. (the
"Initial Purchasers"). Except as the context may otherwise require or otherwise
expressly stated, the term "Notes" herein means the Old Notes, the New Notes
and the Regulation S Notes.
(continued on the following page)
This Prospectus and the Letter of Transmittal are first being mailed to
all registered holders of Old Notes as of _____________ __, 1999.
SEE "RISK FACTORS" COMMENCING ON PAGE 20 FOR MATERIAL RISKS THAT SHOULD
BE CONSIDERED BY HOLDERS IN DECIDING WHETHER TO TENDER OLD NOTES IN THE EXCHANGE
OFFER.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR AD-
EQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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The date of this Prospectus is __________ __, 1999.
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(Continued from the previous page)
Interest on the Notes will be payable in cash semi-annually in arrears
on each January 1 and July 1, commencing on January 1, 1999, at a rate per
annum of 11 1/2%. 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 set forth herein, plus accrued and unpaid interest to the
date of redemption. In addition, on or prior to July 14, 2001, the Company may,
on any one or more occasions, use the net proceeds of one or more offerings of
its common stock, par value $0.01 per share (the "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.
Upon the occurrence of a Change of Control (as defined under "Description of
New Notes - Repurchase at the Option of Holders - Certain Definitions"), the
Company is required, subject to certain conditions, to offer to purchase all of
the Notes at a price equal to 101% of the principal amount thereof, plus
accrued and unpaid interest to the date of purchase.
The New Notes will be represented by one or more certificates in
registered global form (the "Global Securities"), which will be deposited with
a custodian for and registered in the name of Cede & Co., as nominee for The
Depository Trust Company ("DTC"). Beneficial interests in New Notes will be
shown on, and transfers thereof will be effected through, records maintained by
DTC and its participants. See "Description of Notes - Book-Entry, Delivery and
Form."
Based on the position of the staff of the Division of Corporation
Finance (the "Staff") of the Securities and Exchange Commission (the
"Commission") as set forth in certain interpretive letters addressed to third
parties in other transactions, the Company believes that New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold and otherwise transferred by a holder thereof (other than a
holder who is a broker-dealer or who is an "affiliate" of the Company within
the meaning of Rule 405 under the Securities Act (an "Affiliate")) without
further compliance with the registration and prospectus delivery requirements
of the Securities Act, provided that such New Notes are acquired in the
ordinary course of such holder's business and that such holder is not
participating, and has no arrangement or understanding with any person to
participate, in a distribution (within the meaning of the Securities Act) of
such New Notes. Each holder of Old Notes wishing to accept the Exchange Offer
must represent to the Company in the accompanying letter of transmittal (the
"Letter of Transmittal") that such conditions have been met in connection with
its proposed acquisition of New Notes. In addition, as described herein, if any
broker-dealer (a "Participating Broker-Dealer") holds Old Notes acquired for
its own account as a result of market-making or other trading activities and
exchanges such Old Notes for New Notes then such Participating Broker-Dealer
must deliver a prospectus meeting the requirements of the Securities Act in
connection with any resales of such New Notes, which may be this Prospectus, as
amended or supplemented from time to time. See "The Exchange Offer Resales of
New Notes."
Prior to the Exchange Offer, there has been only a limited secondary
market and no public market for the Old Notes. The New Notes will be a new
issue of securities for which there is no existing market. There can be no
assurance as to the development or liquidity of any market for the Notes. The
Company does not intend to apply for listing of the New Notes on any securities
exchange or to seek approval for quotation of the New Notes through any
automated quotation system.
Any Old Notes not tendered and accepted in the Exchange Offer will
remain outstanding and will be entitled to all the same rights and will be
subject to the same limitations applicable thereto under the Indenture between
the Company and Norwest Bank Minnesota, National Association (the "Indenture"),
except for those rights which terminate upon consummation of the Exchange
Offer. Following consummation of the Exchange Offer, the holders of Old Notes
will continue to be subject to all of the existing restrictions upon transfer
thereof, and the Company will not have any further obligation to such holders
to provide for registration under the Securities Act of the Old Notes held by
them, except under limited circumstances. See "Registration Rights Agreement."
To the extent that Old Notes
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(Continued from the previous page)
are tendered and accepted in the Exchange Offer, a holder's ability to sell
untendered Old Notes could be adversely affected. See "Risk Factors -
Consequences of a Failure to Exchange Old Notes."
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF OLD NOTES ARE URGED TO READ THIS PROSPECTUS AND THE
RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER THEIR
OLD NOTES PURSUANT TO THE EXCHANGE OFFER.
Old Notes may be tendered for exchange on or prior to 5:00 p.m., New
York City time, on ____________ __, 1999 (such time on such date being
hereinafter called the "Expiration Date"), unless the Exchange Offer is
extended by the Company to a date which is no later than 30 business days after
the date hereof (in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended). Tenders of Old Notes
may be withdrawn at any time on or prior to the Expiration Date. The Exchange
Offer is not conditioned upon any minimum aggregate principal amount of Old
Notes being tendered for exchange. However, the Exchange Offer is subject to
certain events and conditions which may be waived by the Company and to the
provisions of the Registration Rights Agreement. Holders may tender their Old
Notes in whole or in part in integral multiples of $1,000 principal amount. The
Company has agreed to pay all expenses of the Exchange Offer. See "The Exchange
Offer--Fees and Expenses." Holders of New Notes as of the record date for the
payment of interest on July 1, 1999 will be entitled to receive interest
accumulated from January 1, 1999. Holders of Old Notes whose Old Notes are
accepted for exchange will not receive interest on such Old Notes accumulated
from and after January 1, 1999 and will be deemed to have waived the right to
receive any such interest accumulated from January 1, 1999. Consequently,
holders who exchange their Old Notes for New Notes will receive the same
interest payment on July 1, 1999 that they would have received had they not
accepted the Exchange Offer. See "The Exchange Offer - Interest on New Notes."
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TABLE OF CONTENTS
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AVAILABLE INFORMATION......................................................................................................... 8
ORGANIZATIONAL CHART.......................................................................................................... 8
SUMMARY....................................................................................................................... 9
The Company........................................................................................................... 9
The Exchange Offer .................................................................................................. 11
The New Notes........................................................................................................ 15
SELECTED CONSOLIDATED FINANCIAL DATA......................................................................................... 16
RECENT DEVELOPMENTS.......................................................................................................... 19
RISK FACTORS................................................................................................................. 20
Recent Operating Losses of the Company and Decision to Discontinue Investment
Activities Could Adversely Affect Future Operations of the Company............................................. 20
The Company's Ability to Comply with Indebtedness Requirements Not Assured........................................... 21
The Company's Dependence on Short-Term Financing May Require Additional Borrowings,
Which May Not Be Available..................................................................................... 21
Ownership of Subordinate and Residual Interests Subject to Credit, Prepayment and Liquidity Risks.................... 22
Value and Revenues of Real Estate Dependent on Conditions Beyond the Company's Control............................... 23
Real Properties with Environmental Problems Will Increase
Costs and May Create Liability for the Company................................................................. 24
Greater Risks of Loss from Commercial and Multifamily Construction and
Renovation Lending Activities.................................................................................. 25
Greater Risks of Loss from Distressed Mortgage Loans................................................................. 25
Allowance for Loan Losses May Not Be Adequate to Cover Losses........................................................ 25
Potential Adverse Effects of Changes in Interest Rates............................................................... 26
Potential Adverse Effects of Hedging Strategies...................................................................... 26
Foreign Investments Subject to Currency Conversion Risks and Uncertainty of Foreign Laws............................. 26
The Company is Subject to Intense Competition........................................................................ 27
Investment Policies of the Company May be Changed Without Approval of Shareholders or Noteholders.................... 27
Potential Adverse Tax Consequences of Failure to Qualify as a REIT and Other Tax Liabilities......................... 27
Loss of Investment Company Act Exemption Could Have Adverse Consequences............................................. 28
Dependence of the Company Upon External Management................................................................... 29
Manager Entitled to Broad Indemnification From the Company........................................................... 29
Potential Conflicts of Interest Between the Company and Its Affiliates Could be
Disadvantageous to the Company................................................................................. 30
Limitations on the Company's Ability to Access to Cash Flow of Subsidiaries.......................................... 31
No Assurance as to the Company's Ability to Purchase Notes Upon a Change in Control.................................. 31
Absence of Market for the Notes...................................................................................... 31
Failure of Computer Systems to Recognize the Year 2000 Could Adversely Affect
the Company's Operations........................................................................................ 32
Failure to Exchange Old Notes Could Adversely Affect the Marketability and
Value of Old Notes............................................................................................. 32
Exchange Offer Can Be Effected Only if a Holder Provides Requisite Documentation..................................... 33
THE COMPANY.................................................................................................................. 33
General.............................................................................................................. 33
Structure of the Company............................................................................................. 33
The Manager and Ocwen Financial...................................................................................... 33
USE OF PROCEEDS.............................................................................................................. 34
RATIO OF EARNINGS TO FIXED CHARGES........................................................................................... 35
CAPITALIZATION............................................................................................................... 35
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THE EXCHANGE OFFER........................................................................................................... 36
Purpose and Effect of the Exchange Offer............................................................................. 36
Terms of the Exchange Offer.......................................................................................... 36
Expiration Date; Extensions; Amendments.............................................................................. 37
Acceptance for Exchange and Issuance of New Notes.................................................................... 37
Procedures for Tending Old Notes..................................................................................... 38
Resales of New Notes................................................................................................. 40
Withdrawal Rights.................................................................................................... 41
Interest on New Notes................................................................................................ 42
Conditions to the Exchange Offer..................................................................................... 42
Certain Federal Income Tax Consequences of the Exchange Offer........................................................ 42
Exchange Agent....................................................................................................... 43
Fees and Expenses.................................................................................................... 43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS................................................................................................................ 45
General............................................................................................................. 45
Recent Operating Losses; Discontinuance of Investment Activities.................................................... 45
Recent Developments................................................................................................. 46
Results of Operations............................................................................................... 46
Changes in Financial Condition...................................................................................... 51
Funds from Operations............................................................................................... 74
Capital Resources and Liquidity..................................................................................... 75
Year 2000........................................................................................................... 78
REIT Status......................................................................................................... 78
Market Risk......................................................................................................... 78
Asset and Liability Management...................................................................................... 80
Miscellaneous....................................................................................................... 82
INVESTMENT GUIDELINES........................................................................................................ 84
General............................................................................................................. 84
Mortgage-Related Securities......................................................................................... 84
Distressed Real Estate.............................................................................................. 88
Mortgage Loans...................................................................................................... 89
FEDERAL INCOME TAX CONSIDERATIONS............................................................................................ 90
Taxation of the Company............................................................................................. 91
Requirements for Qualification...................................................................................... 92
Distribution Requirements........................................................................................... 97
Failure to Qualify.................................................................................................. 98
MANAGEMENT OF OPERATIONS..................................................................................................... 98
The Manager; Ocwen Financial........................................................................................ 98
The Management Agreement............................................................................................ 98
Management Fees..................................................................................................... 99
Stock Options...................................................................................................... 101
Limits of Responsibility........................................................................................... 101
Certain Relationships; Conflicts of Interest....................................................................... 101
Certain Transactions............................................................................................... 102
MANAGEMENT OF THE COMPANY................................................................................................... 103
General............................................................................................................ 103
Directors and Executive Officers................................................................................... 104
Compensation of Directors.......................................................................................... 106
Executive Compensation............................................................................................. 106
Limitation on Liability of Manager and Directors and Officers of the Company....................................... 106
BENEFICIAL OWNERSHIP OF COMMON STOCK........................................................................................ 107
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DESCRIPTION OF NEW NOTES.................................................................................................... 108
General............................................................................................................ 108
Principal, Maturity and Interest................................................................................... 109
Optional Redemption................................................................................................ 109
Selection and Notice............................................................................................... 110
Repurchase at the Option of Holders................................................................................ 110
Certain Covenants.................................................................................................. 111
Events of Default and Remedies..................................................................................... 116
No Personal Liability of Directors, Officers, Employees and Shareholders........................................... 117
Legal Defeasance and Covenant Defeasance........................................................................... 117
Transfer and Exchange.............................................................................................. 118
Amendment, Supplement and Waiver................................................................................... 118
Concerning the Trustee............................................................................................. 118
Certain Definitions................................................................................................ 119
Book-Entry, Delivery and Form...................................................................................... 128
Depository Procedures.............................................................................................. 128
Exchange of Book-Entry Securities for Certificated Securities...................................................... 129
DESCRIPTION OF OLD NOTES.................................................................................................... 130
REGISTRATION RIGHTS AGREEMENT............................................................................................... 130
PLAN OF DISTRIBUTION........................................................................................................ 131
VALIDITY OF NEW NOTES....................................................................................................... 132
EXPERTS..................................................................................................................... 132
INDEX TO FINANCIAL STATEMENTS............................................................................................... F-1
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, files reports, proxy statements and other information
with the Commission. Reports, proxy statements and other information concerning
the Company can be inspected and copied at prescribed rates at the Commission's
Public Reference Room, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, as well as the following Regional Offices of the Commission: 7
World Trade Center, 13th Floor, New York, New York 10048; and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material may be obtained by mail from the Commission's Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
If available, such reports and other information also may be accessed through
the Commission's electronic data gathering, analysis and retrieval system
("EDGAR") via electronic means, including the Commission's web site on the
Internet (http://www.sec.gov). The Common Stock is traded on the New York Stock
Exchange (the "NYSE") and, consequently, such reports, proxy statements and
other information also may be inspected at the offices of the NYSE, 20 Broad
Street, New York, New York 10005.
This Prospectus constitutes part of a Registration Statement on Form S-4
(together with all amendments and exhibits, the "Registration Statement") filed
by the Company with the Commission under the Securities Act. This Prospectus
does not contain all of the information included in the Registration Statement,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. Statements contained in this Prospectus concerning the
provisions or contents of any contract, agreement or any other document
referred to herein are not necessarily complete. With respect to each such
contract, agreement or document filed as an exhibit to the Registration
Statement, reference is made to such exhibit for a more complete description of
the matters involved, and each such statement shall be deemed qualified in its
entirety by such reference to the copy of the applicable document filed with
the Commission. The Registration Statement, including the exhibits thereto, may
be inspected without charge at the Commission's principal office at 450 Fifth
Street, N.W., Washington, D.C. and copies of it or any part thereof may be
obtained from such office, upon payment of the fees prescribed by the
Commission.
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THIS EXCHANGE
OFFER, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE
AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR A
SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION.
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ORGANIZATIONAL CHART
The following organizational chart sets forth the ownership structure
and relationships among the Company, its affiliates and the Manager. Such
structure does not reflect single-purpose subsidiaries of the Company or the
Operating Partnership which have been formed to hold individual investments in
securities and real estate.
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Ocwen Financial Corporation
(Ocwen Financial)
Stockholders 100% 100% 100%
91.9% Investors Ocwen Ocwen
Mortgage Capital Federal
8.1% Insurance Corporation Bank FSB
Holding (the Manager) (the Bank)
Ocwen Asset Investment Company
Corp. (the Company) (IMIHC)
(1) (2)
100% 100%
Ocwen General, Inc. Ocwen Limited, Inc.
(the General Partner) (the Limited Partner)
0.9% 90.4%
8.7%
Ocwen Partnership, L.P.
(the Operating Partnership)
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(1) The Company and the Operating Partnership are managed and advised by the
Manager pursuant to a management agreement.
(2) The Operating Partnership generally assigns the Bank special servicing
rights and obligations (other than the right to direct foreclosure)
received in connection with acquisitions of mortgage-related securities.
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SUMMARY
The following summary is qualified in its entirety by and should be read
in conjunction with the detailed information and financial statements,
including the notes thereto, appearing elsewhere herein or incorporated herein
by reference. Unless the context otherwise requires, references herein to the
Company include Ocwen Asset Investment Corp. and its subsidiaries.
THE COMPANY
GENERAL. The Company is a real estate investment trust ("REIT") based in
West Palm Beach, Florida which specializes in investments in real estate and
real estate-related assets. The Company was incorporated in Virginia on January
22, 1997 and was capitalized on May 19, 1997 with $283.7 million of net
proceeds from the initial public offering (the "Initial Public Offering") of
its Common Stock. The Company is externally managed and advised by Ocwen
Capital Corporation (the "Manager"), which is a wholly-owned subsidiary of
Ocwen Financial Corporation ("Ocwen Financial"), a diversified financial
services company that is primarily engaged in the acquisition, servicing and
resolution of subperforming and nonperforming residential and commercial
mortgage loans through Ocwen Federal Bank, FSB (the "Bank") and other
subsidiaries.
The Company conducts its business primarily through Ocwen Partnership,
L.P. (the "Operating Partnership"), a Virginia limited partnership, and its
other subsidiaries. Ocwen General, Inc. (the "General Partner"), a Virginia
corporation and a wholly-owned qualified REIT subsidiary of the Company, holds
an 0.9% interest in the Operating Partnership and is the general partner of and
controls the Operating Partnership. In addition, Ocwen Limited, Inc. (the
"Limited Partner"), a Virginia corporation and a wholly-owned qualified REIT
subsidiary of the Company, currently owns a 90.4% limited partnership interest
in the Operating Partnership. The remaining 8.7% partnership interests in the
Operating Partnership are limited partnership interests held by Ocwen Financial
through Investors Mortgage Insurance Holding Company ("IMIHC"), a wholly-owned
subsidiary of Ocwen Financial.
INVESTMENTS. The Company's investments consist primarily of (i)
subordinate and residual interests in collateralized mortgage obligations and
other mortgage-related securities (collectively, "mortgage-related
securities"), which generally are the first to bear loss upon a default on the
underlying mortgage collateral, more sensitive to changes in economic
conditions than more senior classes, unrated or rated below investment grade by
one or more credit rating agencies and are not actively traded and thus do not
provide liquidity of investment, and (ii) underperforming commercial and
multifamily real property, including properties acquired by mortgage lenders at
foreclosure or through deed-in-lieu thereof. The Company's investments also
include other real estate-related assets, including (i) commercial, multifamily
and single-family mortgage loans, including construction and renovation loans
and mezzanine loans, which comprise the Company's loan portfolio, and (ii)
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.
At September 30, 1998, the Company's investments consisted primarily of
(i) $395.5 million of subordinate and residual mortgage-related securities,
which amounted to 43.4% of the Company's total assets and consisted of $129.6
million of subordinate commercial and multifamily mortgage-related securities
and $265.9 million of subordinate and residual residential mortgage-related
securities, (ii) $261.2 million of net loans, which amounted to 28.7% of the
Company's total assets and consisted of $197.5 million of single-family
residential loans, $55.1 million of commercial and multifamily residential
loans and $8.6 million of discount commercial real estate loans, and (iii)
$209.9 million of net investments in real estate, which amounted to 23.1% of
total assets,
RECENT OPERATING LOSSES; DISCONTINUANCE OF INVESTMENT ACTIVITIES. The
Company reported a loss of $7.6 million or $0.40 per fully diluted share for
the three months ended September 30, 1998 and a loss of $11.5 million or $0.61
per fully diluted share for the nine months ended September 30, 1998. These
losses were primarily attributable
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to (i) $17.1 million of losses incurred in connection with the Company's
AAA-rated portfolio of agency interest only ("IO") and inverse floating rate
interest only ("Inverse IO") classes of mortgage-related securities backed by
single-family residential loans (the "IO Portfolio"), which were adversely
affected in the first quarter of 1998 by a projected increase in prepayments of
the underlying mortgages in response to a decrease in market interest rates, and
(ii) $15.6 million of losses on subordinate and residual interests in
mortgage-related securities and derivatives, which were adversely affected by
increased prepayments of the underlying mortgage loans and the substantial
volatility in U.S. and foreign stock markets since mid-July 1998, which has
resulted in widening mortgage spreads and declining market liquidity. Moreover,
as a result of these conditions, in recent months 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, real estate
investment trust 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. In order to enhance its ability to meet its borrowings
obligations, and in anticipation of a possible economic downturn, 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. As a result, the Company has
curtailed each of its business lines, which include the acquisition of
subordinate and residual interests in residential and commercial
mortgage-related securities, underperforming real estate and residential and
commercial real estate loans, including construction and renovation loans.
RECENT DEVELOPMENTS. On December 21, 1998, the Company announced that
its Board of Directors has approved a proposal to terminate the Company's
status as a REIT effective for calendar 1999. The proposal, which requires
amendment of the Company's Articles of Incorporation, is subject to shareholder
approval. The Board currently anticipates that this proposal will be considered
at the annual meeting of shareholders of the Company which is scheduled to be
held in May 1999. If approved, the Company will be treated as a general
corporation for federal, state and local tax purposes and will be subject to
federal, state and local income tax on its taxable income.
The Board's action is motivated by the desire to enhance shareholder
value. Unlike general corporations, REITs are penalized for not distributing at
least 95% of taxable income to their shareholders, although general corporations
do pay corporate income tax on taxable income. By eliminating the dividend
requirement, retained earnings can be used to enhance liquidity, improve
shareholders' equity, and better realize asset values, as well as facilitate the
transition of the Company to a growth strategy.
Consistent with the Company's focus on enhancing shareholder value and
improving liquidity, the Board of Directors has deferred payment of the
Company's final 1998 dividend, which is expected to range from $14.6 million or
$0.77 per share, to $16.1 million, or $0.85 per share. The Board expects to pay
this dividend in 1999, although there can be no assurance as to whether or when
that dividend will be paid. At December 18, 1998, the Company had cash and cash
equivalents of $52.9 million. See "Recent Developments."
10
<PAGE> 12
THE EXCHANGE OFFER
<TABLE>
<S> <C>
The Exchange Offer.......................... Up to $142.5 million aggregate principal amount of New Notes are being offered
in exchange for a like aggregate principal amount of Old Notes resold in reliance
on Rule 144A under the Securities Act. Old Notes may be tendered for exchange in
whole or in part. The Company is making the Exchange Offer in order to satisfy its
obligations under the Registration Rights Agreement relating to the Old Notes. For a
description of the procedures for tendering Old Notes, see "The Exchange Offer --
Procedures for Tendering Old Notes."
Expiration Date............................. 5:00 p.m., New York City time, on ________, 1999 unless the Exchange Offer is
extended by the Company (in which case the Expiration Date will be the latest
date and time to which the Exchange Offer is extended). See "The Exchange
Offer -- Terms of the Exchange Offer."
Conditions to the Exchange Offer............ The Exchange Offer is subject to certain conditions, which may be waived by the
Company in its sole discretion. The Exchange Offer is not conditioned upon any
minimum principal amount of Old Notes being tendered. See "The Exchange
Offer -- Conditions to the Exchange Offer."
Offer....................................... The Company reserves the right in its sole and absolute discretion, subject to
applicable law, at any time and from time to time, (i) to delay the acceptance
of the Old Notes for exchange, (ii) to terminate the Exchange Offer if certain
specified conditions have not been satisfied, (iii) to extend the Expiration
Date of the Exchange Offer and retain all Old Notes tendered pursuant to the
Exchange Offer, subject, however, to the right of holders of Old Notes to
withdraw their tendered Old Notes, or (iv) to waive any condition or otherwise
amend the terms of the Exchange Offer in any respect. See "The Exchange Offer
-- Terms of the Exchange Offer."
Withdrawal Rights........................... Tenders of Old Notes may be withdrawn at any time on or prior to the Expiration
Date by delivering a written notice of such withdrawal to Norwest Bank Minnesota,
National Association (the "Exchange Agent ") in conformity with certain procedures
set forth below under "The Exchange Offer-- Withdrawal Rights."
Procedures for Tendering Old Notes.......... Tendering holders of Old Notes must complete and sign a Letter of Transmittal in
accordance with the instructions contained therein and forward the same by mail,
facsimile or hand delivery, together with any other required documents, to the
Exchange Agent, either with the Old Notes to be tendered or in compliance with the
specified procedures for guaranteed
</TABLE>
11
<PAGE> 13
<TABLE>
<S> <C>
delivery of Old Notes. Certain brokers, dealers, commercial banks, trust companies
and other nominees also may effect tenders by book-entry transfer, including an
Agent's Message (as defined herein) in lieu of a Letter of Transmittal. Holders of
Old Notes registered in the name of a broker, dealer, commercial bank, trust company
or other nominee are urged to contact such person promptly if they wish to tender Old
Notes pursuant to the Exchange Offer. See "The Exchange Offer--Procedures for
Tendering Old Notes." Letters of Transmittal and certificates representing Old Notes
should not be sent to the Company. Such documents should only be sent to the
Exchange Agent. See "The Exchange Offer - Exchange Agent."
Resales of New Notes........................ The Company is making the Exchange Offer in reliance on the position of the Staff
of the Commission as set forth in certain interpretive letters addressed to third
parties in other transactions. See, e.g., Exxon Capital Holdings Corp. (pub.
avail. April 13, 1989), Morgan Stanley & Co. Inc. (pub. avail. June 5, 1991),
Shearman & Sterling (pub. avail. July 2, 1993) and Brown & Wood (pub. avail.
February 7, 1997). However, the Company has not sought its own interpretive
letter, and there can be no assurance that the Staff of the Commission would make
a similar determination with respect to the Exchange Offer as it has in such
interpretive letters to third parties. Based on these interpretations by the
Staff of the Commission, and subject to the two immediately following sentences,
the Company believes that New Notes issued pursuant to the Exchange Offer in
exchange for Old Notes may be offered for resale, resold and otherwise transferred
by a holder thereof (other than a holder who is a broker-dealer) without further
compliance with the registration and prospectus delivery requirements of the
Securities Act, provided that such New Notes are acquired in the ordinary course
of such holder's business and that such holder is not participating, and has no
arrangement or understanding with any person to participate, in a distribution
(within the meaning of the Securities Act) of such New Notes. However, any holder
of Old Notes who is an Affiliate of the Company or who intends to participate in
the Exchange Offer for the purpose of distributing the New Notes, or any
broker-dealer who purchased the Old Notes from the Company to resell pursuant to
Rule 144A or any other available exemption under the Securities Act, (i) will not
be able to rely on the interpretations of the staff of the Division of Corporation
Finance of the Commission set forth in the above-mentioned interpretive letters,
(ii) will not be permitted or entitled to tender such Old Notes in the Exchange
Offer and (iii) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any sale or other transfer
of such Old Notes unless such sale is made
</TABLE>
12
<PAGE> 14
<TABLE>
<S> <C>
pursuant to an exemption from such requirements. In addition, as described below,
if any broker-dealer holds Old Notes acquired for its own account as a result of
market-making or other trading activities and exchanges such Old Notes for New
Notes, then such broker-dealer must deliver a prospectus meeting the requirements
of the Securities Act in connection with any resales of such New Notes.
Each holder of Old Notes who wishes to exchange Old Notes for New Notes in the
Exchange Offer will be required to represent in the Letter of Transmittal
or by transmission of an Agent's Message that (i) it is not an Affiliate of the
Company, (ii) any New Notes to be received by it are being acquired in the
ordinary course of its business, (iii) it has no arrangement or understanding with
any person to participate in a distribution (within the meaning of the Securities
Act) of such New Notes and (iv) if such holder is not a broker-dealer, such holder is
not engaged in, and does not intend to engage in, a distribution (within the meaning
of the Securities Act) of such New Notes. The Letter of Transmittal contains the
foregoing representations. Each Participating Broker-Dealer that receives New
Notes for its own account pursuant to the Exchange Offer will be deemed to have
acknowledged by execution of the Letter of Transmittal or delivery of an Agent's
Message that it acquired the Old Notes for its own account as the result of
market-making activities or other trading activities and must agree that it will
deliver a prospectus meeting the requirements of the Securities Act in connection
with any resale of such New Notes. The Letter of Transmittal states that, by so
acknowledging and by delivering a prospectus, a Participating Broker-Dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. Based on the position taken by the Staff of the Commission in the
interpretive letters referred to above, the Company believes that Participating
Broker-Dealers who acquired Old Notes for their own accounts as a result of
market-making activities or other trading activities may fulfill their prospectus
delivery requirements with respect to the New Notes received upon exchange of such
Old Notes (other than Old Notes which represent an unsold allotment from the
original sale of the Old Notes) with a prospectus meeting the requirements of
the Securities Act, which may be the prospectus prepared for an exchange offer so
long as it contains a description of the plan of distribution with respect to the
resale of such New Notes. Accordingly, this Prospectus, as it may be amended or
supplemented from time to time, may be used by a Participating Broker-Dealer in
connection with resales of New Notes received in exchange for Old Notes where such
Old Notes were acquired by such Participating Broker-Dealer for its own account as a
result of market-making or other trading activities.
</TABLE>
13
<PAGE> 15
<TABLE>
<S> <C>
Subject to certain provisions set forth in the Registration Rights Agreement and to
the limitations described below under "The Exchange Offer--Resales of New Notes,"
the Company has agreed that this Prospectus, as it may be amended or supplemented
from time to time, may be used by a Participating Broker-Dealer in connection with
resales of such New Notes for a period ending 180 days after the date of this
Prospectus (subject to extension under certain limited circumstances) or, if
earlier, when all such New Notes have been disposed of by such Participating
Broker-Dealer. Pursuant to the Registration Rights Agreement, the Company has
agreed to amend or supplement this Prospectus, as required, during such 180-day
period. See "Plan of Distribution." Any person, including any Participating
Broker-Dealer, who is an Affiliate of the Company may not rely on such interpretive
letters and must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any resale transaction. See "The Exchange
Offer -- Resales of New Notes."
Certain Federal Income Tax
Consequences............................... Based upon current provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), applicable U.S. Treasury regulations, judicial authority and
administrative rulings and practice, special counsel to the Company has issued an
opinion to the effect that the exchange of an Old Note for a New Note pursuant to
the Exchange Offer will not constitute a taxable event for federal income tax
purposes. For a description of the basis of counsel's opinion regarding the
material federal income tax consequences of the Exchange Offer, see "The Exchange
Offer - Certain Federal Income Tax Consequences of the Exchange Offer." EACH
HOLDER OF OLD NOTES SHOULD CONSULT SUCH HOLDER'S OWN TAX ADVISOR AS TO THE
PARTICULAR TAX CONSEQUENCES OF EXCHANGING SUCH HOLDER'S OLD NOTES FOR NEW NOTES,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
Exchange Agent.............................. The Exchange Agent with respect to the Exchange Offer is Norwest Bank Minnesota,
National Association. The addresses, and telephone and facsimile numbers of the
Exchange Agent are set forth in "The Exchange Offer -- Exchange Agent" and in the
Letter of Transmittal.
Use of Proceeds............................. The Company will not receive any cash proceeds from the issuance of the New Notes
offered hereby. See "Use of Proceeds."
</TABLE>
14
<PAGE> 16
THE NEW NOTES
<TABLE>
<S> <C>
Securities Offered.......................... Up to $142.5 million aggregate principal amount of New Notes which have been
registered under the Securities Act. The New Notes will be issued, and the Old
Notes were issued, under the Indenture. The terms of the New Notes are identical
in all material respects to the terms of the Old Notes, except that (i) the New
Notes have been registered under the Securities Act and therefore will not be
subject to certain restrictions on transfer under federal securities laws and (ii)
the holders of New Notes will not be entitled to registration rights that holders
of the Old Notes have under the Registration Rights Agreement, except under
limited circumstances. See "The Exchange Offer--Purpose and Effect of the
Exchange Offer," "Description of New Notes" and "Description of Old Notes."
Maturity Date............................... July 1, 2005.
Interest Rate............................... The New Notes will bear interest at a rate of 111/2% per annum. Interest will be
paid in cash. Interest will accrue from the most recent interest payment date for
which interest has been paid or provided on the Old Notes.
Interest Payment Dates...................... Interest on the New Notes will be payable on each January 1 and July 1, commencing
on July 1, 1999.
Ranking..................................... The New Notes will rank on a parity with the Old Notes (and the Regulation S
Notes). The Notes are general unsecured obligations of the Company. Because the
Company conducts all of its operations through the Operating Partnership and its
qualified REIT subsidiaries, the right of the Company (and therefore the right of
the Company's creditors and shareholders) to participate in any distribution of
the assets or earnings of any subsidiary is subject to the prior claims of
creditors of such subsidiaries, including any claims of the Company as a creditor
to the extent such claims may be recognized.
Optional Redemption......................... The New Notes are redeemable, at the option of the Company, in whole or in part,
at any time on or after July 1, 2002, at the redemption prices set forth herein,
plus accrued and unpaid interest to the date of redemption. In addition, during
the first 36 months after the Closing Date, the Company may, on one or more
occasions, 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 then outstanding
at a redemption price of 111.50% of the principal amount thereof, plus accrued and
unpaid interest to the date of redemption; provided, however, that after any such
redemption, the aggregate principal amount of the Notes outstanding must equal at
least $112.5 million and that such redemption occurs within 90 days
</TABLE>
15
<PAGE> 17
<TABLE>
<S> <C>
following the closing of such offering of Common Stock.
See "Description of New Notes - Optional Redemption."
Change of Control........................... In the event of a Change of Control, the Company will, subject to certain
conditions, be required to offer to purchase all outstanding Notes at a purchase
price equal to 101% of the principal amount thereof, plus accrued and unpaid
interest to the date of purchase. There can be no assurance that the Company will
have sufficient funds to purchase all of the Notes in the event of a Change of
Control or that the Company would be able to obtain financing for such purpose on
favorable terms, if at all. See "Description of New Notes -Repurchase at the
Option of Holders - Change of Control."
Certain Covenants........................... The Indenture pursuant to which the New Notes will be issued and the Old Notes
(and Regulation S Notes) were issued contains certain covenants that will, among
other things, and subject to certain exceptions, limit the ability of the Company
and its Restricted Subsidiaries (as defined herein) to incur additional
indebtedness, pay dividends or make certain other restricted payments, enter into
certain transactions with affiliates, impose restrictions on the ability of a
Restricted Subsidiary to pay dividends or make certain payments to the Company,
merge or consolidate with any other person or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of their assets to any
other person. See "Description of New Notes - Certain Covenants."
Risk Factors................................ For a discussion of material risks that should be considered in deciding whether
to accept the Exchange Offer, including, among other things, the following, see
"Risk Factors":
- Recent operating losses by the Company and its decision to discontinue further
investment activities, which could adversely affect the Company's future results
of operations;
- Uncertainty regarding the Company's ability to meet its indebtedness obligations;
- The Company's investments in subordinate and residual interests in
mortgage-related securities, which are sensitive to events of loss, changes in
interest rates and liquidity considerations;
- The Company's investments in underperforming real estate, which are subject to
various risks which are incident to the ownership of real property;
</TABLE>
16
<PAGE> 18
<TABLE>
<S> <C>
- The Company's concentration of real estate investments in San Francisco,
California, and thus its vulnerability to economic conditions in that area;
- The Company's commercial and multi-family construction and renovation
activities, which generally are much riskier than other types of lending
activities;
- The vulnerability of the Company's assets and operations to changes in interest
rates;
- The consequences of the Company failing to qualify as a REIT or being required to
register as an investment company;
- Potential conflicts of interest between the Company and Ocwen Financial and its
affiliates; and
- Limitations on the ability of the Company to obtain funds from its subsidiaries.
</TABLE>
17
<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in Thousands, Except Per Share Data)
The following table presents selected consolidated historical financial
data of the Company and its subsidiaries at the dates and for the periods
indicated. The selected consolidated historical financial data at December 31,
1997 and for the period from May 14, 1997 to December 31, 1997 have been derived
from the financial statements audited by PricewaterhouseCoopers LLP, independent
certified public accountants. The selected consolidated historical financial
data at September 30, 1998 and for the period from May 14, 1997 to September 30,
1997 and the nine months ended September 30, 1998 is unaudited but in the
opinion of management reflects all adjustments (consisting only of normal
recurring accruals) which the Company considers necessary for a fair
presentation of the Company's financial data at such date and for such period.
Operating results for the nine months ended September 30, 1998 are not
necessarily indicative of the results that may be expected for any other interim
period or the entire year ending December 31, 1998. The selected consolidated
historical financial data should be read in conjunction with, and is qualified
in its entirety by reference to, the information in the Consolidated Financial
Statements and related notes included elsewhere herein.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
---- ----
<S> <C> <C>
BALANCE SHEET DATA:
Total assets.................................................. $910,398 $288,003
Cash and cash equivalents..................................... 18,330 48,677
Securities available for sale................................. 395,495 146,027
Residential loan portfolio, net............................... 197,495 15,831
Commercial and multifamily loan portfolio..................... 55,116 --
Discount loans, net........................................... 8,589 26,979
Investments in real estate, net............................... 209,851 45,430
Securities sold under agreements to repurchase................ 143,059 --
Obligations outstanding under lines of credit................. 189,137 --
Obligations outstanding under lines of credit -
real estate............................................... 142,445 --
11 1/2 % Redeemable Notes due 2005............................ 143,000 --
Minority interest............................................. 28,370(1) 2,942
Shareholders' equity.......................................... 242,981 271,258
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED MAY 14, 1997 TO MAY 14, 1997 TO
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 DECEMBER 31, 1997
------------------ ------------------ -----------------
<S> <C> <C> <C>
OPERATIONS DATA:
Interest income......................................... $43,088 $ 7,995 $13,462
Interest expense........................................ 16,838 -- --
-------- ------ -------
Net interest income..................................... 26,250 7,995 13,462
Provision for loan losses............................... 557 -- --
-------- ------ -------
Net interest income after provision for loan losses..... 25,693 7,995 13,462
Real estate income, net ................................ 1,092 65 1,482
Other expenses.......................................... 6,573 1,649 3,143
Net loss on securities and derivatives.................. 32,723(2) -- --
------- ------ -------
Income (loss) before minority interest.................. (12,511) 6,410 11,801
Minority interest in net (income) loss of operating
partnership......................................... 399 -- 9
------- ------ -------
Net income (loss) before extraordinary item............. (12,112) 6,410 11,792
Extraordinary gain on repurchase of debt................ 615 -- ---
------- ------ -------
Net income (loss)....................................... $(11,497) $ 6,410 $ 11,792
======= ====== =======
PER SHARE DATA(3):
Net income (loss) before extraordinary item............. $(0.64) $0.33 $0.60
Net income (loss)....................................... (0.61) 0.33 0.60
Book value.............................................. 12.81 14.91 14.30
Dividends............................................... 0.44 0.34 0.73
OTHER DATA:
Average equity to average assets........................ 42.22% 97.22% 98.29%
Dividend payout ratio................................... N/A 100.00% 117.74%
</TABLE>
- --------------------
(1) Reflects the Operating Partnership's issuance of limited partnership
units to IMIHC. Includes 1,473,733 limited partnership units in the
Operating Partnership issued to IMIHC for a capital contribution of $24.5
million in May 1998.
(2) Reflects a $3.1 million impairment write-down of the Company's IO
Portfolio in the first quarter of 1998.
(3) Based on diluted weighted average shares outstanding.
18
<PAGE> 20
RECENT DEVELOPMENTS
On December 21, 1998, the Company announced that its Board of Directors
has approved a proposal to terminate the Company's status as a REIT effective
for calendar 1999. The proposal, which requires amendment of the Company's
Articles of Incorporation, is subject to shareholder approval. The Board
currently anticipates that this proposal will be considered at the annual
meeting of shareholders of the Company which is scheduled to be held in May
1999. If approved, the Company will be treated as a general corporation for
federal, state and local tax purposes and will be subject to federal, state and
local income tax on its taxable income. In addition, the Company would not be
eligible to re-elect REIT status until 2004.
The Board's action is motivated by the desire to enhance shareholder
value. Unlike general corporations, REITs are penalized for not distributing at
least 95% of taxable income to their shareholders, although general corporations
do pay corporate income tax on taxable income. By eliminating the dividend
requirement, retained earnings can be used to enhance liquidity, improve
shareholders' equity, and better realize asset values, as well as facilitate the
transition of the Company to a growth strategy.
Currently, it is not anticipated that the proposal to terminate the
Company's status as a REIT, if adopted by shareholders, will result in any
material change in the Company's current plans to cease to acquire additional
assets or fund additional loans or, in the event that the Company resumes
investment activities, in the Company's investment guidelines and practices or
corporate structure, although there can be no assurance that this will be the
case. See "Risk Factors - Investment Policies of the Company May Be Changed By
It Without Approval of Shareholders or Noteholders."
Consistent with the Company's focus on enhancing shareholder value and
improving liquidity, the Board of Directors has deferred payment of the
Company's final 1998 dividend, which is expected to range from $14.6 million or
$0.77 per share, to $16.1 million, or $0.85 per share. The Board expects to pay
this dividend in 1999, although there can be no assurance as to whether or when
that dividend will be paid. At December 18, 1998, the Company had cash and cash
equivalents of $52.9 million.
Assuming that the Company's status as a REIT will terminate for 1999 and
that the Company will be taxed as a general corporation for 1999 and future
years, the Company will be subject to federal income taxes on taxable income
earned during 1999 and thereafter and will no longer be entitled to a deduction
for any dividends paid to shareholders. In addition, the Company will not be
subject to the distribution rules applicable to REITs. Corporate shareholders
that satisfy certain holding period requirements will be entitled to a dividends
received deduction on dividends paid out of current or accumulated earnings and
profits. The Company, however, generally does not currently anticipate paying
dividends on its Common Stock following termination of REIT status (except to
the extent necessary to meet the remainder of the REIT distribution requirement
for 1998). Any distributions on the Common Stock will be treated as dividends
for federal income tax purposes to the extent of the Company's current or
accumulated earnings and profits and, as such, will be eligible for any
applicable dividends received deduction for corporate shareholders (except to
the extent that such dividends constitute all or a portion of the remainder of
the Company's REIT distribution requirement for 1998) and will be treated as
ordinary dividend income for other shareholders.
The Company anticipates that as a result of the deferral of its quarterly
dividend it will be subject to a 4% non-deductible excise tax imposed by Section
4981 of the Code on REITs that fail to make certain distributions by calendar
year-end. Pursuant to Section 4981 of the Code, if the Company should fail to
distribute during each calendar year (or, in the case of distribution with
declaration and record dates falling in the last three months of the calendar
year, by the end of January immediately following such year) at least the sum of
(i) 85% of the Company's ordinary income for the calendar year, (ii) 95% of the
Company's capital gain net income for the calendar year and (iii) any
undistributed taxable income from prior periods, the Company would be subject to
a 4% nondeductible excise tax on the excess of such required distribution over
the amounts actually distributed. The Company currently estimates that the
deferral of its quarterly dividend will result in the incurrence of an excise
tax liability under Section 4981 of the Code of approximately $400,000, which is
due on or before March 15, 1999.
19
<PAGE> 21
RISK FACTORS
Prospective investors should carefully review the following factors, as
well as the other information contained in this Prospectus, in connection with
the Exchange Offer and the New Notes offered hereby. Each of the factors set
forth below could, directly or indirectly, affect the Company's results of
operations and financial condition and, thus, the Company's obligations to make
payments on the Notes.
Certain statements contained herein are not, and certain statements
contained in future filings by the Company with the Commission, in the Company's
press releases or in the Company's other public or shareholder communications,
may not be based on historical facts and are "forward-looking statements" within
the meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. These forward-looking statements, which are based on various assumptions
(some of which are beyond the Company's control), may be identified by reference
to a future period(s) or by the use of forward-looking terminology such as
"anticipate," "believe," "commitment," "consider," "continue," "could,"
"encourage," "estimate," "expect," "intend," "may," "plan," "present,"
"propose," "prospect," "will," future or conditional verb tenses, similar terms,
variations on such terms or negatives of such terms. Although the Company
believes the anticipated results or other expectations reflected in such
forward-looking statements are based on reasonable assumptions, it can give no
assurance that those results or expectations will be attained. 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, those described below and other factors generally affecting the
real estate acquisition, mortgage and leasing markets and securities markets.
RECENT OPERATING LOSSES OF THE COMPANY AND DECISION TO DISCONTINUE INVESTMENT
ACTIVITIES COULD ADVERSELY AFFECT FUTURE OPERATIONS OF THE COMPANY
The Company reported a loss of $7.6 million or $0.40 per fully diluted
share for the three months ended September 30, 1998 and a loss of $11.5 million
or $0.61 per fully diluted share for the nine months ended September 30, 1998.
These losses were primarily attributable to (i) an aggregate of $17.1 million of
losses incurred in connection with the Company's IO Portfolio, which was
adversely affected in the first quarter of 1998 by a projected increase in
prepayments of the underlying mortgages in response to a decrease in market
interest rates, and (ii) $15.6 million of losses on subordinate and residual
interests in mortgage-related securities and derivatives (consisting of a $13.6
million loss on securities and a $2.0 million loss on derivatives), which were
adversely affected by increased prepayments of the underlying mortgage loans and
the substantial volatility in U.S. and foreign stock markets since mid-July
1998, which has resulted in widening mortgage spreads and declining market
liquidity. Moreover, as a result of these conditions, in recent months there has
been a general "flight to quality" by investors, with the result that the market
for subordinate and residual interests in 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, real estate investment trust 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 interests in mortgage-related securities,
the Company has received requests from its lenders to pledge additional
collateral pursuant to the terms of its indebtedness, which it has been able to
meet as of the date hereof. In order to enhance its ability to meet the
obligations under its indebtedness, and in anticipation of a possible economic
downturn, 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. As a result,
the Company has curtailed each of its business lines, which include the
acquisition of subordinate and residual interests in residential and commercial
mortgage-related securities, underperforming real estate and residential and
commercial real estate loans, including construction and renovation loans.
At September 30, 1998, the Company's shareholder's equity amounted to
$243.0 million or $12.81 per fully diluted share. This amount was comprised of
$295.0 million of stated capital and additional paid-in capital related to the
Company's Common Stock, less distributions in excess of earnings of $36.0
million, unrealized losses on securities available for sale of $13.7 million and
accumulative translation adjustments of $2.0 million.
The future success of the Company will be primarily dependent on its
ability to continue to be able to meet its obligations under its indebtedness,
including without limitation the Notes. This ability will depend largely on the
Company's future performance, which, in turn, is subject to prevailing economic
conditions and to financial, business and other factors beyond its control,
including levels of interest rates. This ability also could be significantly
adversely affected by the Company's decision to discontinue future investment
activities, which effectively means that the Company's future profitability, and
its ability to meet its indebtedness obligations, will be dependent on its
existing assets. There can be no assurance that the Company's existing assets
will be sufficient to ensure future profitable operations or enable the Company
to meet its indebtedness obligations, or that such assets will not be further
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significantly adversely affected by changes in market and economic conditions
and other factors. Moreover, it can be anticipated that unless and until the
Company resumes investment activities, income from the Company's portfolio of
investment securities and loans, which along with investments in real estate
comprise the Company's three principal business lines, will decrease as
securities and loans mature and are repaid in the ordinary course of business.
THE COMPANY'S ABILITY TO COMPLY WITH INDEBTEDNESS REQUIREMENTS NOT ASSURED
The Company has significant debt service obligations. At September 30,
1998, the Company had total consolidated indebtedness of $617.6 million, of
which all but the $143.0 million of outstanding Old Notes and Regulation S Notes
was secured indebtedness, as well as $21.4 million of other liabilities. This
indebtedness consisted of (i) $143.1 million of securities sold to investment
dealers under agreements to repurchase ("repurchase agreements"), of which $17.8
million, $73.9 million and $51.4 million were scheduled to mature within 30
days, within six to 12 months and in 18 months or over, respectively, (ii) lines
of credit aggregating $331.6 million, $136.0 million of which was repaid in
November 1998 and the remainder of which matures in 2001 (which in certain
cases, and subject to certain conditions, may be extended by the Company until
2002) and are secured by real estate, loans and/or securities and (iii) $143.0
million of outstanding Old Notes and Regulation S Notes.
As a result of market and economic conditions, in recent months the
Company has been required to provide additional collateral to secure its
short-term floating rate borrowing facilities. During July, August, September
and October 1998, the Company was required to and did fund requests by its
lenders for additional collateral in the amount of $2.3 million, $1.4 million,
$3.9 million and $13.7 million, respectively. Although to date the Company has
had adequate cash and unencumbered assets to meet such calls for additional
collateral and its other operating and financing requirements, there can be no
assurance that sufficient levels of unencumbered assets will continue to be
available. If the Company is unable to fund additional collateral needs or to
repay, renew or replace maturing indebtedness on terms reasonably satisfactory
to the Company, 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 exists and there can be no assurance that one
will fully develop, thereby limiting the Company's ability to dispose of such
securities promptly for fair value in such situations.
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
financial covenants which require the maintenance of specified amounts of
equity. Other covenants affirmatively impose standards of management,
administration, and reporting with respect to the real property assets of the
Company, and require the observance of certain administrative activities, loan
to value ratios, and advance limitations with respect to mortgage loans. With
respect to the securities available for sale, certain covenants also seek to
control the debt exposure of the lender based on the default and prepayment
experience of the loans that comprise the mortgage pools underlying the
securities, factors which are outside of the Company's control. For a
description of the covenants in the Indenture relating to the Notes, which limit
the Company's ability to incur indebtedness except under specified
circumstances, among other things, but do not impose ongoing financial
requirements to be met by the Company, see "Description of New Notes-Certain
Covenants." At September 30, 1998, 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. As of October 31, 1998, the Company exceeded the highest
applicable requirement by in excess of $19.7 million. The Company's ability to
continue to meet these financial requirements will be dependent on its results
of operations.
In the event of a default in the Company's covenants or other terms of
the Company's indebtedness, the lender generally would be able to accelerate
repayment of the subject 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.
For additional information, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Changes in Financial Condition"
and "- Capital Resources and Liquidity."
THE COMPANY'S DEPENDENCE ON SHORT-TERM FINANCING MAY REQUIRE ADDITIONAL
BORROWINGS, WHICH MAY NOT BE AVAILABLE
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
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finance the Company's acquisition of such assets on a short-term 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 extend, repay 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.
OWNERSHIP OF SUBORDINATE AND RESIDUAL INTERESTS SUBJECT TO CREDIT, PREPAYMENT
AND LIQUIDITY RISKS
The Company invests in subordinate and residual interests in
collateralized mortgage obligations ("CMOs"), including CMOs which have
qualified as real estate mortgage investment conduits ("REMICs") under Section
860D of the Code. These securities are subject to a number of risks, as outlined
below.
CREDIT RISK. 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 therefor will be the first to bear any
credit losses.
The degree of credit risk is affected by the nature of the underlying
mortgage loans. In this regard, the risk of loss on securities backed by
commercial and multifamily 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 ("non-conforming residential loans"), 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.
At September 30, 1998, the Company's securities available for sale consisted of
(i) non-investment grade and unrated subordinate commercial backed securities
having a book value of $134.1 million and a market value of $129.6 million, (ii)
unrated residuals in securities backed by non-conforming residential loans
having a book value of $254.7 million and a market value of $245.2 million and
(iii) unrated subordinate interests in residential mortgage-related securities
having a book value of $20.4 million and a market value of $20.7 million.
For information on how credit risk impacts net portfolio value, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Market Risk."
PREPAYMENT RISK. Subordinate and residual interests are affected by the
rate and timing of payments of principal (including prepayments, repurchases,
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 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 generally will be positively
affected and the yield on residuals generally will be negatively affected.
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. Accelerated
prepayment speeds as a result of declining market interest rates were a
significant factor in the $15.6 million loss on securities and derivatives
recorded by the Company during the three months ended September 30, 1998. For
information on the level of funding for overcollateralization reserves, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Changes in Financial Condition - Securities Available for Sale."
Accelerated prepayment speeds also significantly affect IOs, which are
classes of mortgage-related securities that are entitled to payments of interest
but no (or only nominal) payments of principal, and Inverse IOs, which bear
interest at a floating rate that varies inversely with (and often at a multiple
of) changes in a specified index. As a result of an increase in prepayment
speeds due to declining interest rates in the first quarter of 1998, the Company
incurred $17.1 million of losses on its IO Portfolio and, following the sale of
the IO Portfolio to two affiliates of the Company
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and/or Ocwen Financial in May 1998 at a price equal to its amortized cost plus
accrued interest, the Company discontinued investing in IOs and Inverse IOs.
For information on the impact of changes in interest rates and prepayment
speeds on the Company's net portfolio value, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Changes in
Financial Condition - Securities Available for Sale" and "- Market Risk."
LIQUIDITY RISK. As a result of the risks associated with subordinate and
residual interests in mortgage-related securities, and because they generally
are unrated or rated non-investment grade, such securities generally are traded
less frequently than investment-grade securities and may not provide holders
thereof with liquidity of investment. This is particularly the case since U.S.
and foreign stock markets began experiencing substantial volatility in mid-July
1998, which has substantially adversely affected the market for subordinate
interests in mortgage-related securities.
SUBORDINATE AND RESIDUAL INTERESTS MAY GENERATE TAXABLE INCOME EXCEEDING
CASH FLOW. Subordinate and residual interests, including residual interests
which are designated as REMIC residual interests under Section 860D of the Code,
receive cash flow in excess of amounts needed to make payments on other classes
of the security or to fund a related reserve account. Cash flow otherwise
allocable to subordinate or residual interests is used to protect senior classes
of securities from credit losses on the underlying mortgage loans. Moreover, in
any given year, the taxable income produced by a subordinate or residual
interest may exceed its cash flow. If the Company was deemed to have a
substantial amount of such "phantom income" in any particular year, the Company
could be required to borrow funds or to liquidate assets in order to meet the
REIT distribution requirement for such year. See "-Potential Adverse
Consequences of Failure to Qualify as a REIT and Other Tax Liabilities."
For additional information regarding the risks associated with the
Company's mortgage-related securities, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Changes in Financial
Condition - Securities Available for Sale" and "Investment Guidelines."
VALUE AND REVENUES OF REAL ESTATE DEPENDENT ON CONDITIONS BEYOND THE COMPANY'S
CONTROL
GENERAL. Investment in underperforming real estate is subject to varying
degrees of risk which are generally incident to the ownership of real property.
Revenues may be adversely affected by adverse changes in national or local
economic conditions, competition from other properties offering the same or
similar services, changes in interest rates and in the availability, cost and
terms of mortgage funds, the impact of present or future laws and regulations,
including without limitation those dealing with zoning, the environment, access
by disabled persons and taxation, the ongoing need for capital improvements
(particularly in older structures), changes in real estate tax rates and other
operating expenses, adverse changes in governmental rules and fiscal policies,
civil unrest, acts of nature, including earthquakes, hurricanes and other
natural disasters, acts of war and other factors which are beyond the control of
the Company. Revenues also may be affected by problems experienced by lessees,
which may weaken their financial condition and result in failure to make rental
payments when due. At any time, a lessee of the Company's properties may seek
the protection of bankruptcy laws, which could result in rejection and
termination of the lessee's lease and thereby cause a reduction in cash flow
available for distribution to the Company. As a result of the foregoing factors,
no assurances can be given that the fair market value and/or revenues of the
Company's investments in real estate, which amounted to $209.9 million or 28.7%
of total assets at September 30, 1998, will not decrease in the future or that
the Company will be able to vary its real estate portfolio in response to
changes in economic or other conditions.
VALUE AND REVENUES OF REAL ESTATE DEPENDENT IN PART ON EXTERNAL
MANAGEMENT. The value and revenues of underperforming real estate acquired by
the Company is dependent in part upon the ability of the Manager to operate the
real estate in a manner which is sufficient to maintain or increase revenues in
excess of operating expenses and debt service requirements, which will be
affected by many of the risks which are inherent in investments in real estate
and over which the Company has no control. The underperforming real estate
acquired by the Company to date generally has had significant amounts of
unleased space or restrictive or below market rents in place. As part of its
initial repositioning of a property after an acquisition, the Company, in
addition to making any necessary capital expenditures, generally pursues a
policy of replacing some existing tenants with tenants which have higher lease
payments and/or a higher probability of expansion and renewal. Although this
strategy may adversely affect tenant retention rates in the early years of
ownership of a property, management believes that the strategy will be
beneficial to the Company in the long term. There can be no assurance, however,
that the Company's tenant retention rate will increase as each property is
repositioned or stabilized or that the net present value of new or renewed
leases will substantially exceed the net present value of leases with existing
tenants. At September 30, 1998, approximately 8.9%, 13.0% and 8.4% of the
aggregate square feet of expiring leases for the Company's investments in real
estate was scheduled to expire in 1998, 1999 and 2000, respectively.
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GEOGRAPHIC CONCENTRATION OF REAL ESTATE SUBJECT TO LOCAL MARKET RISK.
Geographic locations can have a substantial effect on the market value of and
revenues from real estate and on the ability of borrowers to repay loans secured
by properties in such a location. Value and revenues can be affected by national
and local economic conditions and other factors which are beyond the control of
the Company. At September 30, 1998, the Company's investments in real estate
included four properties with an aggregate varying value of $143.4 million
located in San Francisco, California. In addition, at the same date the Company
had a $11.6 million loan for the construction of an apartment building in San
Francisco, of which $3.2 million had been disbursed at such date. As a result of
this concentration of investments, the Company's operations will be dependent to
a large extent on the economic conditions in this area.
INSURANCE MAY NOT COVER ALL REAL ESTATE LOSSES. The Company maintains
comprehensive insurance coverage on its real estate, including coverage against
events of a catastrophic nature, such as earthquakes, hurricanes and other
natural disasters. There can be no assurance that insurance against such events
will continue to be obtainable on terms which are acceptable to the Company or
at all. Moreover, changes in building codes and ordinances, environmental
considerations and other factors also might make it not feasible to use
insurance proceeds to replace a property if it is damaged or destroyed. Under
such circumstances, the insurance proceeds received by the Company might not be
adequate to restore its economic position with respect to the affected
distressed real property.
The Company's earthquake insurance relating to its four properties in San
Francisco, California is in the 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
$12.8 million. In the event of a more catastrophic earthquake or damages in
excess of $50 million, the Company would not be insured for such losses.
For additional information, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Changes in Financial Condition -
Investments in Real Estate."
REAL PROPERTIES WITH ENVIRONMENTAL PROBLEMS WILL INCREASE COSTS AND MAY CREATE
LIABILITY FOR THE COMPANY
Operating costs and the value of real property may be affected by the
obligation to pay for the cost of complying with existing environmental laws,
ordinances and regulations, as well as the cost of future legislation. Under
various federal, state and local environmental laws, ordinances and regulations,
a current or previous owner or operator of real property may be liable for the
costs of removal or remediation of hazardous or toxic substances on, under or in
such property. Such laws often impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances. Therefore, an environmental liability could have a material
adverse effect on the underlying value of a real property, and the revenue
therefrom. Although the Company believes that its pre-acquisition due diligence
identified all material environmental concerns which relate to its current
investments in real estate and accurately assessed the costs and liabilities to
be concurred by it in this regard, there can be no assurance that such
investments will not involve unknown material environmental concerns or material
unanticipated environmental costs in the future.
The Company also evaluates the potential for significant environmental
problems prior to acquiring or originating a loan because there is a risk for
any mortgage loan, particularly a multifamily residential and commercial real
estate loan, that hazardous substances or other environmentally restricted
substances could be discovered on the related real estate. Through foreclosure,
the Company could become the owner of the real estate which secured its loan and
might be required to remove such substances from the affected properties or to
engage in abatement procedures at its sole cost and expense. There can be no
assurance that the cost of such removal or abatement will not substantially
exceed the value of the affected properties or the loans secured by such
properties, that the Company would have adequate remedies against the prior
owners or other responsible parties or that the Company would be able to resell
the affected properties either prior to or following completion of any such
removal or abatement procedures. If such environmental problems are discovered
prior to foreclosure, the Company generally will not foreclose on the related
loan; however, the value of such property as collateral will generally be
substantially reduced, and as a result, the Company may suffer a loss upon
collection of the loan.
GREATER RISKS OF LOSS FROM COMMERCIAL AND MULTIFAMILY CONSTRUCTION AND
RENOVATION LENDING ACTIVITIES
The Company's investments include loans for the construction or
renovation of commercial and multifamily real estate, including a mezzanine loan
which is subordinate to the first lien on the property which secures the loan.
Multifamily and commercial real estate lending, particularly construction and
renovation lending, is generally considered to involve a higher degree of risk
than single-family residential lending because of a variety of factors,
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including generally larger loan balances, dependency on successful completion or
operation of the project for repayment, difficulties in estimating construction
and renovation costs and loan terms that often require little or no amortization
of the loan over its term (typically five years) and, instead, provide for a
balloon payment at stated maturity. Furthermore, mezzanine loans, which are
subordinate to a senior loan or loans, and construction loans generally have
higher loan-to-value ratios than conventional loans. Although the Company's
borrowers generally have an equity investment of 10% to 15% of total project
costs, such equity may not be sufficient to protect the Company's investment in
these higher-yielding loans. At September 30, 1998, the Company had originated
$106.8 million of commercial and multifamily loans, of which $56.2 million had
been disbursed. At September 30, 1998, $56.2 million of the Company's funded
commercial and multifamily loans were current, as compared to $9.8 million at
December 31, 1997, respectively, and no loans were past due more than 31 days.
GREATER RISKS OF LOSS FROM DISTRESSED MORTGAGE LOANS
Nonperforming and subperforming mortgage loans may presently be in
default or may have a greater than normal risk of future defaults and
delinquencies, as 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 servicer can liquidate a
defaulted mortgage loan successfully or in a timely fashion. At September 30,
1998, the Company's gross discount loan portfolio amounted to $12.1 million
($8.6 million net) and consisted of (i) an $8.2 million or 13.8% interest in a
loan pool which is secured primarily by three office buildings located in
midtown New York and which is performing in accordance with its terms and (ii) a
$3.9 million loan secured by a shopping center in Havre, Montana which was
acquired by foreclosure in October 1998.
ALLOWANCES FOR LOAN LOSSES MAY NOT BE ADEQUATE TO COVER LOSSES
At September 30, 1998, the Company had established a $557,000 allowance
for loan losses on its commercial and multifamily loan portfolio and had not
established such an allowance on its single-family residential or discount loan
portfolio. Although the Company believes that these actions were adequate at
such date and in accordance with generally accepted accounting principles,
future additions to allowances for loan losses may be necessary due to changes
in economic conditions, increases in loans and the performance of the Company's
loan portfolios. Increases in the Company's provisions for losses on loans would
adversely affect the Company's results of operations.
POTENTIAL ADVERSE EFFECTS OF CHANGES IN INTEREST RATES
The Company's operations are significantly affected by current interest
rates, which are highly sensitive to many factors, including governmental
monetary and tax policies, domestic and international economic and political
considerations and other factors beyond the control of the Company. Changes in
the general level of interest rates will 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. The Company uses
short-term, floating-rate borrowings such as repurchase agreements and lines of
credit to acquire long-term interest-earning assets such as mortgage loans and
subordinate and residual interests in mortgage-related securities, some of which
will have a fixed rate of interest and/or longer effective maturities than the
related borrowings and thus may expose the Company to a maturity mismatch. As a
consequence, in an increasing interest rate environment the Company's borrowing
costs could exceed the income earned on the Company's interest-earning assets
acquired with borrowed funds, thereby reducing the Company's net interest income
and ability to make payments on its indebtedness, including the Notes. Based on
the estimated maturity or repricing of the Company's interest-earning assets and
interest-bearing liabilities at September 30, 1998, the Company's
interest-bearing liabilities which were estimated to mature or reprice within
three months and from four to 12 months exceeded the Company's interest-earning
assets with comparable characteristics by $219.0 million, or 32.6% of total
assets, and by $109.3 million, or 16.3% of total assets, respectively.
Changes in the level of interest rates also affect the value and average
life of the Company's mortgage-related securities, which are substantially
affected by prepayment rates on the underlying mortgage loans, and other
interest-earning assets and the Company's ability to realize gains from the sale
of such assets. In periods of declining mortgage interest rates, prepayments on
mortgage-related securities generally increase. If general interest rates also
decline, the amounts available for reinvestment by the Company during such
periods are likely to be reinvested at lower interest rates than the Company was
earning on the securities that were prepaid. Mortgage-related securities,
particularly residual interests, may decrease in value as a result of increases
in interest rates and may benefit less than other fixed-income securities from
declining interest rates because of the risk of prepayment. If general interest
rates increase, the credit risk associated with subordinate and residual
interests could be increased if borrowers with adjustable or floating-rate loans
are unable to meet increased debt service requirements and default on the
underlying mortgages.
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By reducing the likelihood of loan prepayments, increases in interest rates also
could extend the weighted average maturity of a security, which could adversely
affect the Company to the extent that the cost of the borrowings incurred by the
Company to fund the security are increasing faster than the yield on the
security is increasing, if at all. In general, changes in both prepayment rates
and interest rates will change the total return on mortgage-related securities,
which will in turn affect the Company's ability to make payments on its
indebtedness, including the Notes. Declining interest rates contributed
significantly to the losses incurred by the Company on the IO Portfolio and its
subordinate and residual interests during the nine months ended September 30,
1998.
Changes in interest rates also affect the costs of financing the
acquisition of real estate and thus the value of real estate, as well as the
Company's ability to originate and acquire loans, although it is not looking to
do so at this time. Changes in interest rates also may affect the Company's
ability to incur additional indebtedness or raise capital on acceptable terms.
For additional information, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Market Risk" and "- Asset and
Liability Management."
POTENTIAL ADVERSE EFFECTS OF HEDGING STRATEGIES
The Company may utilize a variety of financial instruments, including
interest rate swaps, caps, floors and other interest rate exchange contracts, in
order to limit the effects of interest rates on its operations. Among the risks
inherent with respect to the purchase and/or sale of such derivative instruments
are (i) interest rate risk, which consists of the risks relating to fluctuating
interest rates; (ii) basis risk, which consists of the risk of loss associated
with variations in the spread between the asset yield and the funding and/or
hedge costs; (iii) credit or default risk, which consists of the risk of
insolvency or other inability of the counterparty to a particular transaction to
perform its obligations thereunder; (iv) prepayment risk, which consists of
reinvestment risk to the extent the Company is not able to reinvest repayments,
if any, at a yield which is comparable to the yield being generated on the
particular security; (v) liquidity risk, which consists of the risk that the
Company may not be able to sell a particular security at a particular price;
(vi) legal enforceability risk, which consists of the risks related to Company's
ability to enforce the terms of a particular instrument or to obtain or collect
upon a legal judgment in the United States in the event that the counterparty to
the transaction is a foreign entity or the underlying collateral is located in a
foreign jurisdiction; and (vii) volatility risk, which consists of the risk that
actual volatility (i.e., the degree of uncertainty relating to the price of the
underlying asset) differs from the historical volatility or "implied" volatility
of the instrument.
During the three months ended September 30, 1998, the Company incurred a
$2.0 million charge on futures used to hedge the Company's portfolio of
single-family residential loans. At September 30, 1998, the Company's
derivatives consisted of $200.8 million notional amount of interest rate swap
agreements, pursuant to which the Company receives payments from a counterparty
based on a floating rate of interest equal to the London Interbank Offered Rate
("LIBOR") and agrees to pay a fixed rate of interest to such party on a
specified notional amount. At September 30, 1998, the Company had a foreign
currency swap contract 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. Under the terms of the agreement, the Company will swap 14.7 million
British Pounds Sterling for $23.5 million on January 29, 1999 based on the
exchange rate on the date the contract became effective. In addition, the
Company entered into a foreign exchange currency swap agreement on November 12,
1998 to hedge its exposure in connection with its investment in the shopping
center located in Halifax, Nova Scotia. Under the terms of the agreement, the
Company will swap 20 million Canadian Dollars for $12.9 million U.S. Dollars on
January 15, 1999 based on the exchange rate on the date the contract became
effective. There can be no assurance that the Company will not be required to
recognize losses in connection with its use of these or other derivatives, which
could adversely affect its results of operations.
For additional information, see Note 6 to the Interim Consolidated
Financial Statements.
FOREIGN INVESTMENTS SUBJECT TO CURRENCY CONVERSION RISKS AND UNCERTAINTY OF
FOREIGN LAWS
The Company currently has investments in real estate and mortgage-related
securities backed by real estate located outside the United States. At September
30, 1998, these investments consisted of (i) a shopping center located in
Halifax, Nova Scotia, which was acquired by foreclosure on a discount loan
purchased by the Company and had a carrying value of $15.1 million, and (ii)
residual interests in six securitizations backed by single-family residential
loans secured by properties located in the United Kingdom, which interests had a
carrying value of $45.3 million and secured a line of credit obtained by the
Company to fund their acquisition which had a U.S. dollar equivalent of $24.2
million.
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Foreign investments are subject to most of the same risks faced by the
Company's domestic operations, as well as risks customarily associated with
United States corporations conducting foreign activities. These risks include
fluctuations in foreign exchange rates and controls (which the Company attempts
to mitigate with currency hedging agreements as available and economical, as
noted above), expropriation, nationalization and other economic, tax and
regulatory policies of foreign governments and policies of the United States
affecting foreign investments. During the nine months ended September 30, 1998,
the Company incurred a $117,000 foreign currency gain in connection with the
discount loan on the property located in Halifax, Nova Scotia. Additionally, the
Company reports gains and losses on foreign currency translation from operations
for which the functional currency is other than the U.S. dollar in shareholders'
equity under "accumulative translation adjustments." For the nine months ended
September 30, 1998, the accumulative translation adjustment account was
comprised of a loss of $1.2 million at the subsidiary which holds the property
located in Halifax, Nova Scotia and $800,000 at the subsidiary which holds the
United Kingdom residuals.
THE COMPANY IS SUBJECT TO INTENSE COMPETITION
GENERAL. The Company's competition varies by business line and geographic
market. In many cases, the acquisition of mortgage-related securities, real
estate and commercial and multi-family loans is based on competitive bidding,
which involves the risk that the Company may bid too low (which generates no
business) or too high (which could result in an acquisition at an economically
unattractive price). Many of the Company's competitors are larger and have
greater financial resources than the Company, and thus may be better able than
the Company to pursue business opportunities or to survive periods of industry
consolidation.
MORTGAGE-RELATED SECURITIES. Until recently the competition for
subordinate interests in mortgage-related securities was intense and dominated
by a relatively few large entities, including Criimi Mae, Inc. Other significant
purchasers of these securities from time to time include General Electric
Capital Corporation, First Chicago Commercial Assets, Wilshire Real Estate
Investment Trust, Amresco, Inc., Clarion Capital Corp. and Anthracite Capital,
Inc. Recent volatility in the U.S. and foreign stock markets in general and the
market for high-risk debt securities in particular has significantly decreased
the number of entities which are willing to purchase subordinate interests at
current prices and resulted in Criimi Mae, Inc. filing for bankruptcy.
Currently, the Company is unable to predict the market for such securities in
the future or the nature of any competition which it may encounter for such
securities in the event that it resumes investment activities.
REAL ESTATE. The markets in which the Company invests in commercial and
multi-family real estate are located nationwide and characterized by competitive
factors that vary based upon the type of real estate and geographic region. In
general, in periods of increasing real estate values the market for commercial
and multifamily real estate is highly competitive. The Company's competitors for
investments in real estate include Goldman Sach's Whitehall Street Real Estate
Funds, Cargill Financial Services, Colony Capital Management, Lone Star
Financial and other real estate investment trusts, insurance companies and
institutional lenders.
COMMERCIAL AND MULTIFAMILY LENDING ACTIVITIES. The markets in which the
Company conducts commercial and multifamily lending activities are located
nationwide and characterized by competitive factors that vary based upon the
type of loan product and geographic region. The Company's competitors for
commercial and multifamily loans include commercial banks, thrift institutions,
insurance companies, finance companies, asset-based lenders and other real
estate investment trusts.
INVESTMENT POLICIES OF THE COMPANY MAY BE CHANGED BY IT WITHOUT APPROVAL OF
SHAREHOLDERS OR NOTEHOLDERS
The investment, financing, borrowing and distribution policies of the
Company and its policies with respect to all other activities, including growth,
debt, capitalization and operations, are determined by the Board of Directors.
These policies may be amended or revised at any time and from time to time at
the discretion of the Board of Directors without a vote of the shareholders of
the Company or holders of Notes. In addition, the Board of Directors may change
the Company's policies with respect to conflicts of interest, provided that such
changes are consistent with applicable requirements. A change in these policies
could adversely affect the Company's financial condition, results of operations
or the market price of its outstanding securities.
POTENTIAL ADVERSE TAX CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT AND OTHER TAX
LIABILITIES
CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT. The Company believes that
it has been organized and operated so as to qualify as a REIT under Sections 856
to 860 of the Code, commencing with its short taxable year ended December 31,
1997. The Company intends to continue to operate as a REIT for calendar 1998
and, subject to shareholder approval, to change its status to a taxable
corporation commencing in calendar 1999. See "Recent Developments." The Company
has received an opinion of Elias, Matz, Tiernan & Herrick L.L.P., special
counsel to
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the Company, to the effect that, based on certain representations and
assumptions, including without limitation that the Company will meet the 95%
distribution requirement described below for calendar 1998 (as to which there
can be no assurance), the Company has been organized and operated in a manner
that has enabled it to qualify and to be taxed as a REIT under the Code, and
that its proposed method of operation will enable it to continue to so qualify
through calendar 1998. Opinions of counsel are not binding on the Internal
Revenue Service and as a result there can be no assurance that the Company is
now or will continue to be organized and operated in a manner so as to so
qualify or remain so qualified. Moreover, qualification and taxation as a REIT
involves the satisfaction of numerous requirements (some on an annual and
quarterly basis) established under highly technical and complex Code provisions
for which there are only limited judicial and administrative interpretations and
involves the determination of various factual matters and circumstances not
entirely within the Company's control. The Company's qualification and taxation
as a REIT depends on the Company's ability to meet (through actual annual
operating results, distribution levels and diversity of stock ownership) the
various qualification and distribution tests imposed under the Code. No
assurances can be given that legislation, new regulations, administrative
interpretations or court decisions will not significantly change the tax laws
with respect to qualification and taxation as a REIT or the federal income tax
consequences of such qualification and taxation. If the Company were to fail to
qualify as a REIT in any taxable year, the Company would be subject to federal
income tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. Moreover, unless entitled to relief under
certain statutory provisions, the Company also would be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification was lost. Because distributions to shareholders would no longer be
deductible in determining taxable income, this treatment would significantly
reduce the earnings of the Company available for distribution to Holders because
of the additional tax liability of the Company for the years involved.
95% DISTRIBUTION REQUIREMENT AND OTHER TAX LIABILITIES. The Company must
distribute annually at least 95% of its net taxable income (excluding any net
capital gains) to avoid corporate income taxation on the earnings that it
distributes. In addition, the Company 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.
The Company currently expects to make distributions to its shareholders
to comply with the 95% distribution requirement for calendar 1998 but
anticipates that it will incur a nondeductible excise tax for such year. See
"Recent Developments." There can be no assurance as to whether or when the
Company will make such distribution and satisfy this requirement, which could
cause the Company (i) to sell assets in adverse market conditions, (ii) to
distribute amounts that represent a return of capital or (iii) to distribute
amounts that would otherwise be spent on future acquisitions, unanticipated
capital expenditures or repayment of debt. Gain from the disposition of any
asset held primarily for sale to customers in the ordinary course of business
generally will be subject to a 100% tax.
The Company acquires subordinate and residual interests and other debt
obligations that are deemed to have original issue discount ("OID") for federal
income tax purposes, which is generally equal to the difference between an
obligation's issue price and its redemption price. The Company also acquires
subordinate and residual interests and other debt obligations that are deemed to
have market discount for federal income tax purposes, which generally is equal
to the excess of an obligation's redemption price over the basis of the
obligation at the time of purchase. The income generated by such instruments for
federal income tax purposes consists of amortization of the OID and the market
discount, and the coupon interest associated with the instruments. The Company
is required to recognize as income each year the portion of the OID and market
discount that accrues during that year, which increases the REIT distribution
requirement for that year, notwithstanding the fact that there may be no
corresponding contemporaneous receipt of cash by the Company. REMIC residual
interests also may generate taxable income in excess of cash flow or economic
income in any year. Consequently, an acquisition by the Company of subordinate
and residual interests, other debt obligations that are deemed to have OID or
market discount or REMIC residual interests could have the effect of requiring
the Company to incur borrowings or to liquidate a portion of its portfolio at
rates or times that the Company regards as unfavorable to meet the REIT
distribution requirement, notwithstanding that depreciation deductions
associated with the Company's distressed real properties help offset the adverse
tax effects of the OID and market discount generated by the Company's other
holdings.
LOSS OF INVESTMENT COMPANY ACT EXEMPTION COULD HAVE ADVERSE CONSEQUENCES
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, a non-exempt entity that is an investment company is
required to register with the Commission and is subject to extensive,
restrictive and potentially adverse regulation relating to, among other things,
operating methods, management, capital structure, dividends and transactions
with affiliates. The Investment
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Company Act exempts entities that, directly or through majority-owned
subsidiaries, are "primarily engaged in the business of purchasing or otherwise
acquiring mortgages and other liens on and interests in real estate"
("Qualifying Interests"). Under current interpretations by the staff of the
Commission, in order to qualify for this exemption, the Company, among other
things, must maintain at least 55% of its assets in Qualifying Interests and
also may be required to maintain an additional 25% in Qualifying Interests or
other real estate-related assets. The assets that the Company may acquire
therefore may be limited by the provisions of the Investment Company Act. The
Company's investments in real estate and mortgage loans generally constitute
Qualifying Interests. In addition, the Company believes that subordinate and
residual interests in mortgage-related securities constitute Qualifying
Interests for purposes of the Investment Company Act when the Company has
certain rights regarding foreclosure on the loans which back its interests in
such securities. In this regard, the Company generally emphasizes subordinate
and residual interests in mortgage-related securities in which the Company
acquires the right to (i) 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 and/or (ii) designate the Bank (or
another party) as special servicer with respect to any defaulted mortgage loan,
subject to the Company's right to exercise the rights set forth in clause (i).
When such arrangements exist, the Company believes that the related subordinate
and residual security constitutes a Qualifying Interest for purposes of the
Investment Company Act. At September 30, 1998, the Company believes that its
Qualifying Interests, including subordinate and residual interests in
mortgage-related securities which the Company believes meet the criteria set
forth above, comprised over 86% of the Company's total assets and that the
Company's Qualifying Interests and other real-estate related assets comprised
over 95% of the Company's total assets. As a result, the Company believes that
it was 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 or
staff on this position. If the Commission or its staff were to take a different
position with respect to whether the Company's subordinate and residual
interests constitute Qualifying Interests, the Company could be required either
(a) to change the manner in which it conducts its operations to avoid being
required to register as an investment company or (b) to register as an
investment company, either of which could have a material adverse effect on the
Company, the price of its securities and the ability to make payments to
Holders. Further, if it were established that the Company were an unregistered
investment company, there would be a risk that the Company would be subject to
monetary penalties and injunctive relief in an action brought by the Commission,
that the Company would be unable to enforce contracts with third parties and
that third parties could seek to obtain recision of transactions undertaken
during the period it was established that the Company was an unregistered
investment company.
DEPENDENCE OF THE COMPANY UPON EXTERNAL MANAGEMENT
The Company is managed by the Manager, subject to the supervision of the
Board of Directors of the Company. Thus, the Company is dependent on the
services of the Manager and its officers and employees for the success of the
Company. Moreover, the Manager's personnel are employees of the Bank, and
accordingly, the Company's success depends in part on the continuing ability of
Ocwen Financial to hire and retain knowledgeable personnel. This ability may be
affected, in turn, by Ocwen Financial's continued financial health. Finally, the
Company is subject to the risk that the Manager will terminate the Management
Agreement and that no suitable replacement can be found to manage the Company.
The Manager is a wholly-owned subsidiary of Ocwen Financial, a registered
savings and loan holding company that conducts substantial operations through
the Bank, a federally-chartered savings bank. Both Ocwen Financial and the Bank
are subject to extensive government supervision and regulation, which is
intended primarily for the protection of depositors. In addition, each of Ocwen
Financial and the Bank are subject to changes in federal and state laws,
including changes in tax laws that could materially affect the real estate
industry, as well as changes in regulations, governmental policies and
accounting principles. Such changes may increase Ocwen Financial's and the
Bank's costs of doing business and assist their competitors. Any such added
burdens may adversely affect the Manager's ability to carry out its management
functions and/or the Bank's ability to provide mortgage loan servicing for the
Company, as well as affect the ability of the Manager and its affiliates to
enter into other arrangements with the Company.
MANAGER ENTITLED TO BROAD INDEMNIFICATION FROM THE COMPANY
Pursuant to the Management Agreement between the Company and the Manager
(the "Management Agreement"), the Company is obligated to indemnify the Manager
and its directors and officers from any action or claim that they are
accountable or liable for the debts or obligations of the Company. In addition,
the Company is required to indemnify the Manager and its directors and officers
for acts performed pursuant to the Management Agreement, except for claims
arising from acts constituting bad faith, willful misconduct, gross negligence
or reckless disregard of their duties under the Management Agreement. There can
be no assurance that these requirements, which have not been applicable to date,
will not adversely affect the Company's operations in the future.
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POTENTIAL CONFLICTS OF INTEREST BETWEEN THE COMPANY AND ITS AFFILIATES COULD BE
DISADVANTAGEOUS TO THE COMPANY
The Company is subject to the following potential conflicts of interest
arising from its relationship with the Manager and its affiliates:
(i) Ocwen Financial beneficially owns 1,540,000 shares or 8.1% of
the outstanding Common Stock, as well as options to purchase 1,912,500
shares of Common Stock. Ocwen Financial also indirectly holds an 8.7%
limited partnership interest in the Operating Partnership.
(ii) Two of the members of the Board of Directors of the Company
and all of its officers are employed by the Bank and generally devote a
majority or more of their time to the affairs of the Bank and Ocwen
Financial. As a result of their positions with the Company and the Bank,
two directors and the officers of the Company have fiduciary duties to
both the Company and the Bank and must consider the same in making
decisions on behalf of these respective entities, including without
limitation decisions of the type referred to in paragraphs (iv), (v) and
(vi) below.
(iii) Pursuant to the Management Agreement, the Manager renders
management services to the Company for a management fee based on average
invested assets, which also benefits the Manager as the asset size of the
Company increases, regardless of the performance of the Company's assets.
In addition, the incentive portion of the management fee, which is based
on the Company's funds from operations, as adjusted, may create an
incentive for the Manager to recommend investments that have greater
income potential but are generally more speculative than if the
management fee did not include a performance component.
(iv) Although the Manager has granted to the Company the first
option to acquire underperforming real estate and subordinate and
residual interests backed by loans which were not formerly owned by the
Manager and its affiliates, Ocwen Financial, the Bank and other
affiliates of the Manager invest in other assets that the Company invests
in, including a wide variety of mortgage-related securities and
single-family, multifamily and commercial real estate loans, including
subperforming and nonperforming loans. The Manager and its affiliates
have no obligation to make investment opportunities available to the
Company, and as a result, the Company's ability to invest in certain real
estate related assets may be limited to the extent that such assets are
attractive to Ocwen Financial or one of its affiliates.
(v) Because they share certain investment strategies, from time to
time the Company may acquire assets from Ocwen Financial, the Bank and
other affiliates of the Manager and co-participate in investment
transactions with these entities. To date, such transactions have
consisted of (i) the Company's purchase of several subordinate and other
interests in mortgage-related securities from Ocwen Financial and the
Bank for an aggregate of $45.1 million in connection with the Initial
Public Offering, (ii) the Company's acquisition of a 13.83% participation
in a pool of commercial real estate loans at the same time that the
remaining participation interest in such loan pool was acquired by the
Bank, which participation interest had a balance of $8.6 million at
September 30, 1998, (iii) the Company's acquisition of residuals in six
securitizations backed by single-family residential loans secured by
properties located in the United Kingdom for approximately Pound
Sterling33.7 million (approximately $56.3 million) at the same time that
Ocwen Financial acquired substantially all of the assets and certain of
the liabilities of the United Kingdom company that effected such
securitizations, and (iv) the Company's acquisition from time to time of
a total of 19 residential whole loan portfolios that were co-bid with
the Bank for an aggregate purchase price of $88.2 million.
(vi) From time to time there may be circumstances in which the
Company sells assets to Ocwen Financial, the Bank and other affiliates of
the Manager. To date, the only such transaction was the Company's sale of
the IO Portfolio to two affiliates of the Company and/or Ocwen Financial
in May 1998. The purchase price of the IO Portfolio exceeded its
estimated fair market value by approximately $14.0 million.
The Board of Directors of the Company, which includes a majority of
Independent Directors (as defined in the Company's Articles of Incorporation)
have established general guidelines for the Company's investments, borrowings
and operations and potential conflicts of interest (the "Guidelines"). The
Independent Directors review transactions engaged in by the Company on a
quarterly basis to monitor compliance with the Guidelines and review the
Company's investment policies annually. The Independent Directors rely primarily
on information provided to them by the Manager in conducting these reviews and
do not otherwise participate in the Company's daily operations.
The Management Agreement and the Guidelines do not limit or restrict the
right of the Manager or any of its directors, officers, employees or affiliates
from engaging in any business or rendering services of any kind to any
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other person, including the purchase of or rendering advice to others purchasing
real estate assets that meet the Company's policies and criteria.
LIMITATIONS ON THE COMPANY'S ABILITY TO ACCESS TO CASH FLOW OF SUBSIDIARIES
The Company conducts its business primarily through the Operating
Partnership and its qualified REIT subsidiaries and its ability to make payments
on the Notes is dependent upon the receipt of dividends from its direct and
indirect subsidiaries. All of the assets of the Company are held by subsidiaries
and all of the Company's operating revenues are derived from operations of such
subsidiaries. Therefore, the Company's ability to pay interest on, principal of
and redemption payments when due on the Notes is dependent upon the earnings of
its subsidiaries and the distribution of sufficient funds from its direct and
indirect subsidiaries to the Company. The Company's subsidiaries have no
obligation, contingent or otherwise, to make any funds available to the Company
for payments on the Notes and are not guarantors of the Notes. Moreover, to the
extent that assets of the Company held through subsidiaries of the Company
secure borrowings incurred by such subsidiaries, the ability of such
subsidiaries to declare dividends or make distributions to the Company will be
limited.
Because the Company conducts all of its operations through the Operating
Partnership and its qualified REIT subsidiaries, the right of the Company (and
therefore the right of the Company's creditors and shareholders) to participate
in any distribution of the assets or earnings of its subsidiaries is subject to
the prior claims of creditors of such subsidiaries, including any claims of the
Company as a creditor to the extent such claims may be recognized.
NO ASSURANCE AS TO THE COMPANY'S ABILITY TO PURCHASE NOTES UPON A CHANGE IN
CONTROL
Upon a Change of Control, the Company will be required to offer to
purchase all of the Notes then outstanding at 101% of their aggregate principal
amount, plus accrued and unpaid interest, if any. The repurchase price is
payable in cash. There can be no assurance that, were a Change of Control to
occur, the Company would have sufficient funds to pay the purchase price for all
Notes which the Company might be required to purchase by Holders who exercise
their option in connection with such an offer.
In the event the Company does not have sufficient funds to pay the
purchase price of the Notes upon a Change of Control, the Company may be
required to seek third party financing to the extent it did not have sufficient
funds available to meet its purchase obligations. There can be no assurance that
the Company would be able to obtain such financing on favorable terms or at all.
The occurrence of a Change of Control would be determined by the Company.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company. Although there is a developing body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under the laws of Virginia, under which the Company is
incorporated, or the laws of New York, which governs the Indenture. Accordingly,
the ability of a Holder of Notes to require the Company to repurchase such Notes
as a result of a sale, lease, transfer, conveyance or other disposition of less
than all of the assets of the Company taken as a whole to another person or
group may be uncertain. For a definition of the term Change of Control, see
"Description of New Notes - Certain Definitions."
ABSENCE OF A MARKET FOR THE NOTES
The New Notes will not be listed on any national securities exchange or
approved for quotation on a national inter-dealer quotation system. There can be
no assurance as to the liquidity of any markets that may develop for the New
Notes or the Old Notes, or at what price holders of the New Notes or the Old
Notes will be able to sell their New Notes or their Old Notes, as the case may
be. Future trading prices of the New Notes will depend on many factors,
including, among other things, prevailing interest rates, the Company's
operating results and the market for similar securities. In connection with the
offering of the Old Notes, each Initial Purchaser informed the Company that it
intends to make a market in the New Notes and the Old Notes. However, the
Initial Purchasers are not obligated to do so and any such market making
activity may be terminated at any time without notice to the holders of the New
Notes or the Old Notes, as applicable. In addition, such market making activity
will be subject to the limits of the Exchange Act and the regulations thereunder
and may be limited during the pendency of the Exchange Offer and during the
period a shelf registration statement required to be filed pursuant to the
Registration Rights Agreement is required to remain effective. See "Description
of Old Notes" and "Registration Rights Agreement."
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FAILURE OF COMPUTER SYSTEMS TO RECOGNIZE THE YEAR 2000 COULD ADVERSELY AFFECT
THE COMPANY'S OPERATIONS
As the year 2000 approaches, a critical business issue has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. Many existing application software products in the
marketplace were designed to accommodate only two-digit 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 year 2000 requirements.
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 the Manager, as well as Ocwen Financial
and its other subsidiaries, which provide management services to the Company.
The Company does not own or maintain computer equipment or software.
Ocwen Financial 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. The project plan is divided
into six phases: identification, evaluation, remediation, validation, risk
assessment and contingency planning. As of September 30, 1998, the systems
identification and evaluation phases of the project were completed. At December
17, 1998, Ocwen Financial had substantially completed the remediation and
validation phases of the project.
As part of the identification and evaluation phases of the project, the
Company has documented critical operating functions within each business unit,
as well as strategic third-party and vendor relationships. Ocwen Financial has
retained a business continuity expert to prepare contingency plans and assist
with the testing and validation of these plans. Ocwen Financial expects to
complete its year 2000 risks assessment and contingency planning efforts during
the first quarter of 1999. The cost of Ocwen Financial's year 2000 project,
which is budgeted at $2.0 million, will be borne by Ocwen Financial. The Company
does not expect to incur any costs in connection with achieving year 2000
compliance. Until the risk assessment phase is completed, the Company will not
know the complete extent of the risks associated with year 2000 issues,
including an analysis of the most reasonably likely worst case year 2000
scenario, nor can the Company prepare a contingency plan. As a result, neither
is ready at this time. There can be no assurance that the failure of the
Manager, the Company or third parties to adequately address their respective
year 2000 issues will not have a material adverse effect on the Company.
FAILURE TO EXCHANGE OLD NOTES COULD ADVERSELY AFFECT THE MARKETABILITY AND VALUE
OF OLD NOTES
The Old Notes have not been registered under the Securities Act or any
state securities laws and therefore may not be offered, sold or otherwise
transferred except in compliance with the registration requirements of the
Securities Act and any other applicable securities laws, or pursuant to an
exemption therefrom or in a transaction not subject thereto, and in each case in
compliance with certain other conditions and restrictions. Old Notes which
remain outstanding after consummation of the Exchange Offer will continue to
bear a legend reflecting such restrictions on transfer. In addition, upon
consummation of the Exchange Offer, holders of Old Notes which remain
outstanding will not be entitled to any rights to have such Old Notes registered
under the Securities Act pursuant to the Registration Rights Agreement, except
under limited circumstances.
To the extent that Old Notes are tendered and accepted in the Exchange
Offer, a holder's ability to sell untendered Old Notes could be adversely
affected. In addition, although the Old Notes have been designated for trading
by QIBs (generally, a designated entity under Rule 144A under the Securities
Act acting for its own account or the accounts of other QIBs which, in the
aggregate, owns and invests on a discretionary basis at least $100 million in
securities of issuers not affiliated with the entity and certain registered
broker-dealers) in the Private Offerings, Resale and Trading through Automated
Linkages Market ("PORTAL") of the National Association of Securities Dealers,
Inc., an automated quotation and communications system that facilitates private
offerings, resales, trading, clearance and settlement by its participants, to
the extent that Old Notes are tendered and accepted in connection with the
Exchange Offer, any trading market for Old Notes which remain outstanding after
the Exchange Offer could be adversely affected.
The Old Notes provide, among other things, that, if a registration
statement relating to the Exchange Offer has not been filed by October 12, 1998,
declared effective by January 10, 1999, or the New Notes are not issued on or
prior to 30 business days after the Registration Statement is declared
effective, the interest rate borne by the Old Notes upon the date of such
default will increase by specified amounts until such default is cured. For
information about an increase in the interest rate on the Old Notes for the
period from January 10, 1999 to ____________ __, 1999, the effective date of the
Registration Statement relating to the Exchange Offer, see "Description of Old
Notes" and "Registration Rights Agreement." Upon consummation of the Exchange
Offer, holders of Old Notes will not be
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entitled to any prospective increase in the interest rate thereon or any further
registration rights under the Registration Rights Agreement, except under
limited circumstances. The New Notes will not be entitled to any such
prospective increase in the interest rate thereon. See "Description of New
Notes" and "Description of Old Notes."
EXCHANGE OFFER CAN BE EFFECTED ONLY IF A HOLDER PROVIDES REQUISITE DOCUMENTATION
Issuance of the New Notes in exchange for Old Notes pursuant to the
Exchange Offer will be made only after a timely receipt by the Exchange Agent of
such Old Notes, a properly completed and duly executed Letter of Transmittal or
Agent's Message in lieu thereof and all other required documents. Therefore,
holders of the Old Notes desiring to tender such Old Notes in exchange for New
Notes should allow sufficient time to ensure timely delivery. The Company is not
under any duty to give notification of defects or irregularities with respect to
the tenders of Old Notes for exchange.
THE COMPANY
GENERAL
The Company is a REIT based in West Palm Beach, Florida which specializes
in investments in real estate and real estate-related assets. The Company was
incorporated in Virginia on January 22, 1997 and was capitalized on May 19, 1997
with $283.7 million of net proceeds from the Initial Public Offering. The
Company is externally managed and advised by the Manager, which is a
wholly-owned subsidiary of Ocwen Financial, a diversified financial services
company that is primarily engaged in the acquisition, servicing and resolution
of subperforming and nonperforming residential and commercial mortgage loans. As
a result, the Company does not maintain an office and does not employ full-time
personnel.
The Company's investments consist primarily of (i) subordinate and
residual interests in mortgage-related securities and (ii) underperforming or
otherwise distressed commercial and multifamily real property, including
properties acquired by mortgage lenders at foreclosure or through deed-in-lieu
thereof. The Company's investments also include (i) commercial, multifamily and
single-family residential mortgage loans, including construction and renovation
loans and mezzanine loans, which comprise the Company's loan portfolio, and (ii)
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.
STRUCTURE OF THE COMPANY
The Company conducts its business primarily through the Operating
Partnership, a Virginia limited partnership. The General Partner, a Virginia
corporation and a wholly-owned qualified REIT subsidiary of the Company, holds
an 0.9% interest in the Operating Partnership and is the general partner of and
controls the Operating Partnership. In addition, the Limited Partner, a Virginia
corporation and a wholly-owned qualified REIT subsidiary of the Company,
currently owns a 90.4% limited partnership interest in the Operating
Partnership. The remaining 8.7% partnership interests in the Operating
Partnership are limited partnership interests held by Ocwen Financial through
IMIHC.
The relationship among the Company, the Operating Partnership, the
General Partner and the Limited Partner is commonly referred to as an umbrella
partnership REIT (or "UPREIT") structure. In this structure, the Company holds
the same number of units in the Operating Partnership (through the General
Partner and the Limited Partner) as the number of shares of Common Stock which
the Company has issued and outstanding. As a result, any additional units issued
by the Operating Partnership share ratably with the Common Stock of the Company
in any distributions made by the Operating Partnership. The benefit of this
structure is that owners of real estate assets may transfer them to the UPREIT
while deferring the recognition of the built-in gain for tax purposes.
THE MANAGER AND OCWEN FINANCIAL
The Company's business and investment affairs are managed by the Manager,
a Florida corporation and a wholly-owned subsidiary of Ocwen Financial, which
also is a Florida corporation. Ocwen Financial is a diversified financial
services company that is primarily engaged in the acquisition, servicing and
resolution of subperforming and nonperforming residential and commercial
mortgage loans and other servicing intensive assets and in diverse mortgage
lending activities. At September 30, 1998, Ocwen Financial had $3.4 billion of
total assets and shareholders' equity of $444.1 million.
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<PAGE> 35
Ocwen Financial has been actively involved since its formation in 1988 in
the real estate and mortgage markets and brings significant expertise to the
Company in acquiring and managing distressed real estate and real estate-related
assets. Since commencing its business of acquiring and resolving subperforming
and nonperforming mortgage loans in mid-1991, Ocwen Financial has acquired over
$6.2 billion aggregate principal amount of distressed single-family residential,
multifamily and commercial real estate loans and currently ranks (based on 1997
and 1996 loan acquisition volumes) as the largest purchaser of domestic
distressed residential and commercial real estate loan portfolios in the United
States. These activities have given the Bank substantial expertise in resolving
defaulted mortgage loans and managing the residential and commercial real estate
which it may acquire in connection with resolving such loans. The Bank also
services mortgage loans for others on a fee basis. These services include (i)
special servicing, which generally involves asset management and resolution
services with respect to defaulted mortgage loans within a pool of mortgage
loans and with respect to the management and disposal of foreclosed properties,
(ii) primary servicing, which involves the monitoring of assets and collection
and distribution of cash flow with respect to a pool of mortgage loans and also
may include special servicing functions, and (iii) sub-servicing, which
generally involves performing primary servicing and/or special servicing
functions for a master servicer through a sub-servicing arrangement. The Bank
believes that it is currently a leading servicer of defaulted mortgage loans in
the United States. At September 30, 1998, the Bank had a servicing portfolio of
91,678 loans for others aggregating approximately $8.2 billion in gross
principal amount, substantially all of which are nonperforming, subperforming
and subprime mortgage loans.
The Company's relationship with Ocwen Financial provides a number of
advantages. First, Ocwen Financial's primary operating subsidiary, the Bank, is
in management's view a leading servicer of problem loans and distressed real
estate. The Bank is one of a select few firms in the United States to be rated
by Standard & Poor's as a "Strong" Special Servicer for commercial loans, its
highest rating category. The Bank is designated as a Special Servicer for
residential mortgage loans by Duff & Phelps Credit Rating Co., Fitch Investor
Service, Inc., Moody's and Standard & Poor's. As a result of the foregoing, the
Company is able to benefit from Ocwen Financial's experience in managing and
repositioning underperforming real estate and real estate-related assets. In
addition, these strengths also enhance the Company's ability to invest in
subordinate and residual interests in circumstances in which the Company
acquires the right to control the foreclosure process and appoint the Bank as
special servicer of the underlying loans. Second, the Company benefits from
Ocwen Financial's technology and proprietary software applications, which
include asset acquisition, loss mitigation and default management systems.
Third, the Company's relationship with Ocwen Financial provides it with access
to markets, positive name recognition and the opportunity to co-bid on
transactions with Ocwen Financial. And finally, the Company's relationship with
Ocwen Financial generally allows the Company to leverage the substantial
infrastructure and expertise which has been developed by Ocwen Financial in
connection with its substantial and diverse experience in dealing with real
estate and real estate-related investments.
The Company attempts to minimize potential conflicts of interest between
it and the Manager and its affiliates, which also invest in real estate related
investments, by assigning investments by asset class. In this regard, the
Management Agreement gives the Company the first option to invest in subordinate
and residual interests collateralized by loans originated by third parties and
distressed real estate. The Company also seeks to minimize potential conflicts
of interest by maintaining a majority of directors who are independent of the
Manager and its affiliates.
Ocwen Financial is a registered savings and loan holding company subject
to regulation by the Office of Thrift Supervision ("OTS"). The Bank is subject
to regulation by the OTS, as its chartering authority, and by the Federal
Deposit Insurance Corporation, which insures the Bank's deposits up to the
maximum extent permitted by law.
Ocwen Financial's executive offices are located at 1675 Palm Beach Lakes
Boulevard, West Palm Beach, Florida 33401, and the telephone number of its
executive offices is (561) 682-8000.
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
New Notes offered hereby. Old Notes surrendered in exchange for New Notes will
be retired and cancelled.
The net proceeds to the Company from the sale of the Old Notes and the
Regulation S Notes amounted to approximately $144.4 million. The Company
contributed the net proceeds from the offering of the Old Notes and the
Regulation S Notes to the Operating Partnership (through the purchase of an
unsecured, unsubordinated note), which used such proceeds for general corporate
purposes, including the acquisition of mortgage-related securities,
underperforming and otherwise distressed multifamily and commercial real estate
properties, commercial, multifamily
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<PAGE> 36
and single-family mortgage loans, nonperforming and subperforming mortgage loans
and other assets and payments under repurchase agreements.
RATIOS OF EARNINGS TO FIXED CHARGES
The Company's ratio of earnings to fixed charges for the period from May
14, 1997 to December 31, 1997 and the period from May 14, 1997 to September 30,
1997 was not meaningful because there were no fixed charges during these
periods. The Company's ratio of earnings to fixed charges for the nine months
ended September 30, 1998, was (.46) (earnings were insufficient to cover fixed
charges of $21.2 million by $11.5 million). For purposes of computing this
information, earnings have been calculated by adding fixed charges (excluding
capitalized interest) to income (loss). Fixed charges consist of interest costs,
whether expensed or capitalized, and amortization relating to any indebtedness,
whether expensed or capitalized.
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1998, which reflects the issuance of the Old Notes and the
Regulation S Notes.
<TABLE>
<CAPTION>
September 30, 1998
------------------------
(Dollars in Thousands,
Except Share Data)
<S> <C>
Liabilities:
11 1/2% Senior Notes due 2005(1)................................. $143,000
Securities sold under agreements to repurchase................... 143,059
Obligations outstanding under lines of credit.................... 189,137
Obligations outstanding under lines of credit-
real estate................................................... 142,445
Dividends and distributions payable.............................. 9,140
Accrued expenses, payables and other liabilities................. 12,267
--------
Total liabilities............................................. 639,048
Minority interest.................................................... 28,370
Shareholders' Equity:
Preferred stock, $.01 par value; 25,000,000 shares
authorized; no shares issued and outstanding................. --
Common Stock, $.01 par value; 200,000,000 shares
authorized; 19,125,000 shares issued (18,965,000
shares outstanding)(2)....................................... 190
Additional paid-in capital....................................... 294,461
Distributions in excess of earnings.............................. (35,983)
Unrealized loss on securities available for sale................. (13,719)
Cumulative translation adjustments............................... (1,968)
-------
Total shareholders' equity................................. 242,981
--------
Total capitalization....................................... $910,398
=======
</TABLE>
- -------------------
(1) For a description of the Notes, see "Description of Notes" and "Description
of Old Notes."
(2) Does not reflect shares issuable upon exercise of options to purchase
1,912,500 shares of Common Stock which have been granted by the Company to the
Manager pursuant to the Option Plan.
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<PAGE> 37
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
In connection with the sale of the Old Notes, the Company entered into
the Registration Rights Agreement with the Initial Purchasers, pursuant to which
the Company agreed to file and to use its best efforts to cause to be declared
effective by the Commission a registration statement with respect to the
exchange of the Old Notes for New Notes with terms identical in all material
respects to the terms of the Old Notes. A copy of the Registration Rights
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part.
The Exchange Offer is being made to satisfy the contractual obligations
of the Company under the Registration Rights Agreement. The form and terms of
the New Notes are the same as the form and terms of the Old Notes, except that
the New Notes (i) have been registered under the Securities Act and therefore
will not be subject to certain restrictions on transfer under the Securities Act
and (ii) holders of New Notes will not be entitled to registration rights that
holders of the Old Notes have under the Registration Rights Agreement, except
under limited circumstances. See "Risk Factors--Consequences of a Failure to
Exchange Old Notes" and "Description of Old Notes."
The Exchange Offer is not being made to, nor will the Company accept
tenders for exchange from, holders of Old Notes in any jurisdiction in which the
Exchange Offer or the acceptance thereof would not be in compliance with the
securities or blue sky laws of such jurisdiction.
Unless the context requires otherwise, the term "holder" with respect to
the Exchange Offer means any person in whose name the Old Notes are registered
on the books of the Company or any other person who has obtained a properly
completed bond power from the registered holder, or any participant in the DTC
system whose name appears on a security position listing as the holder of such
Old Notes and who desires to deliver such Old Notes by book-entry transfer at
DTC.
TERMS OF THE EXCHANGE OFFER
The Company hereby offers, upon the terms and subject to the conditions
set forth in this Prospectus and in the accompanying Letter of Transmittal, to
exchange up to $142.5 million aggregate principal amount of New Notes for a
like aggregate principal amount of Old Notes properly tendered on or prior to
the Expiration Date and not properly withdrawn in accordance with the procedures
described below. The Company will issue, promptly after the Expiration Date,
$142.5 million aggregate principal amount of New Notes in exchange for a like
aggregate principal amount of Old Notes tendered and accepted in connection with
the Exchange Offer. Holders of Old Notes may tender their Old Notes in whole or
in part.
The Exchange Offer is not conditioned upon any minimum aggregate
principal amount of Old Notes being tendered. As of the date of this Prospectus,
$142.5 million aggregate principal amount of Old Notes are outstanding.
Holders of Old Notes do not have any appraisal or dissenters' rights in
connection with the Exchange Offer. Old Notes which are not tendered, or are
tendered but not accepted, in connection with the Exchange Offer will remain
outstanding, but will not be entitled to any further registration rights under
the Registration Rights Agreement, except under limited circumstances. See "Risk
Factors--Consequences of a Failure to Exchange Old Notes" and "Description of
Old Notes."
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, unaccepted Old Notes will be returned, without expense, to the
tendering holder thereof promptly after the Expiration Date.
Holders of Old Notes who tender Old Notes in connection with the Exchange
Offer will not be required to pay brokerage commissions or fees or, subject to
the instructions in the Letter of Transmittal, transfer taxes with respect to
the exchange of Old Notes in connection with the Exchange Offer. The Company
will pay all charges and expenses, other than certain applicable taxes described
below, in connection with the Exchange Offer. See "--Fees and Expenses."
THE COMPANY DOES NOT MAKE ANY RECOMMENDATION TO HOLDERS OF OLD NOTES AS
TO WHETHER TO TENDER OR REFRAIN FROM TENDERING ALL OR ANY PORTION OF THEIR OLD
NOTES PURSUANT TO THE EXCHANGE OFFER. IN ADDITION, NO ONE HAS BEEN
36
<PAGE> 38
AUTHORIZED TO MAKE ANY SUCH RECOMMENDATION. HOLDERS OF OLD NOTES MUST MAKE THEIR
OWN DECISION WHETHER TO TENDER PURSUANT TO THE EXCHANGE OFFER AND, IF SO, THE
AGGREGATE NUMBER OF OLD NOTES TO TENDER BASED ON SUCH HOLDER'S OWN FINANCIAL
POSITION AND REQUIREMENTS.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" means 5:00 p.m., New York City time, on
___________ __, 1999 unless the Exchange Offer is extended by the Company to a
date which is no later than 30 business days after the date hereof (in which
case the term "Expiration Date" shall mean the latest date and time to which the
Exchange Offer is extended).
The Company expressly reserves the right in its sole and absolute
discretion, subject to applicable law, at any time and from time to time, (i) to
delay the acceptance of Old Notes for exchange, (ii) to terminate the Exchange
Offer (whether or not any Old Notes have theretofore been accepted for exchange)
if the Company determines, in its sole and absolute discretion, that any of the
events or conditions referred to under "--Conditions to the Exchange Offer" have
occurred or exist or have not been satisfied, (iii) to extend the Expiration
Date of the Exchange Offer and retain Old Notes tendered pursuant to the
Exchange Offer, subject, however, to the right of holders of Old Notes to
withdraw their tendered Old Notes as described under "--Withdrawal Rights," and
(iv) to waive any condition or otherwise amend the terms of the Exchange Offer
in any respect. If the Exchange Offer is amended in a manner determined by the
Company to constitute a material change, or if the Company waives a material
condition of the Exchange Offer, the Company will promptly disclose such
amendment by means of a prospectus supplement that will be distributed to the
registered holders of the Old Notes, and the Company will extend the Exchange
Offer to the extent required by Rule 14e-1 under the Exchange Act.
Any such delay in acceptance, extension, termination or amendment will be
followed promptly by oral or written notice thereof to the Exchange Agent and by
making a public announcement thereof, and such announcement in the case of an
extension will be made no later than 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date. Without limiting
the manner in which the Company may choose to make any public announcement and
subject to applicable law, the Company shall have no obligation to publish,
advertise or otherwise communicate any such public announcement other than by
issuing a release to an appropriate news agency.
ACCEPTANCE FOR EXCHANGE AND ISSUANCE OF NEW NOTES
Upon the terms and subject to the conditions of the Exchange Offer, the
Company will exchange, and will issue to the Exchange Agent, New Notes for Old
Notes validly tendered and not withdrawn promptly after the Expiration Date.
In all cases, delivery of New Notes in exchange for Old Notes tendered
and accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of (i) Old Notes or a book-entry
confirmation of a book-entry transfer of Old Notes into the Exchange Agent's
account at DTC, including an Agent's Message if the tendering holder has not
delivered a Letter of Transmittal, (ii) the Letter of Transmittal (or facsimile
thereof), properly completed and duly executed, with any required signature
guarantees, or (in the case of a book-entry transfer) an Agent's Message in lieu
of the Letter of Transmittal, and (iii) any other documents required by the
Letter of Transmittal.
The term "book-entry confirmation" means a timely confirmation of a
book-entry transfer of Old Notes into the Exchange Agent's account at DTC. The
term "Agent's Message" means a message, transmitted by DTC to and received by
the Exchange Agent and forming a part of a book-entry confirmation, which states
that DTC has received an express acknowledgment from the tendering participant,
which acknowledgment states that such participant has received and agrees to be
bound by the Letter of Transmittal and that the Company may enforce such Letter
of Transmittal against such participant.
Subject to the terms and conditions of the Exchange Offer, the Company
will be deemed to have accepted for exchange, and thereby exchanged, Old Notes
validly tendered and not withdrawn as, if and when the Company gives oral or
written notice to the Exchange Agent of the Company's acceptance of such Old
Notes for exchange pursuant to the Exchange Offer. The Exchange Agent will act
as agent for the Company for the purpose of receiving tenders of Old Notes,
Letters of Transmittal and related documents, and as agent for tendering holders
for the purpose of receiving Old Notes, Letters of Transmittal and related
documents and transmitting New Notes to validly tendering
37
<PAGE> 39
holders. Such exchange will be made promptly after the Expiration Date. If, for
any reason whatsoever, acceptance for exchange or the exchange of any Old Notes
tendered pursuant to the Exchange Offer is delayed (whether before or after the
Company's acceptance for exchange of Old Notes) or the Company extends the
Exchange Offer or is unable to accept for exchange or exchange Old Notes
tendered pursuant to the Exchange Offer, then, without prejudice to the
Company's rights set forth herein, the Exchange Agent may, nevertheless, on
behalf of the Company and subject to Rule 14e-1(c) under the Exchange Act,
retain tendered Old Notes, and such Old Notes may not be withdrawn except to the
extent tendering holders are entitled to withdrawal rights as described under
"--Withdrawal Rights."
Pursuant to the Letter of Transmittal, or Agent's Message in lieu
thereof, a holder of Old Notes will warrant and agree in the Letter of
Transmittal that it has full power and authority to tender, exchange, sell,
assign and transfer Old Notes, that the Company will acquire good, marketable
and unencumbered title to the tendered Old Notes, free and clear of all liens,
restrictions, charges and encumbrances, and the Old Notes tendered for exchange
are not subject to any adverse claims. The holder also will warrant and agree
that it will, upon request, execute and deliver any additional documents deemed
by the Company or the Exchange Agent to be necessary or desirable to complete
the exchange, sale, assignment and transfer of the Old Notes tendered pursuant
to the Exchange Offer.
PROCEDURES FOR TENDERING OLD NOTES
VALID TENDER. Except as set forth below, in order for Old Notes to be
validly tendered pursuant to the Exchange Offer, a properly completed and duly
executed Letter of Transmittal (or facsimile thereof), with any required
signature guarantees, or (in the case of a book-entry transfer) an Agent's
Message in lieu of a Letter of Transmittal, and any other required documents,
must be received by the Exchange Agent at one of its addresses set forth under
"--Exchange Agent," and (i) tendered Old Notes must be received by the Exchange
Agent, (ii) such Old Notes must be tendered pursuant to the procedures for
book-entry transfer set forth below and a book-entry confirmation, including an
Agent's Message if the tendering holder has not delivered a Letter of
Transmittal, must be received by the Exchange Agent, in each case on or prior to
the Expiration Date, or (iii) the guaranteed delivery procedures set forth below
must be complied with.
If less than all of a tendering holder's Old Notes are tendered, the
holder should fill in the aggregate principal amount of Old Notes being tendered
in the appropriate box on the Letter of Transmittal or so indicate in an Agent's
Message in lieu of the Letter of Transmittal. All Old Notes delivered to the
Exchange Agent will be deemed to have been tendered unless otherwise indicated.
THE METHOD OF DELIVERY OF OLD NOTES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING HOLDER,
AND DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE
AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL, RETURN-RECEIPT REQUESTED,
PROPERLY INSURED, OR AN OVERNIGHT DELIVERY SERVICE IS RECOMMENDED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
BOOK-ENTRY TRANSFER. The Exchange Agent will establish an account with
respect to the Old Notes at DTC for purposes of the Exchange Offer within two
business days after the date of this Prospectus. Any financial institution that
is a participant in DTC's book-entry transfer facility system may make a
book-entry delivery of the Old Notes by causing DTC to transfer such Old Notes
into the Exchange Agent's account at DTC in accordance with DTC's procedures for
transfers. However, although delivery of Old Notes may be effected through
book-entry transfer into the Exchange Agent's account at DTC, the Letter of
Transmittal (or facsimile thereof), properly completed and duly executed, with
any required signature guarantees, or an Agent's Message in lieu of the Letter
of Transmittal, and any other required documents, must in any case be delivered
to and received by the Exchange Agent at its address set forth under "--Exchange
Agent" on or prior to the Expiration Date, or the guaranteed delivery procedure
set forth below must be complied with.
DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH DTC'S PROCEDURES DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
SIGNATURE GUARANTEES. Old Notes need not be endorsed and signature
guarantees on the Letter of Transmittal are unnecessary unless (i) the Old Notes
are registered in a name other than that of the person surrendering the Old
Notes or (ii) such holder completes the box entitled "Special Issuance
Instructions" or "Special Delivery Instructions" in the Letter of Transmittal.
In the case of (i) or (ii) above, such Old Notes must be duly endorsed or
accompanied by a properly executed bond power, with the endorsement or signature
on the bond power and on the Letter of Transmittal
38
<PAGE> 40
guaranteed by a firm or other entity identified in Rule 17Ad-15 under the
Exchange Act as an "eligible guarantor institution," including (as such terms
are defined therein): (i) a bank; (ii) a broker, dealer, municipal securities
broker or dealer or government securities broker or dealer; (iii) a credit
union; (iv) a national securities exchange, registered securities association or
clearing agency; or (v) a savings association that is a participant in a
Securities Transfer Association (an "Eligible Institution"), unless surrendered
on behalf of such Eligible Institution. See Instruction 1 to the Letter of
Transmittal.
GUARANTEED DELIVERY. If a holder desires to tender Old Notes pursuant to
the Exchange Offer and the Old Notes are not immediately available or time will
not permit all required documents to reach the Exchange Agent on or prior to the
Expiration Date, or the procedure for book-entry transfer cannot be completed on
a timely basis, such Old Notes may nevertheless be tendered, provided that all
of the following guaranteed delivery procedures are complied with:
(i) such tenders are made by or through an Eligible Institution;
(ii) a properly completed and duly executed Notice of Guaranteed
Delivery, substantially in the form accompanying the Letter of Transmittal, is
received by the Exchange Agent, as provided below, on or prior to the Expiration
Date; and
(iii) all tendered Old Notes (or a book-entry confirmation), in proper
form for transfer, together with a properly completed and duly executed Letter
of Transmittal (or facsimile thereof), or Agent's Message in lieu thereof, with
any required signature guarantees and any other documents required by the Letter
of Transmittal, are received by the Exchange Agent within three NYSE trading
days after the date of execution of such Notice of Guaranteed Delivery.
The Notice of Guaranteed Delivery may be delivered by hand, or
transmitted by facsimile or mail, to the Exchange Agent and must include a
guarantee by an Eligible Institution in the form set forth in such notice.
Notwithstanding any other provision hereof, the delivery of New Notes in
exchange for Old Notes tendered and accepted for exchange pursuant to the
Exchange Offer will in all cases be made only after timely receipt by the
Exchange Agent of Old Notes, or of a book-entry confirmation with respect to
such Old Notes, and a properly completed and duly executed Letter of Transmittal
(or facsimile thereof), or Agent's Message in lieu thereof, together with any
required signature guarantees and any other documents required by the Letter of
Transmittal. Accordingly, the delivery of New Notes might not be made to all
tendering holders at the same time and will depend upon when Old Notes,
book-entry confirmations with respect to Old Notes and other required documents
are received by the Exchange Agent.
The Company's acceptance for exchange of Old Notes tendered pursuant to
any of the procedures described above will constitute a binding agreement
between the tendering holder and the Company upon the terms and subject to the
conditions of the Exchange Offer.
DETERMINATION OF VALIDITY. All questions as to the form of documents,
validity, eligibility (including time of receipt) and acceptance for exchange of
any tendered Old Notes will be determined by the Company, in its sole
discretion, whose determination shall be final and binding on all parties. The
Company reserves the absolute right, in its sole and absolute discretion, to
reject any and all tenders determined by it not to be in proper form or the
acceptance of which, or exchange for, may, in the opinion of counsel to the
Company, be unlawful. The Company also reserves the absolute right, subject to
applicable law, to waive any of the conditions of the Exchange Offer as set
forth under "--Conditions to the Exchange Offer" or any condition or
irregularity in any tender of Old Notes of any particular holder whether or not
similar conditions or irregularities are waived in the case of other holders.
The interpretation by the Company of the terms and conditions of the
Exchange Offer (including the Letter of Transmittal and the instructions
thereto) will be final and binding. No tender of Old Notes will be deemed to
have been validly made until all irregularities with respect to such tender have
been cured or waived. None of the Company, any affiliates or assigns of the
Company, the Exchange Agent or any other person shall be under any duty to give
any notification of any irregularities in tenders or incur any liability for
failure to give any such notification.
If any Letter of Transmittal, endorsement, bond power, power of attorney
or any other document required by the Letter of Transmittal is signed by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person should so indicate when
39
<PAGE> 41
signing, and unless waived by the Company, proper evidence satisfactory to the
Company, in its sole discretion, of such person's authority to so act must be
submitted.
A beneficial owner of Old Notes that are held by or registered in the
name of a broker, dealer, commercial bank, trust company or other nominee or
custodian is urged to contact such entity promptly if such beneficial holder
wishes to participate in the Exchange Offer.
RESALES OF NEW NOTES
The Company is making the Exchange Offer for the New Notes in reliance on
the position of the Staff of the Commission as set forth in certain interpretive
letters addressed to third parties in other transactions. See, e.g., Exxon
Capital Holdings Corp. (pub. avail. April 13, 1989), Morgan Stanley & Co. Inc.
(pub. avail. June 5, 1991), Shearman & Sterling (pub. avail. July 2, 1993) and
Brown & Wood (pub. avail. February 7, 1997). However, the Company has not sought
its own interpretive letter and there can be no assurance that the Staff of the
Commission would make a similar determination with respect to the Exchange Offer
as it has in such interpretive letters to third parties. Based on these
interpretations by the Staff of the Commission, and subject to the two
immediately following sentences, the Company believes that New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold and otherwise transferred by a holder thereof (other than a
holder who is a broker-dealer) without further compliance with the registration
and prospectus delivery requirements of the Securities Act, provided that such
New Notes are acquired in the ordinary course of such holder's business and that
such holder is not participating, and has no arrangement or understanding with
any person to participate, in a distribution (within the meaning of the
Securities Act) of such New Notes. However, any holder of Old Notes who is an
Affiliate of the Company or who intends to participate in the Exchange Offer for
the purpose of distributing New Notes, or any broker-dealer who purchased Old
Notes from the Company to resell pursuant to Rule 144A or any other available
exemption under the Securities Act, (i) will not be able to rely on the
interpretations of the Staff of the Commission set forth in the above-mentioned
interpretive letters, (ii) will not be permitted or entitled to tender such Old
Notes in the Exchange Offer and (iii) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
sale or other transfer of such Old Notes, unless such sale is made pursuant to
an exemption from such requirements. In addition, as described below,
Participating Broker-Dealers must deliver a prospectus meeting the requirements
of the Securities Act in connection with any resales of New Notes.
Each holder of Old Notes who wishes to exchange Old Notes for New Notes
in the Exchange Offer will be required to represent that (i) it is not an
Affiliate of the Company, (ii) any New Notes to be received by it are being
acquired in the ordinary course of its business, (iii) it has no arrangement or
understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such New Notes and (iv) if such holder is not
a broker-dealer, such holder is not engaged in, and does not intend to engage
in, a distribution (within the meaning of the Securities Act) of such New Notes.
The Letter of Transmittal contains the foregoing representations. In addition,
the Company may require such holder, as a condition to such holder's eligibility
to participate in the Exchange Offer, to furnish to the Company (or an agent
thereof) in writing information as to the number of "beneficial owners" (within
the meaning of Rule 13d-3 under the Exchange Act) on behalf of whom such holder
holds the Old Notes to be exchanged in the Exchange Offer. Each Participating
Broker-Dealer that receives New Notes for its own account pursuant to the
Exchange Offer will be deemed to have acknowledged by execution of the Letter of
Transmittal or delivery of an Agent's Message that it acquired the Old Notes
exchanged therefor for its own account as the result of market-making activities
or other trading activities and must agree that it will deliver a prospectus
meeting the requirements of the Securities Act in connection with any resale of
such New Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a Participating Broker-Dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
Based on the position taken by the Staff of the Commission in the interpretive
letters referred to above, the Company believes that Participating
Broker-Dealers may fulfill their prospectus delivery requirements with respect
to the New Notes received upon exchange of such Old Notes (other than Old Notes
which represent an unsold allotment from the original sale of the Old Notes)
with a prospectus meeting the requirements of the Securities Act, which may be
the prospectus prepared for an exchange offer so long as it contains a
description of the plan of distribution with respect to the resale of such New
Notes. Accordingly, this Prospectus, as it may be amended or supplemented from
time to time, may be used by a Participating Broker-Dealer during the period
referred to below in connection with resales of New Notes received in exchange
for Old Notes where such Old Notes were acquired by such Participating
Broker-Dealer for its own account as a result of market-making or other trading
activities. Subject to certain provisions set forth in the Registration Rights
Agreement, the Company has agreed that this Prospectus, as it may be amended or
supplemented from time to time, may be used by a Participating Broker-Dealer in
connection with resales of such New Notes for a period ending 180-days after the
date of this Prospectus (subject to extension under certain limited
circumstances described below) or, if earlier, when all
40
<PAGE> 42
such New Notes have been disposed of by such Participating Broker-Dealer.
Pursuant to the Registration Rights Agreement, the Company has agreed to amend
or supplement this Prospectus, as required, during such 180-day period. See
"Plan of Distribution." However, a Participating Broker-Dealer who intends to
use this Prospectus in connection with the resale of New Notes received in
exchange for Old Notes pursuant to the Exchange Offer must notify the Company,
or cause the Company to be notified, on or prior to the Expiration Date, that it
is a Participating Broker-Dealer. Such notice may be given in the space provided
for that purpose in the Letter of Transmittal or may be delivered to the
Exchange Agent at one of the addresses set forth herein under "--Exchange
Agent." Any person, including any Participating Broker-Dealer, who is an
Affiliate of the Company may not rely on such interpretive letters and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction.
Each Participating Broker-Dealer who surrenders Old Notes pursuant to the
Exchange Offer will be deemed to have agreed, by execution of the Letter of
Transmittal or delivery of an Agent's Message in lieu thereof, that, upon
receipt of notice from the Company of the occurrence of any event or the
discovery of any fact which makes any statement contained or incorporated by
reference in this Prospectus untrue in any material respect or which causes this
Prospectus to omit to state a material fact necessary in order to make the
statements contained or incorporated by reference herein, in light of the
circumstances under which they were made, not misleading, such Participating
Broker-Dealer will suspend the sale of New Notes pursuant to this Prospectus
until the Company has amended or supplemented this Prospectus to correct such
misstatement or omission and has furnished copies of the amended or supplemented
Prospectus to such Participating Broker-Dealer or the Company has given notice
that the sale of New Notes may be resumed, as the case may be. If the Company
gives such notice to suspend the sale of New Notes, it shall extend the 180-day
period referred to above during which Participating Broker-Dealers are entitled
to use this Prospectus in connection with the resale of New Notes by the number
of days during the period from and including the date of the giving of such
notice to and including the date when Participating Broker-Dealers shall have
received copies of the amended or supplemented Prospectus necessary to permit
resales of New Notes or to and including the date on which the Company has given
notice that the sale of New Notes may be resumed, as the case may be.
WITHDRAWAL RIGHTS
Except as otherwise provided herein, tenders of Old Notes may be
withdrawn at any time on or prior to the Expiration Date.
In order for a withdrawal to be effective a written or facsimile
transmission of such notice of withdrawal must be timely received by the
Exchange Agent at one of its addresses set forth under "--Exchange Agent" on or
prior to the Expiration Date. Any such notice of withdrawal must specify the
name of the person who tendered the Old Notes to be withdrawn, the aggregate
principal amount of Old Notes to be withdrawn, and (if certificates for such Old
Notes have been tendered) the name of the registered holder of the Old Notes as
set forth on the certificate evidencing such Old Notes, if different from that
of the person who tendered such Old Notes. If Old Notes have been delivered or
otherwise identified to the Exchange Agent, then prior to the physical release
of such Old Notes, the tendering holder must submit the certificate numbers
shown on the particular Old Notes to be withdrawn and the signature on the
notice of withdrawal must be guaranteed by an Eligible Institution, except in
the case of Old Notes tendered for the account of an Eligible Institution. If
Old Notes have been tendered pursuant to the procedures for book-entry transfer
set forth in "--Procedures for Tendering Old Notes," the notice of withdrawal
must specify the name and number of the account at DTC to be credited with the
withdrawal of Old Notes, in which case a notice of withdrawal will be effective
if delivered to the Exchange Agent by written or facsimile transmission.
Withdrawals of tenders of Old Notes may not be rescinded. Old Notes properly
withdrawn will not be deemed validly tendered for purposes of the Exchange
Offer, but may be retendered at any subsequent time on or prior to the
Expiration Date by following any of the procedures described above under
"--Procedures for Tendering Old Notes."
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, in its
sole discretion, whose determination shall be final and binding on all parties.
None of the Company, any affiliates or assigns of the Company, the Exchange
Agent or any other person shall be under any duty to give any notification of
any irregularities in any notice of withdrawal or incur any liability for
failure to give any such notification. Any Old Notes which have been tendered
but which are withdrawn will be returned to the holder thereof promptly after
withdrawal.
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<PAGE> 43
INTEREST ON NEW NOTES
Holders of New Notes as of the record date for the payment of interest on
July 1, 1999 will be entitled to receive interest accumulated from and after
January 1, 1999. Holders of Old Notes whose Old Notes are accepted for exchange
will not receive interest on such Old Notes accumulated from and after January
1, 1999 and will be deemed to have waived the right to receive any interest on
such Old Notes accumulated from and after January 1, 1999. Consequently, holders
of Old Notes who exchange their Old Notes for New Notes will receive the same
interest payment on July 1, 1999 that they would have received had they not
accepted the Exchange Offer.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer, or any
extension of the Exchange Offer, the Company will not be required to accept for
exchange, or to exchange, any Old Notes for any New Notes, and, as described
below, may terminate the Exchange Offer (whether or not any Old Notes have
theretofore been accepted for exchange) or may waive any conditions to or amend
the Exchange Offer, if any of the following conditions have occurred or exists
or have not been satisfied:
(a) there shall occur a change in the current interpretation by the Staff
of the Commission which permits the New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes to be offered for resale, resold and otherwise
transferred by holders thereof (other than broker-dealers and any such holder
which is an Affiliate of the Company) without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holders' business and such
holders have no arrangement or understanding with any person to participate in
the distribution of such New Notes;
(b) any law, statute, rule or regulation shall have been adopted or
enacted which, in the judgment of the Company, would reasonably be expected to
impair its ability to proceed with the Exchange Offer;
(c) any action or proceeding shall have been instituted or threatened in
any court or by or before any governmental agency or body with respect to the
Exchange Offer which, in the Company's judgment, would reasonably be expected to
impair the ability of the Company to proceed with the Exchange Offer;
(d) a banking moratorium shall have been declared by United States,
Florida or New York state authorities which, in the Company's judgment, would
reasonably be expected to impair the ability of the Company to proceed with the
Exchange Offer;
(e) trading on the NYSE or generally in the United States
over-the-counter market shall have been suspended by order of the Commission or
any other governmental authority which, in the Company's judgment, would
reasonably be expected to impair the ability of the Company to proceed with the
Exchange Offer; or
(f) a stop order shall have been issued by the Commission or any state
securities authority suspending the effectiveness of the Registration Statement
or proceedings shall have been initiated or, to the knowledge of the Company,
threatened for that purpose, or any governmental approval which the Company
shall, in its sole discretion, deem necessary for the consummation of the
Exchange Offer as contemplated hereby has not been obtained.
If the Company determines in its sole and absolute discretion that any of
the foregoing events or conditions has occurred or exists or has not been
satisfied, the Company may, subject to applicable law, terminate the Exchange
Offer (whether or not any Old Notes have theretofore been accepted for exchange)
or may waive any such condition or otherwise amend the terms of the Exchange
Offer in any respect. If such waiver or amendment constitutes a material change
to the Exchange Offer, the Company will promptly disclose such waiver or
amendment by means of a prospectus supplement that will be distributed to the
registered holders of the Old Notes and will extend the Exchange Offer to the
extent required by Rule 14e-1 under the Exchange Act.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE OFFER
In the opinion of Elias, Matz, Tiernan & Herrick, L.L.P., special counsel
to the Company, the following is a summary of the material United States federal
income tax consequences of the Exchange Offer. This summary does not deal with
special classes of holders such as banks, thrifts, real estate investment
trusts, regulated investment companies, insurance companies, dealers in
securities or currencies, tax-exempt investors or persons that will hold the
Notes as a position in a "straddle," as part of a "synthetic security" or
"hedge," as part of a "conversion transaction"
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<PAGE> 44
or other integrated investment, or as other than a capital asset. This summary
also does not address the tax consequences to persons that have a functional
currency other than the U.S. dollar or the tax consequences to shareholders,
partners or beneficiaries of a holder of Notes. Further, it does not include any
description of any alternative minimum tax consequences or the tax laws of any
state or local government or of any foreign government that may be applicable to
the Notes. This summary is based on the Code, Treasury regulations thereunder
and the administrative and judicial interpretations thereof, as of the date
hereof, all of which are subject to change, possibly on a retroactive basis.
The exchange of Old Notes for New Notes should not be a taxable event to
holders for United States federal income tax purposes. The exchange of Old Notes
for New Notes pursuant to the Exchange Offer should not be treated as an
"exchange" for United States federal income tax purposes because the New Notes
should not be considered to differ materially in kind or extent from the Old
Notes and because the exchange will occur by operation of the terms of the Old
Notes. If, however, the exchange of the Old Notes for the New Notes were treated
as an exchange for United States federal income tax purposes, such exchange
should constitute a recapitalization for federal income tax purposes.
Accordingly, the New Notes should have the same issue price as the Old Notes,
and a holder should have the same adjusted tax basis and holding period in the
New Notes as the holder had in the Old Notes immediately before the exchange.
EACH HOLDER OF OLD NOTES SHOULD CONSULT SUCH HOLDER'S OWN TAX ADVISOR AS
TO THE PARTICULAR TAX CONSEQUENCES OF EXCHANGING SUCH HOLDER'S OLD NOTES FOR NEW
NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX
LAWS.
EXCHANGE AGENT
Norwest Bank Minnesota, National Association has been appointed as
Exchange Agent for the Exchange Offer. Delivery of the Letters of Transmittal
and any other required documents, questions, requests for assistance, and
requests for additional copies of this Prospectus or of the Letter of
Transmittal should be directed to the Exchange Agent as follows:
<TABLE>
<CAPTION>
<S> <C>
By Registered or Certified Mail: In Person:
Norwest Bank Minnesota, Northstar East Bldg.
National Association 608 2nd Ave. S.
Corporate Trust Operations 12th Floor
P.O. Box 1517 Corporate Trust Services
Minneapolis, MN 55480-1517 Minneapolis, MN 55479-0113
By Hand or Overnight Courier: By Facsimile (for Eligible Institutions only):
Norwest Bank Minnesota, (612) 667-4927
National Association
Corporate Trust Operations Confirm Receipt of Notice of
Norwest Center Guaranteed Delivery by Telephone:
Sixth and Marquette
Minneapolis, MN 55479-0113 (612) 667-9764
</TABLE>
Delivery to other than the above addresses or facsimile number will not
constitute a valid delivery.
FEES AND EXPENSES
The Company has agreed to pay the Exchange Agent reasonable and customary
fees for its services and will reimburse it for its reasonable out-of-pocket
expenses in connection therewith. The Company also will pay brokerage houses and
other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in
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<PAGE> 45
forwarding copies of this Prospectus and related documents to the beneficial
owners of Old Notes, and in handling or tendering for their customers.
Holders who tender their Old Notes for exchange will not be obligated to
pay any transfer taxes in connection therewith. If, however, New Notes are to be
delivered to, or are to be issued in the name of, any person other than the
registered holder of the Old Notes tendered, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes in connection with the Exchange
Offer, then the amount of any such transfer taxes (whether imposed on the
registered holder or any other persons) will be payable by the tendering holder.
If satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
The Company will not make any payment to brokers, dealers or other
nominees soliciting acceptances of the Exchange Offer.
44
<PAGE> 46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company is a Virginia corporation, formed in the first quarter of
1997, that has elected to be taxed as a REIT under Sections 856 through 860 of
the Code. The Company's primary investments include:
- commercial and residential subordinate and residual interests CMOs
and other mortgage-related securities; and
- underperforming or otherwise distressed commercial and multifamily
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:
- commercial, multifamily and single-family mortgage loans,
including construction and renovation loans and mezzanine loans,
which comprise the Company's loan portfolio, and
- 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 loss of $7.6 million or ($0.40) per fully diluted
share for the three months ended September 30, 1998 and a loss of $11.5 million
or ($0.61) per fully diluted share for the nine months ended September 30, 1998.
These losses were primarily attributable to: (i) an aggregate of $17.1 million
of losses incurred in connection with the Company's IO Portfolio, which was
adversely affected in the first quarter of 1998 by an increase in prepayments of
the underlying mortgages in response to a decrease in market interest rates; and
(ii) $15.6 million of losses on subordinate and residual interests in
mortgage-related securities and derivatives (consisting of a $13.6 million loss
on securities and a $2.0 million loss on derivatives), which were adversely
affected by increased prepayments of the underlying mortgage loans and the
substantial volatility in U.S. and foreign securities markets which has resulted
in widening mortgage spreads and declining market liquidity. Moreover, as a
result of these conditions, in recent months there has been a general "flight to
quality" by investors, with the result that the market or demand for subordinate
and residual interests in 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 interests in mortgage-related securities,
the Company has received requests from its lenders to pledge additional
collateral or repay certain portions of its debt pursuant to the terms of its
indebtedness, which it has been able to meet as of the date hereof. See " -
Capital Resources and Liquidity." In anticipation of a possible economic
downturn and in order to enhance its ability to meet the obligations under its
indebtedness, 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. As a result, the Company has currently curtailed each of its business
lines, which include the acquisition of subordinate and residual interests in
residential and commercial mortgage-related securities, underperforming real
estate and commercial real estate loans, including construction and renovation
loans.
At September 30, 1998, the Company's shareholders' equity amounted to
$243.0 million or $12.81 per fully diluted share. This amount was comprised of
$295.0 million of stated capital and additional paid-in capital related to the
Company's Common Stock, less distributions in excess of earnings of $36.0
million, unrealized losses on securities available for sale of $13.7 million and
accumulative translation adjustments of $2.0 million.
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<PAGE> 47
The future success of the Company will be primarily dependent on its
ability to continue to be able to meet its obligations under its indebtedness,
including without limitation the Notes. This ability will depend largely on the
Company's future performance, which, in turn, is subject to prevailing economic
conditions and to financial, business and other factors beyond its control,
including levels of interest rates. This ability also could be significantly
adversely affected by the Company's decision to discontinue future investment
activities, which effectively means that the Company's future profitability, and
its ability to meet its indebtedness obligations, will be dependent on its
existing assets. There can be no assurance that the Company's existing assets
will be sufficient to ensure future profitable operations or enable the Company
to meet its indebtedness obligations, or that such assets will not be further
significantly adversely affected by changes in market and economic conditions
and other factors.
RECENT DEVELOPMENTS
On December 21, 1998, the Company announced that its Board of Directors
has approved a proposal to terminate the Company's status as a REIT effective
for calendar 1999, subject to shareholder approval. See "Recent Developments."
On November 13, 1998, the Company completed the securitization of 1,808
first and second single family residential mortgage loans having an aggregate
unpaid principal balance of $182.2 million. The mortgage loans were acquired by
the Operating Partnership during 1997 and 1998. After the payment in full of all
transaction expenses and the repayment in full of the approximately $136.0
million warehouse facility secured by such mortgage loans, the securitization
will net the Company approximately $35.0 million in cash. The Company retained
an approximately $10.1 million non-investment grade equity certificate, which
will entitle the Company to the available excess cash flow, and the Bank will
continue to service the mortgage loans.
During October 1998, the Company closed an existing commitment to finance
a hotel construction loan in the amount of $17.7 million, of which $1.2 million
has been funded.
RESULTS OF OPERATIONS
The following discussion of the Company's consolidated financial
condition, results from operations and capital resources and liquidity should be
read in conjunction with the Consolidated Financial Statements and related Notes
included elsewhere herein.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998
GENERAL. The Company reported a net loss of $7.6 million for the quarter
ended September 30, 1998, or ($0.40) per diluted share, compared to net income
of $4.4 million, or $0.22 per diluted share, for that same period a year ago.
During the third quarter of 1998, the Company recognized a charge of $15.6
million, or ($0.75) per diluted share after minority interest, related primarily
to its commercial and residential mortgage-backed securities. For the nine
months ended September 30, 1998, the Company reported a net loss of $11.5
million, or ($0.61) per diluted share.
INTEREST INCOME. Interest income increased by $14.8 million from $5.5
million in the third quarter of 1997 to $20.3 million for the three months ended
September 30, 1998. This increase was primarily the result of a $346.6 million
increase in the average balance of securities available for sale during the
quarter ended September 30, 1998 as compared to the quarter ended September 30,
1997 and a $231.6 million increase in the average balances of the loan
portfolios during the third quarter of 1998 as compared to the third quarter of
1997. Likewise, interest income increased $35.1 million to $43.1 million for the
nine months ended September 30, 1998, compared to $8.0 million for the same
period a year ago. This increase was primarily attributable to a $223.8 million
increase in the average balance of securities available for sale during the nine
months ended September 30, 1998, as compared to the same period in 1997, and a
$146.6 million increase in the average balance of loan portfolios during the
same respective periods.
INTEREST EXPENSE. The Company had no interest expense during the three
months or nine months ended September 30, 1997 compared to $10.6 million and
$16.8 million during the three months and nine months ended September 30, 1998,
respectively. This increase was the result of the Company being newly formed and
unleveraged during the three and nine months ended September 30, 1997. For
purposes of these financial statements, 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, Net" below.
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<PAGE> 48
NET INTEREST INCOME. Net interest income before provision for loan losses
increased by $4.2 million to $9.7 million in the third quarter of 1998 versus
the same period a year ago. This increase was largely due to an $11.3 million
increase in interest income from securities available for sale and a $3.9
million increase in interest income from residential loans, which were partially
offset by a $2.0 million decrease in interest income from repurchase agreements
and interest earning deposits and a $10.6 million increase in interest expense.
These increases in interest income and interest expense versus the same period a
year ago were largely the result of The Company being newly formed, only
partially invested and not levered in the third quarter of 1997. Net interest
income before provision for loan losses increased $18.3 million to $26.2 million
for the nine months ended September 30, 1998, versus the same period a year ago.
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 statements of
operations for the three and nine months ended September 30, 1998, for the three
months ended September 30, 1997 and for the period May 14, 1997 to September 30,
1997, 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.
47
<PAGE> 49
<TABLE>
<CAPTION>
For the Three Months Ended September 30,
-----------------------------------------------------
1998
-----------------------------------------------------
Average Annualized
Balance Interest Yield/Rates
-----------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Repurchase agreements and interest-bearing
deposits $ 54,861 $ 714 5.16%
Securities available for sale 412,265 13,807 13.29
Commercial and multifamily loan portfolio, net 50,323 1,512 11.92
Residential loan portfolio, net 181,545 3,863 8.44
Discount loans, net 8,527 393 18.29
------- ------ -----
Total interest-earning assets 707,521 20,289 11.38
Interest-bearing liabilities:
Securities sold under agreements to repurchase 163,253 3,082 7.49
Obligations outstanding under lines of credit 189,414 3,828 8.02
11.5% Notes due 2005 128,255 3,687 11.50
------- ------ -----
Total interest-bearing liabilities 480,922 10,597 8.74
Net interest income/spread (1) 9,692 2.64%
Net interest margin (2) 5.43%
<CAPTION>
For the Three Months Ended September 30,
-----------------------------------------------------
1997
-----------------------------------------------------
Average Annualized
Balance Interest Yield/Rates
-----------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Repurchase agreements and interest-bearing
deposits $193,835 $2,754 5.70%
Securities available for sale 65,699 2,492 15.17
Commercial and multifamily loan portfolio, net --- --- ---
Residential loan portfolio, net 294 6 7.58
Discount loans, net 11,480 260 9.08
------- ----- ----
Total interest-earning assets 270,858 5,512 8.14
Interest-bearing liabilities:
Securities sold under agreements to repurchase --- --- ---
Obligations outstanding under lines of credit --- --- ---
11.5% Notes due 2005 --- --- ---
------- ----- ----
Total interest-bearing liabilities --- --- ---
Net interest income/spread (1) 5,512 8.14%
Net interest margin (2) 8.14%
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30, 1998
-----------------------------------------------------
Average Annualized
Balance Interest Yield/Rates
----------------- ----------------- -----------------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Repurchase agreements and interest-bearing
deposits $ 26,375 $ 1,010 5.12%
Securities available for trading 28,702 107 0.50
Securities available for sale 285,298 29,990 14.05
Commercial and multifamily loan portfolio, net 38,815 3,786 13.04
Residential loan portfolio, net 108,017 6,476 8.02
Discount loans, net 14,845 1,719 15.48
------ ----- -----
Total interest-earning assets 502,052 43,088 11.47
Interest-bearing liabilities:
Securities sold under agreements to repurchase 126,071 7,049 7.48
Obligations outstanding under lines of credit 108,514 6,102 7.52
11.5% Notes due 2005 42,752 3,687 11.50
------ ----- -----
Total interest-bearing liabilities 277,337 16,838 8.12
Net interest income/spread (1) 26,250 3.35%
Net interest margin (2) 6.99%
<CAPTION>
For the Period May 14, 1997 to
September 30, 1997
-----------------------------------------------------
Average Annualized
Balance Interest Yield/Rates
------------------ ---------------- -----------------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Repurchase agreements and interest-bearing
deposits $203,527 $4,151 5.58%
Securities available for trading --- --- ---
Securities available for sale 61,525 3,497 15.55
Commercial and multifamily loan portfolio, net --- --- ---
Residential loan portfolio, net 201 6 7.58
Discount loans, net 9,632 341 9.68
------- ----- ----
Total interest-earning assets 274,885 7,995 7.96
Interest-bearing liabilities:
Securities sold under agreements to repurchase --- --- ---
Obligations outstanding under lines of credit --- --- ---
11.5% Notes due 2005 ------- ----- ----
--- --- ---
Total interest-bearing liabilities --- --- ---
Net interest income/spread (1) 7,995 7.96%
Net interest margin (2) 7.96%
</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.
48
<PAGE> 50
PROVISION FOR LOAN LOSSES. The allowance for loan losses was established
in 1998. The provision for loan losses amounted to $351,000 during the three
months ended September 30, 1998, which reflects 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. At September 30, 1998, the allowance for loan losses amounted to
$0.6 million or 1.0% of the net commercial and multifamily loan portfolio. At
the same date, the Company had not established an allowance for loan losses on
the single-family residential loan portfolio or the discount loan portfolio
because the loans in these portfolios were relatively recent acquisitions and
generally were performing in accordance with management's expectations at the
date of origination or acquisition.
REAL ESTATE INCOME, NET. Real estate income, net increased $479,000 to
$543,000 for the three months ended September 30, 1998, versus the same period a
year ago. This increase was largely due to a $7.9 million increase in rental
income offset by a $3.6 million increase in rental operation expense, a $1.1
million increase in depreciation and amortization expense and a $2.7 million
increase in interest expense. These increases in real estate operating income
and expenses versus the same period a year ago were largely the result of an
increase in The Company's investment in real estate, net of $209.8 million at
September 30, 1998, versus $26.3 million at September 30, 1997. For the same
reason, real estate income, net increased $1.0 million to $1.1 million for the
nine months ended September 30, 1998, versus the same period a year ago.
OTHER EXPENSES. Other expenses increased $2.0 million to $3.2 million for
the three months ended September 30, 1998, versus the same period a year ago.
This increase was largely due to a $0.9 million increase in management fees and
a $0.8 million increase in other expenses (which consisted generally of
servicing, legal, and accounting expenses). These increases in other expenses
versus the same period a year ago are largely the result of the Company becoming
fully invested and leveraging its assets in 1998. Other expenses increased $4.9
million to $6.6 million for the nine months ended September 30, 1998, versus the
same period a year ago. The management fees payable by the Company to the
Manager totaled $1.6 million for the quarter ended September 30, 1998 and $4.1
million for nine months ended September 30, 1998. The Manager advises the
Company on various facets of its business and manages its day-to-day operations,
subject to the supervision of the Company's Board of Directors. See Note 2 to
the Interim Consolidated Financial Statements included elsewhere herein. In
addition, the Company reimbursed the Manager for due diligence expenses of
$568,000 and $936,000 in connection with its asset acquisitions during the three
and nine months ended September 30, 1998 (which amounts are likely to be
substantially reduced or eliminated to the extent the Company does not review or
acquire assets in the future).
LOSSES ON SECURITIES AND DERIVATIVES. Due to accelerated prepayment
speeds, widening mortgage spreads and declining market liquidity, The Company
recognized a $15.6 million charge to earnings during the third quarter of 1998.
This charge was comprised of a $13.6 million writedown of the securities
available for sale portfolio (which is comprised of residential and commercial
subordinate and residual mortgage-backed securities) and a $2.0 million charge
on futures losses incurred on short positions in U.S. Treasury futures used to
hedge the residential loan portfolio. Total losses on securities and derivatives
for the nine months ended September 30, 1998, were $32.7 million.
The Company recognized net losses on securities and derivatives of $32.7
million during the nine months ended September 30, 1998, which consisted of the
above - discussed losses and $17.1 million of losses recognized by the Company
in connection with the IO Portfolio. See "- Changes in Financial Condition -
Securities Available for Sale."
MINORITY INTEREST IN NET LOSS OF CONSOLIDATED SUBSIDIARY. Minority
interest in net loss of $0.7 million and $0.4 million for the three and nine
months ended September 30, 1998, respectively, arose from the investment by
IMIHC in the Operating Partnership which conducts the majority of The Company's
business activities. The Company has a 91.3% ownership interest in the Operating
Partnership.
EXTRAORDINARY GAIN ON REPURCHASE OF DEBT. On September 30, 1998, The
Company repurchased in the open market $7.0 million of its $150.0 million
outstanding Notes. This resulted in The Company realizing an extraordinary gain
of $615,000 during the third quarter of 1998. At September 30, 1998, the
outstanding balance of the Notes was $143.0 million.
NET INCOME/LOSS AND OTHER COMPREHENSIVE INCOME/LOSS. The Company's net
loss before extraordinary item amounted to $8.3 million and $12.1 million during
the three and nine months ended September 30, 1998, respectively,
49
<PAGE> 51
as compared to a comprehensive loss before extraordinary item during the same
periods of $22.4 million and $19.9 million, respectively. The comprehensive loss
exceeded the Company's net loss during the three and nine months ended September
30, 1998 primarily because of $13.8 million and $6.4 million of unrealized
losses on securities which were not included in the Company's net loss during
the respective periods, and to a lesser extent $917,000 and $2.0 million of
foreign currency translation losses which were not included in the Company's net
loss during the respective periods. For further information, see Note 5 to the
Interim Consolidated Financial Statements included elsewhere herein.
Although the Company had a net loss of $11.5 million for financial
reporting purposes for the nine months ended September 30, 1998, it had income
of approximately $23.2 million for federal income tax purposes. The principal
reasons for the difference between the Company's loss for financial reporting
purposes and income for federal income tax purposes were (1) capital losses
incurred in connection with the Company's IO Portfolio only may be used to
offset capital gains, (2) write-downs of investment securities for financial
reporting purposes generally may not be recognized for federal income tax
purposes until sale of the securities and (3) certain of the requirements
relating to determination of taxable income from mortgage-backed securities may
result in the recognition of income thereon for federal income tax purposes
earlier than income thereon is recognized for financial reporting purposes.
REITs such as the Company which have taxable income are subject to certain
distribution requirements in order to avoid corporate income taxation. See
"Federal Income Tax Considerations - Distribution Requirements" and "Recent
Developments."
RESULTS OF OPERATIONS FOR THE PERIOD MAY 14, 1997 TO DECEMBER 31, 1997
The Company priced the Initial Public Offering on May 14, 1997 and
commenced operations thereon. Net income for the period from May 14, 1997 to
December 31, 1997 amounted to $11.8 million. Diluted earnings per weighted
average common share was $0.60 for the period.
The following table presents the contribution by investment activity to
the Company's net income before minority interest for the period indicated.
<TABLE>
<CAPTION>
May 14, 1997 to
December 31, 1997
---------------------------------
Amount Percentage
------------ -----------
(Dollars in Thousands)
<S> <C> <C>
Mortgage-related securities and other
short-term investments $ 9,949 84%
Commercial real estate 1,376 12
Commercial discount loans 394 3
Commercial and residential loans 82 1
------ ------
$11,801 100%
====== ===
</TABLE>
INTEREST INCOME. Interest income for the period from May 14, 1997 to
December 31, 1997 amounted to $13.5 million. The following table sets forth the
total amount of interest income generated from interest-earning assets and the
resultant annualized yields. The average balance is based on average daily
balances for the indicated period.
<TABLE>
<CAPTION>
May 14, 1997 to
December 31, 1997
-----------------------------------------------------
Average Interest Annualized
Balance Income Yield
------------- -------------- ----------------
(Dollars in Thousands)
<S> <C> <C> <C>
Repurchase agreements and interest-
earning deposits $155,757 $5,539 5.72%
Securities for sale 76,423 6,363 13.39
Loans 4,294 311 11.65
Discount loans 16,453 1,249 12.2
------- ------ ----
Total $252,927 $13,462 8.56%
======= ====== ====
</TABLE>
50
<PAGE> 52
The amount of interest income from interest-bearing deposits and
repurchase agreements was attributable to initial investments of net proceeds
from the Initial Public Offering.
PROVISION FOR LOAN LOSSES. The Company did not establish a provision for
loan losses during the period May 14, 1997 to December 31, 1997 because all
loans held by the Company were recent acquisitions and were performing in
accordance with management's expectation at the date of origination or
acquisition.
OPERATING INCOME. Operating income was comprised primarily of $1.5
million in income earned on investments in real estate during the period from
May 14, 1997 to December 31, 1997. Such income represents rental income, net of
operating expenses and depreciation, and $890,000 of income realized from the
early termination of a lease by a tenant, generated from the Company's
investment in two office buildings located in California and a retail shopping
center located in Florida.
OPERATING EXPENSES. The following table sets forth the principal
components of the Company's operating expenses during the period from May 14,
1997 to December 31, 1997.
<TABLE>
<CAPTION>
May 14, 1997 to
December 31, 1997
-----------------------
(In Thousands)
<S> <C>
Management $1,796
Due diligence 326
Foreign currency loss 569
Other 464
------
Total $3,155
======
</TABLE>
Management fees totaling $1.8 million for the period from May 14, 1997 to
December 31, 1997 were comprised solely of a base management fee (1% per annum
of average invested assets) earned by the Manager pursuant to the terms of the
Management Agreement entered into between the Company and the Manager. In
addition, the Company incurred $326,000 of due diligence expense in connection
with its asset acquisitions. Foreign currency loss for the period was a result
of the strengthening U.S. dollar versus the Canadian dollar and relates to the
Company's investment in a Canadian commercial discount loan. See "-- Changes in
Financial Condition -Discount Loan Portfolio." Other expenses were comprised of
auditing fees, insurance premiums and other miscellaneous expenses.
CHANGES IN FINANCIAL CONDITION
GENERAL. From December 31, 1997 to September 30, 1998, total assets
increased $622.4 million or 216.1% to $910.4 million. This increase was
primarily due to a $55.1 million increase in the commercial and multifamily loan
portfolio, a $191.1 million increase in the residential loan portfolio, a $164.4
million increase in investments in real estate and a $249.5 million increase in
securities available for sale, which were offset in part by a $18.4 million
decrease in the discount loan portfolio. Total liabilities increased $625.2
million during the period, primarily as a result of $143.1 million increase in
securities sold under agreements to repurchase, $189.1 million of obligations
outstanding under lines of credit, $142.4 million of obligations outstanding
under lines of credit secured by real estate and a $143.0 million obligation
with respect to the Notes.
Total assets amounted to $288.0 million at December 31, 1997 and
consisted primarily of $48.3 million of interest-earning deposits, $146.0
million of securities available for sale, $15.8 million of loans held in the
loan portfolio, $27.0 million of discount loans and $45.4 million of investments
in real estate. These assets were the result of the Company's investment of the
$283.7 million of proceeds received from the Initial Public Offering in May
1997.
CASH AND INTEREST-EARNING DEPOSITS. At September 30, 1998, cash and
interest-earning deposits amounted to $18.3 million or 2.0% of total assets and
were comprised of deposits at various banks. Interest-bearing deposits declined
by $30.4 million or 62% from December 31, 1997 to September 30, 1998 due to the
reinvestment of cash and cash equivalents into long-term assets. At December 31,
1997, total interest-earning deposits amounted to $48.3 million or 17% of total
assets and were comprised of deposits at various banks, including $16,000 on
deposit in an account at the Bank.
51
<PAGE> 53
Although the Company had no repurchase agreements at September 30, 1998
or December 31, 1997, it enters into such agreements from time to time. In these
transactions, the Company purchases securities from a counterparty, and agrees
to sell the securities back to the counterparty at a specified future date.
Repurchase agreements are carried at the amounts at which the securities will be
subsequently resold to the counterparty plus accrued interest, as specified in
the respective agreements. The Company monitors the market value of the
underlying securities relative to the amounts due under the agreements and, when
necessary, requires prompt additional collateral or reduction in loan balance to
ensure that the market value remains sufficient to protect itself in the event
of default by the counterparty. At October 31, 1998, The Company had cash and
cash equivalents of approximately $26.6 million.
SECURITIES AVAILABLE FOR SALE. The Company's investment in securities
available for sale at September 30, 1998 increased by $249.5 million to $395.5
million from $146.0 million at December 31, 1997. The $146.0 million of
securities available for sale at December 31, 1997 was the result of purchases
of $166.3 million during the period May 14, 1997 to December 31, 1997, which
were offset in part by $6.7 million of principal payments and maturities, $6.3
million of net premium amortization and net unrealized losses of $7.3 million.
At September 30, 1998, the Company's securities available for sale
portfolio of $395.5 million consisted of:
- Non-investment grade and unrated subordinate commercial
mortgage-backed securities having a book value of $134.1 million
and a market value of $129.6 million;
- Unrated residential subprime residuals having a book value of
$254.7 million and a market value of $245.2 million; and
- Unrated subordinate residential mortgage-backed securities having
a book value of $20.4 million and a market value of $20.7 million.
At September 30, 1998, the Company's unrated subprime residual portfolio
of $245.2 million consisted of:
- $112.8 million of seasoned residuals (i.e., securitized between
1994 and 1997) with overcollateralization reserves funded at
approximately $125.3 million.
- $132.4 million of unseasoned residuals (i.e., securitized in 1998)
with overcollateralization reserves funded at approximately $23.3
million.
At October 31, 1998, the market value and book value of the Company's
securities available for sale was approximately $362.1 million and $397.2, which
consisted of the following:
- Non-investment grade and unrated subordinate commercial
mortgage-backed securities having a book value of $133.4 million
and a market value of $120.3 million;
- Unrated residential subprime residuals having a book value of
$243.6 million and a market value of $222.0 million; and
- Unrated subordinate residential mortgage-backed securities having
a book value of $20.2 million and a market value of $19.8 million.
At October 31, 1998, the Company's unrated subprime residual portfolio of
$222.0 million consisted of:
- $107.3 million of seasoned residuals (i.e., securitized between
1994 and 1997) with overcollateralization reserves funded at
approximately $120.9 million.
- $114.7 million of unseasoned residuals (i.e., securitized in 1998)
with overcollateralization reserves funded at approximately $24.8
million.
52
<PAGE> 54
The following table describes the composition of the securities available
for sale at the dates indicated.
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------------- -----------------
(In Thousands)
<S> <C> <C>
Single-family residential:
FHLMC interest-only $ --- $ 21,178
FNMA interest-only --- 22,573
AAA-rated interest-only --- 729
Subordinates 20,743 9,444
Subprime residuals 245,181 ---
------- ------
265,924 53,924
------- ------
Multifamily residential and commercial:
AAA-rated interest-only 508 866
A-rated interest-only 265 480
Non-rated interest-only 3,951 4,803
Non-rated principal-only 608 960
Subordinates 124,239 84,994
------- ------
129,571 92,103
------- ------
Total $395,495 $146,027
======= =======
</TABLE>
The following tables detail the Company's securities available for sale
portfolio at September 30, 1998, 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 LOSSES - Represents cumulative losses expressed as a
percentage of the unpaid balance of the original collateral at the indicated
date.
OVER-COLLATERALIZATION LEVEL - For residual interests in residential
mortgage-backed securities, over-collateralization ("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 on 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-collateralization target has been satisfied as of a specific date, such
that warrant cash flows to the residual holder are warranted. To the extent
consumed by losses on more highly rated bonds, OC is remitted to the residual
holders.
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. 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.
53
<PAGE> 55
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 securitization at the
indicated date and, in the case of subordinates, the outstanding principal
balance of the entire securitization at the indicated date.
ACTUAL LIFE-TO-DATE CPR - The lifetime Constant Prepayment Rate is used to
measure the average prepayment rate for the underlying mortgage pool(s) over
the period of time elapsed since the issuance of the securities through the
date indicated, and is calculated as follows:
<TABLE>
<S> <C>
12
Final Aggregate Balance(actual) (----------------)
Actual Life-to-Date CPR=100x[(1- ----------------------- ) months in period ].
Final Aggregate Balance(scheduled)
</TABLE>
DEAL NAME - Series description.
WEIGHTED-AVERAGE DSCR - Represents debt service coverage ratio, which is
calculated by dividing cash flow available for debt service by debt service.
ISSUE DATE - Represents the date on which the indicated securities were issued.
WEIGHTED-AVERAGE LTV - Represents the ratio of the loan amount to the value of
the underlying collateral.
RATING - Represents the rating, if any, on the security or securities by the
indicated rating agencies.
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.
YIELD TO MATURITY - represents a measure of the average rate of return that is
earned on a security if held to maturity.
54
<PAGE> 56
RESIDENTIAL MORTGAGE BACKED SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
Class
Designation
Securitization Security Issue Date Letter Rating Agencies
- ---------------------- -------------- ------------ ------------- ---------------------
Residuals
<S> <C> <C> <C> <C>
SASCO 1998-2(1) X Jan-98 NR S&P, Fitch
SASCO 1998-3(1) X Mar-98 NR S&P, Fitch
MLMI 1998-FF1(2) X Jun-98 NR S&P, Fitch
PANAM 1997-1(3) X Dec-97 NR S&P, Moody's
Prepay Pen.
LHELT 1998-2(4) X Jun-98 NR Moody's, Fitch
EQUICON 1994-2(5) B Fix, B-2 Oct-94 NR S&P, Moody's, Fitch
QS Fix, QS-2 NR
B Var, B-2 NR
EQUICON 1995-1(5) B Fix, B-2 May-95 NR S&P, Moody's, Fitch
B Var, B-2 NR
EQUICON 1995-2(5) B Fix, B-2 Oct-95 NR S&P, Moody's
B Var, B-2 NR
ACCESS 1996-1(6) B Fix, B-2 Feb-96 NR S&P, Moody's
B Var, B-2 NR
ACCESS1996-2(6) B-1, B-1 May-96 NR S&P, Moody's
B1-S, B1-S-1 NR
B-11, B-1 NR
B11-S, B11-S-1 NR
ACCESS 1996-3(6) B-1, B-1 Aug-96 NR S&P, Moody's
B1-S,B1-S-1 NR
B-11,B-1 NR
B11-S,B11-S-1 NR
ACCESS 1996-4(6) B,B-1 Nov-96 NR S&P, Moody's
B-S, B-S-1 NR
ACCESS 1997-1(6) B,B-1 Feb-97 NR S&P, Moody's
B-S,B-S-1 NR
ACCESS 1997-2(6) B,B-1 May-97 NR S&P, Moody's
B-S,B-S-1 NR
ACCESS 1997-3(6) B,B-1 Oct-97 NR S&P, Moody's
B-S,B-S-1 NR
Subordinates
SBMS 1997-HUD1(7) B5 Apr-97 B2, (Moody's) Moody's, Duff&Phelps
B6 Apr-97 NR
ORMBS 1998-R1(8) B4 Mar-98 NR Moody's, Duff&Phelps
GECMS 1994-12(9) B4 Mar-94 NR Moody's, Fitch, S&P
</TABLE>
<TABLE>
<CAPTION>
Weighted Actual
Average Weighted Life to
Collateral Balance at Interest Average Actual Date
----------------------------- Rate at LTV at Delinquency at CPR at
Deal Name Issuance 9/30/98 9/30/98 9/30/98 9/30/98 9/30/98
- ------------------------ ---------- -------------- ---------- --------- ---------------- ---------
Residuals (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
SASCO 1998-2(1) $600,052 $524,294 10.17% 74.61% 6.96% 17.70%
SASCO 1998-3(1) 769,671 695,254 9.77 76.15 5.21 17.90
MLMI 1998-FF1(2) 198,155 190,695 9.15 77.16 1.95 10.30
PANAM 1997-1(3) 113,544 101,346 9.92 76.02 5.80 15.00
LHELT 1998-2(4) 209,225 198,060 10.04 76.14 4.66 15.10
EQUICON 1994-2(5) 78,846 30,481 9.94 69.01 4.82 31.19
32,306 8,084 11.17 74.82 14.09 44.63
EQUICON 1995-1(5) 70,024 24,208 12.06 68.52 6.56 27.50
70,519 9,589 11.80 73.74 5.60 33.93
EQUICON 1995-2(5) 79,288 33,731 10.85 72.20 7.82 33.67
39,667 11,037 11.81 73.17 11.74 41.63
ACCESS 1996-1(6) 120,015 55,023 10.86 72.46 40.52 30.22
55,362 16,760 11.77 75.29 9.14 39.21
ACCESS1996-2(6) 142,259 69,355 10.85 72.90 8.45 31.08
68,345 20,646 11.02 74.86 24.60 50.62
ACCESS 1996-3(6) 107,712 52,972 11.38 74.97 9.36 33.85
99,885 31,453 12.05 76.86 13.27 53.52
ACCESS 1996-4(6) 239,778 103,063 11.83 75.04 20.63 43.88
ACCESS 1997-1(6) 276,442 147,923 11.44 76.38 11.96 42.02
ACCESS 1997-2(6) 185,197 109,074 11.31 75.17 13.82 42.06
ACCESS 1997-3(6) 199,884 137,081 11.13 75.85 32.95 37.87
Subordinates
SBMS 1997-HUD1(7) 9,785 9,525 9.77 113.59 8.62 12.91
16,998 13,015
ORMBS 1998-R1(8) 101,774 100,144 8.92 113.82 12.82 3.55
GECMS 1994-12(9) 2,069 1,594 6.83 50.50 0.27 6.20
</TABLE>
<TABLE>
<CAPTION>
Actual
Life to Date Over- Yield to Maturity at
Losses at Collateralization Product Type at --------------------------
Deal Name 9/30/98 Level at 9/30/98 9/30/98 Purchase 9/30/98
- -------------------- ------------ ----------------- --------------------------------------- --------------------------
Residuals
<S> <C> <C> <C> <C> <C>
SASCO 1998-2(1) $ 0 1.01%OC 24% Fixed, 69% 2/28 ARM 16.00% 5.66%
SASCO 1998-3(1) 0 1.90%OC 9% Fixed, 74% 2/28 ARM 17.04 5.60
MLMI 1998-FF1(2) 0 1.03%OC 18% 1/29 ARM, 78% 2/28 ARM 18.57 9.95
PANAM 1997-1(3) 25 31.21%OC 33% 6 mo. ARM, 61% 2/28 ARM 22.45 24.65
25.69 49.33
LHELT 1998-2(4) 0 1.59%OC 40% Fixed, 37% 2/28 ARM 18.55 17.59
EQUICON 1994-2(5) 462 8.42%OC 100% Fixed 18.00 19.38
237 15.34%OC 100% 6 mo. ARM 18.00 20.98
EQUICON 1995-1(5) 439 16.34%OC 100% Fixed 18.00 21.62
579 24.88%OC 100% 6 mo. ARM 18.00 23.72
EQUICON 1995-2(5) 432 11.90%OC 100% Fixed 18.00 31.49
329 16.20%OC 100% 6 mo. ARM 18.00 34.39
ACCESS 1996-1(6) 926 9.04%OC 100% Fixed 18.00 29.59
423 10.42%OC 100% 6 mo. ARM 18.00 46.36
ACCESS1996-2(6) 678 10.48%OC 100% Fixed 18.00 18.77
259 12.98%OC 96% 6 mo. ARM 18.00 31.74
ACCESS 1996-3(6) 361 8.54%OC 100% Fixed 18.00 23.98
433 13.86%OC 99% 6 mo. ARM 18.00 16.21
ACCESS 1996-4(6) 490 10.90%OC 48% Fixed, 19% 6 mo. ARM, 33% 2/28 ARM 18.00 17.44
ACCESS 1997-1(6) 883 11.25%OC 55% Fixed, 40% 2/28 ARM 18.00 15.08
ACCESS 1997-2(6) 173 7.10%OC 49% Fixed, 25% 6 mo. ARM, 26% 2/28 ARM 18.00 9.67
ACCESS 1997-3(6) 70 4.50%OC 43% Fixed, 23% 6 mo. ARM, 34% 2/28 ARM 18.00 15.32
Subordinates
SBMS 1997-HUD1(7) 3,665 5.06%* 97% Fixed, 3% ARM 16.87 18.82
0.00%* 22.86 24.75
ORMBS 1998-R1(8) 679 0.00%* 98% Fixed, 2% ARM 13.75 8.58
GECMS 1994-12(9) 0 0.00%* 100% Fixed 19.37 20.50
</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)Salomon Brothers Mortgage Securities
(8)Ocwen Residential Mortgage-Backed Securities
(9)GE Capital Mortgage Services, Inc.
*Subordination level at 9/30/98
55
<PAGE> 57
COMMERCIAL MORTGAGE BACKED SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
CLASS
DESIGNATION
SECURITIZATION SECURITY ISSUE DATE LETTER RATING AGENCIES
--------------------- ------------- --------------- ----------- -----------------------
<S> <C> <C> <C> <C>
NASC 1996 MD-V (1) B-2 Apr-96 B S&P, Duff, Fitch
E BB
CSFB 1995-AEW1 (2) F-1 Oct-95 B S&P, Fitch
G-1 NR
G-2 NR
K B-
L-1 NR-PO
MRAC 1996-C2 (3) L-2 Dec-96 NR-IO Fitch, Moody's
E, F BB/B
Equity NR
BTC 1997-S1 (4) B-2 Dec-97 BB S&P, Fitch
B-3 B
DLJ 1993-MF17 (5) C-1 Nov-93 NR Moody's, Duff
S-1 AAA-IO
S-2 A-IO
B NR
MLMCI 1993-M1 (6) Sep-93 Moody's, S&P
<CAPTION>
WEIGHTED WEIGHTED
COLLATERAL BALANCE AT AVERAGE AVERAGE ACTUAL
-------------------------------- DSCR AT LTV AT DELINQUENCY
SECURITIZATION ISSUANCE 9/30/98 ISSUANCE ISSUANCE 9/30/98
--------------------- ------------- ---------------- ----------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C>
NASC 1996 MD-V (1) $773,693 $757,235 1.69 62.0% 0.0%
CSFB 1995-AEW1 (2) 288,906 152,734 1.26 71.8 8.6
MRAC 1996-C2 (3) 512,102 476,691 1.36 69.1 0.8
BTC 1997-S1 (4) 328,659 230,410 1.27 106 22.7
DLJ 1993-MF17 (5) 139,183 122,209 1.36 73.7 0
MLMCI 1993-M1 (6)
258,765 13,266 1.51 56 34.8
</TABLE>
<TABLE>
<CAPTION>
SUBORDINATION
ACTUAL LEVEL AT
LIFE TO DATE ACTUAL LIFE TO --------------------------------
CPR DATE LOSSES
AT 9/30/98 AT 9/30/98 ISSUANCE 9/30/98
------------------ ---------------------- --------------- ----------------
(Dollars in Thousands)
<S> <C> <C> <C>
0.0% $ 0 0.00% 0.00%
19 739 13.75 25.44
4.80 8.86
0.00 0.00
0.00 0.00
0.8 0 2.50 2.68
0.00 0.00
0.00 0.00
31.44 3,007 19.00 25.77
0.00 0.00
0 0 4.59 5.22
1.28 1.46
0.00 0.00
32.18 36.64
18.02 20.52
80.4 0 2.00 6.19
</TABLE>
<TABLE>
<CAPTION>
CLASS SIZE % OF
TOTAL AS OF YIELD TO MATURITY AT
--------------- ---------------- ----------------- ---------------
ISSUANCE 9/30/98 PURCHASE 9/30/98
--------------- ---------------- ----------------- ---------------
<S> <C> <C> <C>
4.36% 4.45% 9.90% 9.78%
11.00 20.31 7.93 7.75
1.80 3.32 9.75 9.65
4.80 8.86 12.84 12.77
5.72 10.11 14.87 14.6
1.50 1.61 12.1 12.14
2.50 2.68 12.31 14.32
2.50 2.68 12.82 16.25
14.50 19.66 8.36 8.36
19.00 25.77 21.19 27.19
9.41 10.72 12.29 12.29
3.31 3.76 11.39 14.93
1.28 1.46 (29.82) 29.25
67.82 63.36 16.69 (3.67)
14.15 16.12 14.46 (8.84)
9.00 26.9 13.65 6.85
</TABLE>
ISSUERS:
(1) Nomura Asset Securities Corporation
(2) CS First Boston Mortgage Securities Corp.
(3) Midland Realty Acceptance Corp.
(4) BTC Mortgage Investors Trust 1997-S1
(5) DLJ Mortgage Acceptance Corp.
(6) Merrill Lynch Mortgage Capital, Inc.
56
<PAGE> 58
The foregoing tables indicate that yields on securities available for sale
have been adversely affected by the general decline in interest rates in the
case of those residual interests in residential mortgage-backed securities where
the actual prepayment experience exceeded the levels assumed at acquisition.
Subordinate interests in commercial mortgage- backed securities, however,
generally, have not been adversely affected by the decline in interest rates,
delinquency or loss experience. The principal risk associated with declines in
interest rates is acceleration in the rate of prepayments, which decreases the
future cashflows accruing to bondholders. This risk generally does not have a
significant effect on commercial mortgage-backed securities as their loan
collateral generally has contractual prohibitions or substantial financial
penalties associated with prepayments and their losses and delinquencies have
been in accordance with, or an improvement on, the assumptions made by the
Company at acquisition. As a result, the recent declines in market value
experienced in both the commercial and residential mortgage-backed securities
portfolio were primarily the result of widening mortgage spreads and declining
market liquidity, exacerbated by the impact of an increase in prepayment speeds
on the yields on residential mortgage-backed securities. See "- Recent Operating
Losses; Discontinuance of Investment Activities."
The following table summarizes information relating to the Company's
mortgage-related securities available for sale at September 30, 1998.
<TABLE>
<CAPTION>
Original
Anticipated Anticipated
Unleveraged Anticipated Weighted
Yield to Unleveraged Average
Amortized Fair Percent Maturity Yield to Maturity Remaining
Rating/Description Cost Value Owned at 9/30/98 at 9/30/98 Coupon Life(3)
- ------------------------- ------------- ---------- --------- ------------ ------------------ ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Single-family Residential:
Unrated residuals $254,652 $245,181 100% 17.90% 13.48% 0.00% 2.57%
B-rated subordinates 5,143 5,143 100 16.87 18.82 7.75 7.11
Unrated subordinates 15,205 15,600 41 15.16 11.19 7.03 6.27
--------- --------
275,000 265,924
Multifamily and
Commercial:
BB-rated subordinates 66,070 66,567 68 8.67 8.62 7.86 4.38
B-rated subordinates 33,460 32,308 80 10.42 10.65 8.39 10.09
Unrated subordinates 27,984 25,364 89 14.04 15.80 9.97 5.56
AAA-Rated IOs 508 508 100 16.69 (3.67) 0.34 6.11
A-Rated IOs 265 265 100 14.46 (8.84) 0.65 2.22
Unrated IOs (1) 4,811 3,951 100 12.82 16.25 7.23 11.18
Unrated principal only
("POs") (1) 1,117 608 100 12.31 14.32 0.00 11.21
------- -------
134,215 129,571
------- -------
$409,215 $395,495
======= =======
</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, 1998 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, 1998 book
value.
57
<PAGE> 59
The following table sets forth information regarding the geographic
location underlying the Company's securities portfolio at September 30, 1998,
based upon the notional amount of the residual and par amount of the class of
subordinate securities held.
<TABLE>
<CAPTION>
Description California Florida Texas New York Ohio Other(1)
- --------------------- --------------- -------------- ----------- -------------- ------------- -------------
(Dollars in Thousands)
<S> <C> <C> <C>
Single-family residential $244,511 $283,801 $179,629 $101,726 $122,276 $2,655,499
Multifamily and
commercial 209,663 131,793 166,496 112,286 54,303 1,024,357
------- -------- -------- -------- -------- ----------
Total $454,174 $415,594 $346,125 $214,012 $176,579 $3,679,856
Percentage (2) 8.6% 7.9% 6.5% 4.1% 3.3% 69.6%
=== === === === === ====
</TABLE>
- ------------------
(1) No other individual state makes up more than 5% of total.
(2) Based on a percentage of the total unpaid principal balance of the
underlying loans.
The following table sets forth the property types of the Company's
commercial mortgage-backed securities at September 30, 1998.
<TABLE>
<CAPTION>
Property type Percentage Invested
-------------------- ---------------------
<S> <C>
Multifamily 27.4%
Retail 25.7
Hotel 20.6
Office 16.5
Industrial 5.3
Mixed use 2.8
Other 1.7
-----
Total 100.0%
=====
</TABLE>
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 1998, the Company utilized
proprietary prepayment curves generated by the Company (reaching an approximate
range of annualized rates of 30%-40%). In its estimates of annual loss rates,
the Company utilizes assumptions that it believes are reasonable. The Company
estimates annual losses of between 0.22% and 2.06% 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 multifamily 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 FHLMC and the FNMA for
purchases
58
<PAGE> 60
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. Accelerated prepayment speeds
on residential mortgage-backed securities were a significant factor in the
$15.6 million loss on securities and derivatives recorded by the Company during
the three months ended September 30, 1998.
Accelerated prepayment speeds also significantly affected the IO Portfolio
in the first half of 1998 at which time the portfolio was sold. The IO
Portfolio consisted of IOs, which are classes of mortgage-related securities
that are entitled to payments of interest but no (or only nominal) payments of
principal, and Inverse IOs, which bear interest at a floating rate that varies
inversely with (and often at a multiple of) changes in a specified index. As a
result of an increase in prepayment speeds due to declining interest rates in
the first quarter of 1998, the Company incurred $17.1 million of losses on its
IO Portfolio and, following the sale of the IO Portfolio to affiliates of the
Company in May 1998 at a price equal to its amortized cost plus accrued
interest, the Company discontinued investing in the Ios and Inverse IOs.
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 and the market value is
typically available from only a small group of broker/dealers, and in most
cases only one broker/dealer. When valuations are obtained from two or more
broker/dealers, the average dealer mark will be 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. During the third quarter of 1998,
the Company valued its securities available for sale portfolio and net
unrealized losses thereon at the end of each month as follows.
59
<PAGE> 61
<TABLE>
<CAPTION>
July 31, 1998 August 31, 1998 September 30, 1998
---------------------- ---------------------- -------------------------
Unrealized Unrealized Unrealized
Value Loss (Gain) Value Loss (Gain) Value Loss (Gain)
------- ------------- ------- ------------ ------- ------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Single-family
residential:
Subordinates $ 20,331 $ 8,508 $ 21,413 $ 720 $ 20,743 $ (396)
Residuals 260,197 1,901 253,160 16,026 245,181 9,569
------- ----- ------- ------ ------- -----
Total single-family 280,528 10,409 274,573 16,746 265,924 9,173
Commercial:
AAA-rated interest-only 584 255 534 299 508 ---
A-rated interest-only 296 175 271 198 265 ---
Non-rated interest-only 5,023 (218) 4,427 381 3,951 859
Non-rated principal-only 1,248 (163) 864 236 608 509
Subordinates 114,349 (2,643) 131,578 (2,354) 124,239 3,178
------- ------- ------- ------ -------- -----
Total commercial 121,500 (2,594) 137,674 (1,240) 129,571 4,546
------- ------- ------- ------ -------- ------
Total $402,028 $7,815 $412,247 $15,506 $395,495 $13,719
======== ====== ======== ======= ======== =======
</TABLE>
COMMERCIAL AND MULTIFAMILY LOAN PORTFOLIO. The Company's investment in
commercial and Multifamily loans amounted to $55.1 million at September 30,
1998, a $45.6 million increase over the $9.5 million investment at December 31,
1997. During the period May 14, 1997 to December 31, 1997, the Company
originated one Multifamily residential loan in the amount of $3.5 million, two
hotel acquisition and renovation loans in the aggregate amount of $21.0
million, and one office building renovation and construction loan in the amount
of $33.1 million.
The Company's commercial lending activities focuses on real estate lending
opportunities in selected major metropolitan markets throughout the United
States where the Company believes there are significant supply constraints and
where employment and/or population growth and other demand generators are
expected to remain strong. The Company's general approach to commercial lending
is to capitalize on the core capabilities of the Manager and its affiliates,
which include an ability to assess the value creation potential of
underutilized real estate and to oversee and manage the conversion,
rehabilitation and/or construction process. The Company seeks to make loans to
borrowers who have a proven ability to acquire such assets and enhance value
through a process of repositioning or development. Loans are usually structured
to provide current income along with either exit fees or gross revenue
participation features. Loans may be originated as first mortgage loans or
structured as subordinated debt or mezzanine financing.
The following table sets forth the composition of the Company's commercial
and multifamily loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- -------------
(In Thousands)
<S> <C> <C>
Multifamily $ 45,285 $ 3,455
Commercial real estate:
Office 33,058 33,058
Hotel 28,581 20,952
------ ------
Total loans 106,924 57,465
Deferred origination
fees, net (665) (344)
Loans in progress (1) (50,586) (47,640)
Allowance for loan losses (557) ---
-------- --------
Commercial and
multifamily loans, net $ 55,116 $ 9,481
======== ========
</TABLE>
- -----------
(1) Represents the unfunded balance of closed loan agreements.
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, 1998, the Company had
an allowance for loan losses in the amount of $0.6 million on the commercial
and Multifamily loan portfolio. At December 31, 1997, no allowance for loan
losses had been provided.
60
<PAGE> 62
The following table sets forth certain information regarding the loans in
the Company's commercial and multifamily loan portfolio at September 30, 1998.
<TABLE>
<CAPTION>
Loan Amount
Outstanding
Loan at Type of
Loan Location Amount September 30, Loan
- --------------- -------------------- ---------- ---------------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Multifamily
residential:
Fourth & San Francisco, CA $11,550 $ 3,228 Construction
Harrison
241 Church New York, NY 30,280 13,684 Conversion
Street
459 Washington New York, NY 3,455 2,026 Conversion
Street
Commercial:
Doubletree Hotel Lowell, MA 7,652 7,447 Renovation
Hawthorn Suites Schaumburg, IL 7,629 --- Construction
Hotel
Wyndham Wilmington, DE 13,300 10,555 Renovation
Garden Hotel
Landmark III- Burlington, MA 33,058 19,281 Renovation
-------- --------
GTE
$106,924 $56,221
======== ========
</TABLE>
<TABLE>
<CAPTION>
Loan per Stabilized
Ratio of Unit/ Debt
Loan to Square Coverage Coupon
Cost Foot Ratio Rate Size
--------- --------- ------------ -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Multifamily
residential:
Fourth & 85% $201 1.22 9.630% 160 units
Harrison
241 Church 88 582 N/A 9.000 52 units
Street
459 Washington 61 314 N/A 10.500 11 units
Street
Commercial:
Doubletree Hotel 85 31 1.9 10.000 249 rooms
Hawthorn Suites 65 56 1.59 8.750 136 suites
Hotel
Wyndham 67 61 2.2 8.650 291 rooms
Garden Hotel
Landmark III- 85 114 1.18 9.250 291,007 sq.ft.
GTE
</TABLE>
- ---------------
(1) Represents the net income of the stabilized property divided by debt
service required by the loan.
The following table sets forth the activity in the Company's gross
commercial and multifamily loan portfolio during the periods indicated.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, 1998 September 30, 1998
---------------------- ----------------------
Balance No. of Loans Balance No. of Loans
------- ------------- ------- -------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $106,924 7 $57,465 4
Originations:
Multifamily loans --- --- 41,830 2
Hotel loan --- --- 7,629 1
------- ------- ------- -
Net (decrease) increase in loans --- --- 49,459 3
------- ------- ------- -
Balance at end of period $106,924 7 $106,924 7
======= ======= ======= =
</TABLE>
During October 1998, the Company closed a commitment to finance a hotel
construction loan in New York, New York in the amount of $17.7 million, of
which $1.2 million has been funded.
61
<PAGE> 63
The following table sets forth certain information relating to the payment
status of funded loans in the Company's commercial and multifamily loan
portfolio at the dates indicated.
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
(In Thousands)
<S> <C> <C>
Past due less than 31 days $56,221 $9,825
Past due 31 days to 89 days --- ---
Past due 90 days or more --- ---
------ ------
$56,221 $9,825
====== =====
</TABLE>
RESIDENTIAL LOAN PORTFOLIO. The Company's investment in residential loans
amounted to $197.5 million at September 30, 1998, a $191.1 million increase
over the $6.4 million investment at December 31, 1997. These loans were
acquired with the intent of accumulating such loans, executing a securitization
and effectively retaining a subordinate interest.
The following table sets forth the composition of the Company's
residential loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
(In Thousands)
<S> <C> <C>
Single-family residential $196,111 $6,465
Premium (discount), net 1,039 115
Deferred hedge loss 345 ---
------- -----
Residential loans, net $197,495 $6,350
======= =====
</TABLE>
On November 13, 1998, the Company securitized approximately $182.2 million
of its single-family residential loans through a special purpose entity which
issued mortgage-related securities backed by such loans. See " - Recent
Developments."
The following table sets forth the geographic location of the residential
loan portfolio at September 30, 1998.
<TABLE>
<CAPTION>
Geographic Location Balance Percentage
------------------- ------- ----------
(Dollars in Thousands)
<S> <C> <C>
Michigan $ 50,282 26.2%
California 19,710 10.3
Florida 10,032 5.2
Ohio 9,387 4.9
Texas 9,259 4.8
Other 97,441 48.6
-------- ------
$196,111 100.0%
======= =====
</TABLE>
62
<PAGE> 64
The following table sets forth the activity in the Company's gross
residential loan portfolio during the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1998
------------------------ --------------------------
Balance No. of Loans Balance No. of Loans
-------- ------------- -------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $137,462 1,392 $ 6,465 50
Purchases 70,644 673 210,524 2,041
Sales (131) (5) (131) (5)
Principal repayments (11,864) (128) (20,747) (154)
-------- ----- -------- ------
Net increase in loans 58,649 540 189,646 1,882
------ ---- ------- -----
Balance at end of period $196,111 1,932 $196,111 1,932
======= ===== ======= =====
</TABLE>
The following table sets forth certain information relating to the payment
status of loans in the Company's residential loan portfolio at the dates
indicated.
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
(In Thousands)
<S> <C> <C>
Current to past due 30 days $183,253 $6,196
Past due 31 days to 89 days 6,080 ---
Past due 90 days or more 6,778 269
-------- ------
$196,111 $6,465
======= =====
</TABLE>
DISCOUNT LOAN PORTFOLIO. The discount loan portfolio consists of
nonperforming and subperforming mortgage loans that are in default or for which
default is likely or imminent or for which the borrower is currently making
monthly payments in accordance with a forbearance plan, which generally are
purchased at a discount to both the unpaid principal amount of the loan and the
estimated value of the security property. At September 30, 1998, the Company's
gross discount loan portfolio amounted to $12.1 million, exclusive of $3.5
million of discount recorded in connection with the acquisition of discount
loans. At December 31, 1997, the Company's gross discount loan portfolio
amounted to $42.5 million, exclusive of $15.6 million of discount recorded in
connection with the acquisition of discount loans.
The following table sets forth the composition of the Company's discount
loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
(In Thousands)
<S> <C> <C>
Commercial real estate
loans:
Office $8,246 $11,893
Retail 3,873 30,636
----- ------
Total unpaid
principal balance 12,119 42,529
Discount (3,530) (15,550)
------ -------
Discount loans, net $8,589 $26,979
===== ======
</TABLE>
During the period May 14, 1997 to December 31, 1997, the Company acquired
three discount loans. During June 1997 the Company acquired a 13.83% pari
passu interest in four subperforming commercial loans with an aggregate unpaid
principal balance of $10.5 million. At the time of acquisition the loans were
collateralized by three office buildings located in New York, New York and one
shopping center in Yorktown, New York. The Bank acquired the remaining interest
in these loans. During September 1997, the Company acquired a Canadian
commercial loan with an unpaid principal balance of $27.6 million, ($38.3
million Canadian). The loan is collateralized by a 395,000
63
<PAGE> 65
square foot shopping center located in Halifax, Nova Scotia, Canada. During
November 1997, the Company acquired two loans secured by a 195,445 square foot
shopping center in Havre, Montana and a 43,205 square foot office building in
Dayton, Ohio with an aggregate unpaid principal balance of $6.6 million.
During the nine months ended September 30, 1998, the Company acquired
through foreclosure the shopping center located in Halifax, Nova Scotia and the
office building located in Dayton, Ohio, which secured discount loans with a
balance of $15.4 million and $1.5 million, respectively. These foreclosures
were the primary reason for the decrease in the discount loan portfolio during
the nine months ended September 30, 1998.
At September 30, 1998, the Company's discount loans included:
- a 13.83% interest in two loans, which interest had an aggregate
outstanding principal balance of $8.2 million. The collateral for
the loans consist of two office buildings located in Manhattan,
New York. In September 1998, the maturity date of one of these
loans were extended to June 1, 1999. As of September 30, 1998,
these loans were performing in accordance with their terms.
- a loan secured by a shopping center located in Havre, Montana with
an unpaid principal amount of $3.9 million. The shopping center
has 195,445 gross rentable square feet. As of September 30, 1998,
the loan was nonperforming and foreclosure proceedings were in
process. During the month of October 1998, this property was
acquired by the Company through foreclosure sale.
The following table sets forth certain information relating to the payment
status of loans in the Company's discount loan portfolio at the dates
indicated.
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ -----------
(In Thousands)
<S> <C> <C>
Current to past due 30 days $8,246 $7,964
Past due 31 days to 89 days --- ---
Past due 90 days or more 3,873 34,565
----- ------
$12,119 $42,529
====== ======
</TABLE>
INVESTMENTS IN REAL ESTATE. The Company's real estate investment approach
had sought value creation opportunities that can be realized through increased
management focus and capital investment. The Company generally sought
underperforming properties that can be acquired and renovated at discounts to
replacement cost. In evaluating opportunities, the Company has focused on a
series of key investment criteria. These include analysis of the level of
proposed new supply and development constraints in the markets where it is
considering investing. An underlying premise of the Company's real estate
investment philosophy is that, while demand for real estate has remained
relatively constant over time, sudden and dramatic increases in supply have
driven boom and bust real estate cycles.
At September 30, 1998, the Company's investments in real estate consisted
of eight properties which had an aggregate carrying value of $209.9 million. A
total of four of the properties currently owned by the Company with an
aggregate carrying value of approximately $143.4 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, satisfies its general
real estate investment philosophy because in management's view it is
characterized by limited new supply and significant barriers to entry. Low
vacancy rates, coupled with lack of new construction, currently are increasing
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.
64
<PAGE> 66
The Company's net investment in real estate increased to $209.9 million at
September 30, 1998 from $45.4 million at December 31, 1997 and is comprised of
the following properties.
<TABLE>
<CAPTION>
Date Book Value at
Acquired Property Location Square Feet Property Type September 30, 1998
- -------- -------- -------- ----------- ------------- -------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
04/08/98 225 Bush Street San Francisco, CA 536,382 Office Bldg. $102,870
09/23/97 450 Sansome St. San Francisco, CA 130,437 Office Bldg. 17,588
01/23/97 690 Market St. San Francisco, CA 124,692 Office Bldg. 13,772
09/03/97 10 U.N. Plaza San Francisco, CA 71,636 Office Bldg. 9,155
07/22/98 841 Prudential Drive Jacksonville, FL 488,080 Office Bldg. 32,827
11/10/97 Cortez Plaza Bradenton, FL 289,686 Shopping Ctr. 19,288
04/09/98 7075 Bayers Rd. Halifax, Nova Scotia 402,259 Shopping Ctr. 15,219
04/03/98 Park Center I Dayton, OH 44,000 Office Bldg. 1,534
Accumulated depreciation (2,402)
-------
$209,851
=======
</TABLE>
The following table sets forth the cost of improvements for each
investment in real estate during the nine months ended September 30, 1998.
<TABLE>
<CAPTION>
Budgeted Actual Carrying
Cost of Cost of Value Rents due and
Initial Cost to Improvements Improvements at September Accumulated Accrued at end Total Rental
Property Company (1) to Date 30, 1998 Depreciation of Period Income
- --------------- --------------- ------------ ------------ ------------ ------------ -------------- ------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
225 Bush Street $101,632 $ 3,701 $1,238 $102,870 $ 890 $ 530 $4,787
450 Sansome St. 17,205 496 383 17,588 361 179 1,783
690 Market St. 13,707 4,072 65 13,772 189 45 1,419
10 United
Nations Plaza 9,080 2,417 75 9,185 196 66 999
Prudential
Building 32,827 465 --- 32,827 190 71 1,586
Cortez Plaza 19,244 197 44 19,288 398 345 2,173
Bayers Road 15,219 609 --- 15,219 162 1,208 1,838
Park Center I 1,534 --- --- 1,534 16 --- ---
-------- ------- -------- -------- ------ ------ --------
Total $210,448 $11,957 $1,805 $212,253 $2,402 $2,444 $ 14,585
========
- ----------------------
</TABLE>
(1) Projected through December 1999.
Set forth below is a brief description of each of the Company's
investments in real estate at September 30, 1998.
BUSH STREET. In April 1998, the Company acquired an existing 536,382
square foot, 22-story, Class A office building located at 225 Bush Street in
the financial district of San Francisco, California for $100.2 million. Bush
Street was originally constructed in 1923, expanded in 1994 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 $11.1 million to pay tenants
improvements and leasing commissions and to install a sprinkler system,
life/safety systems, ADA upgrades and cosmetic improvements to the entrance
lobby. As of September 30, 1998, the Bush Street Property was 89% leased and
the average rent per square foot amounted to approximately $18.30. A new 25,000
square foot lease has been executed and is projected for occupancy in October
1998, with an effective rate of $38 per square foot.
65
<PAGE> 67
450 SANSOME STREET. In September 1997, the Company acquired a 130,437
square foot, 16-story, Class B office building located at 450 Sansome Street in
the financial district of San Francisco, California. The Company purchased this
property for $17.2 million. The building was 77% leased as of September 30,
1998. 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. As a result, average rent per square foot amounted to
approximately $18.00 at the date of acquisition. During the next five years,
86% of the leased space in the property expires. The Company plans to invest
approximately $6.7 million in this property to renovate the entrance lobby,
elevator cabs, bathrooms and hallways, install a sprinkler system, install
various upgrades to enhance compliance with the Americans with Disabilities Act
of 1990 (the "ADA"), fund deferred maintenance and various tenant improvements
and pay leasing commissions.
690 MARKET STREET. In January 1998, the Company acquired a 124,692 square
foot, 16-story, Class C office building located at 690 Market Street in the
financial district of San Francisco, California. 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, approximately 41%
of the building was available for re-leasing by the end of 1998 and existing
rents averaged $14.06 per square foot. The building was 72% leased as of
September 30, 1998. The Company is investing approximately $4.3 million to
install structural upgrades, a sprinkler system and ADA upgrades, fund deferred
maintenance and tenant improvements and pay leasing commissions. The Company
is currently implementing a new leasing program at the property to coincide
with the renovation schedule and has executed nine new leases totaling
approximately 13,800 square feet.
10 UNITED NATIONS PLAZA. In September 1997, the Company acquired a 71,636
square foot, six-story, Class B 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 9% leased as of September 30, 1998,
which is consistent with the acquisition strategy to retenant the building. The
property is currently being marketed for lease to tenants with full floor or
full building space requirements. The Company is investing approximately $3.5
million in this property to fund cosmetic improvements to enhance the lobby and
hallways, install ADA upgrades, fund deferred maintenance and tenant
improvements and pay leasing commissions.
PRUDENTIAL BUILDING. On July 22, 1998, the Company purchased the
Prudential Building, a 488,080 square foot, 22 story office building 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 the Company's line of credit. Simultaneously
with this closing, the Company also leased 97% 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. The Company
also entered into an agreement with the hospital pursuant to which the hospital
is to lease up to 150,000 square feet in the Prudential Building for a
nine-year period should Prudential exercise its termination option.
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 $650,000, which resulted in a
total investment in this property of $19.1 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, 1998, the shopping
center was 97% leased, and national and regional tenants, including Publix,
PetSmart, Circuit City and Montgomery Ward, which currently is in bankruptcy,
comprised a majority of the complex. Below market leases covering approximately
14% of the center expire during 1998, 1999 and 2000.
BAYERS 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
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<PAGE> 68
1987. Major tenants of the property currently consist of Zellers, Lawton's and
Mark's Work Wearhouse. The property was approximately 81% leased at September
30, 1998. The Company currently is implementing an operating plan for this
investment that will include the relocation of existing major tenants to higher
visibility areas in order to improve pedestrian traffic flow.
PARK CENTER I. In April 1998, the Company acquired Park Center I, a
suburban office building located on a frontage road to Interstate 75 in Dayton,
Ohio. The building was constructed in 1981 and has four stories and
approximately 44,000 square feet of rentable space. The property was acquired
by foreclosure on the loan secured by the property, which was acquired by the
Company at a discount in September 1997. The building is currently vacant and
configured for single tenant use, but may be converted to multi-tenant use.
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, 1998, 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 Base
Expiration(1) Expiring Leases Feet Leases(2) Leases(3) Rent
- ------------- --------- -------------- ------------- ------------ -------------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
1998 36 75,627 4.39% $ 320,170 $ 4.23 1.69%
1999 45 166,888 9.68 1,996,059 11.96 10.52
2000 37 110,400 6.41 1,644,278 14.89 8.67
2001 44 160,075 9.29 2,038,016 12.73 10.74
2002 43 585,294 33.96 7,981,246 13.64 42.08
2003 9 37,496 2.18 737,511 19.67 3.89
2004 5 48,770 2.83 640,189 13.13 3.38
2005 5 32,960 1.91 128,563 3.90 0.68
2006 5 127,804 7.42 677,470 5.30 3.57
2007 5 113,492 6.59 1,359,321 11.98 7.17
2008 & beyond 12 264,496 15.35 1,445,298 5.46 7.62
-- ---------- ------ ---------- ----
246 1,723,302 100.00% $18,968,121 100.00%
=== ========= ====== ========== ======
</TABLE>
- -------------------
(1) Lease year runs from January 1 to December 31 for all years except for
1998, in which the lease year is October 1 to December 31, 1998.
(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 1998
in which the amount is based on the amount of rent scheduled from October
1 to lease expiration.
(3) Average base rent per square foot is calculated using the annualized base
rent divided by the square footage.
As part of its initial repositioning of a property after an acquisition,
the Company generally pursues a policy of replacing some existing tenants with
tenants which have higher lease payments and/or a higher probability of
expansion and renewal. This policy, which is in accordance with the Company's
philosophy of investing in distressed real estate, may affect a number of
existing tenants at acquired properties. Although the Company's repositioning
strategy may adversely affect tenant retention rates in the early years of
ownership of a property, management believes that the strategy will be
beneficial to the Company in the long term. There can be no assurance, however,
that the Company's tenant retention rate will increase as each property is
repositioned or stabilized or that the net present value of new or renewed
leases will substantially exceed the net present value of leases with existing
tenants.
The Company's leases generally contain provisions designed to mitigate the
adverse impact of inflation on net income. These provisions include clauses
enabling the Company to pass through to tenants certain operating costs,
including real estate taxes, common area maintenance, utilities and insurance,
thereby reducing the Company's exposure to increases in costs and operating
expense resulting from inflation. In addition, many of the Company's
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<PAGE> 69
leases are for terms of less than ten years, which permits the Company to seek
increased rents upon re-leasing at higher market rates.
SIGNIFICANT PROPERTIES. Set forth below is additional information with
respect to the Bush Street Property and the Prudential Building, which are
deemed "significant" under Commission requirements.
BUSH STREET PROPERTY
DEPRECIATION. For federal income tax purposes, the basis, net of
accumulated depreciation, of the Bush Street Property aggregated approximately
$102.9 million at September 30, 1998. A land only valuation of this property
has been ordered, which may modify the tax basis of this property. The real
property associated with the Bush Street Property (other than land) generally
will be depreciated for federal income tax purposes over 39 years using the
straight line method. For financial reporting purposes, the Bush Street
Property is recorded at its historical cost and is depreciated using the
straight line method over its estimated useful life, which is estimated to be
39 years.
REAL ESTATE TAXES. The 1997 annual real estate taxes paid on the Bush
Street Property were approximately $343,701. The city of San Francisco real
estate tax is 1.19% of assessed value.
OCCUPANCY. At September 30, 1998, the Bush Street Property was leased to
33 tenants which are engaged in a variety of businesses, including oil, law,
technology, engineering, publication, consulting and philanthropy. The
following table sets forth information relating to occupancy of and net
effective rent for the Bush Street Property for the periods indicated.
<TABLE>
<CAPTION>
Average Occupancy*
------------------
Property 1997 1996 1995
-------- ---- ----- ----
<S> <C> <C> <C>
Bush Street Property...... 94% 78% 82%
</TABLE>
<TABLE>
<CAPTION>
Net Effective Rent
per Square Foot*
----------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Bush Street Property........ $16.35 $16.17 $*
</TABLE>
- ----------
* Data is not available for periods prior to 1995 or as indicated.
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<PAGE> 70
LEASE EXPIRATIONS. The following table sets forth a summary schedule of
the total lease expirations for the Bush Street Property for leases in place as
of September 30, 1998, assuming that none of the tenants exercise renewal
options or termination rights, if any, at or prior to the scheduled
expirations.
<TABLE>
<CAPTION>
Year of Lease
Expiration 1998 1999 2000 2001 2002 2003
- ---------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
No. of leases
expiring 3 8 7 8 7 1
Square footage of
expiring leases 5,681 128,362 69,026 21,446 28,994 812
Percent of total
leased square feet 1.45% 25.91% 13.93% 4.32% 5.85% 0.16%
Annualized rent
of expiring leases $88,422 $2,532,710 $1,085,351 $460,580 $457,677 $14,726
Percent of total
annualized rent 0.81% 23.16% 9.93% 4.21% 4.19% 0.13%
Annualized rent
per square foot of
expiring leases $15.56 $19.73 $15.72 $21.51 $15.79 $18.14
</TABLE>
<TABLE>
<CAPTION>
Year of Lease 2008 &
Expiration 2004 2005 2006 2007 Beyond
- ---------- ---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C>
No. of leases
expiring 1 1 1 4 5
Square footage of
expiring leases 45,996 1,574 2,210 88,519 102,898
Percent of total
leased square feet 9.28% 0.32% 0.45% 17.87% 20.77%
Annualized rent
of expiring leases $909,120 $47,220 $44,752 $2,028,888 $3,264,282
Percent of total
annualized rent 8.31% 0.43% 0.41% 18.56% 29.86%
Annualized rent
per square foot of
expiring leases $19.77 $30.00 $20.25 $22.92 $31.72
</TABLE>
69
<PAGE> 71
At September 30, 1998, the only tenant of the Bush Street Property which
occupied 10% or more of the rentable square footage in the building was Chevron
USA, Inc. ("Chevron"), which is engaged in the oil business. Chevron leases
139,348 rentable square feet on nine floors. Chevron has subleased all of its
space except for three floors totaling 63,021 square feet. Of the 63,031 square
feet that Chevron occupies, 45,674 square feet expires in June 1999. Management
is in negotiations with Chevron to extend its term. The remaining space
comprising 17,347 square feet on the 22nd floor expires in June 2000. Space
sub-leased by Chevron totals 76,327 square feet. These sub-leases extend beyond
Chevron's term (at the end of which they will become direct leases with the
Company), and have varying terms, as reflected in the lease expiration
schedule.
PRUDENTIAL BUILDING
DEPRECIATION. For federal income tax purposes, the basis, net of
accumulated depreciation, of the Prudential Building aggregated approximately
$32.8 million at September 30, 1998. A land only valuation of this property
has been ordered, which may modify the tax basis of this property. The real
property associated with the Prudential Building (other than land) generally
will be depreciated for federal income tax purposes over 39 years using the
straight-line method. For financial reporting purposes, the Prudential
Building is recorded at its historical cost and is depreciated using the
straight-line method over its estimated useful life, which is estimated to be
39 years.
REAL ESTATE TAXES. The 1997 annual real estate taxes paid on the
Prudential Building were approximately $631,729. The Duval county real estate
tax is 1.92 percent of assessed value.
OCCUPANCY. At September 30, 1998, the Prudential Building was leased to
five tenants engaged in insurance and food services. Information about the
occupancy rate and the average effective annual rental per square foot for the
Prudential Building for the last five years is not meaningful because the
building was substantially occupied by its owner, Prudential Insurance Company
of America ("Prudential"), during this period.
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<PAGE> 72
LEASE EXPIRATIONS. The following table sets forth a summary schedule of
the total lease expirations for the Prudential Building for leases in place as
of September 30, 1998, assuming that none of the tenants exercise renewal
options or termination rights, if any, at or prior to the scheduled
expirations.
<TABLE>
<CAPTION>
Year of Lease 2008 &
Expiration 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Beyond
- ---------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
No. of leases
expiring --- 1 2 1 1 --- --- --- --- --- ---
Square footage of
expiring leases --- --- 3,022 2,832 47,570 --- --- --- --- --- ---
Percent of total
leased square feet --- --- 0.63% 0.59% 98.78% --- --- --- --- --- ---
Annualized rent of
expiring leases --- $3,936 $39,041 $43,324 $7,585,154 --- --- --- --- --- ---
Percent of total
annualized rent --- 0.05% 0.51% 0.57% 98.87% --- --- --- --- --- ---
Annualized rent
per square foot of
expiring leases --- --- $12.92 $15.30 $15.92 --- --- --- --- --- ---
</TABLE>
71
<PAGE> 73
At September 30, 1998, the only tenant of the Prudential Building which
occupied 10% or more of the rentable square footage in the building was
Prudential, which is engaged in the insurance business. Prudential leases
474,570 rentable square feet on 22 floors. The other two minor leases totaling
5,749 square feet, provide support services for Prudential. As noted above,
the Company has entered into an agreement with a local hospital pursuant to
which the hospital is to lease up to 150,000 square feet in the Prudential
Building for a nine-year period should Prudential exercise its termination
option.
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.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE. Securities sold under
agreements to repurchase were $143.1 million at September 30, 1998, a decrease
from $223.8 million at June 30, 1998. The Company had no securities sold under
agreements to repurchase at December 31, 1997. These obligations are secured
by certain of the Company's investments in subordinated interests in commercial
mortgage-backed securities and residual interests in subprime residential loan
securitizations. The following table summarizes the maturity dates of the
Company's repurchase agreements and the market value of the related collateral
securities as of September 30, 1998.
<TABLE>
<CAPTION>
Outstanding Commercial Securities Residential Securities
Maturity Date Borrowing Collateral Value Collateral Value
- ------------- ----------- --------------------- ----------------------
(Dollars in Millions)
<S> <C> <C> <C>
0-30 days $17.8 $20.9 $ ---
6-12 months 73.9 60.5 58.0
18 months
and over 51.4 -- 104.7
------ ---- -----
Total $143.1 $81.4 $162.7
===== ==== =====
</TABLE>
At September 30, 1998, interest payments with respect to these obligations
were approximately $0.6 million per month (which assumes that the repurchase
agreements which mature within 30 days are renewed at approximately the same
rate of interest).
The following table summarizes the maturity dates of the Company's
repurchase agreements and the market value of the related collateral securities
as of October 31, 1998.
<TABLE>
<CAPTION>
Outstanding Commercial Securities Residential Securities
Maturity Date Borrowing Collateral Value Collateral Value
- ------------- ----------- --------------------- ----------------------
(Dollars in Millions)
<S> <C> <C> <C>
0-30 days $28.2 $34.6 $15.1
31-180 days 53.7 40.9 51.9
6-12 months 13.7 18.3 ---
42.5 --- 88.5
----- ---- -----
18 months and
over Total $138.1 $93.8 $155.5
===== ==== =====
</TABLE>
72
<PAGE> 74
At October 31, 1998, interest payments with respect to these obligations
were approximately $0.56 million per month (which assumes that the repurchase
agreements which mature within 30 days are renewed at approximately the same
rate of interest).
OBLIGATIONS OUTSTANDING UNDER LINES OF CREDIT. Obligations outstanding
under lines of credit amounted to $189.1 million at September 30, 1998, as
compared to $154.2 million at June 30, 1998. The Company had no obligations
outstanding under lines of credit at December 31, 1997. These borrowings at
September 30, 1998, include:
- $28.9 million pursuant to a three-year agreement which matures in
July 2001, which is collateralized by commercial loans, with respect
to which, the monthly interest payments were $0.18 million and which
is described below under "Obligations Outstanding Under Lines of
Credit - Real Estate;"
- the U.S. dollar equivalent of $24.2 million pursuant to a three year
agreement which matures in June 2001, which is denominated in Pounds
Sterling with respect to which the monthly interest payments were
$0.20 million and collateralized by certain U.K. mortgage loan
residual securities; and
- $136.0 million pursuant to an agreement which matures in April 1999,
and on which monthly interest payments were $0.67 million. The
obligation was collateralized by single-family residential mortgages
but was repaid on November 13, 1998, in conjunction with the
securitization of 1,808 first and second single-family residential
mortgage loans (as discussed above).
At October 31, 1998, the outstanding balances with respect to these
borrowings were $34.5 million, $22.3 million, and $136.0 million, respectively,
and the monthly interest payments with respect to these borrowings were
approximately $0.17 million $0.20 million and $0.67 million, respectively.
OBLIGATIONS OUTSTANDING UNDER LINES OF CREDIT - REAL ESTATE. Obligations
outstanding under lines of credit secured by real estate amounted to $142.4
million at September 30, 1998, as compared to $115.2 million at June 30, 1998
and $0 at December 31, 1997. These borrowings have a three-year term and an
interest rate that floats in accordance with LIBOR. Set forth below is
information regarding the Company's mortgage indebtedness relating to its
investment in real estate at September 30, 1998.
<TABLE>
<CAPTION>
Principal Interest Maturity Annual
Property Amount Rate Date Payments
- -------------------- ---------- ---------- --------- ----------
(Dollars in Millions)
<S> <C> <C> <C> <C>
Bush Street Property $ 75.0(1) LIBOR plus 1.75% April 2001 (3) $5.5 (4)
Other 67.4(2) LIBOR plus 1.75% June 2001 (3) $5.0 (4)
======
$142.4
======
</TABLE>
- ---------------
(1) Plus up to $5.0 million of additional advances for capital improvements
to Bush Street.
(2) Represents the portion of the outstanding balance under a $200 million
loan that is secured by real estate. As of September 30, 1998, the
Company's investments in Cortez Plaza, 450 Sansome Street, 10 U.N. Plaza,
Prudential Plaza and 690 Market Street secured this loan, and an
additional $28.9 million was borrowed and secured by commercial mortgage
loans under this line of credit.
(3) Subject to certain conditions, the Company may extend the maturity date
by one year.
(4) Based on the interest rate in effect as of September 30, 1998.
At October 31, 1998, the obligations under lines of credit-real estate
had not changed materially.
DERIVATIVE AND FOREIGN EXCHANGE FINANCIAL INSTRUMENTS. Derivative and
foreign exchange transactions involve credit and market risk. Because of
changing market environments, the monitoring and managing of these risks
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<PAGE> 75
is a continual process. For a further discussion of market risk, see " - Market
Risk." The Company believes the true measure of credit risk is the replacement
cost of the derivative or foreign exchange contract. This is also referred to
as repayment risk or the mark-to-market exposure amount. While notional amount
is the most commonly used volume measure in the derivative and foreign exchange
markets, it is not a measure of credit or market risk. The notional amount
typically does not change hands, but is simply a quantity upon which interest
and other payments are calculated. The notional amounts of the Company's
derivative and foreign exchange products exceed the possible credit and market
loss that could arise from such transactions. For a further discussion of the
Company's derivative and foreign exchange instruments, see Note 6 to the
Interim Consolidated Financial Statements included elsewhere herein.
The following table indicates the interest rate swaps outstanding at
October 31, 1998.
<TABLE>
<CAPTION>
Notional LIBOR Floating Rate at
Maturity Amount Index Fixed Rate End of Period Fair Value
----------- -------- ------- ---------- ---------------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
2003 $100,000 1-month 5.75% 5.22% $(3,327)
2001 17,000 1-month 6.00 5.34 (522)
2001 75,000 1-month 6.00 5.38 (2,292)
2002 8,780 1-month 6.04 5.34 (349)
-------- -------
$200,780 $(6,490)
======= =======
</TABLE>
At October 31, 1998, there were no futures contracts outstanding.
MINORITY INTEREST. At September 30, 1998, minority interest totaled $28.4
million and represented Ocwen Financial's ownership through IMIHC of 1,808,733
units in the Operating Partnership. On May 7, 1998, the Company sold 1,473,733
units in the Operating Partnership to IMIHC for $24.5 million. On February 17,
1998, the Company sold 175,000 shares of common stock for cash in an aggregate
amount of approximately $3.1 million to certain officers and directors of the
Company and Ocwen Financial. In connection with this stock issuance, IMIHC sold
a like number of shares of the Company's common stock to the Company and
invested in a like number of units in the Operating Partnership in order to
comply with the stock ownership restrictions imposed on REITs under the Code.
See Notes 1 and 2 to the Interim Consolidated Financial Statements included
elsewhere herein.
SHAREHOLDERS' EQUITY. Shareholders' equity decreased by $28.3 million from
December 31, 1997 to September 30, 1998. The decrease was due to a $6.4 million
increase in unrealized losses on securities available for sale, a net loss of
$11.5 million, a cumulative currency translation adjustment of $2.0 million,
$22.4 million in cash dividends paid during 1998, which were offset by a $14.0
million capital contribution in connection with the sale of the IO Portfolio.
Shareholders' equity increased to $271.3 million from May 14, 1997 to December
31, 1997 as a result of the net proceeds from the Initial Public Offering in
May 1997 and net income of $11.8 million during the period, which were offset
in part by net unrealized losses on securities available for sale of $7.3
million, the repurchase of 160,000 shares of Common Stock (the effect of which
was offset by a concurrent issuance of limited partnership units in the
Operating Partnership) for $3.0 million and dividends declared on the Common
Stock of $13.9 million. See the Consolidated Statement of Changes in
Shareholders' Equity in the Consolidated Financial Statements included
elsewhere herein.
FUNDS FROM OPERATIONS
The Company generally considers Funds From Operations ("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
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<PAGE> 76
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 generally accepted accounting principles ("GAAP")
and should not be considered an alternative to net income as an indication of
the results of the Company's performance or to cash flows as a measure of
liquidity. For a discussion of the Company's operating, investing and financing
activities under GAAP, see "-Capital Resources and Liquidity" below. In 1995,
the National Association of Real Estate Investment Trusts ("NAREIT")
established new guidelines clarifying its definition of FFO and requested that
REITs adopt this new definition beginning in 1996. 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. Because other REITs may
calculate FFO in a different manner, however, there can be no assurance that
the Company's FFO is comparable with the FFO reported by other entities.
FFO for the three months ended September 30, 1998 was ($7.1) million
compared to $4.4 million for the same period a year ago. FFO for the nine
months ended September 30, 1998, was $4.1 million, as compared to $6.4 million
for the period May 14, 1997 to September 30, 1997, which began on the date the
Company completed the Initial Public Offering.
FFO differs from cash made available to holders of the Company's common
stock, which is based on the Company's net taxable income. Distributions of
dividends to shareholders amounted to $6.5 million or $0.34 per share for the
period May 14, 1997 to September 30, 1997 and $22.4 million or $1.10 per share
for the nine months ended September 30, 1998.
The following table reconciles FFO and net income during the periods
indicated.
<TABLE>
<CAPTION>
For the Three For the Three For the Nine For the Period For the Period
Months Ended Months Ended Months Ended May 14, 1997 to May 14, 1997 to
September 30, September 30, September 30, September 30, December 31,
1998 1997 1998 1997 1997
------------- ------------- ------------- --------------- ---------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Net income $(7,639) $4,350 $(11,497) $6,410 $11,792
Depreciation and amortization 1,160 22 2,223 22 179
Loss on sale of IO Portfolio --- --- 13,957 --- ---
Extraordinary gain on
repurchase of debt (615) --- (615) --- ---
------ ----- ------ ----- ------
FFO $(7,094) $4,372 $ 4,068 $6,432 $11,971
====== ===== ====== ===== ======
</TABLE>
CAPITAL RESOURCES AND LIQUIDITY
Liquidity is a measurement of the Company's ability to meet potential cash
requirements, including ongoing commitments to repay borrowings, fund
investments, engage in loan acquisition and lending activities and for other
general business purposes. Additionally, to maintain its status as a REIT under
the Code, the Company must distribute annually at least 95% of its taxable
income. The primary sources of funds for liquidity during the first nine months
of 1998 consisted of net cash provided by operating activities, reverse
repurchase agreements, proceeds from issuance of the Notes, other secured
borrowings, maturities and principal payments on loans and securities and
proceeds from the sale of Operating Partnership units to IMIHC. The primary
sources of funds for liquidity during the period May 14, 1997 to December 31,
1997 consisted of proceeds from the Initial Public Offering, net income and
reverse repurchase agreements.
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The Company's operating activities provided cash flows of $43.7 million
and $344,000 during the nine months and three months ended September 30, 1998,
respectively. The Company's investing activities used cash flows of $711.5
million and $110.2 million during the nine months and three months ended
September 30, 1998, respectively. During both of the foregoing periods, cash
flows from investing activities were used primarily to purchase securities
available for sale, originate or purchase loans, and purchase commercial real
estate. The Company's financing activities provided cash flows of $637.5
million and $129.0 million during the nine months and three months ended
September 30, 1998, respectively, and primarily consisted of proceeds from
lines of credit and repurchase agreements of $474.6 million and proceeds from
the issuance of the Notes of $150.0 million.
Cash and cash equivalents were $48.7 million at December 31, 1997. The
Company's operating activities provided cash flows of $21.1 million during the
period from May 14, 1997 to December 31, 1997. During the foregoing period,
cash resources from operating activities were provided primarily by net income.
The Company's investing activities used cash flows of $249.6 million during the
period from May 14, 1997 to December 31, 1997. During the foregoing period,
cash flows from investing activities were used primarily to purchase securities
available for sale, discount loans, loans and investments in real estate. The
Company's financing activities provided cash flows of $277.2 million during the
period from May 14, 1997 to December 31, 1997 and consisted of $283.7 million
net proceeds from the issuance of Common Stock, net of $6.5 million of
dividends paid during the period.
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 asset reprice on a different
schedule or in relation to a different index than its floating rate debt which
in turn could impact potential returns to shareholders. At September 30, 1998,
the Company had interest rate swap agreements with a notional amount of
approximately $200.8 million and a fair value of ($6.3) million in order to
partially limit the adverse effects of rising interest rates on the remaining
floating-rate debt. 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 flexibility in the Company's leverage is dependent
upon, among other things, the levels of unencumbered assets, which are
inherently linked to prevailing interest rates and changes in the credit of the
underlying asset. At September 30, 1998, the Company had unencumbered
residential loans and securities having a market value totaling approximately
$167.6 million ($57.9 million of subordinate and residual mortgage-backed
securities, $48.2 million of commercial mortgage-backed securities, and $61.5
million of residential loans). In certain circumstances, including, among other
things, increases in interest rates, changes in market spreads or decreases in
credit quality of underlying assets, the Company would be required to provide
additional collateral in connection with its short-term, floating-rate
borrowing facilities. During the third quarter of 1998, the Company was
required to and did fund requests by its lenders for additional collateral
calls on outstanding reverse repurchase agreements collateralized by securities
available for sale which aggregated $2.3 million in July 1998, $1.4 million in
August 1998 and $3.9 million in September 1998 and $13.7 million in October
1998. The Company funded requests for additional margin deposits in connection
with its swaps and future positions which aggregated $0.7 million in July 1998,
$1.0 million in August 1998, $4.6 million in September 1998 and $3.3 million in
October 1998. At October 31, 1998, the Company had unencumbered securities
having a market value totaling approximately $67.0 million, which was comprised
of $40.5 million of subordinate and residual mortgage-backed securities and
$26.5 million of commercial mortgage-backed securities. For additional
information with respect to the Company's monthly mark-to-market of its
securities available for sale portfolio, see "- Changes in Financial Condition
- - Securities Available for Sale."
The Company has significant debt service obligations, as discussed above.
At September 30, 1998, the Company had total consolidated indebtedness of
$617.6 million, of which all but the $143.0 million of outstanding Notes was
secured indebtedness, as well as $21.4 million of other liabilities. This
consolidated indebtedness consisted of (i) $143.1 million of repurchase
agreements, of which $91.7 million was scheduled to mature in one year, (ii)
lines of credit aggregating $331.6 million, $136.0 million of which was repaid
in November 1998 and the remainder of which matures in 2001 (which in certain
cases, and subject to certain conditions, may be extended by the Company until
2002) and are secured by real estate, loans and/or securities and (iii) $143.0
million of outstanding Notes, which mature in 2005. The monthly interest
payments on the Company's total consolidated indebtedness were $4.1 million,
$5.2 million and $4.0 million for the months of July, August and September
1998, respectively. One line of credit which amounted to $136.0 million at
September 30, 1998 was repaid on November 13, 1998 (in connection with the
securitization of the residential mortgage loans which secured this line of
credit, which resulted in $173.4 million of net proceeds to the Company prior
to repayment of this line of credit).
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See " - Recent Developments." In light of the repayment of this line of
credit, the only indebtedness of the Company which matures within one year of
September 30, 1998 is approximately $91.7 million of repurchase agreements.
The Company's recent 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 investment securities, could adversely effect 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. In addition, 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 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.
If the Company is unable to fund additional collateral needs or to repay,
renew or replace maturing indebtedness on terms reasonably satisfactory to the
Company, 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 exists and there can be no assurance that one
will fully develop, thereby limiting the Company's ability to dispose of such
securities promptly for fair value in such situations.
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, 1998, 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. As of October 31,
1998, the Company exceeded the highest applicable requirement by in excess of
$19.7 million. There can be no assurance that additional operating losses will
not result in the Company's violation of its financial covenants in the future.
In the event of a default in such covenants, the lender generally would be able
to accelerate repayment of the subject 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. 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 below, including the sale of certain assets and the
potential tax and other consequences associated therewith. There can be no
assurance that the Company will have sufficient liquidity to meet these
obligations on a short-term (one year or less) or long-term basis.
For the quarter ended September 30, 1998, the Company closed transactions
totaling approximately $114.6 million, all of which were funded. This activity
brings the Company's total closed transactions since the Initial Public
Offering, net of repayment, to $917.1 million as of September 30, 1998. Of this
amount, $866.5 million has been funded and the remaining $50.6 million is to be
funded over the construction and renovation periods, which range from two to 18
months. In addition, at September 30, 1998, the Company had budgeted $11.9
million of capital expenditures on its investments in real estate in order to
improve such properties for reposition in the market, of which $4.8 million is
anticipated to be spent in the fourth quarter of 1998 and $7.1 million is
anticipated to be spent in 1999.
Based on its monthly interest and other expenses, monthly cash receipts,
existing commitments, capital expenditure plans and rate of collateral calls
through October 31, 1998, the Company believes that its existing sources of
funds will be adequate for purposes of meeting its short-term (one year or
less) and long-term liquidity needs, assuming the renewal of existing
indebtedness as it becomes due. There can be no assurance that this will be the
case, however. Material increases in monthly interest expense or in collateral
calls, or material decreases in monthly cash receipts, generally would
negatively
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<PAGE> 79
impact the Company's liquidity. On the other hand, material decreases in
monthly interest expense or in collateral calls generally would positively
affect the Company's liquidity.
YEAR 2000
As the year 2000 approaches, a critical business issue has emerged
regarding how existing application software programs and operating systems can
accommodate this 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.
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 The Manager, as well as Ocwen Financial
and its other subsidiaries, which provide management services to the Company.
The Company does not own nor maintain computer equipment or software.
Ocwen Financial 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. The project plan is divided
into six phases: identification, evaluation, remediation, validation, risk
assessment and contingency planning. As of September 30, 1998, the systems
identification and evaluation phases of the project were completed. At December
17, 1998, Ocwen Financial had substantially completed the remediation and
validation phases of the project.
As part of the identification and evaluation phases of the project, the
Company has documented critical operating functions within each business unit,
as well as strategic third-party and vendor relationships. Ocwen Financial has
retained a business continuity expert to prepare contingency plans and assist
with the testing and validation of these plans. Ocwen Financial expects to
complete its year 2000 risks assessment and contingency planning efforts during
the first quarter of 1999. The cost of Ocwen Financial's year 2000 project,
which is budgeted at $2.0 million, will be borne by Ocwen Financial. The
Company does not expect to incur any costs in connection with achieving year
2000 compliance. Until the risk assessment phase is completed, the Company
will not know the complete extent of the risks associated with year 2000
issues, including an analysis of the most reasonably likely worst case year
2000 scenario, nor can the Company prepare a contingency plan. As a result,
neither is ready at this time.
REIT STATUS
The Company has qualified and intends to continue to qualify through
calendar 1998 as a REIT under Sections 856 through 860 of the Code. See "Recent
Developments." Qualification for treatment as a REIT requires the Company to
meet certain criteria, including certain requirements regarding the nature of
its ownership, assets and 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 meets those tests and distributes at least 95 percent of
its taxable income. 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 for all reported periods, no provision has been made
for federal income taxes for the Company and its subsidiaries in the
accompanying Interim Consolidated Financial Statements. As taxable income is
finalized and the tax return is filed, an additional distribution may be
required which may be significant. The Company may be subject to tax at normal
corporate rates on net income or capital gains not distributed. For additional
information about an anticipated excise tax liability to be incurred by the
Company in connection with the distribution requirements, see "Recent
Developments."
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
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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 exchange 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)
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 which 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. The base interest rate scenario assumes interest rates at September 30,
1998. Actual results could differ significantly from those estimated in the
table.
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<TABLE>
<CAPTION>
Projected Percentage Change In
-------------------------------------------------
Change in Interest Rate Net Interest Income(1) Net Portfolio Value
- ----------------------- --------------------- -------------------
<S> <C> <C>
- -400 Basis Points 38.53% 25.00%
- -300 Basis Points 28.90 17.60
- -200 Basis Points 19.26 10.26
- -100 Basis Points 9.63 3.67
Base Interest Rate 0 0
+100 Basis Points (9.63) (4.26)
+200 Basis Points (19.26) (8.52)
+300 Basis Points (28.90) (15.05)
+400 Basis Points (38.53) (21.68)
</TABLE>
- -------------
(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 as a deduction interest expense associated with real
estate.
ASSET AND LIABILITY MANAGEMENT
Asset and liability management is concerned with 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 financial techniques
to assist it in the management of interest rate risk. These techniques include
interest rate exchange agreements, 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 exchange agreements 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, 1998, the Company had entered into
interest rate exchange agreements with an aggregate notional amount of $200.8
million. See Note 6 to the Interim Consolidated Financial Statements included
elsewhere herein.
The Company currently has a foreign currency swap with a counterparty to
hedge currency exposure in connection with its investment in residual interests
originated in the U.K. The purpose of the Company's foreign currency hedging
activities is to protect the Company from the risk that the eventual dollar net
cash inflows will be adversely affected by changes in exchange rates. Under the
terms of the agreement, the Company will settle in U.S. dollars on January 29,
1999 on the difference between the exchange rate on the effective date of the
contract and the exchange rate on January 29, 1999, on a notional amount of
14.7 million British Pounds Sterling. In addition, the Company entered into a
foreign exchange currency swap agreement on November 12, 1998 to hedge its
exposure in connection with its investment in the shopping center located in
Halifax, Nova Scotia. Under the terms of the agreement, the Company will swap
20 million Canadian Dollars for $12.9 million U.S. Dollars on January 15, 1999
based on the exchange rate on the date the contract became effective. See
Note 6 to the Interim Consolidated Financial Statements included elsewhere
herein.
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
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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. Because 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.
The following table sets forth the estimated maturity or repricing of the
Company's interest-earning assets and interest-bearing liabilities at September
30, 1998. 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.
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<TABLE>
<CAPTION>
September 30, 1998
--------------------------------------------------------------------------------------
More than 1
Within 3 4 to 12 Year to 3 3 Years and
Months Months Years Over Total
----------- -------------- ----------------- --------------------- ------------
Rate-Sensitive Assets: (In Thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning cash and repurchase
agreements $ 15,194 $ --- $ --- $ --- $ 15,194
Securities available for sale 15,116 44,512 99,345 236,522 395,495
Loan portfolio, net (1) 23,316 63,418 98,910 66,968 252,612
Discount loan portfolio, net (1) 1,201 1,770 5,618 --- 8,589
------- -------- -------- --------- --------
Total rate-sensitive assets 54,827 109,700 203,873 303,490 671,890
------- -------- -------- --------- --------
Rate-Sensitive Liabilities:
Securities sold under agreements
to repurchase 143,059 --- --- --- 143,059
Obligations outstanding under lines of
credit 331,581 --- --- --- 331,581
Notes, debentures and other interest-
bearing obligations --- --- --- 143,000 143,000
------- -------- -------- --------- --------
Total rate-sensitive liabilities 474,640 --- --- 143,000 617,640
Interest rate sensitivity gap before
off-balance sheet financial instruments (419,813) 109,700 203,873 160,490 54,250
Off-Balance Sheet Financial Instruments:
Futures contracts and interest rate swaps 200,780 --- (92,000) (108,780) ---
------- -------- -------- --------- --------
Interest rate sensitivity gap (219,033) 109,700 111,873 51,710 $54,250
------- -------- -------- --------- ========
Cumulative interest rate sensitivity gap $(219,033) $(109,333) $ 2,540 $ 54,250
======= ======== ======== =========
Cumulative interest rate sensitivity
gap as a percentage of total rate-sensitive
assets (32.60)% (16.27)% 0.38% 8.07%
</TABLE>
- --------------------
(1) Balances have not been reduced for non-performing loans.
As shown by the preceding table, at September 30, 1998, the Company had a
cumulative excess of interest-rate sensitive liabilities over assets of $109.3
million (equivalent to 16.27% of total assets) that are scheduled to reprice
within one year (including net repricing effects of derivative instruments). As
discussed above, should interest rates increase, net interest income would be
adversely effected by this negative gap; conversely, should interest rates
decrease net interest income would tend to improve during the next twelve
months. A decrease in net interest income, in turn, would adversely impact
short-term liquidity. See " - Capital Resources and Liquidity."
MISCELLANEOUS
On September 22, 1998, the Company announced that its Board of Directors
authorized a program to repurchase up to $10 million of its issued and
outstanding shares of Common Stock. Any such repurchases will be at
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times, at prices per share, in amounts and through solicited or unsolicited
transactions in the open market, on the New York Stock Exchange or in privately
negotiated transactions, in each case as the Company deems appropriate
depending on market conditions, corporate requirements, and applicable
securities laws. The Company has not repurchased any Common Stock as of the
date hereof.
On September 30, 1998, the Company filed with the Commission a shelf
registration statement allowing for the issuance of up to $250 million of
Common Stock and Preferred Stock, senior and subordinated debt and other
securities. The Company has no plans to conduct a registered offering of
securities in the foreseeable future.
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INVESTMENT GUIDELINES
GENERAL
The Company invests primarily in (i) subordinate and residual interests in
mortgage-related securities and (ii) distressed commercial and multifamily
residential real estate, including real estate acquired in connection with
foreclosure on non-performing loans or by deed-in-lieu thereof. Although the
Company's primary emphasis is on the acquisition of subordinate and residual
interests and distressed real properties, the Company has acquired and will
continue to acquire other real estate-related assets.
The discussion below describes the principal categories of assets that the
Company is authorized to acquire under the Guidelines, which may be amended at
any time by the Board of Directors of the Company to reflect competitive
conditions and other business considerations. As noted above, the Company has
decided that, for the foreseeable future, it does not plan to acquire any
additional assets or to fund any additional loans (beyond those which are
currently committed) in order to enhance its ability to meet its obligations
under its indebtedness. See "Risk Factors - Recent Operating Losses;
Discontinuance of Investment Activities."
MORTGAGE-RELATED SECURITIES
SUBORDINATE AND RESIDUAL INTERESTS. The Company has the authority to
acquire subordinate and residual interests in mortgage-related securities
backed by single-family residential, multifamily residential and commercial
real estate loans. Mortgage-related securities typically are divided into two
or more classes, sometimes called "tranches." The senior classes are higher
"rated" securities, which are rated from low investment grade "BBB" to higher
investment grade "AA" or "AAA." The junior, subordinated classes typically
include one or more lower rated, non-investment grade classes, and an unrated,
higher-yielding, credit support class (which generally is required to absorb
the first losses on the underlying mortgage loans).
Mortgage-related securities generally are issued either as CMOs or
pass-through certificates. CMOs are debt obligations of special purpose
corporations, owner trusts or other special purpose entities secured by
multifamily and commercial mortgage loans or mortgage-related securities.
Pass-through certificates evidence interests in trusts, the primary assets of
which are mortgage loans. CMOs and pass-through certificates may be issued or
sponsored by private originators of, or investors in, mortgage loans, including
savings and loan associations, mortgage bankers, commercial banks, investment
banks and other entities.
In most mortgage loan securitizations, a series of mortgage-related
securities is issued in multiple classes in order to obtain investment-grade
ratings for the senior classes and thus increase their marketability. Each
class of mortgage-related securities is generally issued with a specific fixed
or variable coupon rate and has a stated maturity or final scheduled
distribution date. Principal prepayments on the underlying mortgage loans may
cause the mortgage- related securities to be retired substantially earlier than
their stated maturities or final scheduled distribution dates, although in many
instances mortgage loans may have penalties for or limitations on the ability
of the borrower to prepay the loan. Interest is paid or accrued on
mortgage-related securities on a periodic basis, typically monthly.
The credit quality of mortgage-related securities depends on the credit
quality of the underlying mortgage loans. Among the factors determining the
credit quality of the underlying mortgage loans are the creditworthiness of the
borrowers, the ratio of the mortgage loan balances to the value of the
properties securing the mortgage loans, the purpose of the mortgage loans
(e.g., refinancing or new purchase), the balance of the mortgage loans, their
terms and the geographic diversification of the location of the properties,
and, in the case of commercial mortgage loans, the creditworthiness of the
tenants.
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The principal of and interest on the underlying mortgage loans may be
allocated among the several classes of a mortgage-related security in many
ways, and the credit quality of a particular class results primarily from the
order and timing of the receipt of cash flow generated from the underlying
mortgage loans. Subordinate and residual interests carry significant credit
risks. Typically, in a "senior/subordinate" structure, the subordinate and
residual interests provide credit protection to the senior classes by absorbing
losses from loan defaults or foreclosures before such losses are allocated to
senior classes. Moreover, typically, as long as the more senior tranches of
securities are outstanding, all prepayments on the mortgage loans generally are
paid to those senior tranches, at least until the end of a lock-out period. In
some instances, particularly with respect to subordinate interests in
commercial securitizations, the holders of subordinate interests are not
entitled to receive scheduled payments of principal until the more senior
tranches are paid in full or until the end of a lock-out period. Because of
this structuring of the cash flows from the underlying mortgage loans,
subordinate and residual interests in a typical securitization are subject to a
substantially greater risk of non-payment than the senior tranches.
Accordingly, subordinate and residual interests are assigned lower credit
ratings, or no ratings at all. Neither the subordinate and residual interests
nor the underlying mortgage loans are guaranteed by agencies or
instrumentalities of the U.S. Government or by other governmental entities and
accordingly are subject, among other things, to credit risks.
A subordinate and residual interest will be extremely sensitive to losses
on the underlying mortgage loans. For example, if the Company owns a $10
million subordinate interest in a mortgage-related security consisting of $100
million of underlying mortgage loans, a 7% loss on all the underlying mortgage
loans (assuming no principal paydown on such loans) will result in a 70% loss
on the subordinate interest. Accordingly, the holder of a subordinate and
residual interest is particularly interested in minimizing the loss frequency
(the percentage of the loan balances that default over the life of the mortgage
collateral) and the loss severity (the amount of loss on a defaulted mortgage
loan, i.e., the principal amount of the mortgage loan unrecovered after
applying any recovery to the expenses of foreclosure and accrued interest) on
the underlying mortgage loans.
The loss frequency on a pool of mortgage loans depends upon a number of
factors, most of which are beyond the control of the Company or the applicable
servicer. Among other things, the default frequency reflects broad conditions
in the economy generally and real estate particularly, economic conditions in
the local area in which the underlying mortgage property is located, the
loan-to-value ratio of the mortgage loan, the purpose of the loan, and the debt
service coverage ratio (with respect to commercial mortgage loans). The loss
severity depends upon many of the same factors described above, and also is
influenced by the servicer's ability to promptly return the loan to performing
status or to foreclose on the defaulted mortgage loan and sell the underlying
mortgaged property. Various legal issues may extend the time of foreclosure
proceedings or may require the expenditure of additional sums to sell the
underlying mortgaged property, in either case increasing the amount of loss
with respect to the loan.
Before acquiring a subordinate and residual interest, the Company performs
a number of due diligence tasks to evaluate the investment and to verify the
information and material provided by the seller. With respect to mortgage-
related securities backed by single-family residential loans, the Manager
creates two sample pools: 1) a random sample and 2) an adverse sample, with
characteristics (such as high loan-to-value ratios or poor delinquency
histories) that make them likely to perform more poorly than the average loan
in the pool. The Manager obtains a broker's price opinion ("BPO") from one of
its approved brokers for each of the loans in the sample pools. The Manager
evaluates each BPO to verify its reasonableness, and, if appropriate,
additional information is obtained until the Manager is satisfied that a
reasonable determination of the value of the loan can be made. The Manager also
estimates the potential for increases or decreases in estimated property values
based on local real estate trends.
Losses on mortgage loans are measured in two ways, loss frequency and loss
severity. Loss frequency is estimated by using industry standard predictive
models, supplemented by Ocwen Financial's historical data and experience. Loss
severity is estimated by projecting the net resolution proceeds expected to be
derived from the defaulted loans based upon Ocwen Financial's proprietary
in-house computer models. This net resolution analysis reviews all potential
forms of resolution, including full payoff, discounted payoff, reinstatement,
foreclosure and sale,
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deed-in-lieu and sale, and takes into account, among other things, real estate
value, carrying costs (that is, property taxes, insurance and maintenance) and
average months to foreclose in the particular state.
With respect to mortgage-related securities backed by multifamily
residential and commercial real estate loans, the Company determines on a
loan-by-loan basis which loans will undergo a full-scope review and which loans
will undergo a more streamlined "desktop analysis." Although the choice is a
subjective one, considerations that influence the choice for scope of review
often include loan size, debt service coverage ratio, loan to value ratio, loan
maturity, lease rollover, property type and geographic location. A full-scope
review may include, among other factors, a property site inspection,
tenant-by-tenant rent roll analysis, review of historical income and expenses
for each property securing the loan, a review of major leases for each property
(if available); recent appraisals (if available), engineering and environmental
reports (if available), and a BPO review. For those loans that are selected for
the more streamlined desktop analysis, the Manager's evaluation may include a
review of the property operating statements, summary loan level data and third
party reports, each as available. If the Manager's review of such information
does not reveal any unusual or unexpected characteristics or factors, no
further due diligence is performed. After completing the review of the
documentation and the property inspection, the information compiled is analyzed
to determine collateral value for each property securing the loans. Based on
these factors, the Manager determines a resolution value for each loan for
purposes of projecting future cash flows after adjustments for estimated future
losses.
Determining a resolution value is a subjective process, requiring,
ultimately, a business judgment. In making this determination, the Manager
often evaluates some of the following characteristics of the mortgage-related
security: (i) the type of collateral (e.g., conforming or subprime
single-family residential mortgage collateral, multifamily residential mortgage
collateral, or office, hotel, industrial or retail mortgage collateral); (ii)
the payment status of the underlying mortgage (performing, nonperforming or
subperforming); (iii) the actual mortgage prepayment and default history; (iv)
the ratio of the unpaid mortgage balance to the current property value; (v) the
current income and cash flows generated by multifamily and commercial real
estate as compared to the debt service requirements; and (vi) the region of the
country in which the collateral is concentrated. However, which of these
characteristics (if any) are important and how important each characteristic
may be to the evaluation of a particular mortgage-related security depends on
the individual circumstances. Because there are so many characteristics to
consider, each subordinate and residual interest must be analyzed individually,
taking into consideration both objective data as well as subjective analysis.
After completing the foregoing evaluations, the Manager models the
structure of the mortgage-related security based on the disclosure documents
that reveal its payment structure and the characteristics of the underlying
mortgage collateral. This modeling is done in order to estimate future cash
flows to be received by the subordinate or residual interests, after
adjustments for estimated future losses. Using that information, the Manager
determines the price at which it would effect the purchase of the subordinate
or residual interest on behalf of the Company.
Although there are some exceptions, most issuers of multi-class
mortgage-related securities elect to be treated, for federal income tax
purposes, as REMICs. The Company acquires subordinate and residual interests
that are treated as regular interests in REMICs, and also may acquire residual
interests that are designated as REMIC residual interests for federal income
tax purposes. Unlike regular interests in REMICs, REMIC residual interests
typically generate Excess Inclusion or other forms of "phantom income" that
bear no relationship to the actual economic income that is generated by a
REMIC. Consequently, if a residual interest that is designated as a REMIC
residual interest generates a significant amount of phantom income in any
taxable year, the Company could be required to borrow funds or to liquidate
assets in order to meet the REIT distribution requirement for such taxable
year.
Subordinate interests generally are issued at a significant discount to
their outstanding principal balance, which gives rise to OID for federal income
tax purposes. The Company will be required to accrue the OID as taxable income
over the life of the related subordinate interest on a level-yield method in
advance of the receipt of the related cash flow. The OID income attributable to
a subordinate interest generally increases the Company's REIT distribution
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requirement in the early years of the Company's ownership of the subordinate
interest even though the Company may not receive the related cash flow from the
subordinate interest until a later taxable year. As a result, the Company could
be required to borrow funds or to liquidate assets in order to satisfy the REIT
distribution requirement for any taxable year.
Unlike residential mortgage-related securities, which typically are backed
by thousands of single-family mortgage loans, commercial mortgage-related
securities are backed generally by a more limited number of commercial or
multifamily mortgage loans with larger principal balances than those of
single-family residential loans. As a result, a loss on a single mortgage loan
underlying a commercial mortgage-related security will have a greater negative
effect on the yield of such security, especially the subordinate interests.
Subordinate and residual interests in residential mortgage-related
securities may be backed by "non-conforming" mortgage loans, that is,
single-family residential loans that do not qualify for sale to FHLMC or FNMA.
Subordinate and residual interests in residential mortgage-related securities
also may be backed by subprime mortgage loans, which also are known as "B," "C"
and "D" mortgage loans. B, C and D mortgage loans are loans made to borrowers
who have credit histories of a lower overall quality than "A" borrowers. These
credit histories generally result from previous repayment difficulties, brief
job histories, previous bankruptcies or other causes. Except with respect to
loans originated under programs sponsored by HUD, the loan-to-value ratio for a
B, C and D mortgage loan is typically significantly lower than the
loan-to-value ratio of an "A" mortgage loan, and the pass-through coupon of a
B, C and D mortgage loan is typically higher than the coupon on an A mortgage
loan. As a result of the typically lower loan-to-value ratios and higher yields
on B, C and D mortgage loans, the Company believes these residential
mortgage-related securities with B, C and D mortgage loan collateral may
justify accepting the higher credit risk associated with such borrowers.
Although the owner of subordinate and residual interests in
mortgage-related securities ordinarily cannot control the servicing of the
underlying mortgage loans, the Company generally emphasizes investments in
subordinate and residual interests in which the Company acquires the right to
(i) 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 and/or (ii) designate the Bank (or another party) as
special servicer with respect to any defaulted mortgage loan, subject to the
Company's right to exercise the rights set forth in clause (i). The Company
believes that these arrangements allow it to obtain the servicing expertise of
the Bank and enable the related subordinate and residual interests to
constitute Qualifying Interests for purposes of the Investment Company Act.
See "Risk Factors -- Loss of Investment Company Act Exemption Could have
Adverse Consequences." As a result of the foregoing arrangements, however, the
Company does not benefit from receipt of material amounts of special servicing
fees.
Because the acquisition and special servicing of problem loans and
distressed real estate is one of the Bank's business focuses, the Bank has an
established network of real estate professionals throughout the United States
to assist its asset management activities. The Bank maintains working
relationships with approved engineers, environmental consultants and real
estate brokers nationwide, and calls upon these local advisors for assistance
when appropriate.
OTHER MORTGAGE-RELATED SECURITIES. The Company has the authority to
invest not only in subordinate and residual interests but also in other classes
of mortgage-related securities, including without limitation, more senior
tranches or combined tranches of first-loss and more senior tranches and IOs
and Inverse IOs. The Company currently has no intention of acquiring IOs and
Inverse IOs and recently sold its portfolio of IOs and Inverse IOs backed by
single-family residential loans.
Because IOs often pay at a relatively small rate of interest on a large
notional principal balance, an accelerated reduction of that principal balance
will have an adverse effect on the anticipated yield to maturity of the related
IO. Accordingly, if the underlying mortgage collateral prepays (including
prepayments as a result of default and repurchases by the seller) at a rate
faster than anticipated, the weighted average life of the IO will be reduced,
and the
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yield to maturity adversely affected. Conversely, if the underlying mortgage
collateral prepays at a rate slower than anticipated, the weighted average life
of the IO will be extended, with the consequent positive effect on the
anticipated yield to maturity.
Residential mortgage loans typically do not have any prepayment penalty,
with the result that prepayments tend to increase during periods of falling
interest rates, and decrease during periods of rising interest rates. However,
prepayments are dependent upon a number of other factors as well (such as the
number of jobs available in the area, general economic conditions and the
borrower's need for additional cash). Commercial loans often carry prepayment
restrictions, or require that the borrower pay a prepayment penalty (which
generally is not for the benefit of the holder of the IO). In any event, it is
very difficult to predict the prepayment pattern for any particular mortgage
collateral, which makes it harder to predict the actual yield with respect an
IO.
Inverse IOs bear interest at a floating rate that varies inversely with
(and often at a multiple of) changes in a specified index. The yield to
maturity of a class of Inverse IOs is not only very sensitive to the rate of
prepayments on the underlying mortgage collateral, but also changes in the
related index.
DISTRESSED REAL ESTATE
The Company has the authority to acquire commercial and multifamily real
estate acquired at foreclosure or by receipt of a deed-in-lieu thereof and
other underperforming and otherwise distressed commercial and multifamily real
estate. Commercial and multifamily properties are acquired individually or in
pools. The Company's policy is to conduct an investigation and evaluation of a
distressed real property before purchase. Prior to purchase, the Manager
identifies and contacts real estate brokers and/or appraisers in the market
area of the subject properties to obtain rent and sale comparables and develops
pro forma cash flows and estimates of value for each property. The Company also
engages construction engineering and environmental professionals to estimate
the scope and costs of potential renovation and other capital improvement
costs. This information is used to supplement due diligence that is performed
by the Manager's employees.
The Company's due diligence generally includes the review of market
studies for each applicable market. The studies typically include area economic
data, employment trends, absorption rates and market rental rates. Due
diligence also includes site inspections by the Manager's employees or agents
and a review of all available asset files and documentation. To the extent
possible those will include examinations of available legal documents,
litigation files, correspondence, title reports, operating statements,
appraisals and engineering and environmental reports. The information compiled
is then analyzed to determine a valuation for each property.
The property valuation process utilizes a variety of tools which may
include various proprietary financial models that have been developed by Ocwen
Financial and are available to the Company through the management agreement
with the Manager. Sources of information examined to determine value generally
include: (a) current and historical operating statements; (b) existing
appraisals; (c) rent and sales comparables; (d) industry statistics and reports
regarding operating expenses such as those compiled by the Institute of Real
Estate Management; (e) leases; and (f) deferred maintenance observed during
site inspections or described in structural reports, reports and correspondence
found in the asset files or by professionals engaged by the Manager.
The Manager develops projections of net operating income and cash flows
taking into account lease rollovers, tenant improvement costs and leasing
commissions. The Manager compares its estimates of revenue and expenses to
historical operating statements and estimates provided in appraisals and
general industry and regional statistics. Market capitalization rates and
discount rates are then applied to the cash flow projections to estimate
values. These values are then compared to available appraisals and market sale
comparables to determine recommended bid prices for each asset. The bids take
into account projected holding periods, capital costs and projected profit
expectations. Recommended bid prices are then reviewed with senior management
and a decision whether to bid is made. The
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amount offered by the Company generally will be the price that the Manager
estimates is sufficient to generate an acceptable risk-adjusted return on the
Company's investment.
After the Company acquires distressed real property, the Company's goal
generally is to improve the positioning and management of the property so as to
increase the cash flow from the property. If cash flows can be increased and
the property stabilized, the Company may begin to seek an opportunity to sell
the property. Although the period during which the Company will hold distressed
real properties will vary considerably from asset to asset, the Company
believes that most such properties will be held in its portfolio more than four
years and generally fewer than ten years.
If the Company is offered the opportunity to purchase a distressed real
property that is likely to be held for fewer than four years, the Company
generally will establish a corporation in which the Operating Partnership will
hold a 95% non-voting ownership interest to make the purchase. Such a
corporation is not eligible for taxation as a qualified REIT subsidiary, and
any profits that it earns on its activities are subject to federal corporate
income tax before they are distributable to the Company. If the Company
purchases a distressed real property with the intent to hold it in the
Operating Partnership for more than four years, but an opportunity arises to
sell the property sooner, the Company will consider certain strategies, such as
a like-kind exchange, to reduce any negative tax consequences relating to the
sale.
The Company has the authority to acquire real estate located throughout
the United States or outside the United States or loans secured by such real
estate. The Company may not invest more than 25% of the Company's total assets
in foreign real estate.
The Company also has the authority to acquire real estate with known
environmental problems that materially impair the value of the property or
loans secured by such real estate. The Company may not invest more than 10% of
its total assets in environmentally distressed real estate.
The Company has the authority to participate in sale leaseback
transactions in which the Company purchases improved or unimproved real estate
and then leases such real estate back to the seller under a long-term triple
net lease. The Company also may provide financing necessary to build commercial
improvements on the land, to refinance existing debt on the property or to
provide additional funds to operate the business. After participating in a
number of these transactions, the Company may pool the leased real estate, and
issue debt backed by the real estate and the related leases in a securitization
transaction.
The Company has the authority to acquire real estate in exchange for
limited partnership interests in the Operating Partnership.
MORTGAGE LOANS
CONSTRUCTION LOANS AND MEZZANINE LOANS. The Company has the authority to
provide construction or rehabilitation financing on commercial property,
lending generally 85% to 90% of total project costs, and taking a first lien
mortgage to secure the debt ("construction loans"). The Company also may invest
in loans that are subordinate to first lien mortgage loans on commercial real
estate ("mezzanine loans"). For example, on a commercial property subject to a
first lien mortgage loan with a principal balance equal to 70% of the value of
the property, the Company could lend the owner of the property (typically a
partnership) an additional 15% to 20% of the value of the property. Typically
the loan is secured, either by the property subject to the first lien (giving
the Company a second lien position) or by a controlling equity interest in the
owner. Construction and mezzanine loans provide the Company with the right to
receive a stated interest rate on the loan balance, and also may provide the
Company with the right to receive a percentage of gross revenues from the
property, payable to the Company on an ongoing basis, and/or a percentage of
any increase in value of the property, payable upon maturity or refinancing of
the loan, or otherwise allow the Company to charge an interest rate that
provides an attractive risk-adjusted return.
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DISTRESSED MORTGAGE LOANS. The Company has the authority to purchase
nonperforming and subperforming mortgage loans, particularly those secured by
commercial properties, that are in default or for which default is likely or
imminent or for which the borrower is currently making monthly payments in
accordance with a forbearance plan. Because nonperforming and subperforming
loans generally are purchased at a discount to both the unpaid principal amount
of the loan and the estimated value of the security property, successful
resolution can provide total returns which are in excess of an equivalent
investment in performing mortgage loans. The Company classifies such loans as
discount loans and maintains them in a separate portfolio from its other loans.
The Company believes that it has a competitive advantage relative to many
of its competitors as a result of the Manager's experience in managing and
resolving discount loans, the Manager's large investment in the computer
systems, technology and other resources which are necessary to conduct this
business, the Manager's national reputation and the strategic relationships and
contacts developed by the Manager in connection with these activities.
Commercial and multifamily discount loans generally are reviewed
individually. Prior to making an offer to purchase discount loans, the Manager
conducts an extensive investigation and evaluation of the loan. Evaluations of
potential discount loans are conducted primarily by the Manager's employees who
specialize in the analysis of nonperforming loans, often with further
specialization based on geographic or collateral specific factors. The
Manager's employees regularly use third parties, such as brokers, who are
familiar with the property's type and location, to assist them in conducting an
evaluation of the collateral property, and depending on the circumstances,
particularly in the case of commercial real estate loans, may use
subcontractors, such as local counsel and engineering and environmental
experts, to assist in the evaluation and verification of information and the
gathering of other information not previously made available by the potential
seller.
The Company determines the amount to offer to acquire discount loans by
using the Manager's proprietary modeling system and loan information database
which focuses on the anticipated recovery amount, timing and cost of resolving
the loan. The amount offered by the Company generally is at a discount from
both the stated value of the loan and the value of the underlying collateral
and is sufficient to generate an acceptable return on the Company's investment.
Upon acquisition, the servicing of the loan is transferred to the Manager.
After a discount loan is acquired, the Manager utilizes its computer
software system to resolve the loan as expeditiously as possible in accordance
with specified procedures. The various resolution alternatives generally
include the following: (i) the borrower brings the loan current in accordance
with original or modified terms, (ii) the borrower repays the loan or a
negotiated amount of the loan, (iii) the borrower agrees to deed the property
to the Company in lieu of foreclosure, in which case it is classified as real
estate, or (iv) the Company forecloses on the loan and the property is acquired
at the foreclosure sale either by a third party or by the Company, in which
case it is classified as real estate.
PERFORMING MORTGAGE LOANS FOR SECURITIZATION. The Company has the
authority to purchase single-family residential loans to pool in a special
purpose entity and to issue mortgage-related securities backed by such loans.
The Company generally intends to retain the subordinate and residual interests
in any such mortgage-related securities and the right to service (by assignment
to the Bank) the loans which back such securities.
FEDERAL INCOME TAX CONSIDERATIONS
The statements in this discussion are based on current provisions of the
Code, regulations promulgated under the Code by the U.S. Treasury (the
"Treasury Regulations"), the legislative history of the Code, existing
administrative rulings and practices of the IRS and judicial decisions. No
assurance can be given that future legislative, judicial, or administrative
actions or decisions, which may be retroactive in effect, will not affect the
accuracy of any statements
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in this Prospectus with respect to the transactions entered into or
contemplated prior to the effective date of such changes.
The Company has received an opinion of Elias, Matz, Tiernan & Herrick
L.L.P., special counsel to the Company, to the effect that, based on certain
representations and assumptions, including without limitation that the Company
will meet the 95% distribution requirement described below for calendar 1998
(as to which there can be no assurance), the Company has been organized and
operated in a manner that has enabled it to qualify and to be taxed as a REIT
under Sections 856 through 860 of the Code, commencing with its short taxable
year ended December 31, 1997, and that the Company's proposed method of
operation will enable it to continue to so qualify and to be taxed through
calendar 1998. See "Recent Developments." Holders should be aware, however,
that opinions of counsel are not binding on the IRS or any court. The Company's
ability to qualify and to be taxed as a REIT under the requirements of the Code
and the Treasury Regulations promulgated thereunder is dependent upon actual
operating results and compliance with distribution and other requirements.
Accordingly, no assurance can be given that the actual results of the Company's
operations for any particular taxable year will satisfy such requirements. For
a discussion of the tax consequences of failure to qualify as a REIT, see " --
Failure to Qualify" below.
TAXATION OF THE COMPANY
The Company has made an election to be taxed as a REIT under Sections 856
through 860 of the Code, commencing with its short taxable year beginning on
the day prior to the closing of the Initial Public Offering, and ending on
December 31, 1997, and intends to continue to maintain such election through
calendar 1998. See "Recent Developments." The following discussion sets forth
the material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its shareholders, which are highly technical and
complex. The discussion does not address taxation of the Company in the event
that it ceases to qualify as a REIT. The discussion is qualified in its
entirety by the applicable Code provisions, the Treasury Regulations and
administrative and judicial interpretations thereof, all of which are subject
to change prospectively or retroactively.
The Company generally will not be subject to federal corporate income tax
on its net income that is distributed currently to its shareholders. That
treatment substantially eliminates the "double taxation" (i.e., taxation at
both the corporate and shareholder levels) that generally results from an
investment in a corporation. However, the Company will be subject to federal
income tax in the following circumstances. First, the Company will be taxed at
regular corporate rates on any undistributed REIT taxable income, including
undistributed net capital gains. Second, under certain circumstances, the
Company may be subject to the "alternative minimum tax" on its undistributed
items of tax preference, if any. Third, if the Company has (i) net income from
the sale or other disposition of "foreclosure property" that is held primarily
for sale to customers in the ordinary course of business or (ii) other
nonqualifying income from foreclosure property, it will be subject to tax at
the highest corporate rate on such income. Fourth, if the Company has net
income from prohibited transactions (which are, in general, certain sales or
other dispositions of property (other than foreclosure property) held primarily
for sale to customers in the ordinary course of business), such income will be
subject to a 100% tax. A shared appreciation provision may give rise to income
from a prohibited transaction if the debt instrument was in default, or default
was imminent, when the instrument was acquired. Fifth, if the Company should
fail to satisfy the 75% gross income test or the 95% gross income test (as
discussed below), and nonetheless has maintained its qualification as a REIT
because certain other requirements have been met, it will be subject to a 100%
tax on the net income attributable to the greater of the amount by which the
Company fails the 75% or 95% gross income test. Sixth, if the Company should
fail to distribute during each calendar year at least the sum of (i) 85% of its
REIT ordinary income for such year, (ii) 95% of its REIT capital gain net
income for such year and (iii) any undistributed taxable income from prior
periods, the Company would be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed. Seventh, if the
Company acquires any asset from a C corporation (i.e., a corporation generally
subject to full corporate-level tax) in a merger or other transaction in which
the basis of the asset in the Company's hands is determined by reference to the
basis of the asset (or any other asset) in the hands of the C corporation and
the Company recognizes gain on the disposition of such asset during the 10-year
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period beginning on the date on which it acquired such asset, then to the
extent of such asset's "built-in-gain" (i.e., the excess of the fair market
value of such asset at the time of acquisition by the Company over the adjusted
basis in such asset at such time), the Company will be subject to tax at the
highest regular corporate rate applicable (as provided in Treasury Regulations
that have not yet been promulgated). The results described above with respect
to the tax on "built-in-gain" assume that the Company will elect pursuant to
IRS Notice 88-19 to be subject to the rules described in the preceding sentence
if it were to make any such acquisition. Finally, the Company will be subject
to tax at the highest marginal corporate rate on the portion of any Excess
Inclusion income derived by the Company from REMIC residual interests equal to
the percentage of the stock of the Company held by the United States, any state
or political subdivision thereof, any foreign government, any international
organization, any agency or instrumentality of any of the foregoing, any other
tax-exempt organization (other than a farmer's cooperative described in Section
521 of the Code) that is exempt from taxation under the unrelated business
taxable income provisions of the Code, or any rural electrical or telephone
cooperative (each, a "Disqualified Organization"). Any such tax on the portion
of any Excess Inclusion allocable to stock of the Company held by a
Disqualified Organization will reduce the cash available for distribution from
the Company to all shareholders.
REQUIREMENTS FOR QUALIFICATION
The Code defines a REIT as a corporation, trust or association (i) that is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation, but
for Sections 856 through 860 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons; (vi) not
more than 50% in value of the outstanding shares of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of each taxable year (the "5/50 Rule");
(vii) that makes an election to be a REIT (or has made such election for a
previous taxable year) and satisfies all relevant filing and other
administrative requirements established by the IRS that must be met in order to
elect and maintain REIT status; (viii) that uses a calendar year for federal
income tax purposes and complies with the recordkeeping requirements of the
Code and Treasury Regulations promulgated thereunder; and (ix) that meets
certain other tests, described below, regarding the nature of its income and
assets. The Code provides that conditions (i) to (iv), inclusive, must be met
during the entire taxable year and that condition (v) must be met during at
least 335 days of a taxable year of 12 months, or during a proportionate part
of a taxable year of less than 12 months. Conditions (v) and (vi) do not apply
until after the first taxable year for which an election is made by the Company
to be taxed as a REIT. For purposes of determining stock ownership under the
5/50 Rule, a supplemental unemployment compensation benefits plan, a private
foundation or a portion of a trust permanently set aside or used exclusively
for charitable purposes generally is considered an individual. A trust that is
a qualified trust under Code Section 401(a), however, generally is not
considered an individual and beneficiaries of such trust are treated as holding
shares of a REIT in proportion to their actuarial interests in such trust for
purposes of the 5/50 Rule.
The Company's subsidiaries include the General Partner and the Limited
Partner. Code Section 856(i) provides that a corporation that is a "qualified
REIT subsidiary" shall not be treated as a separate corporation, and all
assets, liabilities and items of income, deduction and credit of a "qualified
REIT subsidiary" shall be treated as assets, liabilities and items of income,
deduction and credit of the REIT. A "qualified REIT subsidiary" is a
corporation all of the capital stock of which is held by the REIT. Thus, in
applying the requirements described herein, any "qualified REIT subsidiaries"
of the Company will be ignored, and all assets, liabilities and items of
income, deduction and credit of such subsidiaries will be treated as assets,
liabilities and items of income, deduction and credit of the Company. The
General Partner and the Limited Partner are "qualified REIT subsidiaries."
Accordingly, neither the General Partner nor the Limited Partner is subject to
federal corporate income taxation, although each may be subject to state and
local taxation.
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In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the gross
income of the partnership attributable to such share. In addition, the assets
and gross income of the partnership will retain the same character in the hands
of the REIT for purposes of Section 856 of the Code, including satisfying the
gross income and asset tests described below. Because the Company is a partner
in the Operating Partnership, the Company's proportionate share of the assets
and gross income of the Operating Partnership are treated as assets and gross
income of the Company for purposes of applying the requirements described
herein.
INCOME TESTS. In order for the Company to qualify and to maintain its
qualification as a REIT, two requirements relating to the Company's gross
income must be satisfied annually. First, at least 75% of the Company's gross
income (excluding gross income from prohibited transactions) for each taxable
year must consist of defined types of income derived directly or indirectly
from investments relating to real property or mortgages on real property
(including "rents from real property" and interest on obligations secured by
mortgages on real property or on interests in real property) or temporary
investment income. Second, at least 95% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year
must be derived from such real property, mortgages on real property or
temporary investments, and from dividends, other types of interest, certain
payments under hedging instruments and gain from the sale or disposition of
stock, securities and certain hedging instruments, or from any combination of
the foregoing. The specific application of these tests to the Company is
discussed below.
The term "interest," as defined for purposes of the 75% and 95% gross
income tests, generally does not include any amount received or accrued
(directly or indirectly) if the determination of such amount depends in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term "interest" solely by
reason of being based on a fixed percentage or percentages of receipts or
sales. In addition, an amount received or accrued generally will not be
excluded from the term "interest" solely by reason of being based on the income
or profits of a debtor if the debtor derives substantially all of its gross
income from the related property through the leasing of substantially all of
its interests in the property, to the extent the amounts received by the debtor
would be characterized as rents from real property if received by a REIT.
Furthermore, to the extent that interest from a loan that is based on the cash
proceeds from the sale of the property securing the loan constitutes a "shared
appreciation provision" (as defined in the Code), income attributable to such
participation feature will be treated as gain from the sale of the secured
property, which generally is qualifying income for purposes of the 75% and 95%
gross income tests.
Interest on obligations secured by mortgages on real property or on
interests in real property is qualifying income for purposes of the 75% gross
income test. Any amount includible in gross income with respect to a regular or
residual interest in a REMIC generally is treated as interest on an obligation
secured by a mortgage on real property. If, however, less than 95% of the
assets of a REMIC consists of real estate assets (determined as if the Company
held such assets), the Company will be treated as receiving directly its
proportionate share of the income of the REMIC. In addition, if the Company
receives interest income with respect to a mortgage loan that is secured by
both real property and other property and the highest principal amount of the
loan outstanding during a taxable year exceeds the fair market value of the
real property on the date the Company purchased the mortgage loan, the interest
income will be apportioned between the real property and the other property,
which apportionment may cause the Company to recognize income that is not
qualifying income for purposes of the 75% gross income test.
Interest, OID and market discount income that the Company derives from its
investments in subordinate and residual interests generally will be qualifying
interest income for purposes of both the 75% and the 95% gross income tests,
except to the extent that less than 95% of the assets of a REMIC in which the
Company holds an interest consists of real estate assets (determined as if the
Company held such assets), and the Company's proportionate share of the income
of the REMIC includes income that is not qualifying income for purposes of the
75% and 95% gross income tests. Most of the income that the Company recognizes
with respect to its investments in loans will be qualifying income for purposes
of both gross income tests. In some cases, however, the loan amount may exceed
the value of the
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real property securing the loan, which will result in a portion of the income
from the loan being classified as qualifying income for purposes of the 95%
gross income test, but not for purposes of the 75% gross income test. It is
also possible that, in some instances, the interest income from a loan may be
based in part on the borrower's profits or net income, which generally will
disqualify the income from the loan for purposes of both the 75% and the 95%
gross income tests.
The Company may originate or acquire construction loans or mezzanine loans
that have shared appreciation provisions. The Company generally will be
required to recognize income from a shared appreciation provision over the term
of the related loan using the constant yield method pursuant to certain
Treasury Regulations. The Company may also acquire distressed mortgage loans
with shared appreciation provisions. Such loans may be subject to the 100% tax
on net income. See "-- Taxation of the Company."
The Company may originate or acquire and securitize loans through the
issuance of non-REMIC CMOs. As a result of such transactions, the Company will
retain an equity ownership interest in the loans that, after considering the
notes issued in the securitization, has economic characteristics similar to
those of a subordinate interest. In addition, the Company may resecuritize
mortgage-related securities (or non-REMIC CMOs) through the issuance of
non-REMIC CMOs, retaining an equity interest in the mortgage-related securities
used as collateral in the resecuritization transaction. The Company does not
intend to enter into any such transactions that could cause the Company to fail
to satisfy the gross income tests or the asset tests described herein.
The Company may receive income not described above that is not qualifying
income for purposes of the 75% and 95% gross income tests. For example, certain
fees for services rendered by the Operating Partnership will not be qualifying
income for purposes of the gross income tests. It is not anticipated that the
Operating Partnership will receive a significant amount of such fees. Such
fees include, without limitation, (i) fees for servicing loans, (ii) fees for
performing underwriting or appraisal services for others and (iii) fees for
managing property owned by others. The Company will monitor the amount of
nonqualifying income produced by its assets and intends to manage its portfolio
in order to comply at all times with the two gross income tests.
The rent received by the Company from the tenants of its real property
("Rent") will qualify as "rents from real property" in satisfying the gross
income tests for a REIT described above only if several conditions are met.
First, the amount of Rent must not be based, in whole or in part, on the income
or profits of any person. However, an amount received or accrued generally will
not be excluded from the term "rents from real property" solely by reason of
being based on a fixed percentage or percentages of receipts or sales. Second,
the Code provides that the Rent received from a tenant will not qualify as
"rents from real property" in satisfying the gross income tests if the Company,
or a direct or indirect owner of 10% or more of the Company, owns 10% or more
of such tenant, taking into account both direct and constructive ownership (a
"Related Party Tenant"). Third, if Rent attributable to personal property,
leased in connection with a lease of real property, is greater than 15% of the
total Rent received under the lease, then the portion of Rent attributable to
such personal property will not qualify as "rents from real property." Finally,
for the Rent to qualify as "rents from real property," the Company generally
must not operate or manage the real property or furnish or render services to
the tenants of such real property, other than through an "independent
contractor" who is adequately compensated and from whom the Company derives no
revenue. (An "independent contractor" for this purpose generally means a
service provider that is not (i) an employee of the Company or (ii) in general,
an entity which owns 35% or more of the Company or an entity of which the
persons owning a greater than 35% equity interest also own 35% or more of the
Company.) The "independent contractor" requirement, however, does not apply to
the extent the services provided by the Company are "usually or customarily
rendered" in connection with the rental of space for occupancy only and are not
otherwise considered "rendered to the occupant." Pursuant to a de minimus
exception, the Company may provide non-customary services to its tenants other
than through an independent contractor without disqualifying the income from
the property as long as the amount the Company receives for the impermissible
services does not exceed 1% of the Company's gross income from the property.
The amount that the Company receives that is attributable to impermissible
services cannot be valued at less than 150% of the direct cost to the Company
of providing the services.
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It is the Company's policy that it will not charge Rent for any portion of
any Real Property that is based, in whole or in part, on the income or profits
of any person (except by reason of being based on a fixed percentage or
percentages of receipts of sales, as described above) to the extent that the
receipt of such Rent would jeopardize the Company's status as a REIT. In
addition, it is the Company's intention that, to the extent that it receives
Rent from a Related Party Tenant, such Rent will not cause the Company to fail
to satisfy either the 75% or 95% gross income test. It is also the Company's
intention that it will not allow the Rent attributable to personal property
leased in connection with any lease of real property to exceed 15% of the total
Rent received under the lease, if the receipt of such Rent would cause the
Company to fail to satisfy either the 75% or 95% gross income test. Finally,
the Company intends that it will not operate or manage its real property or
furnish or render noncustomary services to the tenants of its real property
other than through an "independent contractor," to the extent that such
operation or the provision of such services would jeopardize the Company's
status as a REIT.
REITs generally are subject to tax at the maximum corporate rate on any
income from foreclosure property (other than income that would be qualifying
income for purposes of the 75% gross income test), less expenses directly
connected with the production of such income. "Foreclosure property" is defined
as any real property (including interests in real property) and any personal
property incident to such real property (i) that is acquired by a REIT as the
result of such REIT having bid in such property at foreclosure, or having
otherwise reduced such property to ownership or possession by agreement or
process of law, after there was a default (or default was imminent) on a lease
of such property or on an indebtedness owed to the REIT that such property
secured, (ii) for which the related loan was acquired by the REIT at a time
when default was not imminent or anticipated and (iii) for which such REIT
makes a proper election to treat such property as foreclosure property. The
Company does not anticipate that it will receive any income from foreclosure
property that is not qualifying income for purposes of the 75% gross income
test, but, if the Company does receive any such income, the Company intends to
make an election to treat the related property as foreclosure property.
If property is not eligible for the election to be treated as foreclosure
property ("Ineligible Property") because the related loan was acquired by the
REIT at a time when default was imminent or anticipated, income received with
respect to such Ineligible Property may not be qualifying income for purposes
of the 75% or 95% gross income test. The Company anticipates that any income it
receives with respect to Ineligible Property will be qualifying income for
purposes of the 75% and 95% gross income tests.
Net income derived from a "prohibited transaction" is subject to a 100%
tax. The term "prohibited transaction" generally includes a sale or other
disposition of property (other than foreclosure property) that is held
primarily for sale to customers in the ordinary course of a trade or business.
The Company believes that no asset owned by the Company or the Operating
Partnership will be held for sale to customers and that a sale of any such
asset will not be in the ordinary course of the Company's or the Operating
Partnership's business. Whether property is held "primarily for sale to
customers in the ordinary course of a trade or business" depends, however, on
the facts and circumstances in effect from time to time, including those
related to a particular property. Nevertheless, the Company will attempt to
comply with the terms of safe-harbor provisions in the Code prescribing when
asset sales will not be characterized as prohibited transactions. Complete
assurance cannot be given, however, that the Company can comply with the
safe-harbor provisions of the Code or avoid owning property that may be
characterized as property held "primarily for sale to customers in the ordinary
course of a trade or business."
From time to time the Company enters into hedging transactions with
respect to one or more of its assets or liabilities. Any such hedging
transactions could take a variety of forms, including interest rate swap
contracts, interest rate cap or floor contracts, futures or forward contracts
and options. To the extent that the Company enters into an interest rate swap
or cap contract to hedge its interest rate risk with respect to indebtedness
incurred or to be incurred to acquire or carry real estate assets, any periodic
income or gain from the disposition of such contract should be qualifying
income for purposes of the 95% gross income test, but not the 75% gross income
test. To the extent that the
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Company hedges with other types of financial instruments or in other
situations, it may not be entirely clear how the income from those transactions
will be treated for purposes of the various income tests that apply to REITs
under the Code. The Company intends to structure any hedging transactions in a
manner that does not jeopardize its status as a REIT. Accordingly, the Company
may conduct some or all of its hedging activities through a corporate
subsidiary that is fully subject to federal corporate income tax.
If the Company fails to satisfy one or both of the 75% and 95% gross
income tests for any taxable year, it nevertheless may qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
Those relief provisions generally will be available if the Company's failure to
meet such tests is due to reasonable cause and not due to willful neglect, the
Company attaches a schedule of the sources of its income to its return and any
incorrect information on the schedule was not due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances the
Company would be entitled to the benefit of those relief provisions. As
discussed above, even if those relief provisions apply, a 100% tax would be
imposed on the net income attributable to the greater of the amount by which
the Company fails the 75% or 95% gross income test.
ASSET TESTS. The Company, at the close of each quarter of each taxable
year, also must satisfy two tests relating to the nature of its assets. First,
at least 75% of the value of the Company's total assets must be represented by
cash or cash items (including certain receivables), government securities,
"real estate assets," or, in cases where the Company raises new capital through
stock or long-term (at least five-year) debt offerings, temporary investments
in stock or debt instruments during the one-year period following the Company's
receipt of such capital. The term "real estate assets" includes interests in
real property, interests in mortgages on real property to the extent the
principal balance of a mortgage does not exceed the fair market value of the
associated real property, regular or residual interests in a REMIC (except
that, if less than 95% of the assets of a REMIC consists of "real estate
assets" (determined as if the Company held such assets), the Company will be
treated as holding directly its proportionate share of the assets of such
REMIC), and shares of other REITs. For purposes of the 75% asset test, the term
"interest in real property" includes an interest in mortgage loans or land and
improvements thereon, such as buildings or other inherently permanent
structures (including items that are structural components of such buildings or
structures), a leasehold of real property, and an option to acquire real
property (or a leasehold of real property). An "interest" in real property also
generally includes an interest in mortgage loans secured by controlling equity
interests in entities treated as partnerships for federal income tax purposes
that own real property, to the extent that the principal balance of the
mortgage does not exceed the fair market value of the real property that is
allocable to the equity interest. Second, of the investments not included in
the 75% asset class, the value of any one issuer's securities owned by the
Company may not exceed 5% of the value of the Company's total assets, and the
Company may not own more than 10% of any one issuer's outstanding voting
securities (except for its interests in the Operating Partnership, the General
Partner, the Limited Partner, any other qualified REIT subsidiary, partnership
or any other REIT).
The Company expects that any distressed real properties, subordinate and
residual interests, IOs, Inverse IOs and temporary investments that it acquires
generally will be qualifying assets for purposes of the 75% asset test, except
to the extent that less than 95% of the assets of a REMIC in which the Company
owns an interest consists of "real estate assets" and the Company's
proportionate share of those assets includes assets that are nonqualifying
assets for purposes of the 75% asset test. Loans also will be qualifying assets
for purposes of the 75% asset test to the extent that the principal balance of
each mortgage loan does not exceed the value of the associated real property.
The Company will monitor the status of the assets that it acquires for purposes
of the various asset tests and intends to manage its portfolio in order to
comply at all times with such tests.
If the Company should fail to satisfy the asset tests at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status if
(i) it satisfied the asset tests at the close of the preceding calendar quarter
and (ii) the discrepancy between the value of the Company's assets and the
asset test requirements arose from changes in the market values of its assets
and was not wholly or partly caused by the acquisition of one or more
non-qualifying assets. If the condition described in clause (ii) of the
preceding sentence were not satisfied, the Company still could avoid
disqualification by eliminating any discrepancy within 30 days after the close
of the calendar quarter in which it arose.
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RECORDKEEPING REQUIREMENTS. Pursuant to applicable Treasury Regulations,
in order to be able to elect to be taxed as a REIT, the Company must maintain
certain records and request on an annual basis certain information from its
shareholders designed to disclose the actual ownership of its outstanding
stock. The Company intends to comply with such requirements.
DISTRIBUTION REQUIREMENTS
The Company, in order to avoid corporate income taxation of the earnings
that it distributes, is required to distribute with respect to each taxable
year dividends (other than capital gain dividends) to its shareholders in an
aggregate amount at least equal to (i) the sum of (A) 95% of its "REIT taxable
income" (computed without regard to the dividends paid deduction and its net
capital gains) and (B) 95% of the net income (after tax), if any, from
foreclosure property, minus (ii) the sum of certain items of noncash income.
Such distributions must be paid in the taxable year to which they relate, or in
the following taxable year if declared before the Company timely files its
federal income tax return for such year and if paid on or before the first
regular dividend payment date after such declaration. To the extent that the
Company does not distribute all of its net capital gain or distributes at least
95%, but less than 100%, of its "REIT taxable income," as adjusted, it will be
subject to tax thereon at regular ordinary and capital gains corporate tax
rates. Furthermore, if the Company should fail to distribute during each
calendar year (or, in the case of distributions with declaration and record
dates falling in the last three months of the calendar year, by the end of the
January immediately following such year) at least the sum of (i) 85% of its
REIT ordinary income for such year, (ii) 95% of its REIT capital gain income
for such year and (iii) any undistributed taxable income from prior periods,
the Company would be subject to a 4% nondeductible excise tax on the excess of
such required distribution over the amounts actually distributed. The Company
intends to make distributions sufficient to satisfy the annual distribution
requirements, although it anticipates incurring a liability as a result of the
above-mentioned excise tax in connection with a decision to defer payment of a
dividend on the Common Stock in the fourth quarter of 1998. See "Recent
Developments."
It is possible that, from time to time, the Company may experience timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of that income and deduction of such
expenses in arriving at its REIT taxable income. For example, the Company will
recognize taxable income in excess of its cash receipts when, as generally
happens, OID accrues with respect to its subordinated interests. Furthermore,
some loans, IOs and Inverse IOs may be deemed to have OID, in which case the
Company will be required to recognize taxable income in advance of the related
cash flow. In addition, pursuant to certain Treasury Regulations, the Company
may be required to recognize the amount of any payment to be made pursuant to a
shared appreciation provision over the term of the related loan using the
constant yield method. OID generally will be accrued using a methodology that
does not allow credit losses to be reflected until they are actually incurred.
In addition, the Company may recognize taxable market discount income upon the
receipt of proceeds from the disposition of, or principal payments on,
subordinated interests and loans that are "market discount bonds" (i.e.,
obligations with a stated redemption price at maturity that is greater than the
Company's tax basis in such obligations), although such proceeds often will be
used to make non-deductible principal payments on related borrowings. The
Company also may recognize Excess Inclusion or other "phantom" taxable income
from REMIC residual interests. It also is possible that, from time to time, the
Company may recognize net capital gains attributable to the sale of depreciated
property that exceeds its cash receipts from the sale. Finally, the Company may
recognize taxable income without receiving a corresponding cash distribution if
it forecloses on or makes a "significant modification" (as defined in Treasury
Regulations Section 1.1001-3(e)) to a loan, to the extent that the fair market
value of the underlying property or the principal amount of the modified loan,
as applicable, exceeds the Company's basis in the original loan. Therefore, the
Company may have less cash than is necessary to meet its annual 95%
distribution requirement or to avoid corporate income tax or the excise tax
imposed on certain undistributed income. In such a situation, the Company may
find it necessary to arrange for short-term (or possibly long-term) borrowings
or to raise funds through the issuance of capital stock.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirements for a year by paying "deficiency
dividends" to its shareholders in a later year, which may be included in
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the Company's deduction for dividends paid for the earlier year. Although the
Company may be able to avoid being taxed on amounts distributed as deficiency
dividends, it will be required to pay to the IRS interest based upon the amount
of any deduction taken for deficiency dividends.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year, and
the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to the Company's shareholders in any year
in which the Company fails to qualify will not be deductible by the Company nor
will they be required to be made. In such event, to the extent of the Company's
current and accumulated earnings and profits, all distributions to shareholders
will be taxable as ordinary income and, subject to certain limitations of the
Code, corporate distributees may be eligible for the dividends received
deduction. Unless entitled to relief under specific statutory provisions, the
Company also will be disqualified from taxation as a REIT for the four taxable
years following the year during which the Company ceased to qualify as a REIT.
It is not possible to state whether in all circumstances the Company would be
entitled to such statutory relief.
MANAGEMENT OF OPERATIONS
THE MANAGER; OCWEN FINANCIAL
The Manager is a wholly-owned subsidiary of Ocwen Financial. Ocwen Financial, a
diversified financial services company that is primarily engaged in the
acquisition, servicing and resolution of subperforming and nonperforming
residential and commercial mortgage loans and other servicing-intensive assets
and in diverse mortgage lending activities through the Bank and other
subsidiaries. At September 30, 1998, Ocwen Financial had $3.4 billion of total
assets and shareholders' equity of $444.1 million. For additional information
regarding the Manager and Ocwen Financial, see "The Company."
THE MANAGEMENT AGREEMENT
GENERAL. The Company has entered into the Management Agreement with the
Manager for an initial term expiring on May 19, 1999, the second anniversary of
the closing date of the Initial Public Offering. Thereafter, successive
extensions, each for a period not to exceed one year, may be made by agreement
between the Company and the Manager, subject to the affirmative vote of a
majority of the Independent Directors. The Company may terminate, or decline to
extend the term of, the Management Agreement without cause at any time after the
first two years upon 60 days written notice by a majority vote of the
Independent Directors or by a vote of the holders of a majority of the
outstanding shares of Common Stock; provided, that a termination fee, equal to
the sum of the base management fee and incentive management fee earned during
the twelve months preceding such termination, will be due. In addition, the
Company has the right to terminate the Management Agreement upon the occurrence
of certain specified events, including a material breach by the Manager of any
provision contained in the Management Agreement, without the payment of any
termination fee. If the Management Agreement is terminated for any reason, Ocwen
Financial will have certain registration rights with respect to the Common Stock
held by it.
The Manager at all times is subject to the supervision of the Company's
Board of Directors and has only such functions and authority as the Company
delegates to it. The Manager is responsible for the day-to-day operations of the
Company and performs (or causes to be performed) such services and activities
relating to the assets and operations of the Company as may be appropriate,
including: (i) serving as the Company's consultant with respect to formulation
of investment criteria and preparation of policy Guidelines by the Board of
Directors; (ii) representing the Company in connection with the purchase and
commitment to purchase assets, the sale and commitment to sell assets, and the
maintenance and administration of its portfolio of assets; (iii) furnishing
reports and statistical and economic research to the Company regarding the
Company's activities and the services performed for the Company by the Manager;
(iv) monitoring and providing to the Board of Directors on an ongoing basis
price information and other data obtained from
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certain nationally recognized dealers that maintain markets in assets identified
by the Board of Directors from time to time, and providing data and advice to
the Board of Directors in connection with the identification of such dealers;
(v) providing executive and administrative personnel, office space and office
services required in rendering services to the Company; (vi) administering the
day-to-day operations of the Company and performing and supervising the
performance of such other administrative functions necessary in the management
of the Company as may be agreed upon by the Manager and the Board of Directors,
including the collection of revenues and the payment of the Company's debts and
obligations and maintenance of appropriate computer services to perform such
administrative functions; (vii) communicating on behalf of the Company with the
holders of any equity or debt securities of the Company as required to satisfy
the reporting and other requirements of any governmental bodies or agencies or
trading markets and to maintain effective relations with such holders; (viii) to
the extent not otherwise subject to an agreement executed by the Company,
designating a servicer for mortgage loans sold to the Company and arranging for
the monitoring and administering of such servicers; (ix) counseling the Company
in connection with policy decisions to be made by the Board of Directors; (x)
engaging in hedging activities on behalf of the Company, consistent with the
Company's status as a REIT and with the Guidelines; (xi) upon request by and in
accordance with the directions of the Board of Directors, investing or
reinvesting any money of the Company; and (xii) counseling the Company regarding
the maintenance of its status as a REIT and monitoring compliance with the
various REIT qualification tests and other rules set out in the Code and
Treasury Regulations (as herein defined) thereunder.
PORTFOLIO MANAGEMENT. The Manager performs portfolio management services
on behalf of the Company and the Operating Partnership pursuant to the
Management Agreement. Such services include, but are not limited to, consulting
with the Company on purchase and sale opportunities, collection of information
and submission of reports pertaining to the Company's assets, interest rates,
and general economic conditions, periodic review and evaluation of the
performance of the Company's portfolio of assets, acting as liaison between the
Company and banking, mortgage banking, investment banking and other parties with
respect to the purchase, financing and disposition of assets, and other
customary functions related to portfolio management. The Manager may enter into
subcontracts with other parties, including its affiliates, to provide any such
services to the Company.
MONITORING SERVICING. The Manager performs monitoring services on behalf
of the Company pursuant to the Management Agreement with respect to the
Company's portfolio of mortgage loans. Such monitoring services include, but are
not limited to, the following activities: negotiating servicing agreements;
serving as the Company's consultant with respect to the servicing of mortgage
loans; collection of information and submission of reports pertaining to the
mortgage loans and to moneys remitted to the Manager or the Company; acting as a
liaison between the servicers of the mortgage loans and the Company and working
with servicers to the extent necessary to improve their servicing performance;
with respect to mortgage loans for which the Company is servicer, periodic
review and evaluation of the performance of each servicer to determine its
compliance with the terms and conditions of the related servicing agreement;
review of and recommendations as to fire losses, easement problems and
condemnation, delinquency and foreclosure procedures with regard to mortgage
loans; review of servicers' delinquency, foreclosures and other reports on
mortgage loans; supervising claims filed under any mortgage insurance policies;
and enforcing the obligation of any servicer to repurchase mortgage loans. The
Manager may enter into subcontracts with other parties, including its
affiliates, to provide any such services for the Manager.
MANAGEMENT FEES
BASE AND INCENTIVE FEES. The Manager receives a base management fee,
calculated and paid quarterly, in an amount equal to 0.25% per quarter (1% per
annum), based upon the Average Invested Assets of the Company for such quarter.
The term "Average Invested Assets" for any period means the average of the
aggregate book value of the assets of the Company, including the assets of all
of its direct and indirect subsidiaries, before reserves for depreciation or bad
debts or other similar noncash reserves, computed by taking the daily average of
such values during such period.
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The Manager is entitled to receive incentive compensation for each fiscal
quarter in an amount equal to the product of (A) 25% of the dollar amount by
which (1)(a) FFO (before the incentive fee) of the Company per share of Common
Stock (based on the weighted average number of shares outstanding) plus (b)
gains (or minus losses) from debt restructuring and sales of property per share
of Common Stock (based on the weighted average number of shares outstanding),
exceed (2) an amount equal to (a) the weighted average of the price per share at
the initial offering and the prices per share at any secondary offerings by the
Company multiplied by (b) the ten-year U.S. Treasury rate plus five percent per
annum multiplied by (B) the weighted average number of shares of Common Stock
outstanding during such period. FFO, as defined by NAREIT, means net income
(computed in accordance with generally accepted accounting principles) excluding
gains (losses) from debt restructuring and sales of property, plus depreciation
and amortization on real estate assets, and after adjustments for unconsolidated
partnerships and joint ventures. FFO does not represent cash generated from
operating activities in accordance with generally accepted accounting principles
and should not be considered as an alternative to net income as an indication of
the Company's performance or to cash flows as a measure of liquidity or ability
to make distributions. As used in calculating the Manager's compensation, the
term "Ten Year U.S. Treasury Rate" means the arithmetic average of the weekly
average yield to maturity for actively traded current coupon U.S. Treasury fixed
interest rate securities (adjusted to constant maturities of ten years)
published by the Federal Reserve Board during a quarter, or, if such rate is not
published by the Federal Reserve Board, any Federal Reserve Bank or agency or
department of the federal government selected by the Company. If the Company
determines in good faith that the Ten Year U.S. Treasury Rate cannot be
calculated as provided above, then the rate shall be the arithmetic average of
the per annum average yields to maturities, based upon closing asked prices on
each business day during a quarter, for each actively traded marketable U.S.
Treasury fixed interest rate security with a final maturity date not less than
eight nor more than twelve years from the date of the closing asked prices as
chosen and quoted for each business day in each such quarter in New York City by
at least three recognized dealers in U.S. Government securities selected by the
Company.
The ability of the Company to generate FFO in excess of the Ten Year U.S.
Treasury Rate, and of the Manager to earn the incentive compensation described
in the preceding paragraph, is dependent upon the level and volatility of
interest rates, the Company's ability to react to changes in interest rates and
to utilize successfully the operating strategies described herein, and other
factors, many of which are not within the Company's control.
Because the Manager's employees perform certain due diligence tasks that
purchasers of real estate (including managers of REITs) typically hire outside
consultants to perform, the Manager is reimbursed for (or charges the Company
directly for) the Manager's out-of-pocket costs in performing such due diligence
on assets purchased or considered for purchase by the Company. Moreover, the
Manager tracks the time its employees spend in performing such due diligence
tasks and is entitled to reimbursement for the allocated portion of the salary
and benefits of such employees.
EXPENSES. The Company does not, and does not expect to, maintain an
office or to employ full-time personnel. Instead it relies on the facilities and
resources of the Manager to conduct its operations, and it is required to pay
out-of-pocket expenses and an allocated portion of salary and benefits of the
Manager attributable to the operations of the Company. Expense reimbursement is
made quarterly.
PAYMENT OF FEES AND EXPENSES. The management fees are payable in arrears.
The Manager's base and incentive fees and due diligence and other expenses are
calculated by the Manager within 45 days after the end of each quarter, and such
calculation is promptly delivered to the Company. The Company is obligated to
pay such fees and expenses within 60 days after the end of each fiscal quarter.
For the period from May 14, 1997 to December 31, 1997, the Manager earned
from the Company $1.8 million in base management fees and no incentive
compensation. In addition, for such period, the Manager was reimbursed $625,000
for out-of-pocket costs and salary allocations for due diligence tasks.
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STOCK OPTIONS
The Company has adopted a non-qualified Option Plan which provides for
the grant of options to purchase shares of Common Stock (or, at the election of
the Company, limited partnership interests in the Operating Partnership that may
be redeemed for cash, or, at the election of the General Partner, shares of
Common Stock on a one-for-one basis). The maximum aggregate number of shares of
Common Stock that may be issued pursuant to options granted under the Option
Plan is 5,000,000. The purpose of the Option Plan is to provide a means of
performance-based compensation in order to provide incentive for the Manager to
enhance the value of the Company's stock.
The Company has granted to the Manager under the Option Plan options to
acquire 1,912,500 shares of Common Stock (or, at the election of the Company, an
equivalent number of units of limited partnership interests in the Operating
Partnership) at an exercise price per share equal to $16.00, the per share price
of the Common Stock in the Initial Public Offering. One quarter of these options
vest and become exercisable on each of the first four anniversaries following
May 19, 1997, the closing date of the Initial Public Offering. Accordingly,
options to acquire 478,125 shares of Common Stock vested on May 19, 1998. Such
options terminate on May 19, 2007.
The Board of Directors may amend the Option Plan any time, except that
approval by the Company's shareholders is required for any amendment that
increases the aggregate number of shares of Common Stock that may be issued
pursuant to the Option Plan, increases the maximum number of shares of Common
Stock that may be issued to any person, changes the class of persons eligible to
receive such options, modifies the period within which the options may be
granted, modifies the period within which the options may be exercised or the
terms upon which options may be exercised, or increases the material benefits
accruing to the participants under the Option Plan. Unless previously terminated
by the Board of Directors, the Option Plan will terminate on May 19, 2007.
LIMITS OF RESPONSIBILITY
Pursuant to the Management Agreement, the Manager does not assume any
responsibility other than to render the services called for thereunder and is
not responsible for any action of the Company's Board of Directors in following
or declining to follow its advice or recommendations. The Manager, its directors
and its officers are not liable to the Company, any subsidiary of the Company,
the Independent Directors, the Company's shareholders or any subsidiary's
shareholders for acts performed in accordance with and pursuant to the
Management Agreement, except by reason of acts constituting bad faith, willful
misconduct, gross negligence or reckless disregard of their duties under the
Management Agreement. The Company has agreed to indemnify the Manager, its
directors and its officers with respect to all expenses, losses, damages,
liabilities, demands, charges and claims arising from acts of the Manager not
constituting bad faith, willful misconduct, gross negligence or reckless
disregard of duties, performed in good faith in accordance with and pursuant to
the Management Agreement.
The Management Agreement does not limit or restrict the right of the
Manager or any of its officers, directors, employees or affiliates from engaging
in any business or rendering services of any kind to any other person, including
the purchase of, or rendering advice to others purchasing, assets that meet the
Company's policies and criteria. The Manager has agreed, however, to give the
Company an exclusive right to invest in subordinate and residual interests and
distressed real properties, subject to certain exceptions. See "Risk Factors -
Potential Conflicts of Interest between the Company and its Affiliates Could Be
Disadvantageous to the Company" and "- Certain Relationships; Conflicts of
Interest" and "- Certain Transactions."
CERTAIN RELATIONSHIPS; CONFLICTS OF INTEREST
The Company, on the one hand, and the Manager and its affiliates, on the
other, are subject to various potential conflicts of interest arising by virtue
of the Management Agreement and the Company's other relationships with the
Manager and its affiliates.
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Ocwen Financial currently beneficially owns 1,540,000 shares or
approximately 8.1% of the outstanding Common Stock (exclusive of presently
exercisable stock options). These shares are indirectly held by the Company
through IMIHC, a wholly-owned subsidiary of the Company which also holds an 8.7%
limited partnership interest in the Operating Partnership. Except in certain
circumstances resulting in a termination of the Management Agreement, Ocwen
Financial will retain its shares of Common Stock for at least two years after
the Initial Public Offering, but may dispose of its shares any time thereafter
in accordance with the provisions of Rule 144 under the Securities Act. The
Manager also has received stock options pursuant to the Company's Option Plan.
See "- Stock Options."
In addition to being Chairman of the Board of Directors and Chief
Executive Office of the Company, William C. Erbey is Chairman of the Board and
Chief Executive Officer of the Manager and of the Manager's parent, Ocwen
Financial. As of September 30, 1998, William C. Erbey owned or had voting power
over approximately 31.8% of the outstanding common stock, including options
exercisable within 60 days, of Ocwen Financial. Christine A. Reich is President
and a member of the Board of Directors of the Company and is President of both
the Manager and Ocwen Financial. Similarly, each of the Company's executive
officers also serves as an executive officer of the Manager and is employed by
Ocwen Financial.
The relationships between the Company, on the one hand, and the Manager
and its affiliates, on the other, are governed by policy Guidelines which have
been approved by a majority of the Independent Directors. The Guidelines
establish certain parameters for the operations of the Company, including
quantitative and qualitative limitations on the Company's assets that may be
acquired. The Guidelines are to assist and instruct the Manager and to establish
restrictions applicable to transactions with affiliates of the Manager. Pursuant
to the Guidelines, any acquisition of assets from the Manager or one of its
affiliates must be approved by a majority of the Independent Directors. Other
transactions with the Manager and its affiliates that fall within the provisions
of the Guidelines need not be specifically approved by a majority of the
Independent Directors. The Independent Directors review the Company's
transactions on a quarterly basis to monitor compliance with the Guidelines,
however, and review the Company's investment policies annually. The Independent
Directors rely primarily on information provided to them by the Manager in
conducting such reviews.
If the Independent Directors determine in their periodic review of
transactions that a particular transaction does not comply with the Guidelines,
then the Independent Directors will consider what corrective action, if any, can
be taken. If the transaction is one with the Manager or an affiliate of the
Manager, then the Manager will be required to repurchase the asset at the
purchase price to the Company. Moreover, if transactions are consummated that
deviate from the Guidelines, then the Independent Directors will have the
option, under the terms of the Management Agreement, to terminate the Manager.
For a description of certain provisions of the Management Agreement which
are intended to address certain potential conflicts of interest between the
Company and the Manager and its affiliates, see "Risk Factors -Potential
Conflicts of Interest between the Company and its Affiliates Could Be
Disadvantageous to the Company."
CERTAIN TRANSACTIONS
In 1997, the Company entered into a number of transactions with Ocwen
Financial and the Bank, in addition to the services rendered by the Manager to
the Company pursuant to the Management Agreement, as discussed above under "-
The Management Agreement." In this regard, the Bank services all of the
Company's mortgage loans pursuant to servicing agreements (one for commercial
loans and one for residential loans), the forms of which were approved by the
Independent Directors. In addition to servicing the Company's mortgage loans,
the Bank is the special
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servicer for the loans underlying most of the mortgage-backed securities owned
by the Company, and the Independent Directors have approved those transactions
in their quarterly meetings.
After closing the Initial Public Offering, the Company purchased from
Ocwen Financial and the Bank several subordinate interests and other classes of
mortgage-related securities for an aggregate purchase price of approximately
$45.1 million, which was disclosed in the prospectus for the Initial Public
Offering. In addition, in June 1997, the Company entered into a participation
agreement in which the Company purchased a 13.8% participation interest in four
commercial subperforming and nonperforming loans for a purchase price of
approximately $8.54 million. Additionally, during 1997 the Bank and the Company
were co-bidders on four pools of residential mortgages (with an aggregate
principal amount of $4.7 million, of which the Company purchased $3.2 million)
and one pool of commercial mortgages (with an aggregate principal amount of
$75.9 million, of which the Company purchased $10.5 million).
In December 1997, the Company repurchased 160,000 shares of Common Stock
held by IMIHC. On the same day, IMIHC acquired 160,000 units of limited
partnership interest in the Operating Partnership. These transactions reduced
IMIHC's voting power with respect to the Company, but left in place IMIHC's
economic investment in the Company.
On February 17, 1998, the Company issued an aggregate of 175,000 shares
of Common Stock to William C. Erbey, Christine A. Reich, Jordan C. Paul and
Barry N. Wish, a director of Ocwen Financial, who acquired 113,300 shares, 2,500
shares, 2,500 shares and 56,700 shares, respectively. The per share purchase
price for the Common Stock was the weighted average sales price per share of
Common Stock on the last trading day before the transaction. In connection with
this stock issuance, IMIHC exchanged 175,000 shares of Common Stock for a like
number of limited partnership units in the Operating Partnership in order to
comply with the stock ownership restrictions imposed on REITs under the Code.
In April 1998, the Company sold the IO Portfolio to William C. Erbey and
Barry N. Wish, a director of Ocwen Financial, and in May 1998 IMIHC acquired
1,473,733 limited partnership units from the Operating Partnership in exchange
for a capital contribution of $24.5 million.
The Company may purchase additional assets from or engage in other
transactions with the Manager and its affiliates in the future and may
participate on a joint basis with the Manager and its affiliates in investments.
Any such purchases or transactions will be in accordance with the Guidelines
approved by a majority of the Company's Independent Directors.
The market in which the Company purchases assets is characterized by
rapid evolution of products and services, and thus, in the future there may be
relationships between the Company, the Manager and affiliates of the Manager in
addition to those described herein.
MANAGEMENT OF THE COMPANY
GENERAL
Pursuant to a resolution adopted by the Board of Directors of the
Company, the Board of Directors consists of five persons. All directors are
elected at each annual meeting of the Company's shareholders for a term of one
year and hold office until their successors are elected and qualified. All
officers serve at the discretion of the Board of Directors.
The Articles of Incorporation of the Company provide that, except in the
case of an unfilled vacancy, the majority of the members of the Board of
Directors will at all times be Independent Directors. Vacancies occurring on
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the Board of Directors among the Independent Directors will be filled by the
vote of a majority of the directors, including a majority of the Independent
Directors.
The Company currently does not have employees and does not expect to
employ anyone as long as the Management Agreement is in force.
Executive officers of the Company are required to devote only so much of
their time to the Company's affairs as is necessary or required for the
effective conduct and operation of the Company's business. Because the
Management Agreement provides that the Manager will assume principal
responsibility for managing the affairs of the Company, the officers of the
Company, in their capacities as such, do not devote substantial portions of
their time to the affairs of the Company. However, in their capacities as
officers or employees of the Manager, or its affiliates, they will devote such
portion of their time to the affairs of the Manager as is required for the
performance of the duties of the Manager under the Management Agreement.
DIRECTORS AND EXECUTIVE OFFICERS
The following tables set forth certain information about the directors
and executive officers of the Company. Other than William C. Erbey and John R.
Erbey, who are brothers, no director or executive officer is related by blood,
marriage or adoption to any other director or executive officer of the Company
or any of its affiliates.
Directors
<TABLE>
<CAPTION>
Name Age Position(s) Held
- ---- --- -----------------
<S> <C> <C>
William C. Erbey 48 Chairman and Chief Executive Officer
Christine A. Reich 37 President
Benjamin W. Navarro 35 Director
Stuart L. Silpe 40 Director
Peter M. Small 55 Director
</TABLE>
Executive Officers Who Are Not Directors
<TABLE>
<CAPTION>
Name Age Position(s) Held
- ---- --- -----------------
<S> <C> <C>
John R. Erbey 56 Senior Managing Director and Secretary
John R. Barnes 56 Senior Vice President
Mark S. Zeidman 46 Senior Vice President and Chief Financial Officer
</TABLE>
The principal occupation for the last five years of each director and
executive officer of the Company, as well as some other information, is set
forth below.
Mr. William C. Erbey has served as Chairman, Chief Executive Officer and
Treasurer of the Company since May 1997. Mr. Erbey also has served as Chief
Executive Officer of Ocwen Financial since January 1988 and Chairman of the
Board of Ocwen Financial since September 1996. Mr. Erbey served as President of
Ocwen Financial from January 1988 to May 1998. Mr. Erbey has served as Chairman
of the Board of the Bank, since February 1988 and as President and Chief
Executive Officer of the Bank since June 1990 and serves as a director and/or
officer of many subsidiaries of the Company and Ocwen Financial. From 1983 to
1995, Mr. Erbey served as a Managing General Partner of The Oxford Financial
Group ("Oxford"), a private investment company, in charge of merchant banking.
From 1975 to 1983, he served at General Electric Capital Corporation ("GECC") in
various capacities, most recently as President and Chief Operating Officer of
General Electric Mortgage Insurance Corporation, a subsidiary
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of the General Electric Company engaged in the mortgage insurance business. Mr.
Erbey also served as program general manager of GECC's Commercial Financial
Services Department and its subsidiary, Acquisition Funding Corporation.
Ms. Christine A. Reich has served as a director and President of the
Company since January 1997. Ms. Reich also has served as President of Ocwen
Financial since May 1998 and as a Managing Director of Ocwen Financial since
June 1994, and serves as a director and/or officer of many subsidiaries of the
Company and Ocwen Financial. Ms. Reich served as Chief Financial Officer of
Ocwen Financial from January 1990 to May 1997, as Senior Vice President of Ocwen
Financial from January 1993 until June 1994 and as Vice President of Ocwen
Financial from January 1990 until January 1993. Ms. Reich has served as a
director of the Bank since 1993 and as a Managing Director of the Bank since
June 1994, and served as Chief Financial Officer of the Bank from May 1990 to
May 1997. Ms. Reich served as Senior Vice President of the Bank from May 1993 to
June 1994 and Vice President of the Bank from January 1990 to May 1993. From
1987 to 1990, Ms. Reich served as an officer of another subsidiary of Ocwen
Financial. Prior to 1987, Ms. Reich was employed by KPMG Peat Marwick LLP, most
recently in the position of Manager.
Mr. Benjamin W. Navarro has been a director of the Company since May
1998. Mr. Navarro is Managing Director of Sherman Financial Group, LLC, a
company founded by Mr. Navarro in early 1997 to purchase and securitize
distressed debt. From 1988 to 1997, Mr. Navarro served as a Vice President and
as the Co-Head of Mortgage Sales and Trading for Citicorp, with responsibility
for the purchase and sale of residential and commercial mortgages to and from
institutional clients such as thrifts, insurance companies, commercial banks,
pension funds and money managers. Prior to joining Citicorp, Mr. Navarro was an
associate with Goldman Sachs & Co. from 1986 to 1988, where he worked in both
the Sales and Trading areas of the mortgage group.
Mr. Stuart L. Silpe has served as a director of the Company since
November 1998. Mr. Silpe has served as Executive Director, Financial
Institutions Group, CIBC Oppenheimer, New York since 1996. Prior to this
appointment, he has had almost 17 years of mortgage finance experience,
including senior positions with several major financial institutions such as:
Prudential Securities, from 1991 to 1995, Morgan Stanley and Merrill Lynch. At
Prudential Securities, he was Director, Real Estate and Financial Services Group
with business development responsibilities for depository institutions and
specialty finance companies such as banks, savings and loans and mortgage
banking companies.
Mr. Peter M. Small has been a director of the Company since May 1997. Mr.
Small served as President and Chief Executive Officer of Spaulding and Slye
Company, a commercial real estate company, for fifteen years and served as
Chairman of its Board of directors from 1992 to 1996. While he was president of
Spaulding and Slye Company, Mr. Small directed the development of over 100
commercial projects and later repositioned the company from a development
company to a service company providing consulting, asset management and real
estate services to major corporations and financial institutions. Currently, Mr.
Small manages a property portfolio, advises and invests in young companies and
consults and speaks about planning and managing real estate organizations in
changing environments. He serves as a director of Bariston Partners, LLC,
Benchmark Assisted Living, LLC, Spaulding and Slye Properties Company and the
United Way of Massachusetts Bay. Mr. Small also serves as a Trustee of Bowdoin
College.
The background for the last five years of each executive officer of the
Company who is not a director is set forth below.
Mr. John R. Erbey has served as Senior Managing Director of the Company
since May 1998 and as Secretary of the Company since May 1997, and served as
Managing Director of the Company from May 1997 to May 1998. Mr. Erbey also has
served as Senior Managing Director of Ocwen Financial since May 1998 and
Secretary of Ocwen Financial since June 1989 and serves as a director and/or
officer of many subsidiaries of the Company and Ocwen Financial. Mr. Erbey
served as Managing Director of Ocwen Financial from January 1988 to May 1998 and
served as Senior Vice President of Ocwen Financial from June 1989 until January
1993. Mr. Erbey also serves as Chairman,
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General Counsel and Chief Executive Officer of Ocwen Technology Xchange, a
newly-formed subsidiary of Ocwen Financial which will provide software products
to the mortgage and real estate industries. Mr. Erbey has served as a director
of the Bank since 1990, as a Managing Director of the Bank since May 1993 and as
Secretary of the Bank since July 1989. Previously, he served as Senior Vice
President of the Bank from June 1989 until May 1993. From 1971 to 1989, he was a
member of the Law Department of Westinghouse Electric Corporation and held
various management positions, including Associate General Counsel and Assistant
Secretary from 1984 to 1989. Previously, he held the positions of Assistant
General Counsel of the Industries and International Group and Assistant General
Counsel of the Power Systems Group of Westinghouse.
Mr. John R. Barnes has served as Senior Vice President of the Company
since May 1997. Mr. Barnes also has served as Senior Vice President of Ocwen
Financial and the Bank since May 1994 and served as Vice President of the same
from October 1989 to May 1994 and serves as an officer and/or director of many
subsidiaries of the Company and Ocwen Financial. Mr. Barnes was a Tax Partner in
the firm of Deloitte Haskins & Sells from 1986 to 1989 and in the firm of Arthur
Young & Co. from 1979 to 1986. Mr. Barnes was the Partner in Charge of the
Cleveland Office Tax Department of Arthur Young & Co. from 1979 to 1984.
Mr. Mark S. Zeidman has served as Senior Vice President and Chief
Financial Officer of the Company since June 1997. Mr. Zeidman also has served as
Senior Vice President and Chief Financial Officer of Ocwen Financial and the
Bank since May 1997, and he serves as an officer of many subsidiaries of the
Company and Ocwen Financial. From 1986 until May 1997, Mr. Zeidman was employed
by Nomura Securities International, Inc., most recently as Managing Director.
Prior to 1986, Mr. Zeidman held positions with Shearson Lehman Brothers and
Coopers & Lybrand. Mr. Zeidman is a Certified Public Accountant.
COMPENSATION OF DIRECTORS
The Company pays the Independent Directors an annual fee of $20,000, plus
an additional fee of $1,000 for each additional meeting of the Board of
Directors attended in person after the first four meetings. In addition, an
annual fee of $2,000 is paid to the chair of any committee of the Board. The
Company currently pays no cash compensation to its directors who are not
Independent Directors. The Company reimburses all directors for their
out-of-pocket expenses in connection with their service on the Board of
Directors.
EXECUTIVE COMPENSATION
The Company has not paid, and does not intend to pay, any annual
compensation to the Company's executive officers for their services as executive
officers. Moreover, the Company has not granted, and does not intend to grant,
any options to purchase shares of stock to the executive officers or directors.
Notwithstanding that the Company has no employees and does not pay its executive
officers any compensation, the Board of Directors has formed a Compensation
Committee, comprised of the Independent Directors, to handle any compensation
matters. The Board of Directors has the discretion, among other things, to
change the base management fee payable to the Manager.
LIMITATION ON LIABILITY OF MANAGER AND DIRECTORS AND OFFICERS OF THE COMPANY
The Articles of Incorporation of the Company contain a provision which,
subject to certain exceptions, eliminates the liability of a director or officer
to the Company or its shareholders for monetary damages for any breach of duty
as a director or officer. This provision does not eliminate such liability to
the extent that it is proved that the director or officer engaged in willful
misconduct or a knowing violation of criminal law or of any federal or state
securities law.
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The Company will indemnify the Manager and its directors and officers
from any action or claim brought or asserted by any party by reason of any
allegation that the Manager or one or more of its directors or officers is
otherwise accountable or liable for the debts or obligations of the Company or
its affiliates. In addition, the Manager and its directors and officers will not
be liable to the Company, and the Company will indemnify the Manager and its
directors and officers, for acts performed pursuant to the Management Agreement,
except for claims arising from acts constituting bad faith, willful misconduct,
gross negligence or reckless disregard of their duties under the Management
Agreement. See "Management of Operations-Limits of Responsibility."
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of the date indicated by (i) each
director of the Company, (ii) all directors and current executive officers of
the Company as a group and (iii) all persons known by the Company to own
beneficially 5% or more of the outstanding Common Stock. The table is based upon
information supplied to the Company by directors, officers and principal
stockholders and filings under the Exchange Act.
<TABLE>
<CAPTION>
Shares of Common Stock
Beneficially Owned as of
December 31, 1998
--------------------------------------------------------------
Name of Beneficial Owner Amount(1) Percent(1)
-------------------------------------------------------------- ---------------------------------- --------------------------
<S> <C> <C>
Ocwen Financial Corporation
1675 Palm Beach Lakes Blvd.
West Palm Beach, FL 33401 2,131,425(2) 11.0%
The Capital Group Companies, Inc.
333 South Hope Street
Los Angeles, CA 90071 1,264,500(3) 6.7
J. P. Morgan & Co. Incorporated
60 Wall Street
New York, NY 10260 1,017,300(4) 5.4
Directors:
William C. Erbey 2,131,425(5) 11.0
Benjamin W. Navarro 10,000 *
Christine A. Reich 15,500(6) *
Stuart L. Silpe(7) 0 *
Peter M. Small 60,000 *
All directors and executive officers as a
group (9 persons) 2,220,125 11.4%
</TABLE>
(Footnotes on following page)
- ----------------
* Less than 1%
(1) For purposes of this table, pursuant to rules promulgated under the
Exchange Act an individual is considered to beneficially own any shares of
Common Stock if he or she directly or indirectly has or shares: (i) voting
power, which includes the power to vote or to direct the voting of the shares,
or (ii) investment power, which includes the power to dispose or direct the
disposition of the shares. Unless otherwise indicated, (i) an individual has
sole voting
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power and sole investment power with respect to the indicated shares and (ii)
individual holdings amount to less than 1% of the outstanding shares of Common
Stock.
(2) Based on records available to the Company as well as information
contained in a Schedule 13D filed with the Commission by Ocwen Financial, the
Manager, IMIHC and William C. Erbey on March 4, 1998. Includes: (a) 113,300
shares held by FF Plaza Partners ("FF Plaza"), a partnership of which Mr. Erbey,
his spouse and Delaware Permanent Corporation, a corporation wholly-owned by Mr.
Erbey, are general partners; (b) 1,540,000 shares owned directly by IMIHC and as
to which Ocwen Financial and Mr. Erbey share voting and investment power; and
(c) options granted to the Manager to acquire 478,125 shares. See "Management of
Operations - Stock Options." Mr. Erbey has disclaimed beneficial ownership of
the 1,540,000 shares owned of record by IMIHC and the options granted to the
Manager to acquire 478,125 shares.
(3) Based on information contained in Schedule 13D filed with the Commission
as of December 31, 1997 by The Capital Group Companies, Inc. ("Capital Group"),
the parent of a group of investment management companies, and Capital Guardian
Trust Company ("Capital Group Trust"), one of those investment management
companies. Includes: 1,227,500 shares owned by Capital Group Trust and 37,000
shares owned by direct or indirect subsidiaries of Capital Group ("Capital
Subsidiaries"). All such shares are owned by accounts under the discretionary
investment management of Capital Group Trust or the Subsidiaries. Capital Group
has no investment or voting power over any of such securities.
(4) Based on information contained in Schedule 13G filed with the Commission
as of December 31, 1997 by J.P. Morgan & Co. Incorporated, a parent holding
company of subsidiaries, including Morgan Guaranty Trust Company of New York,
J.P. Morgan Investment Management, Inc. and J.P. Morgan Florida Federal Savings
Bank. Includes: 887,250 shares as to which sole voting power is claimed, 977,700
shares as to which sole disposal power is claimed and 39,600 shares as to which
shared voting and disposal power is claimed.
(5) Includes: (a) 113,300 shares held by FF Plaza; (b) 1,540,000 shares owned
directly by IMIHC and as to which William C. Erbey shares voting and investment
power; and (c) options granted to the Manager to acquire 478,125 shares. Mr.
Erbey has disclaimed beneficial ownership of the 1,540,000 shares owned of
record by IMIHC and the options granted to the Manager to acquire 478,125
shares.
(6) The shares are held by the CPR Family Limited Partnership pursuant to
which Christine A. Reich and her husband share voting and investment power. Ms.
Reich has disclaimed beneficial ownership of such shares.
(7) Elected a director of the Company in November 1998.
DESCRIPTION OF NEW NOTES
GENERAL
Pursuant to the terms of the Indenture between the Company and Norwest
Bank Minnesota, National Association (the "Trustee"), the Company has issued the
Old Notes and the Regulation S Notes and will issue the New Notes. The Indenture
has been qualified under the Trust Indenture Act and the terms of the Notes
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act. The Notes are subject to all such terms,
and Holders of Notes are referred to the Indenture and the Trust Indenture Act
for a statement thereof. The following summary of certain provisions of the
Indenture does not purport to be complete and is qualified in its entirety by
reference to the Indenture, including the definitions therein of certain terms
used below. Copies of the Indenture are available as set forth below under the
caption "-- Additional Information." The definitions of certain terms used in
the Indenture and in the following summary are set forth below under "-- Certain
Definitions."
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The Notes are limited in aggregate original principal amount to $150
million, including the Old Notes, the Regulation S Notes and the New Notes. Upon
any exchange of Old Notes for New Notes pursuant to the Exchange Offer, the Old
Notes so exchanged shall be canceled and shall no longer be deemed outstanding
for any purpose. The New Notes will rank on a parity with the Old Notes. The Old
Notes, the Regulation S Notes and the New Notes constitute one class for all
purposes under the Indenture, including without limitation amendments, waivers,
redemptions and Offers to Purchase, and for purposes of this description of the
Notes all references herein to "Notes" shall be deemed to refer collectively to
Old Notes and New Notes, unless the context otherwise requires.
The Notes rank on a parity in right of payment with all existing and
future unsecured and unsubordinated indebtedness of the Company and senior in
right of payment to all existing and future subordinated indebtedness of the
Company. The Notes are effectively subordinated to the claims of any secured
lender to the extent of the value of the collateral securing such indebtedness.
Because the Company conducts all of its operations through the Operating
Partnership and its qualified REIT subsidiaries, the right of the Company (and
therefore the right of the Company's creditors and shareholders) to participate
in any distribution of the assets or earnings of its subsidiaries is subject to
the prior claims of creditors of such subsidiaries, including any claims of the
Company as a creditor (including pursuant to the Operating Partnership Note) to
the extent such claims may be recognized. As of September 30, 1998, the
aggregate amount of Debt and other obligations of the Company's Subsidiaries
that would effectively rank senior in right of payment to the obligations of the
Company under the Notes was approximately $503.0 million.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $150 million and
will mature on July 1, 2005. Interest on the Notes accrues at the rate of 11
1/2% per annum and will be payable semi-annually in arrears on each January 1
and July 1 (each, an "Interest Payment Date") to Holders of record on the
immediately preceding December 15 and June 15, respectively (each a "Record
Date"). Interest is payable in cash. Interest on the Notes accrues from the most
recent date to which interest has been paid or, if no interest has been paid,
from the date of original issuance. Interest is computed on the basis of a
360-day year consisting of twelve 30-day months. The Notes are issuable in
principal amounts of $1,000 and integral multiples thereof.
OPTIONAL REDEMPTION
The Notes are not redeemable at the Company's option prior to July 1,
2002. The Notes may be redeemed in whole or in part at the option of the Company
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:
<TABLE>
<CAPTION>
REDEMPTION
YEAR RATE
- ---- ----
<S> <C>
2002............................... 105.750%
2003............................... 102.875
2004 and thereafter................ 100.000
</TABLE>
Notwithstanding the foregoing, during the first 36 months after the Closing
Date, the Company may, on any one or more occasions, 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 the 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; and provided
further, that any such redemption shall occur within 90 days of the date of
closing of such offering of Common Stock of the Company.
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SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection
of Notes for redemption generally will be made by the Trustee on a pro rata
basis, by lot or by such method as the Trustee shall deem fair and appropriate.
Notices of redemption shall be mailed by first class mail at least 30 but not
more than 60 days before the redemption date to each Holder of Notes to be
redeemed at its registered address. If any Note is to be redeemed in part only,
the notice of redemption that relates to such Note shall state the portion of
the principal amount thereof to be redeemed. A new Note in principal amount
equal to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Note. On and after the redemption
date, interest will cease to accrue on Notes or portions of them called for
redemption.
REPURCHASE AT THE OPTION OF HOLDERS
Upon the occurrence of a Change of Control (as defined under "- Certain
Definitions"), each Holder of Notes will have the right to require the Company
to repurchase all or any part of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash equal
to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest, if any, thereon to the date of purchase (the "Change of Control
Payment"). Within 10 days following any Change of Control, the Company will mail
a notice to each Holder describing the transaction or transactions that
constitute the Change of Control and offering to repurchase Notes pursuant to
the procedures required by the Indenture and described in such notice. The
Company will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent such laws
and regulations are applicable in connection with the repurchase of the Notes as
a result of a Change of Control. To the extent that the provisions of any
securities laws or regulations conflict with the foregoing provisions of the
Indenture, the Company will comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations under the
Indenture by virtue thereof.
On the date on which such Change of Control Payment Date is required to
be made, the Company will, to the extent lawful, (1) accept for payment all
Notes or portions thereof properly tendered pursuant to the Change of Control
Offer, (2) deposit with the paying agent designated by the Company (the "Paying
Agent") an amount equal to the Change of Control Payment in respect of all Notes
or portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes or portions thereof being repurchased by the Company. The
Paying Agent will promptly mail to each holder of Notes so tendered the Change
of Control Payment for such Notes, and the Trustee will promptly authenticate
and mail (or cause to be transferred by book entry) to each Holder a new Note
equal in principal amount to any unpurchased portion of the Notes surrendered,
if any. The Company will publicly announce the results of the Change of Control
Offer on or as soon as practicable after the date on which such Change of
Control occurs.
The Change of Control provisions described above will be applicable
whether or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit the Holders of the Notes to require that the
Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar transaction. The Change of Control provisions of the
Indenture and the Company's obligation to repurchase or redeem the Notes
pursuant to a Change of Control offer may not be amended or waived without the
consent of the Holders of a majority in principal amount of the then outstanding
Notes. See "-Amendment, Supplement and Waiver."
The definition of Change of Control includes a phrase relating to the
sale, lease, transfer, conveyance or other disposition of "all or substantially
all" of the assets of the Company and its Restricted Subsidiaries. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under the laws of
Virginia, under which the Company is incorporated, or the laws of New York,
which governs the Indenture. Accordingly, the ability of a Holder of Notes to
require the Company to repurchase such Notes as a result of a sale, lease,
transfer, conveyance or other disposition of less than all of the assets of the
Company and its Restricted Subsidiaries taken as a whole to another Person or
group may be uncertain.
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Any future credit agreements or other agreements relating to Debt to
which the Company becomes a party may prohibit the Company from purchasing any
Note prior to its maturity, and may also provide that certain change of control
events with respect to the Company would constitute a default thereunder. In the
event a Change of Control occurs at a time when the Company is prohibited from
purchasing Notes, the Company would seek the consent of its lenders to the
purchase of Notes or could attempt to refinance the borrowings that contain such
prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company will remain prohibited from purchasing Notes. In such
case, the Company's failure to purchase tendered Notes would constitute an Event
of Default under the Indenture.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
CERTAIN COVENANTS
LIMITATION ON RESTRICTED PAYMENTS. (a) The Indenture provides that the
Company will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, take any of the following actions:
(i) declare or pay any dividend or make any payment or distribution on
account of the Company's Capital Stock or the Capital Stock of Restricted
Subsidiaries (including, without limitation, any payment in connection with any
merger or consolidation involving the Company or any of its Restricted
Subsidiaries) or make any payment or distribution to or for the benefit of the
direct or indirect holders of the Company's Capital Stock or the Capital Stock
of Restricted Subsidiaries (other than (A) dividends or distributions payable in
its Capital Stock (other than Disqualified Stock) and (B) dividends or
distributions payable to the Company or a Restricted Subsidiary of the Company
(and if such Restricted Subsidiary is not a Wholly-Owned Subsidiary, to its
other holders of Capital Stock on a pro rata basis);
(ii) purchase, redeem or otherwise acquire or retire for value any
Capital Stock of the Company or the Capital Stock of Restricted Subsidiaries
(other than any such Capital Stock owned by the Company or any of its Restricted
Subsidiaries and other than the acquisition of Capital Stock in Restricted
Subsidiaries of the Company solely in exchange for Capital Stock (other than
Disqualified Stock) of the Company);
(iii) make any principal payment on, or repurchase, redeem, defease or
otherwise acquire or retire for value, prior to any scheduled principal payment,
sinking fund payment or maturity, any Subordinated Debt; or
(iv) make any Investment in any Person other than a Permitted
Investment;
(each of the foregoing actions described in clauses (i) through (iii) above,
other than any such action that is a Permitted Payment (as defined below), is
referred to herein as a "Restricted Payment"), unless immediately after giving
effect to the proposed Restricted Payment (in the event such Restricted Payment
is made in other than cash, the amount of such Restricted Payment shall be as
determined in good faith by the Board of Directors of the Company, whose
determination shall be conclusive and evidenced by a Board Resolution), (1) no
Default or Event of Default shall have occurred and be continuing or would occur
as a consequence thereof, (2) the Company could, at the time of such Restricted
Payment and after giving pro forma effect thereto, incur at least $1.00 of
additional Debt (other than Permitted Indebtedness) pursuant to the "Limitation
on Incurrence of Debt" covenant, and (3) the aggregate amount of all such
Restricted Payments by the Company and its Restricted Subsidiaries declared or
made after the Closing Date does not exceed the sum of:
(A) (i) so long as the Company maintains its status as a REIT under the
Code, 100% of the "real estate investment trust taxable income" of the Company
as determined under Section 857(b)(2) of the Code or any successor provision
computed prior to taking into account any deductions or exclusions allowed
pursuant to Section 857(b)(2) of the Code
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and computed after giving effect to any net deficit in "real estate investment
trust taxable income" for prior years, to the extent such deficit is deductible
as a net operating loss carryforward for the year of determination, accrued on a
cumulative basis during the period commencing on July 1, 1998 and ending on the
last day of the Company's most recent fiscal quarter ending prior to the date of
such Restricted Payment or (ii) in the event the Company no longer qualifies as
a REIT under the Code, the sum of (a) 50% of the aggregate cumulative Adjusted
Consolidated FFO (or if such aggregate cumulative Adjusted Consolidated FFO
shall be a loss, minus 100% of such loss) accrued on a cumulative basis during
the period commencing on the first day of the fiscal quarter following the
failure of the Company to qualify as a REIT under the Code and ending on the
last day of the Company's most recent fiscal quarter ending prior to the date of
such Restricted Payment and (b) 100% of any cumulative amount available under
clause (i) above for the period commencing on July 1, 1998 and ending on the
last day of the Company's most recent fiscal quarter ending prior to the failure
of the Company to qualify as a REIT under the Code (or minus 100% of any such
amount if a deficit); plus
(B) the aggregate of the Net Cash Proceeds and the Fair Market Value of
property not constituting Net Cash Proceeds received by the Company or the
Operating Partnership after the Closing Date from the issuance or sale (other
than to the Company or any of its Restricted Subsidiaries) of Capital Stock
(other than Disqualified Stock) of the Company or the Operating Partnership or
other capital contributions subsequent to the Closing Date (other than the Net
Cash Proceeds received from an issuance or sale of such Capital Stock to an
employee stock ownership plan or similar trust to the extent such sale to an
employee stock ownership plan or similar trust is financed by loans from or
guaranteed by the Company or any Restricted Subsidiary unless such loans have
been repaid with cash on or prior to date of determination); plus
(C) the aggregate of the Net Cash Proceeds and the Fair Market Value of
property not constituting Net Cash Proceeds received by the Company or the
Operating Partnership after the Closing Date from the issuance or sale (other
than to the Company or any of its Restricted Subsidiaries) of Disqualified Stock
or debt securities of the Company or the Operating Partnership that have been
converted into Capital Stock (other than Disqualified Stock) of the Company or
the Operating Partnership, plus or minus, as applicable, the amount of any cash,
or other property (other than Capital Stock) received or distributed, as
applicable, upon such conversion or exchange; plus
(D) 100% of the net reduction in Restricted Investments, subsequent to
the Closing Date, in any Person, resulting from payments of interest on Debt,
dividends, repayments of loans or advances, or other transfers of property (but
only to the extent such interest, dividends, repayments or other transfers of
property are not included in the calculation of "real estate investment trust
taxable income" or Adjusted Consolidated FFO, as the case may be), in each case
to the Company or any Restricted Subsidiary from any Person or from
redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries (valued
in each case as provided in the definition of "Investments"), not to exceed in
the case of any Person the amount of Restricted Investments in such Person which
were made subsequent to the Closing Date by the Company or any Restricted
Subsidiary and which were treated as a Restricted Payment; plus
(E) $10.0 million.
(b) Notwithstanding paragraph (a) above, the Company and any Restricted
Subsidiary may take the following actions (each being referred to as a
"Permitted Payment"):
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date such declaration complied with the
provisions of paragraph (a) above and such payment shall be deemed to have been
paid on such date of declaration for purposes of the calculation required by the
foregoing paragraph (a);
(ii) the purchase, redemption or other acquisition or retirement for
value of any Capital Stock of the Company in exchange for, or out of the Net
Cash Proceeds of, a substantially concurrent issuance and sale of other Capital
Stock of the Company (other than any Disqualified Stock);
(iii) any distribution which is necessary to maintain the Company's
status as a REIT under the Code;
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(iv) make any principal payment on, or purchase, redeem, defease or
otherwise acquire or retire for value any Subordinated Debt in exchange for, or
out of the Net Cash Proceeds of, a substantially concurrent issuance and sale
(other than to a Restricted Subsidiary) of shares of Capital Stock of the
Company (other than Disqualified Stock); and
(v) make any principal payment on, or purchase, redeem, defease or
otherwise acquire or retire for value any Subordinated Debt (referred to herein
as the "Subordinated Debt being refinanced") in exchange for, or out of the Net
Cash Proceeds of a substantially concurrent incurrence (other than to a
Restricted Subsidiary) of, Subordinated Debt of the Company so long as (A) the
principal amount of such new Subordinated Debt does not exceed the principal
amount (or, if such Subordinated Debt being refinanced provides for an amount
less than the principal amount thereof to be due and payable upon a declaration
of acceleration thereof, such lesser amount as of the date of determination) of
the Subordinated Debt being refinanced, plus the amount of any stated premium
required to be paid in connection with such refinancing pursuant to the terms of
the Subordinated Debt being refinanced or the amount of any premium actually
paid at such time to refinance the Subordinated Debt as determined in good faith
as being necessary by the Company, or less the amount of any discount from the
principal amount of such Subordinated Notes expected to be deducted from the
amount payable to the holders of such Subordinated Debt in connection with such
refinancing, plus, in either case, the amount of reasonable legal, accounting,
printing and other similar expenses of the Company incurred in connection with
such refinancing, (B) such new Subordinated Debt is subordinated to the Notes to
the same extent as such Subordinated Debt being refinanced and (C) (1) if the
Subordinated Debt being refinanced has an Average Life shorter than that of the
Notes or a final maturity date earlier than the final maturity date of the
Notes, such new Subordinated Debt shall have an Average Life no shorter than the
Average Life of such refinanced Subordinated Debt and a final maturity date no
earlier than the final maturity date of such refinanced Subordinated Debt or (2)
in all other cases, each maturity of principal (or any required repurchase,
redemption or sinking fund payments) of such new Subordinated Debt shall be on
or after the final maturity date of principal of the Notes.
The actions described in clauses (i) and (iii) of this paragraph (b) shall be
Restricted Payments that shall be permitted to be taken in accordance with this
paragraph (b) but shall reduce the amount that would otherwise be available for
Restricted Payments under paragraph (a), and the actions described in clauses
(ii), (iv) and (v) of this paragraph (b) shall be Restricted Payments that shall
be permitted to be taken in accordance with this paragraph and shall not reduce
the amount that would otherwise be available for Restricted Payments under
paragraph (a).
LIMITATION ON INCURRENCE OF DEBT. The Indenture provides that the Company
will not, and will not permit any Restricted Subsidiary to, incur or issue any
Debt (including Acquired Debt) other than Permitted Indebtedness, provided,
however, that the Company and Restricted Subsidiaries may incur or issue Debt if
at the time of such incurrence or issuance each of the following is satisfied:
(a) the ratio of Adjusted FFO Available for Fixed Charges to Adjusted
Fixed Charges for the period consisting of the four full consecutive fiscal
quarters most recently ended prior to the date on which such additional Debt is
to be incurred or issued (after giving pro forma effect to (i) the incurrence or
issuance of such Debt and (if applicable) the application of the net proceeds
therefrom, including to refinance other Debt, as if such Debt was incurred or
issued, and the application of such proceeds occurred, on the first day of such
four-quarter period, (ii) the incurrence, issuance, repayment or retirement of
any other Debt by the Company and its Restricted Subsidiaries since the first
day of such four-quarter period as if such Debt was incurred, issued, repaid or
retired on the first day of such four-quarter period (except that, in making
such computation, the amount of Debt under any revolving credit facility shall
be computed based upon the average balance of such Debt during such four-quarter
period), and (iii) the acquisition (whether by purchase, merger or otherwise) or
disposition (whether by sale, merger or otherwise) of any company, entity or
business acquired or disposed of by the Company or its Restricted Subsidiaries
(including the operations thereof), as the case may be, since the first day of
such four-quarter period, as if such acquisition or disposition occurred on the
first day of such four-quarter period) shall be greater than 1.25 to 1;
(b) the Company's Adjusted Total Debt to Capital Ratio as of the end of
the quarter most recently ended prior to the date of such incurrence or
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issuance is less than 4.0 to 1 (after giving pro forma effect to the incurrence
or issuance of such Debt and (if applicable) the application of the net proceeds
therefrom, including to refinance other Debt, as if such Debt was incurred or
issued, and the application of such proceeds occurred, on the last day of such
quarter); and
(c) the Company's Adjusted Senior Debt to Capital Ratio as of the end of
the quarter most recently ended prior to the date of such incurrence or issuance
is less than 3.5 to 1 (after giving pro forma effect to the incurrence or
issuance of such Debt and (if applicable) the application of the net proceeds
therefrom, including to refinance other Debt, as if such Debt was incurred or
issued, and the application of such proceeds occurred, on the last day of such
quarter).
LIMITATIONS ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES. The Indenture provides that the Company will not, and will not
permit any of its Restricted Subsidiaries to, create, assume or otherwise cause
or suffer to exist or to become effective any consensual encumbrance or
restriction on the ability of any such Restricted Subsidiary to
(a) pay any dividends or make any other distribution on its Capital Stock
to the Company or any of its Restricted Subsidiaries;
(b) make payments in respect of any Debt owed to the Company or any other
Restricted Subsidiary; or
(c) make loans or advances to the Company or any Restricted Subsidiary or
to guarantee Debt of the Company or any other Restricted Subsidiary;
other than, in the case of (a), (b) and (c),
(1) restrictions existing under agreements in effect on the date of the
Indenture;
(2) consensual encumbrances or restrictions binding upon any Person at
the time such Person becomes a Restricted Subsidiary of the Company so long as
such encumbrances or restrictions (i) are not created, incurred or assumed in
contemplation of such Person becoming a Restricted Subsidiary and (ii) do not
encumber or restrict the Company or any other Restricted Subsidiary of the
Company;
(3) restrictions with respect to a Restricted Subsidiary imposed pursuant
to an agreement which has been entered into for the sale or disposition of all
or substantially all the assets (which term may include the Capital Stock) of
such Restricted Subsidiary;
(4) restrictions on the transfer of assets which are subject to Liens;
and
(5) restrictions existing under any agreement which refinances or
replaces any of the agreements containing the restrictions in clauses (1) and
(2); provided that the terms and conditions of any such restrictions are not
materially less favorable to the Holders than those under the agreement
evidencing or relating to the Debt or Disqualified Stock refinanced.
LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Indenture provides that
the Company will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, enter into any transaction or series of related
transactions (including without limitation, the sale, purchase, exchange or
lease of assets, property or services) with any Affiliate of the Company (except
that the Company and any of its Restricted Subsidiaries may enter into any
transaction or series of related transactions with any Restricted Subsidiary of
the Company without limitation under this covenant) unless: (i) such transaction
or series of related transactions is on terms that are no less favorable to the
Company or such Restricted Subsidiary, as the case may be, than would be
available in a comparable transaction in an arm's length dealing with a Person
that is not such an Affiliate or, in the absence of such a comparable
transaction, on terms that the Disinterested Directors determine in good faith
(whose determination shall be conclusive) would be
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offered to a Person that is not an Affiliate; (ii) with respect to any
transaction or series of related transactions involving aggregate payments in
excess of $3.0 million, such transaction or series of related transactions has
been approved by a majority of the Disinterested Directors of the Board of
Directors of the Company; and (iii) with respect to any transaction or series of
related transactions involving aggregate payments in excess of $10.0 million,
(x) in the case of a transaction involving real property, the aggregate rental
or sale price of such real property shall be the fair market value of such real
property as determined in a written opinion by an independent, nationally
recognized expert with experience in appraising the terms and conditions of the
type of transaction or series of related transactions for which approval is
required and (y) in all other cases, the Company shall have received a written
opinion of an independent, nationally-recognized expert with experience in
appraising the terms and conditions of the type of transaction or series of
related transactions for which approval is required to the effect that the
transaction or series of related transactions are fair to the Company or such
Restricted Subsidiary from a financial point of view. The limitations set forth
in this paragraph will not apply to (i) transactions entered into pursuant to
any agreement already in effect on the date of the Indenture and any renewals or
extensions thereof not involving modifications materially adverse to the Company
or any Restricted Subsidiary, (ii) normal banking relationships with an
Affiliate on an arms' length basis, (iii) any employment agreement, stock
option, employee benefit, indemnification, compensation, business expense
reimbursement or other employment-related agreement, arrangement or plan entered
into by the Company or any of its Restricted Subsidiaries either (a) in the
ordinary course of business and consistent with the past practice of the Company
or such Restricted Subsidiary or (b) which agreement, arrangement or plan was
adopted by the Board of Directors of the Company or such Restricted Subsidiary
(including a majority of the Disinterested Directors), as the case may be, (iv)
any payment made in accordance with the covenant entitled "-- Limitation on
Restricted Payments," (v) transactions pursuant to the Management Agreement
which are in compliance with the terms of the Management Agreement and the
Guidelines as in effect on the Closing Date and (vi) any transaction or series
of related transactions in which the total amount involved does not exceed
$250,000.
MERGER, CONSOLIDATION OR SALE OF ALL OR SUBSTANTIALLY ALL ASSETS. The
Indenture provides that the Company may not, directly or indirectly, consolidate
or merge with or into (whether or not the Company is the surviving corporation),
or assign, transfer, lease, convey or otherwise dispose of all or substantially
all of its properties or assets, in one or more related transactions, to another
corporation, person or entity unless (i) the Company is the surviving
corporation or the entity or the Persons formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other deposition shall have been made
(the "Surviving Entity") is a Person organized and existing under the laws of
the United States of America, any State thereof or the District of Columbia;
(ii) if the Company is not the Surviving Entity, the Surviving Entity expressly
and unconditionally assumes by supplemental indenture, executed and delivered to
the Trustee in form reasonably satisfactory to the Trustee, all obligations of
the Company on the Notes; (iii) immediately after such transaction no Default or
Event of Default exists; (iv) except in the case of a merger of a Wholly-Owned
Subsidiary of the Company with or into the Company, the Company or the entity or
Person formed by or surviving any such consolidation or merger (if other than
the Company), or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made (A) will have a Consolidated Net Worth
immediately after the transaction equal to or greater than the Consolidated Net
Worth of the Company immediately preceding the transaction and (B) will,
immediately after such transaction after giving pro forma effect thereto and any
related financing transactions as if the same had occurred as of the end of the
applicable quarter, be permitted to incur at least $1.00 of additional Debt
pursuant to the covenant described above under the caption "-- Limitation on
Incurrence of Debt;" and (v) the Company or the Surviving Entity, as applicable,
shall have delivered or caused to be delivered to the Trustee, in form and
substance reasonably satisfactory to the Trustee, an officers' certificate and
an opinion of counsel, each to the effect that such consolidation, merger, sale,
assignment, transfer, lease, conveyance or other disposition complies with the
Indenture and all conditions precedent provided in clauses (i) through (v) above
have been complied with.
MAINTENANCE OF GENERAL PARTNER INTEREST. The Indenture provides that the
Company will at all times own, directly or indirectly through one or more
Wholly-Owned Subsidiaries which are Restricted Subsidiaries, all of the
outstanding general partnership interests in the Operating Partnership (and any
successor thereto).
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BUSINESS ACTIVITIES. The Indenture provides that the Company will not,
and will not permit any Restricted Subsidiary to, engage in any businesses other
than Permitted Businesses, except to the extent as would not be material to the
Company and its Restricted Subsidiaries taken as a whole.
REPORTS. The Indenture provides that, whether or not required by the
rules and regulations of the Commission, so long as any Notes are outstanding,
the Company will furnish to the Holders of Notes (i) all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Forms 10-Q and 10-K if the Company were required to file such
forms, including "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and, with respect to the annual information only, a
report thereon by the Company's certified independent accountants and (ii) all
current reports that would be required to be filed with the Commission on Form
8-K if the Company were required to file such reports.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (1) default by the Company in the payment of interest on the Notes when
the same becomes due and payable and the default continues for a period of 30
days; (2) default by the Company in the payment of the principal of or premium,
if any, on the Notes when the same becomes due and payable at maturity, upon
redemption or otherwise; (3) failure by the Company to comply with the
provisions described under the caption "-- Change of Control;" (4) failure by
the Company for 60 days after notice to comply with any of its other agreements
in the Indenture or the Notes; (5) default under any mortgage, indenture or
instrument under which there may be issued or by which there may be secured or
evidenced any Debt for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any of its
Restricted Subsidiaries), whether such Debt or guarantee now exists, or shall be
created hereafter, which default is caused by a failure to pay principal of or
premium, if any, or interest on such Debt prior to the expiration of the grace
period provided in such Debt on the date of such default (a "Payment Default")
and the principal amount of such Debt, together with the principal amount of any
other such Debt under which there has been a Payment Default, aggregates $10.0
million or more; (6) a final judgment or final judgments for the payment of
money are entered by a court or courts of competent jurisdiction against the
Company or any Restricted Subsidiary and such judgment or judgments remain
unpaid, undischarged or unstayed for a period of 60 days, provided that the
aggregate of all such undischarged judgments exceeds $10.0 million; and (7)
certain events of bankruptcy or insolvency with respect to the Company or any
Significant Subsidiary.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency with respect to the Company or any Significant
Subsidiary, all outstanding Notes will become due and payable without further
action or notice. Holders of the Notes may not enforce the Indenture or the
Notes except as provided in the Indenture. Subject to certain limitations,
Holders of a majority in principal amount of the then outstanding Notes may
direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from Holders of the Notes notice of any continuing Default or Event of
Default (except a Default or Event of Default relating to the payment of
principal or interest) if it determines that withholding notice is in their
interest.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest or premium on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default to deliver to the Trustee a
statement specifying such Default or Event of Default.
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NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND SHAREHOLDERS
No director, officer, employee, incorporator or shareholder of the
Company, as such, shall have any liability for any obligations of the Company
under the Notes or the Indenture or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each Holder of Notes by accepting
a Note waives and releases all such liability. The waiver and release are part
of the consideration for issuance of the Notes.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
on such Notes when such payments are due from the trust referred to below, (ii)
the Company's obligations with respect to the Notes concerning issuing temporary
Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and the
maintenance of an office or agency for payment and to hold money for security
payments held in trust, (iii) the rights, powers, trusts, duties and immunities
of the Trustee, and the Company's obligations in connection therewith, and (iv)
the Legal Defeasance provisions of the Indenture. In addition, the Company may,
at its option and at any time, elect to have the obligations of the Company
released with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "-- Events of Default and Remedies" will no longer
constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in United States dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, any interest on the
outstanding Notes on the stated maturity or on the applicable redemption date,
as the case may be, and the Company must specify whether the Notes are being
defeased to maturity or to a particular redemption date; (ii) in the case of
Legal Defeasance, the Company shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that (A) the Company has received from, or there has been published by, the IRS
a ruling or (B) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and based
thereon such opinion of counsel shall confirm that, the Holders of the
outstanding Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Legal Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Legal Defeasance had not occurred; (iii) in the
case of Covenant Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders of the outstanding Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit; (v) such Legal
Defeasance or Covenant Defeasance will not result in a breach or violation of,
or constitute a default under any material agreement or instrument (other than
the Indenture) to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound; (vi) the Company must
have delivered to the Trustee an opinion of counsel to the effect that, as of
the date of such opinion, (A) the trust funds will not be subject to rights of
holders of Debt other than the Notes and (B) assuming no intervening bankruptcy
of the Company between the date of deposit and the 91st day following the
deposit and assuming no Holder of Notes is an insider of the Company, after the
91st day following the deposit, the trust funds will not be subject to the
effects of any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally under any applicable United States or
state law; (vii) the Company must deliver to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the intent
of preferring the Holders of Notes over the other creditors of the Company or
with the intent of defeating, hindering, delaying or defrauding creditors of the
Company or others; and (viii) the Company must deliver
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to the Trustee an Officers' Certificate and an opinion of counsel, each stating
that all conditions precedent provided for in the Indenture relating to the
Legal Defeasance or the Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Trustee may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company is not required to transfer or exchange
any Note selected for redemption. Also, the Company is not required to transfer
or exchange any Note for a period of 15 days before a selection of Notes to be
redeemed.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture
or the Notes may be amended or supplemented with the consent of the Holders of
at least a majority in principal amount of the Notes then outstanding
(including, without limitation, consents obtained in connection with a purchase
of, or tender offer or exchange offer for, Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a purchase of,
or tender offer or exchange offer for, Notes).
Without the consent of each Holder affected, an amendment or waiver may
not (with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the Notes (other than
provisions relating to the covenants described above under the caption "--
Change of Control"), (iii) reduce the rate or change the time for payment of
interest on any Note, (iv) waive a Default or Event of Default in the payment of
principal of or premium, if any, or interest on the Notes (except a recision of
acceleration of the Notes by the Holders of a majority in aggregate principal
amount of the Notes and a waiver of the payment default that resulted from such
acceleration), (v) make any Note payable in money other than that stated in the
Note, (vi) make any change in the provisions of the Indenture relating to
waivers of past Defaults or the rights of Holders of Notes to receive payments
of principal of or premium, if any, or interest on the Notes, (vii) waive a
redemption payment with respect to any Note (other than a payment required by
one of the covenants described above under the caption "-- Change of Control")
or (viii) make any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of
Notes, the Company and the Trustee may amend or supplement the Indenture or the
Notes to cure any ambiguity, defect or inconsistency, to provide for the
assumption of the Company's obligations to Holders of Notes in the case of a
merger or consolidation, to make any change that would provide any additional
rights or benefits to the Holders of Notes or that does not adversely affect the
legal rights under the Indenture of any such Holder, or to comply with
requirements of the Commission in order to maintain the qualification of the
Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Holders of a majority in principal amount of the then outstanding
Notes will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of Notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
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CERTAIN DEFINITIONS
"Acquired Debt" means with respect to any specified Person, (i) Debt of
any other Person existing at the time such other Person is merged with or into
or became a Subsidiary of such specified Person, including, without limitation,
Debt incurred in connection with, or in contemplation of, such other Person
merging with or into or becoming a Subsidiary of such specified Person and (ii)
Debt secured by a Lien encumbering any asset acquired by such specified Person.
"Adjusted Consolidated FFO" means Consolidated FFO, plus or minus (as the
case may be) (i) gains (losses) from sales of property in the ordinary course of
business, and (ii) minority interests in net income (loss) of the Operating
Partnership, adjusted by excluding, without duplication, (a) any net after-tax
extraordinary gains or losses (less all fees and expenses relating thereto), (b)
the cumulative effect of a change in accounting principles during such period,
(c) the portion of FFO of any Person (other than the Company or a Restricted
Subsidiary) in which the Company or any Restricted Subsidiary has an ownership
interest, except to the extent of the amount of dividends or other distributions
actually paid to the Company or any Restricted Subsidiary in cash dividends or
distributions during such period, (d) the FFO of any Person combined with the
Company or any Restricted Subsidiary on a "pooling of interests" basis
attributable to any period prior to the date of combination and (e) the FFO of
any Restricted Subsidiary to the extent that the declaration or payment of
dividends or similar distributions by such Restricted Subsidiary is not at the
date of determination permitted, directly or indirectly, by operation of the
terms of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to such Restricted
Subsidiary or its shareholders. In the case of any calculation of "Adjusted
Consolidated FFO" which includes the first quarter of 1998, Adjusted
Consolidated FFO shall be increased by, without duplication, $16.9 million,
representing the aggregate costs related to the Company's IO Portfolio during
such quarter.
"Adjusted Senior Debt to Capital Ratio" means the ratio of total Debt
(other than Match Funded Debt and Subordinated Debt) of the Company and its
Restricted Subsidiaries on a consolidated basis to the sum of (i) Consolidated
Net Worth and (ii) Subordinated Debt of the Company and its Restricted
Subsidiaries. In the event that the Company or any of its Restricted
Subsidiaries incurs, assumes, guarantees or redeems any Debt or issues or
redeems any Capital Stock subsequent to the end of the quarter for which the
Adjusted Senior Debt to Capital Ratio is being calculated but prior to the event
for which the calculation of Adjusted Senior Debt to Capital Ratio is made, then
the Adjusted Senior Debt to Capital Ratio shall be calculated giving pro forma
effect to such incurrence, assumption, guarantee or redemption of Debt or such
issuance or redemption of Capital Stock, and the application of the net proceeds
therefrom, as if the same had occurred at the end of the applicable quarter
(except that, in making such computation, the amount of Debt incurred or
redeemed under any revolving credit facility shall be deemed to be the
difference between (i) the average balance of such Debt during the period
commencing on the last day of such applicable quarter and ending on the date of
such computation, and (ii) the outstanding balance of such Debt on the last day
of such applicable quarter).
"Adjusted Total Debt to Capital Ratio" means the ratio of total Debt
(other than Match Funded Debt) of the Company and its Restricted Subsidiaries on
a consolidated basis to Consolidated Net Worth. In the event that the Company or
any of its Restricted Subsidiaries incurs, assumes, guarantees or redeems any
Debt or issues or redeems any Capital Stock subsequent to the end of the quarter
for which the Adjusted Total Debt to Capital Ratio is being calculated but prior
to the event for which the calculation of Adjusted Total Debt to Capital Ratio
is made, then the Adjusted Total Debt to Capital Ratio shall be calculated
giving pro forma effect to such incurrence, assumption, guarantee or redemption
of Debt or such issuance or redemption of Capital Stock, and the application of
the net proceeds therefrom, as if the same had occurred at the end of the
applicable quarter (except that, in making such computation, the amount of Debt
incurred or redeemed under any revolving credit facility shall be deemed to be
the difference between (i) the average balance of such Debt during the period
commencing on the last day of such applicable quarter and ending on the date of
such computation, and (ii) the outstanding balance of such Debt on the last day
of such applicable quarter).
"Adjusted FFO Available for Fixed Charges" is defined as the sum of,
without duplication, (1) Adjusted Consolidated FFO, plus (2) Consolidated
Interest Expense, plus (3) Consolidated Income Tax Expense.
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"Adjusted Fixed Charges" means the amount which is expensed in any period
for Consolidated Interest Expense of the Company and its Restricted
Subsidiaries, dividends of the Company (other than dividends paid in shares of
Capital Stock (other than Disqualified Stock)) declared and paid or payable
during such period on Disqualified Stock and dividends declared and paid or
payable during such period on Preferred Stock of the Company's Restricted
Subsidiaries (other than Preferred Stock held by the Company or another
Restricted Subsidiary).
"Affiliate" means, with respect to any specified Person(s) (a) any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person or (b) any other Person that
owns, directly or indirectly, 10% or more of such specified Person's Capital
Stock or any executive officer or director of any such specified Person or other
Person. For the purposes of this definition, "control," when used with respect
to any specified Person, means the power to direct the management and policies
of such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing. Notwithstanding the
foregoing, no Securitization Entity shall be deemed to be an Affiliate of any
Person.
"Average Life" means, as of the date of determination with respect to any
Debt, the quotient obtained by dividing (a) the sum of the products of (i) the
number of years from the date of determination to the date or dates of each
successive scheduled principal payment (including, without limitation, any
sinking fund requirements) of such Debt multiplied by (ii) the amount of each
such principal payment, by (b) the sum of all principal payments.
"Capital Lease Obligation" means, at the time any determination thereof
is to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, partnership interests, participations, rights in or other equivalents
(however designated) of such Person's equity, including any preferred stock, and
any rights (other than debt securities convertible into or exchangeable or
exercisable for such equity), warrants or options exchangeable or exercisable
for or convertible into such equity, whether now outstanding or issued after the
Closing Date.
"Cash Equivalents" means (a) securities with maturities of one year or
less from the date of acquisition issued or fully guaranteed or insured by the
United States Government or any agency thereof; (b) certificates of deposit,
bankers acceptances and Eurodollar time deposits with maturities of one year or
less from the date of acquisition and overnight bank deposits of any commercial
bank having capital and surplus in excess of $500,000,000; (c) commercial paper
of a domestic issuer rated at least A-1 by S&P or P-1 by Moody's; (d) securities
with maturities of one year or less from the date of acquisition issued or fully
guaranteed by any state, commonwealth or territory of the United States, by any
political subdivisions or taxing authority of any such state, commonwealth or
territory or by any foreign government, the securities of which state,
commonwealth, territory, political subdivision, taxing authority or foreign
government (as the case may be) are rated at least A by S&P or A2 by Moody's; or
(e) shares of money market mutual or similar funds which invest exclusively in
assets satisfying the requirements of clauses (a) through (d) of this
definition.
"Change of Control" means an event or series of events by which
(a) any "person" or "group" (as such terms are used in Sections 13(d) and
14(d) of the Exchange Act), other than the Permitted Holders, is or
becomes after the Closing Date the "beneficial owner" (as defined in
Rules 13d-3 and 13d-5 under the Exchange Act), of more than 40% of the
total voting power of all Voting Stock of the Company then outstanding;
(b) (1) another corporation merges into the Company or the Company
consolidates with or merges into any other corporation, or
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(2) the Company and its Restricted Subsidiaries taken as a whole, convey,
transfer or lease all or substantially all of their assets to any person
or group, in one transaction or a series of transactions, other than any
conveyance, transfer or lease between the Company and a Wholly-Owned
Subsidiary of the Company,
in the case of each of clauses (1) and (2) with the effect that a person
or group, other than the Permitted Holders, is or becomes the beneficial
owner of more than 40% of the total voting power of all Voting Stock of
the surviving or transferee corporation of such transaction or series of
transactions;
(c) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Company's Board of Directors, or
whose nomination for election by the Company's shareholders was approved
by a vote of a majority of the Directors then still in office who were
either directors at the beginning of such period or whose election or
nomination for election was previously so approved, cease for any reason
to constitute a majority of the Directors then in office;
(d) the shareholders of the Company shall approve any plan or proposal
for the liquidation or dissolution of the Company; or
(e) the Management Agreement is terminated and is not replaced by a
similar agreement between the Company and the Manager or another
Subsidiary of Ocwen Financial.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated FFO" for any period means the amount of FFO of the Company
and its Restricted Subsidiaries for such period determined on a consolidated
basis.
"Consolidated Income Tax Expense" for any period means the provisions for
federal, state, local and foreign income taxes of the Company and all Restricted
Subsidiaries for such period as determined on a consolidated basis in accordance
with GAAP.
"Consolidated Interest Expense" means, for any period, and without
duplication, all interest (including the interest component of rental expenses
reflected in accordance with GAAP as capitalized leases on the consolidated
balance sheet of the Company and its Restricted Subsidiaries, letter of credit
fees, Interest Rate Agreement fees, commitment fees and other like financial
charges) and all amortization of debt discount on all Debt (including, without
limitation, payment in kind, zero coupon and other securities) of the Company
and its Restricted Subsidiaries, determined in accordance with GAAP, less
interest expense attributable to Match Funded Debt, provided that (x) the
Consolidated Interest Expense attributable to interest on any Debt computed on a
pro forma basis and (A) bearing a floating interest rate shall be computed as if
the rate in effect on the date of computation had been the applicable rate for
the entire period and (B) which was not outstanding during the period for which
the computation is being made but which bears, at the option of the Company, a
fixed or floating rate of interest, shall be computed by applying at the option
of the Company, either the fixed or floating rate, and (y) in making such
computation, the Consolidated Interest Expense attributable to interest on any
Debt under a revolving credit facility computed on a pro forma basis shall be
computed based upon the average daily balance of such Debt during the applicable
period.
"Consolidated Net Worth" means, at any date of determination, the sum of
(i) the consolidated shareholders' equity of the Company and any Restricted
Subsidiaries, as determined on a consolidated basis in accordance with GAAP
(excluding for this purpose any Disqualified Stock), and, without duplication,
(ii) any limited partnership interests in the Operating Partnership owned by
Persons other than the Company and its Restricted Subsidiaries which are shown
as minority interests in consolidated subsidiary on a consolidated balance sheet
of the Company and its Restricted Subsidiaries prepared in accordance with GAAP
(and having for this purpose the value as set forth on such consolidated balance
sheet).
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"Currency Agreement" means any foreign exchange contract, currency swap
or cap agreement or other similar agreement designed to protect against or
manage exposure to fluctuations in currency exchange rates relating to any asset
of the Company or its Restricted Subsidiaries which is denominated in, or
purchased with, a currency other than U.S. dollars.
"Debt" of any Person means, without duplication, any indebtedness of such
Person, whether or not contingent, in respect of (i) borrowed money evidenced by
bonds, notes, debentures or similar instruments, (ii) indebtedness secured by
any mortgage, pledge, lien, charge, encumbrance or any security interest
existing on property owned by such Person, (iii) reimbursement obligations,
contingent or otherwise, in connection with any letters of credit actually
issued, bankers acceptances or other similar instruments, or amounts
representing the balance deferred and unpaid of the purchase price of any
property or services except any such balance that constitutes an accrued expense
or trade payable, (iv) net obligations under or in respect of Interest Rate
Agreements and Currency Agreements, if and to the extent such obligations would
appear as a liability on a balance sheet of such Person prepared in accordance
with GAAP, (v) all Debt referred to in the preceding clauses, of other persons
and all dividends of other Persons, the payment of which is secured by (or for
which the holders of such Debt have an existing right, contingent or otherwise,
to be secured by) any Lien upon or with respect to property owned by such
Person, even though such Person has not assumed or become liable for the payment
of such Debt (the amount of such obligation being deemed to be the lesser of the
fair market value of such property or asset (as determined in good faith by the
Person's Board of Directors whose determination shall be conclusive) or the
amount of the obligation so secured), (vi) any lease of property by such Person
as lessee which is reflected in such Person's consolidated balance sheet as a
capitalized lease in accordance with GAAP, (vii) all Disqualified Stock of the
Company and Preferred Stock of any Restricted Subsidiary (other than Preferred
Stock of a Restricted Subsidiary held by the Company or another Restricted
Subsidiary) valued at the greater of its voluntary or involuntary maximum fixed
redemption, repayment or repurchase price plus accrued and unpaid dividends (for
purposes hereof, the "maximum fixed redemption, repayment or repurchase price"
of any Disqualified Stock or Preferred Stock which does not have a fixed
redemption, repayment or repurchase price shall be calculated in accordance with
the terms of such Disqualified Stock or Preferred Stock as if such Disqualified
Stock or Preferred Stock were redeemed, repaid or repurchased on any date on
which Debt shall be required to be determined pursuant to the Indenture, and if
such price is based upon, or measured by, the fair market value of such
Disqualified Stock or Preferred Stock, such fair market value shall be
determined in good faith by the board of directors of the issuer of such
Disqualified Stock, whose determination shall be conclusive), (viii) all
guarantees by such Person of Debt referred to in this definition of any other
Person or (ix) any amendment, supplement, modification, deferral, renewal,
extension, refunding or refinancing of any Debt of the types referred to in
clauses (i) through (viii) above; Debt of a Restricted Subsidiary of the Person
existing prior to the time it became a Restricted Subsidiary of the Person shall
be deemed to be incurred upon such Restricted Subsidiary's becoming a Restricted
Subsidiary of the Person; and Debt of a person existing prior to a merger or
consolidation of such person with the Person or any Restricted Subsidiary of the
Person in which such person is the successor to the Person or such Restricted
Subsidiary shall be deemed to be incurred upon the consummation of such merger
or consolidation; provided, however that the term Debt shall not include any
such indebtedness that has been the subject of an "in substance" defeasance in
accordance with GAAP. The amount of Debt of any Person at any date will be the
outstanding balance as of such date of all unconditional obligations, as
described above and the maximum liability upon the occurrence of the contingency
giving rise to the obligation, of any contingent obligation at such date.
In addition, "Debt" of any Person shall include Debt described in the
foregoing paragraph that would not appear as a liability on the balance sheet of
such Person if (1) such Debt is the obligation of a partnership or joint venture
that is not a Restricted Subsidiary (a "Joint Venture"), (2) such Person or a
Restricted Subsidiary is a general partner of the Joint Venture (a "General
Partner") and (3) there is recourse, by contract or operation of law, with
respect to the payment of such Debt to property or assets of such Person or a
Restricted Subsidiary of such Person; and such Debt shall be included in an
amount not to exceed (x) the greater of (A) the net assets of the General
Partner and (B) the amount of such obligations to the extent that there is
recourse, by contract or operation of law, to the property or assets of such
Person or a Restricted Subsidiary of such Person (other than the General
Partner) or (y) if less than the amount determined pursuant to clause (x)
immediately above, the actual amount of such Debt that is recourse to such
Person, if the Debt is evidenced by a writing and is for a determinable amount.
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"Disinterested Director" of any Person means, with respect to any
transaction or series of related transactions, a member of the board of
directors of such Person who does not have any material direct or indirect
financial interest in or with respect to such transaction or series of related
transactions.
"Disqualified Stock" means any Capital Stock of any Person that, by its
terms (or by the terms of any security into which it is convertible, or for
which it is exchangeable, in each case at the option of the holder thereof), or
upon the happening of any event, matures or is mandatorily redeemable, pursuant
to a sinking fund obligation or otherwise, or redeemable at the option of the
holder thereof, in whole or in part, on or prior to the date that is 91 days
after the date on which the Notes mature; provided, however, that any Capital
Stock that would constitute Disqualified Stock solely because the holders
thereof have the right to require such Person to repurchase such Capital Stock
upon the occurrence of a Change of Control shall not constitute Disqualified
Stock if the terms of such Capital Stock provide that such Person may not
repurchase or redeem any such Capital Stock pursuant to such provisions unless
such repurchase or redemption complies with the covenant described under "--
Limitations on Restricted Payments."
"Fair Market Value" means, with respect to any asset, the price which
could be negotiated in an arm's-length free market transaction, for cash,
between a willing seller and a willing buyer, neither of which is under
compulsion to complete the transaction as determined by the Board of Directors
of the Company, acting in good faith, and shall be evidenced by a resolution of
such Board of Directors delivered to the Trustee (which determination by the
Board of Directors shall be conclusive and binding).
"FFO" of any Person means funds from operations of such Person (as such
term is defined in the guidelines issued by the National Association of Real
Estate Investment Trusts as in effect on the Closing Date).
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture.
"Guidelines" means the general guidelines for the Company's investments,
borrowings and operations established by the Company's Board of Directors,
including a majority of the Independent Directors.
"Independent Director" means a director of the Company who within the
last two years has not, directly or indirectly, (i) owned an interest in the
Manager or any of its affiliates, (ii) been employed by the Manager or any of
its affiliates, (iii) been an officer or director of the Manager or any of its
affiliates, (iv) performed services for the Manager or (v) held any material
business or professional relationship with the Manager or any of its affiliates;
provided that if the definition of "Independent Director" set forth in the
Company's Articles of Incorporation shall be changed or amended after the
Closing Date in accordance with Virginia law and such Articles, the definition
of "Independent Director" as used herein shall be deemed to be correspondingly
changed or amended.
"Interest Rate Agreements" means interest rate protection agreements in
the form of a swap, cap, collar, floor, rate lock or similar agreement designed
to protect against or manage exposure to fluctuations in interest rates for the
purpose of risk management and not for speculation.
"Investment" means, with respect to any Person, any direct or indirect
advance, loan or other extension of credit or capital contribution to (by means
of a transfer of cash or other property to others or any payment for property or
services for the account or use of others), or any purchase, acquisition or
ownership by such Person of any Capital Stock, bonds, notes, debentures or other
securities or evidences of Debt issued or owned by, any other Person and all
other items that would be classified as investments on a balance sheet prepared
in accordance with GAAP. For purposes of the "Limitation on Restricted Payments"
covenant described above, any property transferred to or from any Person shall
be valued at its fair market value at the time of such transfer, in each case as
determined by the Board of Directors of the Company in good faith, whose
determination shall be conclusive.
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"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
security interest, hypothecation, assignment for security, claim, or preference
or priority or other encumbrance (whether or not filed, recorded or otherwise
perfected under applicable law) upon or with respect to any property owned on
the Closing Date or thereafter acquired.
"Management Agreement" means the management agreement between the Manager
and the Company.
"Manager" means Ocwen Capital Corporation.
"Match Funded Debt" means Debt of a special purpose, bankruptcy remote
Subsidiary as to which no recourse exists either to the Company or any other
Restricted Subsidiary, on which (i) the aggregate principal amortization and
maturity of such Debt are based upon the principal amortization and maturity of
a like or greater amount of the funded assets, and (ii) the interest rate of
such Debt is at a fixed rate; provided however, that the interest rate of such
Debt may be at a floating rate if (x) the funded assets include adjustable rate
assets or (y) the funded assets have been effectively swapped under an Interest
Rate Agreement.
"Mortgage" means a mortgage or deed of trust on real property which has
been improved by a completed single or multifamily dwelling unit or commercial
real estate property.
"Mortgage Warehouse Debt" means Debt of any Person under any warehouse
line of credit, mortgage loan repurchase agreement or similar facility or under
any commercial paper program (a) that is incurred for the purpose of funding the
origination or purchase of mortgage loans or mortgage notes that are intended to
be sold to investors, (b) that in the case of any warehouse line of credit or
similar facility is, or, in the case of any commercial paper program, the
letters of credit or revolving credit facility providing credit enhancement or
liquidity backup for such commercial paper program are, secured by mortgage
loans, mortgage notes, residential or commercial mortgage-backed securities or
any combination thereof owned by such Person, (c) the outstanding amount of
which shall not exceed 100% of the principal amount of the mortgage notes
securing such Debt and (d) the underlying mortgage loans, mortgage notes and
residential or commercial mortgage-backed securities are subject to binding
take-out commitments by investors or are being accumulated by the Company with
the intention of securitizing and disposing thereof within a reasonable period
of time.
"Net Cash Proceeds" means, with respect to any issuance or sale of
Capital Stock or debt securities, the proceeds of such issuance or sale in the
form of cash or Cash Equivalents, including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents, net
of attorney's fees, accountant's fees and brokerage, consulting, underwriting
and other fees and expenses actually incurred in connection with such issuance
or sale and net of taxes paid or payable as a result thereof.
"Permitted Business" means acquiring, developing, selling, owning,
managing, operating and leasing real estate; acquiring, originating, owning,
servicing and collecting real estate mortgages and related loans; investing in
real estate and mortgage related securities and securities of companies engaged
primarily in real estate related activities; and other activities related to or
arising out of any of those activities.
"Permitted Holders" means Ocwen Financial and its Affiliates.
"Permitted Indebtedness" means:
(a) Debt of the Company or any Restricted Subsidiary outstanding on the
Closing Date;
(b) Debt of a Restricted Subsidiary owing to the Company or to another
Restricted Subsidiary of the Company; provided that any such Debt is made
pursuant to an unsubordinated intercompany obligation; provided, further,
that (i) any disposition, pledge or transfer of any such Debt to a Person
(other than a disposition, pledge or transfer to the Company or another
Restricted Subsidiary) shall be deemed to be an incurrence of
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such Debt by such Restricted Subsidiary not permitted by this clause (b)
and (ii) any transaction pursuant to which any Restricted Subsidiary,
which is owed Debt by any other Restricted Subsidiary, ceases to be a
Restricted Subsidiary shall be deemed to be an incurrence of such Debt
not permitted by this clause (b);
(c) the endorsement of negotiable instruments by the Company or any
Restricted Subsidiary for deposit or collection or similar transactions
in the ordinary course of business;
(d) Debt under Interest Rate Agreements or Currency Agreements incurred
in the ordinary course of business for the purpose of risk management and
not for the purpose of speculation;
(e) Match Funded Debt;
(f) the incurrence by the Company or any of its Restricted Subsidiaries
of Debt represented by Capital Lease Obligations, mortgage financings or
purchase money obligations, in each case incurred for the purpose of
financing all or any part of the purchase price or cost of construction
or improvement of property, plant or equipment used in the business of
the Company or such Restricted Subsidiary, in an aggregate principal
amount not to exceed $10.0 million at any time outstanding;
(g) Mortgage Warehouse Debt not to exceed $150.0 million at any time
outstanding;
(h) additional Debt not to exceed $50.0 million at any time outstanding;
(i) the Notes and Debt issued in exchange for or the Net Cash Proceeds
from the issuance of which are used to fund the substantially concurrent
redemption or repayment of Notes; and
(j) any renewals, extensions, substitutions, refinancings or replacements
(each, for purpose of this clause, a "refinancing") of any Debt described
in clause (a) of this definition, including any successive refinancings,
so long as (i) any such new Debt shall be in a principal amount that does
not exceed the principal amount (or, if such Debt being refinanced
provides for an amount less than the principal amount thereof to be due
and payable upon a declaration of acceleration thereof, such lesser
amount as of the date of determination) so refinanced, plus the amount of
any premium required to be paid in connection with such refinancing
pursuant to the terms of the Debt refinanced or the amount of any premium
actually paid at such time to refinance the Debt as determined by the
Company in good faith (whose determination shall be conclusive), plus, in
either case, the amount of reasonable expenses incurred in connection
with such refinancing, (ii) such new Debt has a final maturity date which
is the same or later than the final maturity date of, and has an Average
Life equal to or greater than the Average Life of, the Debt being
extended, refinanced, renewed, replaced, defeased or refunded and (iii)
such new Debt is incurred either by the Company or by the Restricted
Subsidiary who is the obligor on the Debt being extended, refinanced,
renewed, replaced, defeased or refunded.
"Permitted Investment" means any of the following:
(a) Investments in Cash Equivalents;
(b) Investments by the Company in real estate or real estate related
assets or in any Restricted Subsidiary engaged in Permitted Businesses;
(c) intercompany Debt to the extent permitted under clause (b) of the
definition of Permitted Indebtedness;
(d) negotiable instruments held for deposit or collection in the ordinary
course of business, except to the extent that they would constitute
Investments in Affiliates;
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(e) Investments in stock, obligations or securities received in
settlement of debts owing to the Company or a Restricted Subsidiary as a
result of foreclosure, perfection or enforcement of any Lien, in each
case in the ordinary course of business;
(f) travel, moving and other advances made to officers, employees and
consultants in the ordinary course of business;
(g) Investments by the Company or any Restricted Subsidiary in another
Person, if as a result of such Investment (i) such other Person becomes a
Restricted Subsidiary or (ii) such other Person is merged or consolidated
with or into, or transfers or conveys all or substantially all of its
assets to, the Company or a Restricted Subsidiary;
(h) Investments in any Person other than a Subsidiary (i) which was
formed for the purpose of engaging in a Permitted Business, and (ii) the
assets of which are managed by the Company (or by the Manager on behalf
of the Company) under a management agreement that gives the Company or
the Manager (as the case may be) control over the use, condition,
operation, improvement and disposition of all real properties and other
real-estate related assets acquired or to be acquired by such Person,
provided that, in the event the Company or the Manager no longer has
control over such assets, any Investment in such Person shall no longer
be a Permitted Investment and shall be deemed to have been a Restricted
Payment solely for purposes of determining the amount of Restricted
Payments that the Company may thereafter make pursuant to the covenant
described under "-- Limitations on Restricted Payments."
(i) Investments in any one or more interests in real property or
mortgages on real property (including obligations secured by or
representing pass-through interests in real property or mortgages on real
property), or such other assets or instruments (other than Capital Stock)
in which the Company may at such time invest without impairing its
qualification as a REIT under the Code, in each case made in the ordinary
course of business; and
(j) Investments, when taken together with all other Investments made
pursuant to this clause (j), in an amount not to exceed 2.0% of Total
Assets in any Person engaged in real estate related activities.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Preferred Stock" means Capital Stock of any class or classes (however
designated) that has a preference or priority as to the payment of dividends or
as to the distribution of assets upon any voluntary or involuntary liquidation
or dissolution of the issuer of such Capital Stock, over shares of Capital Stock
of any other class or classes of such corporation.
"REIT" means a real estate investment trust qualified as such under
Sections 856 through 860 of the Code (or any successor provisions).
"Restricted Investment" shall mean any Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Securitization Entity" means any pooling arrangement or entity formed or
originated for the purpose of holding, and/or issuing securities representing
interests in, one or more pools of mortgages, leases, credit card receivables,
home equity loan receivables, automobile loans, leases or installment sales
contracts, other consumer receivables or other financial assets of the Company
or any Subsidiary, and shall include, without limitation, any
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partnership, limited liability company, liquidating trust, grantor trust, owner
trust or real estate mortgage investment conduit.
"Significant Subsidiary" means any Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act, as such Regulation is in effect on
the date hereof.
"Subordinated Debt" means Debt of the Company that is expressly
subordinated by its terms in right of payment to the Notes.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association, or other business entity (other than a partnership) of which more
than 50% of the total voting power of shares of Capital Stock entitled (without
regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time of determination owned or
controlled, directly or indirectly, by such Person or one or more of the other
Subsidiaries of that Person or a combination thereof and (ii) any partnership,
joint venture, limited liability company or similar entity of which (x) more
than 50% of the capital accounts, distribution rights, total equity and voting
interests or general or limited partnership interests, as applicable, are owned
or controlled, directly or indirectly, by such Person or one or more of the
other Subsidiaries of that Person or a combination thereof whether in the form
of membership, general, special or limited partnership or otherwise and (y) such
Person or any Wholly Owned Subsidiary of such Person is a controlling general
partner or otherwise controls such entity.
"Total Assets" means the total assets of the Company and its Restricted
Subsidiaries on a consolidated basis determined in accordance with GAAP, as
shown on the most recently available consolidated balance sheet of the Company
and its Restricted Subsidiaries.
"Unrestricted Subsidiary" means (i) any Subsidiary (other than the
Operating Partnership or any successor thereto) that is designated by the Board
of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution; but
only to the extent that such Subsidiary: (a) has no Debt other than Non-Recourse
Debt; (b) is not party to any agreement, contract, arrangement or understanding
with the Company or any Restricted Subsidiary of the Company unless the terms of
any such agreement, contract, arrangement or understanding are no less favorable
to the Company or such Restricted Subsidiary than those that might be obtained
at the time from Persons who are not Affiliates of the Company; (c) is a Person
with respect to which neither the Company nor any of its Restricted Subsidiaries
has any obligation (x) to subscribe for additional Capital Stock or (y) to
maintain or preserve such Person's financial condition or to cause such Person
to achieve any specified levels of operating results; (d) has not guaranteed or
otherwise provided credit support for any Debt of the Company or any of its
Restricted Subsidiaries; and (e) has at least one director on its board of
directors that is not a director or executive officer of the Company or any of
its Restricted Subsidiaries and has at least one executive officer that is not a
director or executive officer of the Company or any of its Restricted
Subsidiaries. Any such designation by the Board of Directors shall be evidenced
to the Trustee by filing with the Trustee a certified copy of the Board
Resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing conditions and was
permitted by the covenant described above under the caption "-- Certain
Covenants -- Restricted Payments." If, at any time, any Unrestricted Subsidiary
would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it
shall thereafter cease to be an Unrestricted Subsidiary for purposes of the
Indenture and any Debt of such Subsidiary shall be deemed to be incurred by a
Restricted Subsidiary of the Company as of such date (and, if such Debt is not
permitted to be incurred as of such date under the covenant described under the
caption "-- Certain Covenants -- Limitation on Incurrence of Debt," the Company
shall be in default of such covenant). The Board of Directors of the Company may
at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary;
provided that such designation shall be deemed to be an incurrence of Debt by a
Restricted Subsidiary of the Company of any outstanding Debt of such
Unrestricted Subsidiary and such designation shall only be permitted if (i) such
Debt is permitted under the covenant described under the caption "-- Certain
Covenants -- Limitation on Incurrence of Debt," calculated on a pro forma basis
as if such designation had occurred at the beginning of the four-quarter
reference period or end of the relevant quarter, as the case may be, and (ii) no
Default or Event of Default would be in existence following such designation.
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"Voting Stock" means any class or classes of Capital Stock pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the board of directors, managers,
trustees or other voting members of the governing body of any Person
(irrespective of whether or not, at the time, stock of any other class or
classes shall have or might have voting power by reason of the happening of any
contingency).
"Wholly-Owned Subsidiary" means a Subsidiary all of the Capital Stock of
which (other than directors' qualifying shares) is owned by the Company or
another Wholly-Owned Subsidiary.
BOOK-ENTRY, DELIVERY AND FORM
As of the date hereof, $142.5 million aggregate principal amount of
Old Notes have been resold to QIBs in reliance on Rule 144A and an additional
$500,000 aggregate principal amount of Regulation S Securities have been resold
on offshore transactions in reliance on Regulations S.
Old Notes initially were represented by one Note in registered, global
form (the "Old Restricted Global Securities") and the Regulation S Securities
initially were represented by one Note in registered, global form (the "Old
Regulation S Global Securities" and, together with the Old Restricted Global
Securities, the "Old Global Securities"). The Old Global Securities were
deposited upon issuance with the Trustee as custodian for DTC, in New York, New
York, and registered in the name of DTC or its nominee, in each case for credit
to an account of a direct or indirect participant in DTC as described below.
The Old Restricted Global Securities, to the extent directed by holders
thereof in their Letters of Transmittal, will be exchanged through book-entry
electronic transfer for one or more certificates in registered, global form
representing the New Notes (collectively, the "New Global Securities," and
together with the Old Global Securities, the "Global Securities"). Except as set
forth below, the Global Securities may be transferred, in whole and not in part,
only to another nominee of DTC or to a successor of DTC or its nominee.
Beneficial interests in the Global Securities may not be exchanged for Notes in
certificated form except in the limited circumstances described below. See "--
Exchange of Book-Entry Securities for Certificated Securities."
DEPOSITARY PROCEDURES
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic
book-entry changes in accounts of its Participants. The Participants include
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations. Access to DTC's system is also available to
other entities such as banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a Participant, either directly
or indirectly (collectively, the "Indirect Participants"). Persons who are not
Participants may beneficially own securities held by or on behalf of DTC only
through the Participants or the Indirect Participants. The ownership interest
and transfer of ownership interest of each actual purchaser of each security
held by or on behalf of DTC are recorded on the records of the Participants and
Indirect Participants.
DTC has also advised the Company that, pursuant to procedures established
by it, DTC will credit the accounts of Participants with portions of the
principal amount of the Global Securities and ownership of such interests in the
Global Securities will be shown on, and the transfer of ownership thereof will
be effected only through, records maintained by DTC (with respect to the
Participants) or by the Participants and the Indirect Participants (with respect
to other owners of beneficial interests in the Global Securities).
The laws of some states require that certain persons take physical
delivery in certificated form of securities that they own. Consequently, the
ability to transfer beneficial interests in a Global Security to such persons
will be limited to that extent. Because DTC can act only on behalf of
Participants, which in turn act on behalf of Indirect Participants and certain
banks, the ability of a person having beneficial interests in Global Security to
pledge such
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interests to persons or entities that do not participate in the DTC system, or
otherwise take actions in respect of such interests, may be affected by the lack
of physical certificate evidencing such interests. For certain other
restrictions on the transferability of the Notes, see "-- Exchange of Book-Entry
Securities for Certificated Securities."
Except as described below, owners of interests in the Global Securities
will not have Notes registered in their name, will not receive physical delivery
of Notes in certificated form and will not be considered the registered owners
or holders thereof for any purpose.
Payments in respect of the Global Security registered in the name of DTC
or its nominee will be payable by the Trustee to DTC in its capacity as the
registered holder. The Trustee will treat the persons in whose names the Notes,
including the Global Securities, are registered as the owners thereof for the
purpose of receiving such payments and for any and all other purposes
whatsoever. Consequently, neither the Trustee nor any agent thereof has or will
have any responsibility or liability for (i) any aspect of DTC's records or any
Participant's or Indirect Participant's records relating to or payments made on
account of beneficial ownership interests in the Global Securities, or for
maintaining, supervising or reviewing any of DTC's records or any Participant's
or Indirect Participant's records relating to the beneficial ownership interests
in the Global Securities or (ii) any other matter relating to the actions and
practices of DTC or any of its Participants or Indirect Participants. DTC has
advised the Company that its current practice, upon receipt of any payment in
respect of securities such as the Notes, is to credit the accounts of the
relevant Participants with the payment on the payment date unless DTC has reason
to believe it will not receive payment on such payment date. Payments by the
Participants and the Indirect Participants to the beneficial owners of Notes
will be governed by standing instructions and customary practices and will be
the responsibility of the Participants or the Indirect Participants and will not
be the responsibility of DTC, the Trustee or the Company. Neither the Company
nor the Trustee will be liable for any delay by DTC or any of its Participants
in identifying the beneficial owners of Notes and the Company and the Trustee
may conclusively rely on and will be protected in relying on instructions from
DTC or its nominee for all purposes.
Interests in the Global Securities will trade in DTC's Same-Day Funds
Settlement System and secondary market trading activity in such interests will
therefore settle in immediately available funds, subject in all cases to the
rules and procedures of DTC and its participants.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes only at the direction of one or more Participants to
whose account with DTC interests in the Global Securities are credited. However,
if there is an Event of Default with respect to the Notes, DTC reserves the
right to exchange the Global Securities for legended Notes in certificated form
and to distribute such Notes to its Participants.
The information in this section concerning DTC and its book-entry system
has been obtained from sources that the Company believes to be reliable, but the
Company takes no responsibility for the accuracy thereof.
Although DTC has agreed to the foregoing procedures to facilitate
transfers of interest in the Global Securities among participants in DTC, it is
under no obligation to perform or to continue to perform such procedures, and
such procedures may be discontinued at any time. Neither the Company nor the
Trustee will have any responsibility for the performance by DTC or its
respective participants or indirect participants of their respective obligations
under the rules and procedures governing their operations.
EXCHANGE OF BOOK-ENTRY SECURITIES FOR CERTIFICATED SECURITIES
A Global Security is exchangeable for securities in registered
certificated form if (i) DTC (x) notifies the Company that it is unwilling or
unable to continue as Depositary for the Global Security and the Company
thereupon fails to appoint a successor Depositary or (y) has ceased to be a
clearing agency registered under the Exchange Act, (ii) the Company, at its
option, notifies the Trustee in writing that it elects to cause the issuance of
the Notes in certificate form, or (iii) there shall have occurred and be
continuing a Default or Event of Default with respect to the Notes. In all
cases, certificated securities delivered in exchange for any Global Security or
beneficial interests therein
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will be registered in the names, and issued in any approved denominations,
requested by or on behalf of the Depositary (in accordance with its customary
procedures).
DESCRIPTION OF OLD NOTES
The terms of the Old Notes are identical in all materials respects to the
terms of the New Notes, except that (i) the Old Notes have not been registered
under the Securities Act or applicable state securities laws and therefore are
subject to restrictions on transfer under federal and state securities laws and
(ii) the holders of Old Notes are entitled to certain rights under the
Registration Rights Agreement, which rights will terminate upon consummation of
the Exchange Offer, except under limited circumstances, as discussed under
"Registration Rights Agreement." The Old Notes provide that, in the event that a
registration statement relating to the Exchange Offer has not been filed by
October 12, 1998 and declared effective by January 10, 1999 or the New Notes are
not issued on or prior to 30 business days after the registration statement is
declared effective, or, in certain circumstances, in the event a shelf
registration statement with respect to the resale of the Old Notes is not filed
within 90 days after such filing obligation arises and the shelf registration
statement is not declared effective by the Commission on or prior to 180 days
after such obligation arises, then interest will accrue (in addition to the
stated interest rate on the Old Notes) with respect to the first 90-day period
immediately following the occurrence of the first registration default in an
amount equal to $.05 per week per $1,000 principal amount of Old Notes held by
such Holder. The amount of the additional interest will increase by an
additional $.05 per week per $1,000 principal amount of Old Notes with respect
to each subsequent 90-day period until all registration defaults have been
cured, up to a maximum amount of Liquidated Damages for all registration
defaults of $.50 per week per $1,000 principal amount of Old Notes. The New
Notes are not entitled to any such prospective additional interest. Accordingly,
holders of Old Notes should review the information set forth under "Risk Factors
- -- Consequences of a Failure to Exchange Old Notes" and "Description of New
Notes."
Pursuant to the Registration Rights Agreement, because the registration
statement for the Exchange Offer was not declared effective by the Commission on
or prior to January 10, 1999 (180 days from July 14, 1998, the closing date for
the issuance of the Notes), the interest rate on the Old Notes increased by the
rate of $.05 per week per $1,000 principal amount of Notes for the period from
January 10, 1999 to ______ __, 1999, the date that the Registration Statement
was declared effective, resulting in additional interest payable to the holders
of Old Notes in the amount of $___ per $1,000 principal amount of Old Notes.
REGISTRATION RIGHTS AGREEMENT
Pursuant to the Registration Rights Agreement, the Company agreed to file
the Exchange Offer Registration Statement and conduct the Exchange Offer within
specified periods.
Pursuant to the Registration Rights Agreement, the Company will offer to
the Holders of Transfer Restricted Securities (as defined below) pursuant to the
Exchange Offer who are able to make certain representations the opportunity to
exchange their Transfer Restricted Securities for New Notes. If (i) the Company
is not permitted to consummate the Exchange Offer because the Exchange Offer is
not permitted by applicable law or Commission policy or (ii) any Holder of
Transfer Restricted Securities notifies the Company prior to the 20th day
following consummation of the Exchange Offer that (A) it is prohibited by law or
Commission policy from participating in the Exchange Offer, (B) that it may not
resell the New Notes acquired by it in the Exchange Offer to the public without
delivering a prospectus and the prospectus contained in the Exchange Offer
Registration Statement is not appropriate or available for such resale or (C)
that it is a broker-dealer and owns Notes acquired directly from the Company or
an affiliate of the Company, the Company will be required to file with the
Commission a shelf registration statement to cover resales of the Notes by the
Holders thereof who satisfy certain conditions relating to the provision of
information in connection with the Shelf Registration Statement. The Company
will use its reasonable best efforts to cause the shelf registration statement
to be declared effective as promptly as possible by the Commission. For purposes
of the foregoing, "Transfer Restricted Securities" means all Old Notes until (i)
the date on which any such security has been exchanged by a person other than a
broker-dealer for New Notes in the Exchange Offer, (ii) following the exchange
by a broker-dealer in the Exchange Offer of Old Notes for New Notes, the date on
which such new security is sold to a purchaser who receives from such
broker-dealer on or prior to the date of such sale a copy of the prospectus
contained in the Registration
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Statement, (iii) the date on which such Old Notes have been effectively
registered under the Securities Act and disposed of in accordance with the shelf
registration statement or (iv) the date on which such Old Notes are distributed
to the public pursuant to Rule 144 under the Securities Act or may be sold to
the public without compliance with the requirements of such rule.
Pursuant to the Registration Rights Agreement, (i) unless the Exchange
Offer would not be permitted by applicable law or Commission policy, the Company
will use its reasonable best efforts to issue on or prior to 30 business days
after the date on which the Registration Statement was declared effective by the
Commission the New Notes in exchange for all Old Notes tendered prior thereto in
the Exchange Offer and (ii) if obligated to file the shelf registration
statement, the Company will use its reasonable best efforts to file the shelf
registration statement with the Commission on or prior to 90 days after such
filing obligation arises and to cause the shelf registration to be declared
effective by the Commission on or prior to 180 days after such obligation
arises. If (a) the Company fails to file any of the registration statements
required by the Registration Rights Agreement on or before the date specified
for such filing, (b) any of such registration statements is not declared
effective by the Commission on or prior to the date specified for such
effectiveness (the "Effectiveness Target Date"), (c) the Company fails to
consummate the Exchange Offer within 30 business days of the Effectiveness
Target Date with respect to the Registration Statement or (d) the shelf
registration statement or the Registration Statement is declared effective but
thereafter ceases to be so effective or usable in connection with resales of
Transfer Restricted Securities during the periods specified in the Registration
Rights Agreement (each such event referred to in clauses (a) through (d) above a
"Registration Default"), then the Company will pay Liquidated Damages to each
Holder of Old Notes, with respect to the first 90-day period immediately
following the occurrence of the first Registration Default in an amount equal to
$.05 per week per $1,000 principal amount of Old Notes held by such Holder. The
amount of the Liquidated Damages will increase by an additional $.05 per week
per $1,000 principal amount of Old Notes with respect to each subsequent 90-day
period until all Registration Defaults have been cured, up to a maximum amount
of Liquidated Damages for all Registration Defaults of $.50 per week per $1,000
principal amount of Old Notes. All accrued Liquidated Damages will be paid by
the Company to the holders of Global Securities in the manner set forth under
"Description of Notes -- Depositary Procedures." Following the cure of all
Registration Defaults, the accrual of Liquidated Damages will cease. For
information about Liquidated Damages payable by the Company on the Old Notes
prior to the time that the Registration Statement relating to the Exchange Offer
was declared effective by the Commission, see "Description of Old Notes."
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account in
connection with the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. This Prospectus, as
it may be amended or supplemented from time to time, may be used by
Participating Broker-Dealers during the period referred to below in connection
with resales of New Notes received in exchange for Old Notes if such Old Notes
were acquired by such Participating Broker-Dealers for their own accounts as a
result of market-making activities or other trading activities. The Company has
agreed that this Prospectus, as it may be amended or supplemented from time to
time, may be used by a Participating Broker-Dealer in connection with resales of
such New Notes for a period ending 180 days after the date of this Prospectus
(subject to extension under certain limited circumstances described herein) or,
if earlier, when all such New Notes have been disposed of by such Participating
Broker-Dealer. However, a Participating Broker-Dealer who intends to use this
Prospectus in connection with the resale of New Notes received in exchange for
Old Notes pursuant to the Exchange Offer must notify the Company, or cause the
Company to be notified, on or prior to the Expiration Date, that it is a
Participating Broker-Dealer. Such notice may be given in the space provided for
that purpose in the Letter of Transmittal or may be delivered to the Exchange
Agent at one of the addresses set forth herein under "The Exchange
Offer--Exchange Agent." See "The Exchange Offer--Resales of New Notes."
The Company will not receive any cash proceeds from the issuance of the
New Notes offered hereby. New Notes received by broker-dealers for their own
accounts in connection with the Exchange Offer may be sold from time to time in
one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the New Notes or a combination
of such methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or at negotiated prices. Any
such resale may be made directly to
131
<PAGE> 133
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer and/or the
purchasers of any such New Notes.
Any broker-dealer that resells New Notes that were received by it for its
own account in connection with the Exchange Offer and any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act, and any profit on any
such resale of New Notes and any commissions or concessions received by any such
persons may be deemed to be underwriting compensation under the Securities Act.
The Letter of Transmittal states that by acknowledging that it will deliver and
by delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
VALIDITY OF NEW NOTES
The validity of the New Notes will be passed upon for the Company by
Elias, Matz, Tiernan & Herrick L.L.P., Washington, D.C.
EXPERTS
The financial statements of the Company as of December 31, 1997 and for
the period from May 14, 1997 to December 31, 1997, the Statement of Revenue and
Certain Expenses for the 225 Bush Street Property for the year ended December
31, 1997, and the Statements of Revenue and Certain Expenses for: (i) the 841
Prudential Drive Property for the year ended December 31, 1997; (ii) the 450
Sansome Street Property for the year ended December 31, 1996; (iii) the Cortez
Plaza Property for the year ended December 31, 1997; (iv) the Bayers Road
Shopping Centre Property for the year ended December 31, 1997, and (v) the 10
U.N. Plaza Property for the year ended December 31, 1996, have been audited by
PricewaterhouseCoopers LLP, independent certified public accountants, as stated
in their reports which are included elsewhere herein, and have been so included
in reliance upon the reports of such firm given upon their authority as experts
in accounting and auditing.
132
<PAGE> 134
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Ocwen Asset Investment Corp.:
Report of Management................................................................................................... F-3
Report of Independent Certified Public Accountants..................................................................... F-4
Consolidated Statement of Financial Condition at December 31, 1997..................................................... F-5
Consolidated Statement of Operations for the period from May 14, 1997 to December 31, 1997............................ F-6
Consolidated Statement of Changes in Shareholders' Equity for the period from May 14, 1997 to December 31, 1997........ F-7
Consolidated Statement of Cash Flows for the period from May 14, 1997 to December 31, 1997............................. F-8
Notes to Consolidated Financial Statements............................................................................. F-9
Interim Consolidated Financial Statements (Unaudited):
Consolidated Statement of Financial Condition at September 30, 1998 and December 31, 1997............................ F-22
Consolidated Statement of Operations for the three and nine months ended September 30, 1998,
the three months ended September 30, 1997 and for
the period from May 14, 1997 to September 30, 1997................................................................ F-23
Consolidated Statement of Changes in Shareholders' Equity for the nine months
ended September 30, 1998 and for the period from May 14, 1997 to December 31, 1997................................ F-24
Consolidated Statement of Cash Flows for the nine months ended September 30, 1998 and for
the period from May 14, 1997 to September 30, 1997............................................................... F-25
Notes to Interim Consolidated Financial Statements................................................................... F-26
225 Bush Street Property:
Report of Independent Accountants...................................................................................... F-32
Statements of Revenue and Certain Expenses for:
The year ended December 31, 1997.................................................................................... F-33
The three months ended March 31, 1998 (unaudited)................................................................... F-34
Notes to Statements of Revenue and Certain Expenses.................................................................... F-35
841 Prudential Drive Property:
Report of Independent Accountants...................................................................................... F-38
Statements of Revenue and Certain Expenses for:
The year ended December 31, 1997.................................................................................... F-39
The six months ended June 30, 1998 (unaudited)...................................................................... F-40
Notes to Statements of Revenue and Certain Expenses.................................................................... F-41
450 Sansome Street Property:
Report of Independent Accountants...................................................................................... F-44
Statements of Revenue and Certain Expenses for:
The year ended December 31, 1996.................................................................................... F-45
The six months ended June 30, 1997 (unaudited)...................................................................... F-46
Notes to Statements of Revenue and Certain Expenses.................................................................... F-47
Cortez Plaza Property:
Report of Independent Accountants...................................................................................... F-50
Statements of Revenue and Certain Expenses for:
The year ended December 31, 1996.................................................................................... F-51
The nine months ended September 30, 1997 (unaudited)................................................................ F-52
Notes to Statements of Revenue and Certain Expenses.................................................................... F-52
</TABLE>
F-1
<PAGE> 135
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Bayers Road Shopping Centre Property:
Report of Independent Accountants...................................................................................... F-56
Statements of Revenue and Certain Expenses for:
The year ended December 31, 1997.................................................................................... F-57
The three months ended March 31, 1998 (unaudited) and for the period from May 14, 1997
to December 31, 1997 (unaudited).................................................................................. F-58
Notes to Statements of Revenue and Certain Expenses.................................................................... F-60
10 U.N. Plaza Property:
Report of Independent Accountants...................................................................................... F-63
Statements of Revenue and Certain Expenses for:
The year ended December 31, 1996.................................................................................... F-64
The six months ended June 30, 1997 (unaudited)...................................................................... F-65
Notes to Statements of Revenue and Certain Expenses.................................................................... F-66
SUPPLEMENTAL FINANCIAL DATA
690 Market Street Property:
Statement of Revenue and Certain Expenses for the nine months ended September 30, 1998
(unaudited), with accompanying notes................................................................................ F-69
Park Center I Property:
Statement of Revenue and Certain Expenses for the nine months ended September 30, 1998
(unaudited), with accompanying notes ............................................................................... F-73
PRO FORMA FINANCIAL INFORMATION
Unaudited Condensed Pro Forma Consolidated Statements of Operations for the Period from
May 14, 1997 to December 31, 1997.................................................................................... F-
Unaudited Condensed Pro Forma Consolidated Statement of Operations for the nine months ended
September 30, 1998................................................................................................... F-
Unaudited Condensed Pro Forma Consolidated Statements of Operations for the Period from
October 1, 1997 to September 30, 1998................................................................................ F-
</TABLE>
F-2
<PAGE> 136
REPORT OF MANAGEMENT
The management of Ocwen Asset Investment Corp. is responsible for the
preparation and fair presentation of the financial statements and other
financial information contained herein. The accompanying consolidated financial
statements have been prepared in conformity with generally accepted accounting
principles applied on a consistent basis and include amounts based on
management's best estimates and judgments. Nonfinancial information included
herein has also been prepared by management and is consistent with the
consolidated financial statements. In the opinion of management, the
consolidated financial statements fairly reflect the Company's financial
position, results of operations and cash flows.
To assure that financial information is reliable and assets are safeguarded,
management has established and maintains an effective system of internal
accounting controls and procedures that provide reasonable assurance as to the
integrity and reliability of the financial statements, the protection of assets
against loss from unauthorized use or disposition and the prevention and
detection of errors and irregularities on a timely basis.
Price Waterhouse LLP conducts its audit of the consolidated financial statements
in accordance with generally accepted auditing standards. Such standards include
the evaluation of internal accounting controls to establish a basis for
developing the scope of its examination of the consolidated financial
statements. In addition to the use of independent certified public accountants,
Ocwen maintains a professional staff of internal auditors who conduct financial,
procedural and special audits of the Company. To ensure their independence, both
Price Waterhouse LLP and the internal auditors have direct access to the Audit
Committee of the Board of Directors.
The Audit Committee, which consists solely of independent directors of the
Company, makes recommendations to the Board of Directors concerning the
appointment of the independent certified public accountants and meets with Price
Waterhouse LLP and the internal auditors to discuss the results of their audits,
the Company's internal accounting controls and financial reporting matters.
/s/ William C. Erbey /s/ Mark S. Zeidman
-------------------------------------- -------------------
William C. Erbey Mark S. Zeidman
Chairman and Chief Executive Officer Senior Vice President and
Chief Financial Officer
F-3
<PAGE> 137
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Ocwen Asset Investment Corp.
In our opinion, the accompanying consolidated statements of financial condition
and the related consolidated statements of operations, of changes in
shareholders' equity and of cash flows present fairly, in all material respects,
the financial position of Ocwen Asset Investment Corp. (the "Company") and its
subsidiaries at December 31, 1997 and the results of their operations and their
cash flows for the period from May 14, 1997 to December 31, 1997, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
- ------------------------
Price Waterhouse LLP
Fort Lauderdale, Florida
January 26, 1998
F-4
<PAGE> 138
OCWEN ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Cash and amounts due from depository institutions............................................. $ 331,047
Interest earning deposits..................................................................... 48,346,076
Securities available for sale, at market value................................................ 146,026,907
Loan portfolio, net........................................................................... 15,831,479
Discount loan portfolio, net.................................................................. 26,978,888
Investment in real estate, net................................................................ 45,430,039
Deposits on pending asset acquisitions........................................................ 1,000,000
Principal and interest receivable............................................................. 2,518,272
Other assets.................................................................................. 1,540,633
---------------------
$ 288,003,341
=====================
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Dividends and distributions payable........................................................ $ 7,458,750
Accrued expenses, payables and other liabilities........................................... 6,344,783
---------------------
Total liabilities....................................................................... 13,803,533
---------------------
Minority interest............................................................................. 2,941,541
---------------------
COMMITMENTS AND CONTINGENCIES (NOTE 11)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; 25,000,000 shares authorized; 0 shares issued
and outstanding..................................................................... --
Common Stock, $.01 par value; 200,000,000 shares authorized; 19,125,000
shares issued; 18,965,000 shares outstanding........................................ 191,250
Additional paid-in capital.............................................................. 283,496,750
Distributions in excess of earnings..................................................... (2,107,331)
Unrealized loss on securities available for sale........................................ (7,327,890)
Treasury stock at cost (160,000 shares)................................................. (2,994,512)
---------------------
Total shareholders' equity.......................................................... 271,258,267
---------------------
$ 288,003,341
=====================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-5
<PAGE> 139
OCWEN ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM MAY 14, 1997 TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Interest income:
Repurchase agreements and interest earning deposits............................. $ 5,538,946
Securities available for sale................................................... 6,362,909
Loans........................................................................... 311,157
Discount loans.................................................................. 1,248,703
-------------------
13,461,715
-------------------
Operating income:
Investments in real estate, net................................................. 1,481,633
Other........................................................................... 12,665
-------------------
1,494,298
-------------------
Operating expenses:
Management fees................................................................. 1,796,311
Due diligence................................................................... 326,025
Foreign currency loss........................................................... 568,565
Other .......................................................................... 464,164
-------------------
3,155,065
-------------------
Income before minority interest...................................................... 11,800,948
Minority interest in net income of operating partnership............................. (9,430)
-------------------
Net income...................................................................... $ 11,791,518
===================
Earnings per share:
Basic........................................................................... $ 0.62
===================
Diluted......................................................................... $ 0.60
===================
Weighted average shares outstanding:
Basic........................................................................... 19,108,789
===================
Diluted......................................................................... 19,564,770
===================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-6
<PAGE> 140
OCWEN ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM MAY 14, 1997 TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
Additional
Common Stock Treasury paid-in-
----------------------------
Shares Amount stock capital
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Issuance of common stock........ 19,125,000 $ 191,250 $ -- $ 283,496,750
Repurchase of common stock...... (160,000) -- (2,994,512) --
Net income...................... -- -- -- --
Dividends....................... -- -- -- --
Change in unrealized loss on
securities available for sale.. -- -- -- --
------------ ------------ ------------ -------------
Balance at December 31, 1997 18,965,000 $ 191,250 $ (2,994,512) $ 283,496,750
============ ============ ============ =============
<CAPTION>
Unrealized
loss on
Distributions securities
in excess available
of earnings for sale Total
------------- ------------ ---------------
<S> <C> <C> <C>
Issuance of common stock........ $ -- $ -- $ 283,688,000
Repurchase of common stock...... -- (2,994,512)
Net income...................... 11,791,518 -- 11,791,518
Dividends....................... (13,898,849) -- (13,898,849)
Change in unrealized loss on
securities available for sale.. -- (7,327,890) (7,327,890)
------------ ------------ ---------------
Balance at December 31, 1997 $ (2,107,331) $ (7,327,890) $ 271,258,267
============ ============ ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-7
<PAGE> 141
OCWEN ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM MAY 14, 1997 TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities:
Net income................................................................... $ 11,791,518
Adjustments to reconcile net income to net cash provided by
operating activities:
Premium amortization (discount accretion), net ........................... 6,236,654
Depreciation.............................................................. 179,088
Foreign exchange loss..................................................... 568,565
Increase in interest receivable........................................... (2,518,272)
Increase in other assets.................................................. (1,540,633)
Increase in accrued expenses, payables and other liabilities.............. 6,344,783
Minority interest in earnings............................................. 9,430
-------------------
Net cash provided by operating activities ...................................... 21,071,133
-------------------
Cash flows from investing activities:
Purchase of securities available for sale.................................... (166,334,140)
Maturities and principal payments received on securities available
for sale ................................................................. 6,654,881
Purchase of loans............................................................ (16,091,515)
Purchase of discount loans................................................... (28,465,429)
Principal payments received on discount loans................................ 932,366
Principal payments received on loans......................................... 333,454
Investment in real estate.................................................... (45,609,127)
Deposits on pending asset acquisitions....................................... (1,000,000)
-------------------
Net cash used by investing activities .......................................... (249,579,510)
-------------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of offering costs................ 283,688,000
Dividend payments on common stock............................................ (6,502,500)
Treasury stock acquisition................................................... (2,994,512)
Proceeds from sale of operating partnership units........................... 2,994,512
-------------------
Net cash provided by financing activities....................................... 277,185,500
-------------------
Net increase in cash and cash equivalents....................................... 48,677,123
Cash and cash equivalents at beginning of period................................ --
-------------------
Cash and cash equivalents at end of period...................................... $ 48,677,123
===================
Reconciliation of cash and cash equivalents at end of period:
Cash and amounts due from depository institutions............................ $ 331,047
Interest earning deposits.................................................... 48,346,076
-------------------
$ 48,677,123
===================
Supplemental schedule of non-cash financing activities:
Common stock dividends and distributions declared but not paid............... $ 7,458,750
===================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
F-8
<PAGE> 142
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 ORGANIZATION
Ocwen Asset Investment Corp. ("OAIC" or the "Company") is a newly
formed corporation that has elected to be taxed as a Real Estate Investment
Trust ("REIT") under the Internal Revenue Code of 1986 (the "Code"). As such,
OAIC will generally not be subject to federal income taxation on that portion of
its income that is distributed to shareholders if it distributes at least 95% of
its taxable income to its shareholders by the due date of its federal income tax
return and complies with various other requirements.
The Company was incorporated in the Commonwealth of Virginia on
January 22, 1997 and was initially capitalized on February 12, 1997 through the
sale of 100 shares of common stock for $1,600. On May 14, 1997, the Company
completed an initial public offering ("IPO") with the sale of 19,125,000 shares
of common stock, par value $.01 per share, at a price of $16.00 per share
(before underwriting and offering expenses), and commenced operations thereon.
The Company's consolidated financial statements include the accounts
of OAIC and its subsidiaries. OAIC directly owns two qualified REIT
subsidiaries, Ocwen General Partner, Inc. ("General Partner") and Ocwen Limited,
Inc. ("Limited Partner"). General Partner and Limited Partner own 1% and 98.2%,
respectively of Ocwen Partnership, L.P. ("Operating Partnership"). Additionally,
through General Partner and Limited Partner, the Company established additional
partnerships in Florida and California for real estate investment purposes. The
minority interest at December 31, 1997 represents a 0.8% interest (160,000
units) in the Operating Partnership held by Investors Mortgage Insurance Holding
Company ("IMI"), a wholly owned subsidiary of Ocwen Financial Corporation
("Ocwen"). IMI also owns 1,715,000 shares, or 9.0%, of the Company's outstanding
common stock and has 1,912,500 options (25% of which vest each year over the
next four years) to purchase, at the election of the Company, either shares of
the Company or an equivalent number of units in the operating partnership at an
exercise price of $16.00 per share.
The Company has entered into a management agreement with Ocwen
Capital Corporation ("OCC"), a wholly owned subsidiary of Ocwen, under which OCC
advises the Company on various facets of its business and manages its day-to-day
operations, subject to the supervision of the Company's Board of Directors. For
its services, OCC receives a base management fee of 1% per annum of average
invested assets, as defined in the related agreement, payable quarterly. In
addition, OCC is entitled to receive incentive compensation in an amount equal
to 25% of the dollar amount by which Funds From Operations ("FFO"), as adjusted,
exceeds certain defined levels.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The Company's consolidated financial statements include the accounts
of OAIC and its subsidiaries as described in Note 1 above. All significant
intercompany transactions and balances have been eliminated.
SECURITIES AVAILABLE FOR SALE
Securities available for sale are carried at fair value with the net
unrealized gains or losses reported as a separate component of shareholders'
equity. Unrealized losses on securities that reflect a decline in value which is
other than temporary, if any, are charged to earnings. At disposition, the
realized net gain or loss is included in earnings on a specific identification
basis. The amortization of premiums and accretion of discounts are computed
using the interest method after considering actual and estimated prepayment
rates, if applicable. Actual prepayment experience is periodically reviewed and
effective yields are recalculated when differences arise between prepayments
originally anticipated and amounts actually received plus anticipated future
prepayments.
F-9
<PAGE> 143
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
LOAN PORTFOLIO
Loans held for investment are stated at amortized cost, less any
allowance for loan losses, because the Company has the ability and the intent to
hold them to maturity. Interest income is accrued as it is earned. Loans are
placed on non-accrual status after being delinquent greater than 89 days, or
earlier if the borrower is deemed by management to be unable to continue
performance. When a loan is placed on non-accrual status, interest accrued but
not received is reversed. While a loan is on non-accrual status, interest is
recognized only as cash is received. Loans are returned to accrual status only
when the loan is reinstated and ultimate collectibility of future interest is no
longer in doubt. Loan origination fees and certain direct loan origination costs
are deferred and recognized over the lives of the related loans as a yield
adjustment and included in interest income using the interest method applied on
a loan-by-loan basis. Gains and losses on disposal of such assets are computed
on a specific identification basis.
DISCOUNT LOAN PORTFOLIO
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, is 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 equating 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 December 31,
1997, the Company did not have any impaired loans.
F-10
<PAGE> 144
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
ALLOWANCE FOR LOAN LOSSES
The allowance for estimated loan losses is maintained at a level
that management, based upon evaluation of known and inherent risks in the
portfolio, considers adequate to provide for potential losses. Management's
periodic evaluation of the allowance for estimated loan losses is based upon an
analysis of the portfolio, historical loss experience, economic conditions and
trends, collateral values and other relevant factors. Future adjustments to the
allowance may be necessary if economic conditions and trends, collateral values
and other relevant factors differ substantially from the assumptions used in
making the evaluation.
INVESTMENT IN REAL ESTATE
Investment in real estate is recorded at cost less accumulated
depreciation (which is less than the net realizable value of the property). The
Company reviews its investment in real estate for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. If changes in events or circumstances indicate that the carrying
amount of an investment may not be recoverable, an impairment loss would be
recorded if the sum of the expected future cash flows (undiscounted and without
interest charges) is less than the carrying amount of the investment.
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
The Company's investment in foreign assets is translated into U.S.
dollars at current exchange rates, and related revenues and expenses are
translated at average exchange rates for the period. Resulting translation
adjustments are reflected in the results of operations. Transaction gains and
losses that arise from exchange rate fluctuations on transactions denominated in
a currency other than U.S. dollars are included in the results of operations as
incurred.
INCOME TAXES
The Company qualifies as a REIT under Sections 856 through 860 of
the Code of 1986, as amended. A REIT will generally not be subject to federal
income taxation on that portion of its income that is distributed to
shareholders if it distributes at least 95% of its taxable income by the due
date of its federal income tax return and complies with certain other
requirements. Accordingly, no provision has been made for federal income taxes
for the Company and its subsidiaries in the accompanying consolidated financial
statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents
include non-interest earning deposits, interest earning deposits and all highly
liquid investments purchased with an original maturity date of three months or
less.
F-11
<PAGE> 145
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
BASIC AND DILUTED EARNINGS PER SHARE
Basic earnings per share is calculated based upon the weighted
average number of shares of common stock outstanding during the year. Diluted
earnings per share is calculated based upon the weighted average number of
shares of common stock outstanding and all dilutive potential common shares
outstanding during the year. The computation of diluted earnings per share
includes the impact of the exercise of the outstanding options to purchase
common stock and assumes that the proceeds from such issuance are used to
repurchase common shares at fair value.
RISKS AND UNCERTAINTIES
In the normal course of business, the Company encounters primarily
two significant types of economic risk: credit and market. Credit risk is the
risk of default on the company's loan portfolio that results from a borrowers'
inability or unwillingness to make contractually required payments. Market risk
reflects changes in the value of securities available for sale and investments
in real estate due to changes in interest rates or other market factors,
including the rate of prepayments of principal, the value of the collateral
underlying loans and the valuation of real estate held by the Company.
Additionally, the Company encounters significant tax risks. If OAIC
were to fail to qualify as a REIT in any taxable year, OAIC would be subject to
federal income tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates, and distributions to shareholders
would not be deductible by OAIC in computing its taxable income. Any such
corporate tax liability could be substantial and would reduce the amount of cash
available for distribution to shareholders, which in turn could have an adverse
impact on the value of, and trading prices for, the Company's common stock.
Unless entitled to relief under certain Code provisions, the Company
could also be disqualified from taxation as a REIT for the four taxable years
following the year during which OAIC ceased to qualify as a REIT.
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change in the near or
medium term relate to the determination of the allowance for losses on loans and
discount loans.
RECENT ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" during 1997. SFAS No. 125 (i) sets forth the
criteria for (a) determining when to recognize financial and servicing assets
and liabilities; and (b) accounting for transfers of financial assets as sales
or borrowings; and (ii) requires (a) liabilities and derivatives related to a
transfer of financial assets to be recorded at fair value; (b) servicing assets
and retained interests in transferred assets carrying amounts be determined by
allocating carrying amounts based on fair value; (c) amortization of servicing
assets and liabilities be in proportion to net servicing income; (d) impairment
measurement based on fair value; and (e) pledged financial assets to be
classified as collateral. SFAS No. 125 provides implementation guidance for
assessing isolation of transferred assets and for accounting for transfers of
partial interests, servicing of financial assets, securitizations, transfers of
sales-type and direct financing lease receivables, securities lending
transactions, repurchase agreements including "dollar rolls", "wash sales", loan
syndications and participations, risk participations in banker's acceptances,
factoring arrangements, transfers of receivables
F-12
<PAGE> 146
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
with recourse and extinguishments of liabilities. In December 1996, the FASB
issued SFAS No. 127, "Deferral of the Effective Date of FASB Statement No. 125",
which delayed implementation of certain provisions of SFAS No. 125.
In February 1997, the FASB issued SFAS No. 128, "Earnings per
Share." SFAS No. 128 simplifies the calculation of earnings per share ("EPS"),
and makes them comparable to international standards. Under SFAS No. 128, the
Company is required to present both basic and diluted EPS on the face of its
statements of operations. Basic EPS, which replaces primary EPS required by APB
15 for entities with complex capital structures, excludes common stock
equivalents and is computed by dividing income available to common shareholders
by the weighted-average number of common shares outstanding for the period.
Diluted EPS gives effect to all dilutive potential common shares that were
outstanding during the period. SFAS No. 128 is effective for financial
statements for both interim and annual periods ending after December 15, 1997.
The Company adopted SFAS No. 128 effective December 31, 1997.
In February 1997, the FASB also issued SFAS No. 129, "Disclosure of
Financial Information About Capital Structure" ("SFAS No. 129"). SFAS No. 129
supersedes capital structure disclosure requirements found in previous
accounting pronouncements and consolidates them into one statement for ease of
retrieval and greater visibility for non-public entities. These disclosures are
required for financial statements for periods ending after December 15, 1997. As
SFAS No. 129 makes no changes to previous accounting pronouncements as those
pronouncements applied to OAIC, adoption of SFAS No. 129 will have no impact on
the Company's results of operations and financial condition.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 requires the inclusion of comprehensive income, either in
a separate statement for comprehensive income, or as part of a combined
statement of income and comprehensive income in a full-set of general- purpose
financial statements. Comprehensive income is defined as the change in equity of
a business enterprise during a period from transactions and other events and
circumstances, excluding those resulting from investments by and distributions
to owners. SFAS No. 130 requires that comprehensive income be presented
beginning with net income, adding the elements of comprehensive income not
included in the determination of net income, to arrive at comprehensive income.
SFAS No. 130 also requires that an enterprise display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. SFAS
No. 130 is effective for the Company's fiscal year beginning January 1, 1998.
SFAS No. 130 requires the presentation of information already contained in the
Company's financial statements and therefore is not expected to have an impact
on the Company's financial position or results of operation.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for the reporting of information about operating segments by public
business enterprises in their annual and interim financial reports issued to
shareholders. SFAS No. 131 requires that a public business enterprise report
financial and descriptive information, including profit or loss, certain
specific revenue and expense items, and segment assets, about its reportable
operating segments. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision-maker in deciding how to
allocate resources and in assessing performance. SFAS No. 131 is effective for
the Company's financial statements for periods beginning after December 15,
1997. SFAS No. 131 is a disclosure requirement and therefore is not expected to
have an effect on the Company's financial position or results of operations.
F-13
<PAGE> 147
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 3 FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all of the Company's assets are considered financial
instruments. For the majority of the Company's financial instruments,
principally loans, fair values are not readily available since there are no
available trading markets as characterized by current exchanges between willing
parties. Accordingly, fair values can only be derived or estimated using various
valuation techniques, such as computing the present value of estimated future
cash flows using discount rates commensurate with the risks involved. However,
the determination of estimated future cash flows is inherently subjective and
imprecise. In addition, for those financial instruments with option-related
features, prepayment assumptions are incorporated into the valuation techniques.
It should be noted that minor changes in assumptions or estimation methodologies
can have a material effect on these derived or estimated fair values.
The fair values reflected below are indicative of the interest rate
environments as of December 31, 1997 and do not take into consideration the
effects of interest rate fluctuations. In different interest rate environments,
fair value results can differ significantly, especially for certain fixed-rate
financial instruments and non-accrual assets. In addition, the fair values
presented do not attempt to estimate the value of the Company's anticipated
future business activities. In other words, they do not represent the Company's
value as a going concern. Furthermore, the differences between the carrying
amounts and the fair values presented may not be realized because, except as
indicated, the Company generally intends to hold these financial instruments to
maturity and realize their recorded values.
Reasonable comparability of fair values among institutions is
difficult due to the wide range of permitted valuation techniques and numerous
estimates that must be made in the absence of secondary market prices. This lack
of objective pricing standards introduces a degree of subjectivity to these
derived or estimated fair values. Therefore, while disclosure of estimated fair
values of financial instruments is required, readers are cautioned in using this
data for purposes of evaluating the financial condition of the Company.
The carrying amounts and the estimated fair values of the Company's
financial instruments at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Fair
Carrying Amount Value
--------------- --------------
<S> <C> <C>
Cash and cash equivalents................... $ 48,677,123 $ 48,677,123
Securities available for sale............... 146,026,907 146,026,907
Loan portfolio, net......................... 15,831,479 15,831,479
Discount loan portfolio..................... 26,978,888 26,978,888
</TABLE>
The methodologies used and key assumptions made to estimate fair
value, the estimated fair values determined and recorded carrying values follow:
CASH AND CASH EQUIVALENTS
Cash and cash equivalents have been valued at their carrying amounts
as these are reasonable estimates of fair value given the relatively short
period of time between origination of the instruments and their expected
realization.
SECURITIES AVAILABLE FOR SALE
For securities available for sale, fair value equals quoted price,
if available. For securities for which a quoted market price is not available,
fair value is estimated using quoted market prices for
F-14
<PAGE> 148
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
similar instruments. At December 31, 1997, the fair value for all securities
available for sale was based on quoted market prices.
LOANS AND DISCOUNT LOANS
The fair value of performing whole loans is estimated based upon
quoted market prices for similar whole loan pools. The fair value of the
discount loan portfolio is estimated based upon current market yields at which
recent pools of similar mortgages have traded taking into consideration the
timing and amount of expected cash flows.
NOTE 4 SECURITIES AVAILABLE FOR SALE
The amortized cost, fair value and gross unrealized gains and losses
on the Company's securities available for sale are as follows at the period
ended December 31, 1997:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Mortgage-related securities:
Single-family residential:
FHLMC interest only.............. $ 26,010,872 $ 215,892 $ (5,048,800) $ 21,177,964
FNMA interest only............... 27,289,844 183,774 (4,900,486) 22,573,132
Other AAA-rated interest only.... 1,090,760 -- (361,388) 729,372
Subordinates..................... 8,668,663 806,723 (31,319) 9,444,067
----------------- ----------------- ------------------ -----------------
63,060,139 1,206,389 (10,341,993) 53,924,535
----------------- ----------------- ----------------- -----------------
Multi-family and commercial:
AAA-rated interest only.......... 913,182 -- (47,435) 865,747
A-rated interest only............ 503,707 -- (23,519) 480,188
Non-rated interest only.......... 4,975,589 -- (172,716) 4,802,873
Subordinates..................... 83,902,180 2,536,277 (484,893) 85,953,564
----------------- ----------------- ----------------- -----------------
90,294,658 2,536,277 (728,563) 92,102,372
----------------- ----------------- ----------------- -----------------
$ 153,354,797 $ 3,742,666 $ (11,070,556) $ 146,026,907
================= ================= ================= =================
</TABLE>
A profile of the maturities of securities available for sale at
December 31, 1997 follows. Securities are included based on their
weighted-average maturities, reflecting anticipated future prepayments based on
a consensus of dealers in the market.
<TABLE>
<CAPTION>
Amortized Cost Fair Value
----------------------- -----------------------
<S> <C> <C>
Due within one year........................... $ -- $ --
Due after 1 through 5 years................... 79,455,456 70,323,551
Due after 5 through 10 years.................. 57,361,874 58,753,733
Due after 10 years............................ 16,537,467 16,949,623
------------------ ------------------
$ 153,354,797 $ 146,026,907
================== ==================
</TABLE>
F-15
<PAGE> 149
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
Premiums amortized against and discounts accreted to income during
the period from May 14, 1997 to December 31, 1997 are as follows:
<TABLE>
<S> <C>
Premiums amortized against interest income.................. $8,033,504
Discounts accreted to interest income....................... (1,709,044)
----------
Net premium amortization.............................. $6,324,460
==========
</TABLE>
During January and February 1998, the Company recorded a charge of
$2.5 million against its portfolio of interest-only and inverse interest-only
securities (together, "IOs"). The charge results from increases in projected
prepayment speeds during this period and a resulting shortening of the weighted
average lives of certain individual securities in the portfolio. As a result, a
determination was made to write down the recorded investment in those securities
where the reduction in fair value was considered to be other than temporary. The
Company believes that the current low levels of interest rates, and the inverted
shape of the yield curve, are relatively short-term phenomena. To the extent
that longer term interest rates increase or the relationship between short-term
and long-term rates revert to their historical spreads, the value of the
portfolio should recover. To the extent that the current environment persists,
or that rates decrease further, additional impairment losses may be recognized.
NOTE 5 LOAN PORTFOLIO
The Company's loan portfolio consisted of the following at December
31, 1997:
<TABLE>
<S> <C>
Single-family residential....................................... $ 6,465,080
Multi-family residential........................................ 3,455,000
Commercial real estate:
Office....................................................... 33,058,000
Hotel........................................................ 20,952,000
------------------
Total loans................................................ 63,930,080
Deferred origination fees....................................... (458,925)
Loans in process............................................... (47,639,676)
Allowance for loan losses....................................... --
------------------
Loans, net................................................... $ 15,831,479
==================
</TABLE>
The following table represents a summary of the Company's
non-performing loans at December 31, 1997.
<TABLE>
NON-PERFORMING LOANS:
<S> <C>
Single-family residential................................. $ 268,689
Multi-family.............................................. --
Commercial................................................ --
------------------
$ 268,689
==================
</TABLE>
If non-accrual loans had been current in accordance with their
original terms, additional interest income of approximately $5,603 for the
period from May 14, 1997 to December 31, 1997 would have been earned. No
interest has been accrued on loans greater than 89 days past due.
At December 31, 1997, the Company had no investment in impaired
loans as defined in accordance with SFAS No. 114, and as amended by SFAS No.
118.
F-16
<PAGE> 150
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
The following table sets forth the geographic distribution of
properties securing the Company's loans at December 31, 1997:
<TABLE>
<CAPTION>
Single-family Multi-family Commercial
Residential Residential Real Estate Total
---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
Georgia............ 1,954,863 -- -- 1,954,863
New York........... -- 3,455,000 -- 3,455,000
South Carolina..... 3,520,770 -- -- 3,520,770
Delaware........... -- -- 13,300,000 13,300,000
Massachusetts...... $ -- $ -- $ 40,710,000 $ 40,710,000
Other.............. 989,447 -- -- 989,447
--------------------- --------------------- --------------------- ---------------------
Total.............. $ 6,465,080 $ 3,455,000 $ 54,010,000 $ 63,930,080
===================== ===================== ===================== =====================
</TABLE>
NOTE 6 DISCOUNT LOAN PORTFOLIO
The Company has acquired, through private sales and auctions,
mortgage loans at a discount. The Company estimates the amounts it will realize
through foreclosure, collection or other resolution efforts and the length of
time required to complete the collection process in determining the amounts it
will bid to acquire such loans.
The resolution alternatives applied to the discount loan portfolio
are (i) the borrower brings the loan current in accordance with original or
modified terms; (ii) the borrower repays the loan or a negotiated amount; (iii)
the borrower agrees to a deed-in-lieu of foreclosure, in which case it is
classified as real estate owned and held for sale by the Company and (iv) the
Company forecloses on the loan and the property is either acquired at the
foreclosure sale by a third party or by the Company, in which case it is
classified as real estate owned and held for sale. The Company periodically
reviews the discount loan portfolio performance to ensure that nonperforming
loans are carried at the lower of amortized cost or net realizable value of the
underlying collateral and the remaining unaccreted discount is adjusted
accordingly. Upon receipt of title to the property, the loans are transferred to
real estate owned.
The Company's discount loan portfolio consists of the following at
December 31, 1997:
<TABLE>
<S> <C>
LOAN TYPE:
Commercial real estate loans:
Office..................................................... $ 11,892,814
Retail..................................................... 30,635,968
-----------------------
Total unpaid principal balance.......................... 42,528,782
Discount................................................... (15,549,894)
Allowance for loan losses.................................. --
-----------------------
Discount loans, net..................................... $ 26,978,888
=======================
LOAN STATUS:
Current.................................................... $ 7,964,105
Past due 31 to 89 days..................................... --
Past due 90 days or more................................... 34,564,677
-----------------------
$ 42,528,782
=======================
</TABLE>
F-17
<PAGE> 151
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
The following table sets forth the activity in the Company's gross
discount loan portfolio for the period from May 14, 1997 to December 31, 1997:
<TABLE>
<S> <C>
Principal balance at beginning of period............................... $ --
Acquisitions........................................................... 44,686,413
Resolutions and repayments (1)......................................... (1,281,846)
Foreign currency loss (2).............................................. (875,785)
------------------------
Principal balance at end of period..................................... $ 42,528,782
=======================
</TABLE>
(1) Resolutions and repayments consists of loans which were resolved in
a manner which resulted in full or partial repayment of the loan to
the Company and consisted of $1.3 million of negotiated settlements
and $16,000 of partial repayments.
(2) The $875,785 represents the gross foreign currency loss related to
the unpaid principal balance which, net of $307,220 related to the
discount on loans, resulted in a net foreign currency loss of
$568,565 for the period from May 14, 1997 to December 31, 1997.
The following table sets forth the geographic distribution of
properties securing the Company's discount loans at December 31, 1997:
<TABLE>
<S> <C>
Canada......................................... $ 26,762,692
New York....................................... 9,208,805
Montana........................................ 3,873,276
Ohio........................................... 2,684,009
------------------
Total....................................... $ 42,528,782
==================
</TABLE>
NOTE 7 INVESTMENT IN REAL ESTATE
The investments in real estate at December 31, 1997 represent
acquisitions of two commercial office properties in San Francisco, California
and a shopping plaza in Bradenton, Florida. The investments have been recorded
on the books of OAIC California Partnership, L.P. and OAIC Florida Partnership,
L.P, respectively, and include:
<TABLE>
<S> <C>
Land............................................................. $ 5,250,105
Office buildings................................................. 21,741,968
Retail........................................................... 18,602,922
Building improvements............................................ 14,132
------------------
45,609,127
Accumulated depreciation......................................... (179,088)
------------------
Investment in real estate net................................. $ 45,430,039
==================
</TABLE>
NOTE 8 SHAREHOLDERS' EQUITY
On May 14, 1997, the Company completed its initial public offering
of 17,250,000 shares, including over-allotments, for an initial public offering
price of $16.00 per share, before underwriting discounts and commissions.
Additionally, upon the closing of the offering 1,875,000 shares of common stock
were sold to IMI at the initial public offering price, net of underwriting
discounts and commissions. The total net proceeds from the sale of the above
shares was $283,688,000.
On December 8, 1997 IMI sold to the Company 160,000 shares of the
Company's common stock and invested in an equivalent number of units in the
Operating Partnership. As a result of this sale, IMI's direct ownership interest
in the Company amounted to 9.0% at December 31, 1997. The change in ownership
structure resulted in IMI holding a 0.8% minority interest in the Operating
Partnership.
F-18
<PAGE> 152
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
The Company adopted a non-qualified stock option plan (the "Option
Plan"), which provides options to purchase shares of common stock (or, at the
election of the Company, limited partnership interests ("Units") in the
Operating Partnership that may be redeemed for cash, or, at the election of the
General Partner, shares of common stock on a one-for-one basis). The maximum
aggregate number of shares of Common stock that may be issued pursuant to
options granted under the Option Plan is 5,000,000. The purpose of the Option
Plan is to provide a means of performance-based compensation as an incentive for
OCC to enhance the value of Company's stock.
At the closing of the initial public offering, the Company granted
to OCC 1,912,500 options under the Option Plan at an exercise price per share
equal to the initial offering price of the common stock. The options vest one
quarter each year upon the first four anniversaries of the closing date of the
initial public offering. The options terminate on the tenth anniversary of the
closing date of the initial public offering.
The Company has recorded $103,578 of compensation expense related to
the stock options granted to OCC. The compensation expense is based on the
estimated fair value of the options which was determined using the Black-Scholes
option-pricing model. The fair value of the options was estimated using the
following assumptions:
<TABLE>
<S> <C>
Expected dividend yield....................................... 15.625%
Expected stock price volatility............................... 17.910%
Risk-free interest rate....................................... 5.391%
Expected life of options...................................... 4 year
</TABLE>
NOTE 9 BASIC AND DILUTED EARNINGS PER SHARE
The Company is required to present both basic and diluted EPS on the
face of its statement of operations. Basic EPS, which replaced primary EPS
required by APB 15, is calculated by dividing net income by the weighted average
number of common shares outstanding during the year. Diluted EPS is calculated
by dividing net income by the weighted average number of shares of common stock
outstanding and the dilutive potential common shares related to outstanding
stock options.
The following is a reconciliation of the calculation of basic EPS to
diluted EPS for the period from May 14, 1997 to December 31, 1997.
<TABLE>
<S> <C>
Net income................................................................. $ 11,791,518
=================
BASIC EPS:
Weighted average shares of common stock.................................... 19,108,789
=================
Basic EPS.................................................................. $ 0.62
=================
DILUTED EPS:
Weighted average shares of common stock.................................... 19,108,789
Effect of dilutive securities:
Stock options........................................................... 455,981
-----------------
19,564,770
Diluted EPS................................................................ $ 0.60
=================
</TABLE>
F-19
<PAGE> 153
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 10 TAXATION
The Company qualifies as a REIT under Sections 856 through 860 of
the Code, as amended. A REIT will generally not be subject to federal income
taxation on that portion of its income that is distributed to its shareholders
if it distributes at least 95 percent of its taxable income and meets certain
other income and asset tests. The Company has until the filing of its tax return
to satisfy the distribution requirement. Since the Company plans to distribute
100% of its taxable income, no provision has been made for federal income taxes
for the Company and its subsidiaries in the accompanying consolidated financial
statements. As taxable income is finalized and the tax return is filed, an
additional distribution may be required.
NOTE 11 COMMITMENTS AND CONTINGENCIES
Noncancelable operating leases with tenants expire on various dates
through 2028. The future minimum rental income (base rent) to be received under
leases existing as of December 31, 1997, are as follows:
<TABLE>
<S> <C>
1998..................................................... $ 3,966,128
1999..................................................... 3,684,755
2000..................................................... 3,267,164
2001..................................................... 2,569,014
2002..................................................... 1,839,674
Thereafter............................................... 14,747,152
</TABLE>
Office and retail space in the properties is generally leased to
tenants under lease terms which provide for the tenants to pay for increases in
operating expenses in excess of specified amounts. The above future minimum
lease payments do not include specified payments for tenant reimbursements of
operating expenses.
At December 31, 1997, outstanding commitments totaled $74.3 million
and included $14.0 million related to the purchase of an office building, $60.3
million related to the origination of three real estate loans with initial
fundings of approximately $10.0 million.
Neither the Company nor the Operating Partnership is currently
involved in any material litigation nor, to the Company's knowledge, is any
material litigation currently threatened against the Company or the Operating
Partnership.
F-20
<PAGE> 154
NOTE 12 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth the quarterly financial information
for the period from May 14, 1997 to December 31, 1997.
<TABLE>
<CAPTION>
For the Period
Quarters Ended May 14, 1997
--------------------------------------------
December 31, September 30, to
1997 1997 June 30, 1997
------------------ ------------------- -------------------
<S> <C> <C> <C>
Interest income............................. $ 5,466,971 $ 5,511,937 $2,482,807
Operating income............................ 1,427,260 67,038 --
Operating expenses.......................... (1,503,779) (1,228,703) (422,583)
--------------- ---------------- ----------
Income before minority interest............. 5,390,452 4,350,272 2,060,224
Minority interest in net income of operating
partnership............................... (9,430) -- --
--------------- ---------------- ----------
Net income.................................. $ 5,381,022 $ 4,350,272 $2,060,224
=============== ================ ==========
Earnings per share:
Basic..................................... $ 0.28 $ 0.23 $ 0.11
Diluted................................... $ 0.28 $ 0.22 $ 0.11
</TABLE>
F-21
<PAGE> 155
OCWEN ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(Unaudited) (Audited)
---------------------- ----------------------
<S> <C> <C>
ASSETS:
Cash and amounts due from depository institutions............................. $ 3,135,888 $ 331,047
Interest earning deposits..................................................... 15,193,815 48,346,076
Securities available for sale, at market value................................ 395,495,423 146,026,907
Commercial and multifamily loan portfolio, net................................ 55,116,284 9,481,436
Residential loan portfolio, net............................................... 197,495,230 6,350,043
Discount loan portfolio, net.................................................. 8,589,370 26,978,888
Investment in real estate, net................................................ 209,851,125 45,430,039
Principal and interest receivable............................................. 5,967,421 2,518,272
Deposits on pending asset acquisitions........................................ -- 1,000,000
Other assets.................................................................. 19,553,108 1,540,633
-------------------- --------------------
Total assets............................................... $ 910,397,664 $ 288,003,341
==================== ====================
LIABILITIES:
Securities sold under agreements to repurchase........................... $ 143,058,656 $ --
Obligation outstanding under line of credit.............................. 189,136,665 --
Obligation outstanding under line of credit - secured by real estate..... 142,444,500 --
11.5% Redeemable Notes due 2005.......................................... 143,000,000 --
Dividends and distributions payable...................................... 9,140,443 7,458,750
Accrued expenses, payables and other liabilities......................... 12,267,243 6,344,783
-------------------- --------------------
Total liabilities.......................................... 639,047,507 13,803,533
-------------------- --------------------
Minority interest ............................................................ 28,369,583 2,941,541
-------------------- --------------------
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............................................... 294,461,433 280,503,838
Distributions in excess of earnings...................................... (35,982,904) (2,107,331)
Accumulated other comprehensive income:
Net unrealized loss on securities available for sale................ (13,719,114) (7,327,890)
Accumulative translation adjustments................................ (1,968,491) --
--------------------- --------------------
Total other comprehensive income.................................. (15,687,605) (7,357,890)
--------------------- ---------------------
Total shareholders' equity................................... 242,980,574 271,258,267
-------------------- --------------------
Total liabilities and shareholders' equity................. $ 910,397,664 $ 288,003,341
==================== ====================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-22
<PAGE> 156
OCWEN ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three For the Three
Months ended Months ended
September 30, 1998 September 30, 1997
------------------- -------------------
<S> <C> <C>
Interest income:
Repurchase agreements and interest bearing deposits ... $ 713,966 $ 2,753,729
Securities held for trading............................ -- --
Securities available for sale.......................... 13,806,940 2,492,172
Commercial and multifamily loans ..................... 1,512,508 --
Residential loans...................................... 3,862,725 5,565
Discount loans ........................................ 393,132 260,471
------------ ------------
20,289,271 5,511,937
------------ ------------
Interest expense:
Securities sold under agreements to repurchase......... 3,082,025 --
Obligations outstanding under lines of credit ......... 3,828,297 --
11.5% Redeemable Notes due 2005 ....................... 3,687,347 --
------------ ------------
10,597,669 --
------------ ------------
Net interest income before provision for loan losses... 9,691,602 5,511,937
Provision for loan losses................................. 350,682 --
------------ ------------
Net interest income after provision for loan losses.... 9,340,920 5,511,937
------------ ------------
Real estate-operating income:
Rental income.......................................... 8,035,170 107,668
Other.................................................. 1,508 7,298
------------ ------------
8,036,678 114,966
------------ ------------
Real estate-operating expenses:
Rental operation....................................... 3,626,054 29,039
Depreciation & amortization............................ 1,159,652 21,386
Interest............................................... 2,707,478 --
------------ ------------
7,493,184 50,425
------------ ------------
Real estate income, net................................... 543,494 64,541
------------ ------------
Other expenses (income):
Management fees........................................ 1,576,379 719,914
Due diligence expenses................................. 567,981 237,891
Foreign currency gain.................................. -- (2,497)
Other.................................................. 1,067,996 270,898
------------ ------------
3,212,356 1,226,206
------------ ------------
Net losses on securities and derivatives.................. 15,646,384 --
------------ ------------
(Loss) income before minority interest................. (8,974,326) 4,350,272
Minority interest in net loss of consolidated
subsidiary........................................... 720,513 --
------------ ------------
Net (loss) income before extraordinary items........... (8,253,813) 4,350,272
Extraordinary gain on repurchase of debt.................. 615,047 --
------------ ------------
Net (loss) income................................... $ (7,638,766) $ 4,350,272
============= ============
Basic (loss) earnings per share:
(Loss) income before extraordinary item............. $ (0.43) $ 0.23
Extraordinary item.................................. 0.03 --
------------- -----------
Net (loss) income................................... $ (0.40) $ 0.23
============= ===========
Diluted (loss) earnings per share:
(Loss) income before extraordinary item............. $ (0.43) $ 0.22
Extraordinary item.................................. 0.03 --
------------- -----------
Net (loss) income................................... $ (0.40) $ 0.22
============= ===========
Weighted average shares outstanding:
Basic............................................... 18,965,000 19,125,000
Diluted............................................. 18,965,000 19,715,712
</TABLE>
<TABLE>
<CAPTION>
For the Nine For the Period
Months ended May 14, 1997 to
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Interest income:
Repurchase agreements and interest bearing deposits ... $ 1,009,614 $ 4,150,857
Securities held for trading............................ 106,892 --
Securities available for sale.......................... 29,990,157 3,497,356
Commercial and multifamily loans ..................... 3,786,210 --
Residential loans...................................... 6,475,756 5,565
Discount loans ........................................ 1,719,330 340,966
------------- ------------
43,087,959 7,994,744
------------- ------------
Interest expense:
Securities sold under agreements to repurchase......... 7,048,840 --
Obligations outstanding under lines of credit ......... 6,102,066 --
11.5% Notes due 2005 ................................. 3,687,347 --
------------- ------------
16,838,253 --
------------- ------------
Net interest income before provision for loan losses... 26,249,706 7,994,744
Provision for loan losses................................. 556,731 --
------------- ------------
Net interest income after provision for loan losses.... 25,692,975 7,994,744
------------- ------------
Real estate-operating income:
Rental income.......................................... 14,584,661 107,668
Other.................................................. 28,343 7,298
------------- ------------
14,613,004 114,966
------------- ------------
Real estate-operating expenses:
Rental operation....................................... 6,901,905 29,039
Depreciation & amortization............................ 2,222,573 21,386
Interest............................................... 4,396,581 --
------------- ------------
13,521,059 50,425
------------- ------------
Real estate income, net................................... 1,091,945 64,541
------------- ------------
Other expenses (income):
Management fees........................................ 4,110,011 1,060,914
Due diligence expenses................................. 935,625 285,812
Foreign currency gain.................................. (116,953) (2,497)
Other.................................................. 1,644,090 304,562
------------- ------------
6,572,773 1,648,791
------------- ------------
Net losses on securities and derivatives.................. 32,723,429 --
------------- ------------
(Loss) income before minority interest................. (12,511,282) 6,410,494
Minority interest in net loss of consolidated
subsidiary........................................... 399,359 --
------------- ------------
Net (loss) income before extraordinary items........... (12,111,923) 6,410,494
Extraordinary gain on repurchase of debt.................. 615,047 --
------------- ------------
Net (loss) income................................... $ (11,496,876) $ 6,410,494
============== ============
Basic (loss) earnings per share:
(Loss) income before extraordinary item............. $ (0.64) $ 0.34
Extraordinary item.................................. 0.03 --
------------ -----------
Net (loss) income................................... $ (0.61) $ 0.34
============= ===========
Diluted (loss) earnings per share:
(Loss) income before extraordinary item............. $ (0.64) $ 0.33
Extraordinary item.................................. 0.03 --
------------ -----------
Net (loss) income................................... $ (0.61) $ 0.33
============= ===========
Weighted average shares outstanding:
Basic............................................... 18,965,000 19,125,000
Diluted............................................. 18,965,000 19,620,046
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-23
<PAGE> 157
OCWEN ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
AND FOR THE PERIOD MAY 14, 1997 TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
Distributions
Common stock Additional in excess
----------------------------------
Shares Amount Paid-in-capital of earnings
--------------- ---------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Issuance of common stock.................... 19,125,000 $ 191,250 $ 283,496,750 $ --
Retirement of common stock.................. (160,000) (1,600) (2,992,912) --
Net income.................................. -- -- -- 11,791,518
Dividends................................... -- -- -- (13,898,849)
Change in unrealized loss................... -- -- -- --
------------- ------------- --------------- ---------------
Balances at December 31, 1997............... 18,965,000 189,650 280,503,838 (2,107,331)
Capital contribution........................ -- -- 13,957,595
Net loss .................................. -- -- -- (11,496,876)
Dividends .................................. -- -- -- (22,378,697)
Change in unrealized loss................... -- -- -- --
Change in cumulative translation
adjustment.............................. -- -- -- --
------------- ------------- --------------- ---------------
Balances at September 30, 1998.............. 18,965,000 $ 189,650 $ 294,461,433 $ (35,982,904)
============= ============= ============== ================
</TABLE>
<TABLE>
<CAPTION>
Net unrealized
loss on
securities Cumulative
available translation
for sale adjustment Total
---------------- ---------------- ----------------
<S> <C> <C> <C>
Issuance of common stock.................... $ -- $ -- $ 283,688,000
Retirement of common stock.................. -- -- (2,994,512)
Net income.................................. -- -- 11,791,518
Dividends .................................. -- -- (13,898,849)
Change in unrealized loss................... (7,327,890) -- (7,327,890)
------------- ------------- -------------
Balances at December 31, 1997............... (7,327,890) -- 271,258,267
Capital contribution........................ 13,957,595
Net loss .................................. -- -- (11,496,876)
Dividends .................................. -- -- (22,378,697)
Change in unrealized loss................... (6,391,224) -- (6,391,224)
Change in cumulative translation
adjustment.............................. -- (1,968,491) (1,968,491)
------------- ------------- -------------
Balances at September 30, 1998.............. $ (13,719,114) $ (1,968,491) $ 242,980,574
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-24
<PAGE> 158
OCWEN ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the For the Period
Nine Months May 14, 1997
ended to
September 30, 1998 September 30, 1997
------------------ -------------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income................................................................... $ (11,496,876) $ 6,410,494
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Premium amortization, net..................................................... 7,992,956 1,422,847
Depreciation.................................................................. 2,222,573 21,386
Foreign exchange gain......................................................... (116,953) --
Cumulative translation adjustment ............................................ (1,968,491) --
Extraordinary gain on extinguishment of debt.................................. (615,047) --
Provision for loan losses..................................................... 556,731 --
Proceeds received on sale of securities held for sale......................... 39,408,287 --
Net losses on securities and derivatives...................................... 32,723,429 --
Increase in interest receivable............................................... (3,449,149) (1,897,189)
Increase in other assets...................................................... (20,108,845) (535,106)
Decrease in accrued expenses, payables and other liabilities.................. (1,071,622) 2,039,437
Minority interest in net loss of operating partnership........................ (399,359) --
------------------ -----------------
Net cash provided by operating activities.............................................. 43,677,634 7,461,869
----------------- -----------------
Cash flows from investing activities:
Purchases of securities available for sale.......................................... (357,494,324) (92,295,129)
Maturities and principal payments received on securities available for sale......... 30,388,130 2,957,402
Principal payments received from discount loans..................................... 973,325 6,915
Principal payments received from loans.............................................. 20,344,923 --
Purchase of loans................................................................... (257,818,817) (3,773,321)
Purchase of discount loans.......................................................... (10,031) (25,191,206)
Payment received from sale of loans................................................. 111,109 --
Investment in real estate........................................................... (149,017,946) (26,285,103)
Deposits on pending asset acquisitions.............................................. 996,500 (6,184,300)
----------------- ------------------
Net cash (used) by investing activities................................................ (711,527,131) (150,764,742)
------------------ ------------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of offering costs....................... -- 283,688,000
Dividend payments on common stock................................................... (22,378,697) (1,912,500)
Proceeds received from sale of securities to affiliates in excess of market value... 13,957,595 --
Proceeds from issuance of Notes..................................................... 150,000,000 --
Repurchase of Notes................................................................. (6,309,944) --
Proceeds from sale of operating partnership units................................... 27,593,302 --
Increase in securities sold under agreements to repurchase.......................... 143,058,656 --
Increase in obligations outstanding under lines of credit........................... 331,581,165 --
----------------- -----------------
Net cash provided by financing activities.............................................. 637,502,077 281,775,500
----------------- -----------------
Net (decrease) increase in cash and cash equivalents................................... (30,347,420) 138,472,627
Cash and cash equivalents at beginning of period....................................... 48,677,123 --
----------------- -----------------
Cash and cash equivalents at end of period............................................. $ 18,329,703 $ 138,472,627
================= =================
Reconciliation of cash and cash equivalents at end of period:
Cash and amounts due from depository institutions................................... 3,135,888 10,850
Interest bearing deposits........................................................... 15,193,815 8,461,777
Repurchase agreements............................................................... -- 130,000,000
----------------- -----------------
Total $ 18,329,703 $ 138,472,627
================= =================
Supplemental schedule of non-cash financing activities:
Interest paid....................................................................... $ 16,204,823 $ --
Non-cash activities:
Loans transferred through the foreclosure of a related
Mortgage loan to real estate owned............................................... 17,625,713 --
Change in unrealized (loss) gain on securities available for sale................... (6,391,224) 1,605,820
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-25
<PAGE> 159
OCWEN ASSET INVESTMENT CORP.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in conformity with the instructions to Form 10-Q and Article 10, Rule 10-01 of
Regulation S-X for interim financial statements. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles ("GAAP") for complete financial statements. The
consolidated financial statements include the accounts of Ocwen Asset Investment
Corp. ("OAC" or the "Company") and its subsidiaries. The interim financial
information should be read in conjunction with the Company's 1997 Annual Report
on Form 10-K.
OAC directly owns two qualified real estate investment trust ("REIT")
subsidiaries, Ocwen General, Inc. ("General Partner") and Ocwen Limited, Inc.
("Limited Partner"), among others. At September 30, 1998, the General Partner
and the Limited Partner owned 0.9% and 90.4%, respectively of Ocwen Partnership,
L.P. ("Operating Partnership"). The minority interest at September 30, 1998
represents an 8.7% interest (1,808,733 units) in the Operating Partnership held
by Investors Mortgage Insurance Holding Company ("IMI"), a wholly-owned
subsidiary of Ocwen Financial Corporation ("OCN"). IMI also owns 1,540,000
shares, or 8.12 percent, of the Company's outstanding common stock.
In the opinion of management, the accompanying financial statements contain all
adjustments, consisting of normal and recurring accruals, necessary for a fair
presentation of the Company's:
- - financial condition at September 30, 1998 and December 31, 1997,
- - the results of its operations for the three and nine months ended
September 30, 1998; and for the quarter ended September 30, 1997 and the
period May 14, 1997 to September 30, 1997,
- - the changes in shareholders' equity for the nine month period ended
September 30, 1998 and for the period May 14, 1997 to December 31, 1997,
and
- - cash flows for the nine months ended September 30, 1998 and for the
period May 14, 1997 to September 30, 1997.
Operating results for the period ended September 30, 1998 are not necessarily
indicative of the results that may be expected for any other interim period or
the entire year ending December 31, 1998.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the dates of the statements of financial condition and revenues
and expenses for the periods covered. Actual results could differ from those
estimates and assumptions.
NOTE 2 ORGANIZATION AND RELATIONSHIPS
OAC was incorporated in the Commonwealth of Virginia on January 22, 1997 and was
initially capitalized on February 12, 1997 through the sale of 100 shares of
common stock for $1,600. On May 14, 1997, the Company completed an initial
public offering ("IPO") with the sale of 19,125,000 shares of common stock, par
value $.01 per share, at a price of $16.00 per share (before underwriting and
offering expenses), and commenced operations thereon.
The Company has entered into a management agreement with Ocwen Capital
Corporation ("OCC" or the "Manager"), 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 except for residential mortgage
loans. Effective January 1, 1998, the base management fee for residential loans,
was reduced to 0.25% per quarter of 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
F-26
<PAGE> 160
by which funds from operations, as adjusted, exceeds certain defined levels per
the management agreement.
OCC has 1,912,500 options (478,125 of which vested in May 1998 and an additional
25% of which vest each year over the next three years) to purchase, at the
election of the Company, either shares of the Company or an equivalent number of
units in the Operating Partnership, at an exercise price of $16.00 per share.
The Company also has entered into servicing agreements with Ocwen Federal Bank
FSB ("OFB" or 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.
On May 7, 1998, the Operating Partnership issued 1,473,733 additional limited
partnership units to IMI in exchange for a capital contribution of $24.5
million. At September 30, 1998, IMI's minority interest in the Operating
Partnership was 8.7 percent.
Also on May 7, 1998, the Company sold its entire portfolio of AAA-rated interest
only ("IO") and inverse floating rate interest only ("Inverse IO") classes of
mortgage related securities backed by single-family residential loans (the "IO
Portfolio") to affiliates of the Company, the Manager and OCN, for a cash price
of $54.6 million, which represents the IO Portfolio's amortized cost plus
accrued interest and exceeded the IO Portfolio's market value by approximately
$14.0 million. Because the IOs were being sold to a principal shareholder and
another related party, the $14.0 million by which amortized cost exceeded market
value was recorded as a charge to earnings and has been reflected on the
Company's books as a capital contribution.
NOTE 3 RECENTLY ISSUED 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 that an entity
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
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Initial application of SFAS No. 133 should be as of the beginning of an entity's
fiscal quarter; on that date, hedging relationships must be designated anew and
documented pursuant to the provisions of SFAS No. 133. 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.
In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise", an amendment of FASB Statement No. 65. This
statement is effective for the first fiscal quarter beginning after December 15,
1998. This Statement standardizes how mortgage banking firms account for certain
securities and other interests they retain after securitizing mortgage loans
that were held for sale. Adoption of this pronouncement is not expected to have
a material impact on the Company's consolidated financial statements.
F-27
<PAGE> 161
OCWEN ASSET INVESTMENT CORP.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 4 INCOME TAXES
The Company qualifies as a REIT under Sections 856 through 860 of the Internal
Revenue Code of 1986, as amended (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
for the year 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.
NOTE 5 COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity of a business enterprise
during a period as a result of transactions and other events and circumstances
during such period, excluding those resulting from investments by and
distributions to owners. SFAS No. 130 requires that comprehensive income be
presented beginning with net income and adding the elements of comprehensive
income not included in the determination of net income in order to arrive at
comprehensive income.
The following table computes comprehensive income for the periods indicated.
<TABLE>
<CAPTION>
For the For the For the For the Period
Three Months Three Months Nine Months May 14, 1997
Ended Ended Ended to
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
--------------- ------------- ---------------- --------------
<S> <C> <C> <C> <C>
Net (loss) income before extraordinary item...... $ (8,253,813) $ 4,350,272 $ (12,111,923) $ 6,410,494
Other comprehensive (loss) income:
Foreign currency translation adjustment....... (916,525) -- (1,968,491) --
Unrealized losses on securities:
Unrealized (losses) gains arising
During the period............................. (27,376,733) (177,989) (37,044,667) 1,605,820
Adjustment for losses included in
Net income.................................... 13,576,398 -- 30,653,443 --
--------------- ------------ ---------- -------------
Net unrealized (losses) gains............. (13,800,335) (177,989) (6,391,224) 1,605,820
Other comprehensive (loss) income......... (14,716,860) (177,989) (8,359,715) 1,605,820
--------------- ------------- ----------- -------------
Comprehensive (loss) income before
Extraordinary item.......................... $ (22,970,673) $ 4,172,283 $ (20,471,638) $ 8,016,314
Extraordinary item............................... 615,047 -- 615,047 --
--------------- ------------ -------------- ------------
Comprehensive (loss) income...................... $ (22,355,626) $ 4,172,283 $ (19,856,591) $ 8,016,314
=============== ============= ============ =============
</TABLE>
NOTE 6 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 swaps allow
the Company to receive a floating rate of interest equal to LIBOR and to pay
fixed interest rates.
F-28
<PAGE> 162
OCWEN ASSET INVESTMENT CORP.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
The 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 swaps are held for trading purposes. As of September 30,
1998 the Company held swaps with a notional amount of approximately $200.8
million. The fair value of the swaps are not recognized in the Consolidated
Financial Statements.
To qualify for hedge accounting the derivative must meet two criteria:
- the Company is exposed to interest rate risk as the result of a
debt it has incurred; and
- the interest rate protection agreement reduces the Company's
exposure to such risk.
If an interest rate protection agreement does not qualify as a hedge, it is
accounted for as an investment at fair value, with any gain or loss included as
a component of current income.
The Company is exposed to credit loss in the event of nonperformance by the
counterparties to the interest rate agreements should the floating interest
rates received by the Company exceed the fixed interest rates 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 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, 1998:
<TABLE>
<CAPTION>
Notional LIBOR Floating Rate at
Maturity Amount Index Fixed Rate End of Period Fair Value
------------ ---------------- --------- ------------- ------------------ ---------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
2003 $ 100,000 1-month 5.75% 5.59% $ (3,273)
2001 17,000 1-month 6.00 5.66 (492)
2001 75,000 1-month 6.00 5.64 (2,158)
2002 8,780 1-month 6.04 5.66 (341)
-------------- --------------
$ 200,780 $ (6,264)
============== =============
</TABLE>
The Company has a foreign currency swap contract to hedge currency exposure in
connection with its investment in residual interests backed by residential
mortgage loans originated in the United Kingdom ("U.K."), currently held by
OAIC-UK, a wholly owned subsidiary of the Company. The purpose of the Company's
foreign currency hedging activities is to protect the Company from the risk that
the eventual dollar net cash inflows will be adversely affected by changes in
exchange rates. Under the terms of the agreement, the Company will settle in
U.S. dollars on January 29, 1999, on the difference between the exchange rate on
the effective date of the contract and the exchange rate on January 29, 1999, on
a notional amount of 14.7 million British Pounds Sterling. At September 30,
1998, the fair value of the foreign currency contract was ($1.4) million. Gains
and losses on foreign currency translation from operations for which the
functional currency is other than the U.S. dollar, together with related hedged
item, are reported in Shareholders' Equity.
The Company also enters into U.S. Treasury interest rate futures contracts as
part of its overall interest rate risk management activity. Interest rate
futures contracts are commitments to either purchase or sell designated
financial instruments at a future date for a specified price and may be settled
in cash or through delivery. U.S. Treasury futures have been sold by the Company
to hedge the risk of a reduction in the market value of fixed-rate mortgage
loans and certain fixed-rate mortgage-backed and related securities available
for sale in a rising interest rate environment. Gains and losses on the futures
contracts are recorded in the Consolidated Statement of Financial Condition
offsetting the item being hedged.
F-29
<PAGE> 163
OCWEN ASSET INVESTMENT CORP.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
Terms and other information on interest rate futures contracts sold short were
as follows at the dates indicated:
<TABLE>
<CAPTION>
Maturity Notional Principal Fair Value
--------------- ------------------- ------------
(Dollars in Thousands)
<S> <C> <C> <C>
SEPTEMBER 30, 1998:
U.S. Treasury futures.................. Dec 1998 $ 13,400 $ 345
</TABLE>
The fair value of the interest rate swaps, the foreign currency swap, and the
interest rate 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.
NOTE 7 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 derivatives, are reported
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, 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.
NOTE 8 LOANS
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.
NOTE 9 COMMITMENTS
As of November 16, 1998, OAC had no outstanding commitments to acquire assets.
All other previously announced commitments or negotiations have been closed,
discontinued, or failed to close. The unfunded balances on the commercial and
multi-family loan portfolio amounted to $65.3 million as of October 31, 1998 and
are expected to be funded through working capital and/or a $200.0 million line
of credit secured by certain of the Company's investments in real estate and
commercial and multi-family loans.
F-30
<PAGE> 164
225 BUSH STREET
STATEMENTS OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997 AND
THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
F-31
<PAGE> 165
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Ocwen Asset Investment Corp.
We have audited the accompanying statement of revenue and certain expenses for
the property known as 225 Bush Street for the year ended December 31, 1997. This
financial statement is the responsibility of the property's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial
statement. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying statement of revenue and certain expenses was prepared using
the basis described in Note 2, for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission (for inclusion in the
current report on Form 8-K of Ocwen Asset Investment Corp.) and is not intended
to be a complete presentation of the revenues and expenses of the property known
as 225 Bush Street.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the revenue and certain expenses for 225 Bush Street on
the basis described in Note 2 for the year ended December 31, 1997, in
conformity with generally accepted accounting principles.
Price Waterhouse LLP
San Francisco, California
June 3, 1998
F-32
<PAGE> 166
225 BUSH STREET
<TABLE>
<CAPTION>
STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997
- ----------------------------------------------------------------------------------------
<S> <C>
REVENUES:
Base rents (Note 3)................................................
$ 7,918,726
CERTAIN EXPENSES:
Real estate and property taxes..................................... 381,580
Utilities.......................................................... 929,404
Janitorial......................................................... 591,437
Other operating expenses........................................... 750,387
Property management and administrative expenses (Note 4)........... 415,857
------------
$ 3,068,665
------------
Revenue in excess of certain expenses.............................. $ 4,850,061
============
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE> 167
225 BUSH STREET
<TABLE>
<CAPTION>
STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
- -----------------------------------------------------------------------------------------
<S> <C>
REVENUES:
Base rents (Note 3)..............................................
$ 2,231,098
CERTAIN EXPENSES:
Rel estate and property taxes.................................... 93,772
Utilities........................................................ 185,957
Janitorial....................................................... 147,241
Other operating expenses......................................... 157,978
Property management and administrative expenses (Note 4)......... 98,695
-----------
$ 683,643
------------
Revenue in excess of certain expenses............................ $ 1,547,455
============
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE> 168
225 BUSH STREET
NOTES TO STATEMENTS OF REVENUES AND CERTAIN EXPENSES
- --------------------------------------------------------------------------------
1. ORGANIZATION AND OPERATION OF PROPERTY
For the purpose of the accompanying statements of revenue and certain
expenses, 225 Bush Street (the "Property") is an office building located in San
Francisco, CA., which was acquired by Ocwen Asset Investment Corp. (the
"Company") on May 8, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying statements of revenue and certain expenses have been
prepared on the accrual basis of accounting.
The accompanying financial statements are not representative of the actual
operations for the periods presented, as certain revenues and expenses which may
not be comparable to the revenues and expenses to be earned or incurred by the
Company in the future operations of the Property have been excluded. Revenues
excluded consist of interest and other revenues unrelated to the continuing
operations of the Property. Expenses excluded consist of interest and other
finance changes, depreciation of the building and improvements, and amortization
of organization and other intangible costs and other expenses not directly
related to the future operations of the Property.
INTERIM STATEMENTS
The interim financial data for the three months ended March 31, 1998 is
unaudited. However, in the opinion of the Property's management, the interim
data includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim period. The
results for the period presented are not necessarily indicative of the results
to be expected for the full year or any other period.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues and expenses during the
period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Base rents are recognized on a cash basis which does not significantly
vary from the accrual basis required under generally accepted accounting
principles.
REPAIRS AND MAINTENANCE
Expenditures for maintenance and repairs are charged to operations as
incurred. Betterments which improve or extend the life of the asset beyond its
original condition are capitalized.
F-35
<PAGE> 169
225 BUSH STREET
NOTES TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
- --------------------------------------------------------------------------------
3. LEASES
Leases for the Property have various remaining lease terms of up to
sixteen years with options to certain tenants for renewal. In addition to base
rents, the leases provide for the tenants to pay their proportionate share of
real estate taxes and operating expenses over base year amounts.
Future minimum rents to be received from tenants as of December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 8,134,798
1999 7,270,286
2000 6,277,296
2001 5,752,548
2002 4,426,674
Thereafter 15,305,257
-------------
$ 47,166,859
=============
</TABLE>
For the year ended December 31, 1997, Chevron USA, Inc. ("Chevron") was
the leasee responsible for 43% of total base rents. For the three months ended
March 31, 1998, Chevron was the leasee responsible for 34% (unaudited) of total
base rents.
1. PROPERTY MANAGEMENT AND ADMINISTRATIVE EXPENSES
The Property incurs salary and benefit expenses for full-time employees.
In addition, the Property incurred management fees which totaled $66,000 for the
year ended December 31, 1997 and $18,000 for the three months ended March 31,
1998 (unaudited).
F-36
<PAGE> 170
841 PRUDENTIAL DRIVE
STATEMENTS OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
F-37
<PAGE> 171
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Ocwen Asset Investment Corp.
We have audited the accompanying statement of revenues and certain expenses for
the property known as 841 Prudential Drive for the year ended December 31, 1997.
This financial statement is the responsibility of the property's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial
statement. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying statement of revenues and certain expenses was prepared using
the basis described in Note 2, for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission (for inclusion in the
Current Report on Form 8-K of Ocwen Asset Investment Corp.) and is not intended
to be a complete presentation of the revenues and expenses of the property known
as 841 Prudential Drive.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the revenue and certain expenses for 841 Prudential Drive
on the basis described in Note 2 for the year ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
- ----------------------------------
PricewaterhouseCoopers LLP
Tampa, Florida
July 23, 1998
F-38
<PAGE> 172
841 PRUDENTIAL DRIVE
<TABLE>
<CAPTION>
STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997
- ------------------------------------------------------------------------------------
<S> <C>
REVENUES
Base rents $ 103,329
CERTAIN EXPENSES
Real estate and property taxes 694,282
Utilities 812,812
Janitorial 471,115
Repairs and maintenance 1,026,677
Security 455,908
Grounds and parking 247,339
Other operating expenses 368,911
Property management and administrative expenses 346,787
-----------------
4,423,831
-----------------
CERTAIN EXPENSES IN EXCESS OF REVENUES $ (4,320,502)
------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE> 173
841 PRUDENTIAL DRIVE
<TABLE>
<CAPTION>
STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE SIX MONTHS ENDED JUNE 30, 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C>
REVENUES
Base rents $ 53,954
CERTAIN EXPENSES
Real estate and property taxes 347,141
Utilities 366,466
Janitorial 269,477
Repairs and maintenance 353,269
Security 292,114
Grounds and parking 205,964
Other operating expenses 230,207
Property management and administrative expenses 155,116
------------------
2,219,754
------------------
CERTAIN EXPENSES IN EXCESS OF REVENUES $ (2,165,800)
===================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE> 174
841 PRUDENTIAL DRIVE
NOTES TO STATEMENTS OF REVENUES AND CERTAIN EXPENSES
- --------------------------------------------------------------------------------
1. ORGANIZATION AND OPERATION OF PROPERTY:
For the purpose of the accompanying statements of revenues and certain
expenses (the "financial statements"), 841 Prudential Drive (the
"Property") is a 22 story, 488,080 square foot office building and
adjacent parking lot located in Jacksonville, Florida, which was acquired
by Ocwen Asset Investment Corp. (the "Company") on July 22, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying financial statements have been prepared on the accrual
basis of accounting.
The accompanying financial statements are not representative of the actual
operations for the periods presented, as certain revenues and expenses
which may not be comparable to the revenues and expenses to be earned or
incurred by the Company in the future operations of the Property have been
excluded. Revenues excluded consist of Prudential Insurance Company of
America ("Prudential") tenant rental income and other revenues unrelated
to the continuing operations of the Property. Expenses excluded consist of
depreciation of the building and improvements, Prudential corporate
charges and other expenses not directly related to the future operations
of the Property.
Interim Financial Statement
The interim financial statement for the six months ended June 30, 1998 is
unaudited. However, in the opinion of the Property's management, the
interim financial statement includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of the
results for the interim period. The results for the period presented are
not necessarily indicative of the results to be expected for the full year
or any other period.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates.
Revenue Recognition
Base rents are recognized on a straight-line basis over the terms of the
lease agreements as required under generally accepted accounting
principles.
Repairs and Maintenance
Expenditures for repairs and maintenance are charged to operations as
incurred. Betterments that improve or extend the life of the asset beyond
its original condition are capitalized.
F-41
<PAGE> 175
841 PRUDENTIAL DRIVE
NOTES TO STATEMENTS OF REVENUES AND CERTAIN EXPENSES
- --------------------------------------------------------------------------------
3. TENANT LEASES:
Leases for the Property have various remaining lease terms of up to three
years with options to certain tenants for renewal.
As of December 31, 1997, 100 percent of the total rentable area of the
Property was either occupied by Prudential or leased under executed lease
agreements. As of December 31, 1997, approximately 2 percent of the total
rentable area of the Property had been leased under executed lease
agreements. Future base rentals to be received under these executed lease
agreements as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
<S> <C>
1998 $ 66,615
1999 40,371
2000 9,349
2001 and thereafter --
-----------------
$ 116,335
=================
</TABLE>
For the year ended December 31, 1997 and for the six months ended June 30,
1998 (unaudited), Prudential was the lessee responsible for 98 percent of
total base rents. For purposes of these financial statements, rental
income earned from Prudential tenants of $6,427,200 for the year ended
December 31, 1997 and $3,133,265 for the six months ended June 30, 1998
(unaudited) was excluded, resulting in certain expenses in excess of
revenues of $4,320,502 and $2,165,800 (unaudited), respectively.
4. PROPERTY MANAGEMENT AND ADMINISTRATIVE EXPENSES:
The Property incurs salary and benefit expenses for full-time employees.
In addition, the Property incurred management fees which totaled $67,500
for the year ended December 31, 1997 and $50,472 for the six months ended
June 30, 1998 (unaudited).
5. RELATED PARTY:
Prudential, the current owner of the Property, is also the Property's
primary tenant. Current administrative and other operating expenses of the
Property reflect economies of scale gained by Prudential. There can be no
guarantee that future owners of the Property will be able to maintain
administrative and other operating expenses at levels obtained in these
financial statements.
F-42
<PAGE> 176
450 SANSOME STREET
STATEMENTS OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
F-43
<PAGE> 177
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Ocwen Asset Investment Corp.
We have audited the accompanying statement of revenue and certain expenses for
the property known as 450 Sansome Street for the year ended December 31, 1996.
This financial statement is the responsibility of the property's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial
statement. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying statement of revenue and certain expenses was prepared using
the basis described in Note 2, for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission (for inclusion in the
Current Report on Form 8-K of Ocwen Asset Investment Corp.) and is not intended
to be a complete presentation of the revenues and expenses of the property known
as 450 Sansome Street.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the revenue and certain expenses for 450 Sansome Street
on the basis described in Note 2 for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
San Francisco, CA
June 26, 1998
F-44
<PAGE> 178
450 SANSOME STREET
<TABLE>
<CAPTION>
STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
REVENUE
Rental income (Note 3) $ 2,183,717
Other Income 71,908
--------------
2,255,625
------------
CERTAIN EXPENSES
Real estate and property taxes 120,842
Utilities 390,229
Janitorial 232,219
Other operating expenses 356,195
Property management and administrative expenses (Note 4) 121,281
-------
1,220,766
------------
REVENUE IN EXCESS OF CERTAIN EXPENSES $ 1,034,859
============
</TABLE>
See accompanying notes to financial statements.
F-45
<PAGE> 179
450 SANSOME STREET
<TABLE>
<CAPTION>
STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
REVENUE
Rental income (Note 3) $ 982,853
Other Income 13,265
---------
996,118
---------
CERTAIN EXPENSES
Real estate and property taxes 59,901
Utilities 152,660
Janitorial 80,592
Other operating expenses 223,163
Property management and administrative expenses (Note 4) 49,028
---------
565,344
---------
REVENUE IN EXCESS OF CERTAIN EXPENSES $ 430,774
---------
</TABLE>
See accompanying notes to financial statements.
F-46
<PAGE> 180
450 SANSOME STREET
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES
- --------------------------------------------------------------------------------
1. ORGANIZATION AND OPERATION OF PROPERTY:
For the purpose of the accompanying statements of revenue and certain
expenses, 450 Sansome Street (the "Property") is an office building
located in San Francisco, California, which was acquired by Ocwen Asset
Investment Corp. (the "Company") on September 23, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying statements of revenue and certain expenses have been
prepared on the accrual basis of accounting. The accompanying financial
statements are not representative of the actual operations for the periods
presented, as certain expenses which may not be comparable to the expenses
to be incurred by the Company in the future operations of the Property
have been excluded. Expenses excluded consist of interest and other
finance charges, depreciation of the building and improvements, and
amortization of organization and other intangible costs and other expenses
not comparable to future operations of the Property.
Interim Financial Statement
The interim financial statement for the six months ended June 30, 1997 is
unaudited. However, in the opinion of the Property's management, the
interim data includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of revenue and certain
expenses for the interim period. The revenue and certain expenses for the
period presented are not necessarily indicative of the results to be
expected for the full year or any other period.
Revenue Recognition
Rental income is recognized on a straight-line basis over the terms of the
underlying leases.
Repairs and Maintenance
Expenditures for maintenance and repairs are charged to operations as
incurred. Betterments that improve or extend the life of the asset beyond
its original condition are capitalized.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates.
F-47
<PAGE> 181
450 SANSOME STREET
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES
- --------------------------------------------------------------------------------
3. TENANT LEASES:
Leases for the Property have various remaining lease terms of up to ten
years with options to certain tenants for renewal. In addition to base
rents, the leases provide for the tenants to pay their proportionate share
of real estate taxes and operating expenses in excess of base year amounts
Future minimum rents to be received from tenants under non-cancelable
leases as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
<S> <C>
1997 $ 1,551,783
1998 1,353,848
1999 1,358,606
2000 1,281,262
2001 463,171
Thereafter 403,559
-----------
$ 6,412,229
-----------
</TABLE>
2. PROPERTY MANAGEMENT AND ADMINISTRATIVE EXPENSES:
The Property incurs salary and benefit expenses for full-time employees.
In addition, the Property incurred management fees which totaled $46,631
for the year ended December 31, 1996 and $16,500 for the six months ended
June 30, 1997 (unaudited).
F-48
<PAGE> 182
CORTEZ PLAZA
STATEMENTS OF REVENUES AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
F-49
<PAGE> 183
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Ocwen Asset Investment Corp.
We have audited the accompanying statement of revenues and certain expenses for
the property known as Cortez Plaza for the year ended December 31, 1996. This
financial statement is the responsibility of the property's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial
statement. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying statement of revenues and certain expenses was prepared using
the basis described in Note 2, for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission (for inclusion in the
Current Report on Form 8-K of Ocwen Asset Investment Corp.) and is not intended
to be a complete presentation of the revenues and expenses of the property known
as Cortez Plaza.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the revenues and certain expenses for Cortez Plaza on the
basis described in Note 2 for the year ended December 31, 1996, in conformity
with generally accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Tampa, Florida
June 19, 1998
F-50
<PAGE> 184
CORTEZ PLAZA
<TABLE>
<CAPTION>
STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
REVENUES
Base rents $ 2,294,264
Common area maintenance and property tax recoveries 521,601
----------
2,815,865
----------
CERTAIN EXPENSES
Real estate and property taxes 282,942
Utilities 29,121
Land lease 60,720
Insurance 97,421
Other operating expenses 193,128
Property management and administrative expenses 112,437
----------
775,769
----------
REVENUES IN EXCESS OF CERTAIN EXPENSES $ 2,040,096
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE> 185
CORTEZ PLAZA
<TABLE>
<CAPTION>
STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
REVENUES
Base rents $ 1,658,913
Common area maintenance and property tax recoveries 391,447
-----------
2,050,360
-----------
CERTAIN EXPENSES
Real estate and property taxes 246,467
Utilities 27,150
Land lease 60,834
Insurance 77,146
Other operating expenses 150,854
Property management and administrative expenses 90,240
-----------
652,691
-----------
REVENUES IN EXCESS OF CERTAIN EXPENSES $ 1,397,669
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE> 186
CORTEZ PLAZA
NOTES TO STATEMENTS OF REVENUES AND CERTAIN EXPENSES
- --------------------------------------------------------------------------------
1. ORGANIZATION AND OPERATION OF PROPERTY:
For the purpose of the accompanying statements of revenues and certain
expenses (the "financial statements"), Cortez Plaza (the "Property") is a
289,686 square foot shopping center located in Bradenton, Florida, which
was acquired by Ocwen Asset Investment Corp. (the "Company") on November
10, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying financial statements have been prepared on the accrual
basis of accounting.
The accompanying financial statements are not representative of the actual
operations for the periods presented, as certain revenues and expenses
which may not be comparable to the revenues and expenses to be earned or
incurred by the Company in the future operations of the Property have been
excluded. Revenues excluded consist of miscellaneous revenues unrelated to
the continuing operations of the Property. Expenses excluded consist of
depreciation of the building and improvements and other expenses not
directly related to the future operations of the Property.
Interim Financial Statement
The interim financial statement for the nine months ended September 30,
1997 is unaudited. However, in the opinion of the Property's management;
the interim financial statement includes all adjustments, consisting only
of normal recurring adjustments, necessary for a fair statement of the
results for the interim period. The results for the period presented are
not necessarily indicative of the results to be expected for the full year
or any other period.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates.
Revenue Recognition
Base rents are recognized on a straight-line basis over the terms of the
lease agreements as required under generally accepted accounting
principles.
Repairs and Maintenance
Expenditures for repairs and maintenance are charged to operations as
incurred. Betterments that improve or extend the life of the asset beyond
its original condition are capitalized.
F-53
<PAGE> 187
CORTEZ PLAZA
NOTES TO STATEMENTS OF REVENUES AND CERTAIN EXPENSES
- --------------------------------------------------------------------------------
3. Tenant Leases:
Revenues
As of December 31, 1996, approximately 97 percent of the total rentable
area of the shopping center had been leased under executed lease
agreements. Future base rentals to be received under these lease
agreements as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
<S> <C>
1997 $ 2,224,052
1998 2,318,903
1999 2,200,339
2000 1,904,088
2001 1,795,029
Thereafter 4,948,647
-----------
$ 15,391,058
-----------
</TABLE>
For the year ended December 31, 1996, the Property received approximately
$1,379,000, or 60 percent of total base rentals from five leases. For the
nine months ended September 30, 1997, the Property received approximately
$1,068,000, or 64 percent (unaudited) of total base rentals from five
leases.
Certain lease agreements contain provisions, which enable the Property to
increase the tenants' base rental in accordance with the consumer price
index.
In addition to base rents, the leases provide for the tenants to pay their
proportionate share of common area maintenance and property taxes ("common
area expenses"). Common area expenses are charged back to tenants as
defined in each tenant's lease agreement (primarily pro rata based upon
square footage) and recorded as revenue in Common area maintenance and
property tax recoveries.
Expenses
Land lease expenses consist of costs associated with the leases of land on
which the Property resides. These costs are expensed on a straight-line
basis over the terms of the lease agreements.
Future lease commitments are approximately $62,000 in 1997 and $41,000 in
1998 and thereafter, subject to certain lease adjustments based on
increases in the consumer price index.
1. PROPERTY MANAGEMENT AND ADMINISTRATIVE EXPENSES:
The Property incurred management fees which totaled $112,437 for the year
ended December 31, 1996 and $90,240 for the nine months ended September
30, 1997 (unaudited).
F-54
<PAGE> 188
BAYERS ROAD SHOPPING CENTRE
STATEMENTS OF REVENUES AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997 (AND FOR THE THREE
MONTHS ENDED MARCH 31, 1998 (UNAUDITED) AND THE PERIOD FROM
MAY 14, 1997 TO DECEMBER 31, 1997 (UNAUDITED),
F-55
<PAGE> 189
AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
OCWEN ASSET INVESTMENT CORP.
We have audited the accompanying statement of revenue and certain expenses for
the property known as Bayers Road Shopping Centre for the year ended December
31, 1997. This financial statement is the responsibility of Ocwen Asset
Investment Corp. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial
statement.
The accompanying statement of revenue and certain expenses was prepared using
the basis described in Note 2, for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission (for inclusion in the
current report on Form 8-K of Ocwen Asset Investment Corp.) and is not intended
to be a complete presentation of the revenues and expenses of the property known
as Bayers Road Shopping Centre.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the revenue and certain expenses for Bayers Road Shopping
Centre on the basis described in Note 2 for the year ended December 31, 1997 in
conformity with generally accepted accounting principles in the United States.
/s/ PricewaterhouseCoopers
- --------------------------
PricewaterhouseCoopers
Chartered Accountants
Toronto, Ontario
June 23, 1998
F-56
<PAGE> 190
BAYERS ROAD SHOPPING CENTRE
<TABLE>
<CAPTION>
STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
REVENUE
Rental (Note 3) $ 4,699,923
Recoveries 2,126,254
-----------
6,826,177
CERTAIN EXPENSES
Real estate and property taxes 1,284,317
Utilities 530,700
Janitorial 269,906
Other operating expenses 580,404
Property management and administrative expenses (Note 4) 656,609
Repairs and maintenance 318,680
-----------
3,640,616
-----------
REVENUE IN EXCESS OF CERTAIN EXPENSES $ 3,185,561
-----------
</TABLE>
See accompanying notes to financial statements.
F-57
<PAGE> 191
BAYERS ROAD SHOPPING CENTRE
<TABLE>
<CAPTION>
STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
REVENUE
Rental (Note 3) $ 1,062,801
Recoveries 467,686
----------
1,530,487
CERTAIN EXPENSES
Real estate and property taxes 298,832
Utilities 131,379
Janitorial 67,668
Other operating expenses 184,366
Property management and administrative expenses (Note 4) 130,901
Repairs and maintenance 58,973
----------
872,119
----------
REVENUE IN EXCESS OF CERTAIN EXPENSES $ 658,368
----------
</TABLE>
See accompanying notes to financial statements.
F-58
<PAGE> 192
BAYERS ROAD SHOPPING CENTRE
<TABLE>
<CAPTION>
STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE PERIOD FROM MAY 14, 1997 TO DECEMBER 31, 1997
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
REVENUE
Rental (Note 3) $ 2,948,793
Recoveries 1,164,312
-----------
4,113,105
CERTAIN EXPENSES
Real estate and property taxes 761,445
Utilities 296,469
Janitorial 172,353
Other operating expenses 308,772
Property management and administrative expenses (Note 4) 392,776
Repairs and maintenance 247,819
-----------
2,179,634
-----------
REVENUE IN EXCESS OF CERTAIN EXPENSES $ 1,933,471
-----------
</TABLE>
See accompanying notes to financial statements.
F-59
<PAGE> 193
BAYERS ROAD SHOPPING CENTRE
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES
- --------------------------------------------------------------------------------
1. ORGANIZATION AND OPERATION OF PROPERTY:
For the purpose of the accompanying statements of revenue and certain
expenses, Bayers Road Shopping Centre (the "property") is a shopping
center located in Halifax, Nova Scotia, which was acquired through
foreclosure by Ocwen Asset Investment Corp. (the "REIT") on April 9, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The financial statement is expressed in Canadian dollars and is prepared
in accordance with accounting principles generally accepted in the United
States.
Basis of Presentation
The accompanying statement of revenue and certain expenses has been
prepared on the accrual basis of accounting.
The financial statement is not representative of the actual operations for
the periods presented, as certain revenues and expenses which may not be
comparable to the revenues and expenses to be earned or incurred by the
REIT in the future operations of the property have been excluded. Revenues
excluded consist of interest and other revenues unrelated to the
continuing operations of the property. Expenses excluded consist of
interest and other finance charges, depreciation of the building and
improvements, amortization of organization and other intangible costs,
capital taxes and other expenses not directly related to the future
operations of the property.
Interim Financial Statements
The interim financial data for the three months ended March 31, 1998 and
the period from May 14, 1997 (the date of inception of the REIT) to
December 31, 1997 is unaudited. However, in the opinion of the REIT, the
interim data includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results for the interim
period. The results for the period presented are not necessarily
indicative of the results to be expected for the full year or any other
period.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates.
Revenue Recognition
Rental revenues are recognized on a straight-line basis required under
generally accepted accounting principles.
Repairs and Maintenance
Expenditures for maintenance and repairs are charged to operations as
incurred. Betterments that improve or extend the life of the asset beyond
its original condition are capitalized.
F-60
<PAGE> 194
BAYERS ROAD SHOPPING CENTRE
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES
- --------------------------------------------------------------------------------
3. TENANT LEASES:
Leases for the property have various remaining lease terms of up to nine
years with options to certain tenants for renewal.
Future minimum rents to be received from tenants as at December 31, 1997
are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
<S> <C>
1998 $ 3,907,000
1999 3,080,000
2000 2,307,000
2001 1,884,000
2002 1,320,000
Thereafter 3,299,000
-----------
$ 15,797,000
-----------
</TABLE>
For the year ended December 31, 1997, one lessee was responsible for 13
percent of rental revenue. For the three months ended March 31, 1998 and
the period from May 14, 1997 to December 31, 1997 (unaudited), the one
lessee was responsible for 14 percent and 11 percent of rental revenue,
respectively. This one lessee can terminate its lease agreement if the
property's vacancy exceeds a certain level.
3. PROPERTY MANAGEMENT AND ADMINISTRATIVE EXPENSES:
The property incurs salary and benefit expenses for full-time employees.
In addition, the property incurred management fees which totaled $208,800
for the year ended December 31, 1997, $46,400 for the three months ended
March 31, 1998 (unaudited) and $132,717 for the period from May 14, 1997
to December 31, 1997 (unaudited).
F-61
<PAGE> 195
TEN UNITED NATIONS PLAZA
STATEMENTS OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
F-62
<PAGE> 196
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Ocwen Asset Investment Corp.
We have audited the accompanying statement of revenue and certain expenses for
the property known as Ten United Nations Plaza for the year ended December 31,
1996. This financial statement is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial
statement. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying statement of revenue and certain expenses was prepared using
the basis described in Note 2, for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission (for inclusion in the
current report on Form 8-K of Ocwen Asset Investment Corp.) and is not intended
to be a complete presentation of the revenues and expenses of the property known
as Ten United Nations Plaza.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the revenue and certain expenses for Ten United Nations
Plaza on the basis described in Note 2 for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
San Francisco, California
January 6, 1999
F-63
<PAGE> 197
TEN UNITED NATIONS PLAZA
STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
REVENUE
Base rents $ 1,188,825
Escalations and other revenue 86,024
-------------
1,274,849
CERTAIN EXPENSES
Real estate and property taxes 82,189
Utilities 109,618
Janitorial 116,030
Other operating expenses 113,345
Property management and administrative expenses 119,038
-------------
540,220
-------------
Revenue in excess of certain expenses $ 734,629
-------------
</TABLE>
See accompanying notes to statements of revenue and certain expenses.
F-64
<PAGE> 198
TEN UNITED NATIONS PLAZA
STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE SIX MONTHS ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
REVENUE
Base rents $ 607,259
Escalations and other revenue 55,123
------------
662,382
CERTAIN EXPENSES
Real estate and property taxes 41,421
Utilities 50,591
Janitorial 52,798
Other operating expenses 66,139
Property management and administrative expenses 64,328
------------
275,277
------------
Revenue in excess of certain expenses $ 387,105
------------
</TABLE>
See accompanying notes to statements of revenue and certain expenses.
F-65
<PAGE> 199
TEN UNITED NATIONS PLAZA
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES
- --------------------------------------------------------------------------------
1. ORGANIZATION AND OPERATION OF PROPERTY
For the purpose of the accompanying statements of revenue and certain expenses,
Ten United Nations Plaza (the "Property") is an office building located in San
Francisco, CA, which was acquired by Ocwen Asset Investment Corp. (the
"Company") on September 3, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying statements of revenue and certain expenses have been prepared
on the accrual basis of accounting.
The accompanying financial statements are not representative of the actual
operations for the periods presented, as certain revenues and expenses which may
not be comparable to the revenues and expenses to be earned or incurred by the
Company in the future operations of the Property have been excluded. Revenues
excluded consist of interest and other revenues unrelated to the continuing
operations of the Property. Expenses excluded consist of interest and other
finance changes, depreciation of the building and improvements, amortization of
organization and other intangible costs and other expenses not directly related
to the future operations of the Property.
INTERIM STATEMENTS
The interim financial data for the six months ended June 30, 1997 is unaudited.
However, in the opinion of the Property's management, the interim data includes
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair statement of the results for the interim period. The results for the
period presented are not necessarily indicative of the results to be expected
for the full year or any other period.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues and expenses during the period. Actual
results could differ from those estimates.
REVENUE RECOGNITION
Base rents are recognized on a cash basis which does not significantly vary from
the accrual basis required under generally accepted accounting principles.
REPAIRS AND MAINTENANCE
Expenditures for maintenance and repairs are charged to operations as incurred.
Betterments which improve or extend the life of the asset beyond its original
condition are capitalized.
F-66
<PAGE> 200
TEN UNITED NATIONS PLAZA
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES
- --------------------------------------------------------------------------------
3. LEASES
Leases for the Property have various remaining lease terms of up to 2002 with
options to certain tenants for renewal. In addition to base rents, the leases
provide for the tenants to pay their proportionate share of real estate taxes
and operating expenses over base year amounts.
For the year ended December 31, 1996, the San Francisco AIDS Foundation (the "SF
AIDS Foundation"), the Social Security Administration (the "SSA") and Union Bank
accounted for 37%, 36% and 26%, respectively, of total base rents. For the six
months ended June 30, 1997, the SF AIDS Foundation, the SSA and Union Bank
accounted for 36% (unaudited), 35% (unaudited) and 27% (unaudited),
respectively, of total base rents. The Dan Francisco AIDS Foundation, SSA and
Union Bank are no longer tenants of the Property.
As of December 31, 1998, only two tenants remain in the Property, comprising
annual rental income of approximately $112,000. The leases related to the two
remaining tenants expire October 31, 999 and January 31, 2002.
4. PROPERTY MANAGEMENT AND ADMINISTRATIVE EXPENSES
The Property incurs salary and benefit expenses for full-time employees. In
addition, the Property incurred management fees which totaled $48,000 for the
year ended December 31, 1996 and $24,000 for the six months ended June 30, 1997
(unaudited).
F-67
<PAGE> 201
690 MARKET STREET
STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
F-68
<PAGE> 202
690 MARKET STREET
STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
REVENUES
Rental (Note 3) $ 823,687
Lease termination income -
Recoveries 72,772
Other 13,608
-------
CERTAIN EXPENSES
Real estate and property taxes 54,588
Utilities 61,886
Janitorial 43,386
Service expenses 52,607
Repairs and maintenance 22,765
Depreciation and amortization 116,602
Property management and administrative expenses 213,821
-------
(Note 4)
565,655
-------
REVENUE IN EXCESS OF CERTAIN EXPENSES $ 344,412
-------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-69
<PAGE> 203
690 MARKET STREET
NOTES TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
- --------------------------------------------------------------------------------
1. ORGANIZATION AND OPERATION OF PROPERTY:
For the purpose of the accompanying statement of revenues and certain
expenses (the "financial statement"), 690 Market Street (the "Property")
is a 124,692 square foot, 16-story, Class C office building located in the
financial district of San Francisco, California, which was acquired by
Ocwen Asset Investment Corp. (the "Company") on January 23, 1998. 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, approximately 41% of the building was available for
re-leasing by the end of 1998 and existing rents averaged $14.06 per
square foot. The building was 72% leased as of September 30, 1998. The
Company is investing approximately $4.3 million to install structural
upgrades, a sprinkler system and American with Disabilities Act ("ADA")
upgrades, fund deferred maintenance and tenant improvements and pay
leasing commissions. The Company is currently implementing a new leasing
program at the property to coincide with the renovation schedule and has
executed nine new leases totaling approximately 13,800 square feet.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying financial statement has been prepared on the accrual
basis of accounting.
Interim Financial Statement
The interim financial statement for the nine months ended September 30,
1998 is unaudited. However, in the opinion of the property's management;
the interim financial statement includes all adjustments, consisting only
of normal recurring adjustments, necessary for a fair statement of the
results for the interim period. The results for the period presented are
not necessarily indicative of the results to be expected for the full year
or any other period.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates.
Revenue Recognition
Base rents are recognized on a straight-line basis over the terms of the
lease agreements as required under generally accepted accounting
principles.
Repairs and Maintenance
Expenditures for repairs and maintenance are charged to operations as
incurred. Betterments that improve or extend the life of the asset beyond
its original condition are capitalized.
F-70
<PAGE> 204
690 MARKET STREET
NOTES TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
- --------------------------------------------------------------------------------
3. TENANT LEASES:
Approximately 72 percent of the total rentable area of the office building
had been leased under executed lease agreements as of September 30, 1998,
and approximately 41 percent of total rentable space will become available
for re-leasing by the end of 1998. Future base rentals to be received
under these lease agreements as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING SQUARE FEET OCCUPIED AT
DECEMBER 31, DECEMBER 31, (1) RENT (2)
<S> <C> <C>
1998 77,514 $1,999,678
1999 66,723 1,552,106
2000 61,545 1,441,904
2001 49,819 1,326,171
2002 31,351 1,141,926
Thereafter 31,351 1,369,604
</TABLE>
(1) The square feet projections are based on existing leases only and
assume no renewals or new leases.
(2) Rent projections are based on 12 months and assume rent is
recognized on a straight-line basis.
For the nine months ended September 30, 1998 (unaudited), the property
received approximately $823,687, or 90.5 percent of total rental revenue
from 59 leases.
4. PROPERTY MANAGEMENT AND ADMINISTRATIVE EXPENSES:
The property incurred management fees, which totaled $20,634 for the nine
months ended September 30, 1998. In addition, during the nine months ended
September 30, 1998 the property incurred salary and benefit expenses for
full time employees of $84,377 and other property administrative costs of
$108,810.
F-71
<PAGE> 205
PARK CENTER 1
STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
F-72
<PAGE> 206
PARK CENTER 1
STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
REVENUES
Rental income (Note 3) $ --
Other 175
---------
175
CERTAIN EXPENSES
Depreciation and amortization 16,388
Property management and administrative expenses 20,205
---------
(Note 4)
36,593
---------
REVENUE IN EXCESS OF CERTAIN EXPENSES $ (36,418)
---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-73
<PAGE> 207
PARK CENTER 1
NOTES TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
- --------------------------------------------------------------------------------
1. ORGANIZATION AND OPERATION OF PROPERTY:
For the purpose of the accompanying statement of revenues and certain
expenses (the "financial statements"), Park Center I (the "Property") is
an approximately 44,000 square foot, four-story, suburban office building
located on a frontage road to Interstate 75 in Dayton, Ohio, which was
acquired by Ocwen Asset Investment Corp. (the "Company") on April 3, 1998.
The Property was constructed in 1981, and the Property was acquired by
foreclosure on the loan secured by the Property, which was acquired by the
Company at a discount in September 1997. The building is currently vacant
and configured for single tenant use, but may be converted to multi-tenant
use. The Company currently is preparing an operating plan for this
investment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying financial statement has been prepared on the accrual
basis of accounting.
Interim Financial Statement
The interim financial statement for the nine months ended September 30,
1998 is unaudited. However, in the opinion of the property's management,
the interim financial statement includes all adjustments, consisting only
of normal recurring adjustments, necessary for a fair statement of the
results for the interim period. The results for the period presented are
not necessarily indicative of the results to be expected for the full year
or any other period.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates.
Revenue Recognition
Base rents are recognized on a straight-line basis over the terms of the
lease agreements as required under generally accepted accounting
principles.
Repairs and Maintenance
Expenditures for repairs and maintenance are charged to operations as
incurred. Betterments that improve or extend the life of the asset beyond
its original condition are capitalized.
3. TENANT LEASES:
Currently, the building is vacant and configured for single tenant use,
but may be converted to multi-tenant use.
F-74
<PAGE> 208
PARK CENTER 1
NOTES TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
- --------------------------------------------------------------------------------
4. PROPERTY MANAGEMENT AND ADMINISTRATIVE EXPENSES:
The property incurred management fees and administrative expenses, which
totaled $56,542 for the nine months, ended September 30, 1998.
F-75
<PAGE> 209
OCWEN ASSET INVESTMENT CORP.
UNAUDITED CONDENSED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD MAY 14, 1997 TO DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
The following unaudited pro forma condensed consolidated statements of
operations are presented as if each of the following property acquisitions
occurred on May 14, 1997. The pro forma condensed consolidated statements of
operations should be read in conjunction with the Company's historical financial
statements and notes thereto.
The Company accounts for property acquisitions utilizing purchase accounting
under generally accepted accounting principles.
The unaudited pro forma condensed consolidated financial statements of
operations are not necessarily indicative of what the actual results of
operations of the company would have been assuming they had been completed as
set forth above, nor does it purport to represent the Company's results of
operations for future periods.
<TABLE>
<CAPTION>
Historical (1)
----------------------------------------------------------
Company Bush Street Prudential 10 Un Plaza
----------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 13,462 $ -- $ -- $ --
Interest expense -- -- -- --
------------ ------------ ------------ ------------
Net interest income (expense) before
Provision for loan losses 13,462 -- -- --
Provision for loan losses -- -- -- --
------------ ------------ ------------ ------------
Net interest income (expense) after
provision for loan losses 13,462 -- -- --
Real estate-operating income 2,223 5,196 65 385
Real estate-operating expenses 728 1,936 2,992 117
------------ ------------ ------------ ------------
Real estate - net operating income 1,495 3,260 (2,927) 208
Other expenses 3,155 -- -- --
(Loss) gain on securities held for
trading -- -- -- --
------------ ------------ ------------ ------------
(Loss) income before minority Interest 11,802 3,260 (2,927) 208
Minority interest in net (income)
loss of operating partnership (9) -- -- --
------------ ------------ ------------ ------------
Net income (loss) $ 11,793 $ 3,260 $ (2,927) $ 208
============ ============ ============ ============
Funds from operations $ 11,972
============
<CAPTION>
Other Pro Forma Total Pro Forma
Acquisitions (2) Adjustments (3)
--------------------------------------------------
<S> <C> <C> <C>
Interest income $ -- $ -- $ 13,462
Interest expense -- 6,461 6,461
------------ ------------- ----------
Net interest income (expense) before
Provision for loan losses -- (6,461) 7,001
Provision for loan losses -- -- --
------------ ------------- ----------
Net interest income (expense) after
provision for loan losses -- (6,461) 7,001
Real estate-operating income 6,214 -- 14,083
Real estate-operating expenses 2,995 2,505 11,333
------------ ------------- ----------
Real estate - net operating income 3,219 (2,505) 2,750
Other expenses -- 1,029 4,184
(Loss) gain on securities held for
trading -- -- --
------------ ------------- ----------
(Loss) income before minority Interest 3,219 (9,995) 5,567
Minority interest in net (income)
loss of operating partnership -- 3(4) (6)
------------ ------------- ----------
Net income (loss) $ 3,219 $ (9,992) $ 5,561
============ ============= ==========
Funds from operations $ 8,245
==========
</TABLE>
F-76
<PAGE> 210
OCWEN ASSET INVESTMENT CORP.
UNAUDITED CONDENSED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD MAY 14, 1997 TO DECEMBER 31, 1997
(1) Historical results are based on the actual results of operations from
May 14, 1997 through December 31, 1997. The results of operations
from the acquisition date are included in the Company column.
(2) The following table summarizes the "Other Acquisitions":
<TABLE>
<CAPTION>
Acquisition Purchase Operating Net
Property Name Date Price Revenues Expenses Income
---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
450 Sansome Street......... 9/23/97 17,200 729 407 322
Cortez Plaza............... 11/10/97 19,050 1,350 421 929
Bayers Road Shopping Centre 4/9/98 16,311 4,135 2,167 1,968
---------- ---------- ----------
6,214 2,995 3,219
</TABLE>
(3)
Pro forma adjustments:
<TABLE>
<CAPTION>
Acquisition (a) (b) (c)
Property Name Date Interest Expense Depreciation Expense Other Expense
------------- -----------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
10 UN Plaza 9/3/97 $ -- $ 73 $ 34
450 Sansome Street 9/23/97 -- 135 64
Cortez Plaza 11/10/97 -- 258 101
221 Bush Street 4/8/98 4,697 1,300 626
Bayers Road Shopping Centre 4/9/98 -- 266 --
841 Prudential Drive 7/7/98 1,764 473 204
------------------- ------------------- -------------------
Total $ 6,461 $ 2,505 $ 1,029
=================== =================== ===================
</TABLE>
(a) Interest expense is based on the following assumptions:
221 Bush Street: Salomon Brothers Realty Corp. $75.0
million loan at LIBOR plus 175 basis points (7.44
percent at April 8, 1998) and from $25.2 million of
borrowings from other sources at approximately the same
rate. If LIBOR rate were to change by 12.5 basis points,
interest expense would change approximately $123,000
during a one-year period.
841 Prudential Drive: Salomon Brothers Realty Corp.
$24.1 million loan at LIBOR plus 175 basis points (7.41
percent at July 22, 1998) and from $8.6 million of
borrowings from other sources at 11.50 percent. If LIBOR
rate were to change by 12.5 basis points, interest
expense would change approximately $30,200 during a
one-year period.
(b) Depreciation expense is based on a 39 year useful life.
(c) Other expense represents management fees paid to Ocwen
Capital Corporation. This fee is calculated as .25
percent of invested assets per quarter.
(4) Minority interest in net (income) loss of the operating partnership,
which includes historical results for Bush Street, 841 Prudential
Drive, 10 UN Plaza, and the other acquisitions, as well as the pro
forma adjustments, is calculated by using the weighted average
minority interest percentage for the period May 14, 1997 through
December 31, 1997.
F-77
<PAGE> 211
OCWEN ASSET INVESTMENT CORP.
UNAUDITED CONDENSED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(DOLLAR IN THOUSANDS)
<TABLE>
<CAPTION>
Historical (1)
----------------------------------------------------------------------
Company Bush Street Prudential 10 Un Plaza
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 43,088 $ -- $ -- $ --
Interest expense 16,838 -- -- --
-------------- ---------------- --------------- ----------------
Net interest income (expense) before
Provision for loan losses 25,250 -- -- --
Provision for loan losses 557 -- -- --
-------------- ---------------- --------------- ----------------
Net interest income (expense) after
Provision for loan losses 25,693 -- -- --
Real estate-operating income 14,613 2,417 60 --
Real estate-operating expenses 13,521 741 2,483 --
-------------- ---------------- --------------- ----------------
Real estate - net operating income 1,092 1,676 (2,423) --
Other expenses 6,573 -- -- --
(Loss) gain on securities held for
trading 32,723 -- -- --
-------------- ---------------- --------------- ----------------
(Loss) income before minority Interest (12,511) 1,676 (2,423) --
Minority interest in net (income)
loss of operating partnership 399 -- -- --
-------------- ---------------- --------------- ----------------
Net income (loss) before extraordinary
Items (12,112) 1,676 (2,423) --
Extraordinary gain on repurchase of
debt 615 -- -- --
-------------- ---------------- --------------- ----------------
Net (loss) income $ (11,497) $ 1,676 $ (2,423) $ --
============== ================ =============== ================
Funds from operations $ 4,068
==============
<CAPTION>
Other Pro Forma Total Pro Forma
Acquisitions (2) Adjustments (3)
---------------------------------------------------------
<S> <C> <C> <C>
Interest income $ -- $ -- $ 43,088
Interest expense -- 3,615 20,453
---------------- ---------------- -------------
Net interest income (expense) before
Provision for loan losses -- (3,615) 22,635
Provision for loan losses -- -- 557
---------------- ---------------- -------------
Net interest income (expense) after
Provision for loan losses -- (3,615) 22,078
Real estate-operating income 1,159 18,249
Real estate-operating expenses 668 1,102 18,515
---------------- ---------------- -------------
Real estate - net operating income 491 (1,102) (265)
Other expenses -- 518 7,091
(Loss) gain on securities held for
trading -- -- 32,723
---------------- ---------------- -------------
(Loss) income before minority Interest 491 (5,235) (18,001)
Minority interest in net (income)
loss of operating partnership -- 297(4) 696
---------------- ---------------- --------------
Net income (loss) before extraordinary
Items 491 (4,938) (17,306)
Extraordinary gain on repurchase of
debt -- 615
---------------- ---------------- -------------
Net (loss) income $ 491 $ (4,938) $ (16,691)
================ ================ =============
Funds from operations $ (24)
=============
</TABLE>
F-78
<PAGE> 212
OCWEN ASSET INVESTMENT CORP.
UNAUDITED CONDENSED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD JANUARY 1, 1998 TO SEPTEMBER 30, 1998
(1) Historical results are based on the actual results of operations for
the nine month period form January 1, 1998 through September 30, 1998.
The results of operations from this property are included in the
Company column.
(2) The following table summarizes the "other acquisitions":
<TABLE>
<CAPTION>
Purchase Operating Net
Property Name Acquisition Date Price Revenues Expenses Income
-------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
450 Sansome Street......... 9/23/97 17,200
Cortez Plaza............... 11/10/97 19,050
Bayers Road Shopping Centre 4/9/98 16,311 1,159 668 491
---------- -------- --------
1,159 668 491
</TABLE>
(3)
Pro forma adjustments:
<TABLE>
<CAPTION>
Acquisition (a) (b) (c)
Property Name Date Interest Expense Depreciation Expense Other Expense
------------- ----------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
450 Sansome Street 9/23/97 -- -- --
Cortez Plaza 11/10/97 -- -- --
221 Bush Street 4/8/98 2,048 564 271
Bayers Road Shopping Centre 4/9/98 -- 114 64
841 Prudential Drive 7/7/98 1,567 424 183
------------------- ------------------- -------------------
Total $ 3,615 $ 1,102 $ 518
=================== =================== ===================
</TABLE>
(a) Interest expense is based on the following assumptions:
221 Bush Street: Salomon Brothers Realty Corp. $75.0
million loan at LIBOR plus 175 basis points (7.44
percent at April 8, 1998) and from $25.2 million of
borrowings from other sources at approximately the same
rate. If LIBOR rate were to change by 12.5 basis points,
interest expense would change approximately $123,000
during a one-year period.
841 Prudential Drive: Salomon Brothers Realty Corp.
$24.1 million loan at LIBOR plus 175 basis points (7.41
percent at July 22, 1998) and from $8.6 million of
borrowings from other sources at 11.50 percent. If LIBOR
rate were to change by 12.5 basis points, interest
expense would change approximately $30,200 during a
one-year period.
(b) Depreciation expense is based on a 39 year useful life.
(c) Other expense represents management fees paid to Ocwen
Capital Corporation. This fee is calculated as .25
percent of invested assets per quarter.
(4) Minority interest in net (income) loss of the operating partnership,
which includes historical results for 221 Bush Street, 841
Prudential Drive, 10 UN Plaza, and the other acquisitions, as well
as the pro forma adjustments, is calculated by using the weighted
average minority interest percentage for the period October 1, 1997
through September 30, 1998.
F-79
<PAGE> 213
OCWEN ASSET INVESTMENT CORP.
UNAUDITED CONDENSED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD OCTOBER 1, 1997 TO SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Historical (1)
----------------------------------------------------------------------
Company Bush Street Prudential 10 Un Plaza
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 48,555 $ -- $ -- $ --
Interest expense 16,838 -- -- --
-------------- --------------- -------------- ----------------
Net interest income (expense) before
Provision for loan losses 31,717 -- -- --
Provision for loan losses 557 -- -- --
-------------- --------------- -------------- ----------------
Net interest income (expense) after
Provision for loan losses 31,160 -- -- --
Real estate-operating income 16,721 4,669 86 --
Real estate-operating expenses 14,199 1,522 3,680 --
-------------- --------------- -------------- ----------------
Real estate - net operating income 2,522 3,147 (3,594) --
Other expenses 8,079 -- -- --
(Loss) gain on securities held for
trading 32,723 -- -- --
-------------- --------------- -------------- ----------------
(Loss) income before minority Interest (7,120) 3,147 (3,594) --
Minority interest in net (income)
loss of operating partnership 390 -- -- --
-------------- --------------- -------------- ----------------
Net income (loss) before extraordinary
Items (6,730) 3,147 (3,594) --
Extraordinary gain on repurchase of
debt 615 -- -- --
-------------- --------------- -------------- ----------------
Net (loss) income $ (6,115) $ 3,147 $ (3,594) $ --
============== =============== ============== ================
Funds from operations $ 9,522
==============
<CAPTION>
Other Pro Forma Total Pro Forma
Acquisitions (2) Adjustments (3)
--------------------------------------------------------
<S> <C> <C> <C>
Interest income $ -- $ -- $ 48,555
Interest expense -- 6,195 23,033
---------------- ---------------- -------------
Net interest income (expense) before
Provision for loan losses -- (6,195) 25,522
Provision for loan losses -- -- 557
---------------- ---------------- -------------
Net interest income (expense) after
Provision for loan losses -- (6,195) 24,965
Real estate-operating income 2,593 24,069
Real estate-operating expenses 1,369 1,972 22,742
---------------- ---------------- -------------
Real estate - net operating income 1,224 (1,972) 1,327
Other expenses -- 930 9,009
(Loss) gain on securities held for
trading -- -- 32,723
---------------- ---------------- -------------
(Loss) income before minority Interest 1,224 (9,097) (15,440)
Minority interest in net (income)
loss of operating partnership -- 339(4) 729
---------------- ---------------- -------------
Net income (loss) before extraordinary
Items 1,224 (8,758) (14,711)
Extraordinary gain on repurchase of
debt -- 615
---------------- ---------------- -------------
Net (loss) income $ 1,224 $ (8,758) $ (14,096)
================ ================ =============
Funds from operations $ 2,898
=============
</TABLE>
F-80
<PAGE> 214
OCWEN ASSET INVESTMENT CORP.
UNAUDITED CONDENSED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD OCTOBER 1, 1997 TO SEPTEMBER 30, 1998
(1) Historical results are based on the actual results of operations for
the twelve month period form January 1, 1998 through September 30,
1998. The results of operations from this property are included in
the Company column.
(2) The following table summarizes the "other acquisitions":
<TABLE>
<CAPTION>
Purchase Operating Net
Property Name Acquisition Date Price Revenues Expenses Income
-------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
450 Sansome Street......... 9/23/97 17,200
Cortez Plaza............... 11/10/97 19,050 272 85 187
Bayers Road Shopping Centre 4/9/98 16,311 2,321 1,284 1,037
------------ ----------- -----------
2,593 1,369 1,224
</TABLE>
(3)
Pro forma adjustments:
<TABLE>
<CAPTION>
Acquisition (a) (b) (c)
Property Name Date Interest Expense Depreciation Expense Other Expense
------------- -----------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
450 Sansome Street 9/23/97 -- -- --
Cortez Plaza 11/10/97 -- 53 21
221 Bush Street 4/8/98 3,927 1,087 523
Bayers Road Shopping Centre 4/9/98 -- 219 121
841 Prudential Drive 7/7/98 2,268 613 265
----------------- ------------------ -----------------
Total $ 6,195 $ 1,972 $ 930
================= ================== =================
</TABLE>
(a) Interest expense is based on the following
assumptions:
221 Bush Street: Salomon Brothers Realty Corp.
$75.0 million loan at LIBOR plus 175 basis points
(7.44 percent at April 8, 1998) and from $25.2
million of borrowings from other sources at
approximately the same rate. If LIBOR rate were to
change by 12.5 basis points, interest expense
would change approximately $123,000 during a
one-year period.
841 Prudential Drive: Salomon Brothers Realty
Corp. $24.1 million loan at LIBOR plus 175 basis
points (7.41 percent at July 22, 1998) and from
$8.6 million of borrowings from other sources at
11.50 percent. If LIBOR rate were to change by
12.5 basis points, interest expense would change
approximately $30,200 during a one-year period.
(b) Depreciation expense is based on a 39 year useful
life.
(c) Other expense represents management fees paid to
Ocwen Capital Corporation. This fee is calculated
as .25 percent of invested assets per quarter.
(4) Minority interest in net (income) loss of the operating partnership,
which includes historical results for 221 Bush Street, 841
Prudential Drive, 10 UN Plaza, and the other acquisitions, as well
as the pro forma adjustments, is calculated by using the weighted
average minority interest percentage for the period October 1, 1997
through September 30, 1998.
F-81
<PAGE> 215
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Restated and Amended Articles of Incorporation of the Registrant
contain a provision which, subject to certain exceptions described below,
eliminates the liability of a Director or officer to the Registrant or its
shareholders for monetary damages for any breach of duty as a Director or
officer. This provision does not eliminate such liability to the extent that it
is proved that the Director or officer engaged in willful misconduct or a
knowing violation of criminal law or of any federal or state securities law.
The Registrant's Restated and Amended Articles of Incorporation also
require the Registrant to indemnify any Director or officer who is or was a
party to a proceeding, including a proceeding by or in the right of the
Registrant, by reason of the fact that he or she is or was a Director or officer
or is or was serving at the request of the Registrant as a Director, officer,
employee or agent of another entity provided that the Board of Directors
determines that the conduct in question was in the best interest of the
Registrant and such person was acting on behalf of the Registrant. A Director or
officer of the Registrant is entitled to be indemnified against all liabilities
and expenses incurred by the Director or officer in the proceeding, except such
liabilities and expenses as are incurred (i) if such person is an Independent
Director or officer, because of his or her gross negligence, willful misconduct
or knowing violation of the criminal law or (ii) in the case of the Director
other than the Independent Directors, because of his or her negligence or
misconduct. Unless a determination has been made that indemnification is not
permissible, a Director or officer also is entitled to have the Registrant make
advances and reimbursement for expenses prior to final disposition of the
proceeding upon receipt of a written undertaking from the Director or officer to
repay the amounts advanced or reimbursed if it is ultimately determined that he
or she is not entitled to indemnification. Such advance shall be permissible
when the proceeding has been initiated by a shareholder of the Registrant only
if such advance is approved by the court of competent jurisdiction. The Board of
Directors of the Registrant also has the authority to extend to any person who
is an employee or agent of the Registrant, or who is or was serving at the
request of the Registrant as a Director, officer, employee or agent of another
entity, the same indemnification rights held by Directors and officers, subject
to all of the accompanying conditions and obligations.
The Virginia Stock Corporation Act (the "Virginia Act") permits
indemnification of the Registrant's Directors and officers in a variety of
circumstances, which may include liabilities under the Securities Act of 1933,
as amended. Under Section 13.1-697 of the Virginia Act, a Virginia corporation
generally may indemnify its officers and Directors in civil or criminal actions
if they acted in good faith and believed their conduct to be in the best
interests of the corporation and, in the case of criminal actions, had no
reasonable cause to believe that the conduct was unlawful. The Virginia Act also
permits a corporation to require indemnification of officers and Directors with
respect to any action except in the case of willful misconduct or knowing
violation of the criminal law. In addition, the Virginia Act limits the damages
that may be assessed against a Director or officer of the Registrant in a
shareholder or derivative proceeding to the greater of (a) $100,000 or (b) the
amount of cash compensation received by him from the Registrant in the twelve
months immediately preceding the act or omission giving rise to liability. This
limit on liability will not apply in the event of willful misconduct or a
knowing violation of the criminal law or of federal or state securities laws.
The Registrant carries an insurance policy providing directors' and
officers' liability insurance for any liability its Directors or officers or the
Directors or officers of any of its subsidiaries may incur in their capacities
as such.
The Registrant will indemnify Ocwen Capital Corporation, a Florida
corporation (the "Manager"), and its officers and directors from any action or
claim brought or asserted by any party by reason of any allegation that the
Manager for one or more of its officers or directors is otherwise accountable or
liable for the debts or obligations of the Registrant or its affiliates. In
addition, the Manager and its officers and directors will not be liable to the
Registrant, and the Registrant will indemnify the Manager and its officers and
directors for acts performed pursuant to the management agreement between the
Registrant and the Manager, except for claims arising from acts constituting bad
faith, willful misconduct, gross negligence or reckless disregard of their
duties under the management agreement.
<PAGE> 216
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The exhibits and financial statement schedules filed as a part of this
Registration Statement are as follows:
(a) List of Exhibits:
<TABLE>
<CAPTION>
Exhibit No. Exhibit Location
- ----------- ------- --------
<S> <C> <C>
4.1 Form of Indenture between the Company and Norwest (1)
Bank Minnesota, National Association, as Trustee
thereunder
4.2 Form of Old Note (attached as Exhibit A to the Indenture (1)
included as Exhibit 4.1)
4.3 Form of New Note
4.4 Registration Rights Agreement, dated July 14, 1998, (1)
among the Company and the Initial Purchasers
of the Notes
5 Opinion of Elias, Matz, Tiernan & Herrick L.L.P. *
regarding legality of securities being registered
8.1 Opinion of Elias, Matz, Tiernan & Herrick L.L.P. regarding tax *
consequences of the Exchange Offer
8.2 Opinion of Elias, Matz, Tiernan & Herrick L.L.P. regarding the *
Company's status as a REIT
12 Computation of ratio of earnings to fixed charges *
23.1 Consents of Elias, Matz, Tiernan & Herrick L.L.P. *
(contained in the opinions included as Exhibits 5, 8.1 and 8.2)
23.2 Consent of PricewaterhouseCoopers LLP *
24 Powers of Attorney (included in the signature page *
to this Registration Statement)
25 Form T-1, Statement of Eligibility of Norwest *
Bank Minnesota, National Association to act
as trustee under the Indenture
99.1 Form of Letter of Transmittal
99.2 Form of Notice of Guaranteed Delivery
</TABLE>
- -------------------
* Previously filed.
(1) Incorporated by reference to the Company's Current Report on Form
8-K, filed with the Commission on July 16, 1998.
II-2
<PAGE> 217
(b) Financial Statement Schedules.
No financial statement schedules are filed because the required
information is not applicable or is included in the consolidated financial
statements or related notes.
ITEM 22. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes as follows:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the registration statement;
and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in
the registration statement or any material change to
such information in the registration statement;
Provided, however, that paragraphs (a) (1) (i) and (a) (1)
(ii) do not apply if the registration statement is on Form S-3 or Form
S-8, and the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed by
the registrant pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the questions whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(5) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual report pursuant
to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-3
<PAGE> 218
(b) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b) 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE> 219
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of West Palm
Beach, State of Florida on the 27th day of January 1999.
OCWEN ASSET INVESTMENT CORP.
By: /s/ William C. Erbey
------------------------------------
William C. Erbey
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<S> <C>
/s/ William C. Erbey Date: January 27, 1999
- ------------------------------------
William C. Erbey
Chairman and Chief Executive Officer
(principal executive officer)
/s/ Christine A. Reich * Date: January 27, 1999
- ------------------------------------
Christine A. Reich
Director and President
/s/ Benjamin W. Navarro* Date: January 27, 1999
- ------------------------------------
Benjamin W. Navarro
Director
</TABLE>
- ------------
*By William C. Erbey, Attorney-in-fact.
II-5
<PAGE> 220
<TABLE>
<S> <C>
/s/ Peter M. Small* Date: January 27, 1999
- ------------------------------------
Peter M. Small
Director
/s/ Mark S. Zeidman Date: January 27, 1999
- ------------------------------------
Mark S. Zeidman
Senior Vice President and Chief
Financial Officer (principal
financial and accounting officer)
</TABLE>
- ------------
*By William C. Erbey, Attorney-in-fact.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by Stuart L. Silpe as a director on the
date indicated. In addition, Stuart L. Silpe hereby appoints William C. Erbey
and Christine A. Reich, and each of them severally, as his attorney-in-fact to
sign in his name and behalf in his capacity as director, and to file with the
Securities and Exchange Commission any and all amendments, including
post-effective amendments, to this Registration Statement on Form S-4, making
such changes in the Registration Statement as appropriate, and generally to do
all such things in his behalf in their capacities as directors and/or officers
to enable Ocwen Asset Investment Corp. to comply with the provisions of the
Securities Act of 1933, and all requirements of the Securities and Exchange
Commission.
Date:
- -------------------------------
Stuart L. Silpe
Director
II-6
<PAGE> 1
EXHIBIT 4.3
(Face of Note)
11 1/2% Redeemable Notes due 2005
Each Note shall contain legends substantially to the following effect unless the
Company determines otherwise:
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION
("DTC"), NEW YORK, NEW YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION
OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS
REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE
TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE
REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN
WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR
SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL
SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE
RESTRICTIONS SET FORTH IN THE INDENTURE REFERRED TO ON THE REVERSE
HEREOF.
<PAGE> 2
CUSIP:
No.
$
Ocwen Asset Investment Corp. promises to pay to Cede & Co. or registered
assigns, the principal sum of ______________ Dollars on July 1, 2005.
Interest Payment Dates: January 1 and July 1
Record Dates: December 15 and June 15
2
<PAGE> 3
Dated:
OCWEN ASSET INVESTMENT CORP.
By:
--------------------------------
Name:
Title:
This is one of the
Notes referred to in the
within-mentioned Indenture:
Norwest Bank Minnesota, National Association,
as Trustee
By:----------------------------
Authorized Officer
3
<PAGE> 4
(Back of Note)
11 1/2% Redeemable Notes due 2005
Capitalized terms used herein shall have the meanings assigned to
them in the Indenture referred to below unless otherwise indicated. The terms of
the Notes set forth below are not complete and are qualified in their entirety
by reference to the Indenture.
1. Interest. Owen Asset Investment Corp., a Virginia corporation
(the "Company") promises to pay interest on the principal amount of this Note at
11 1/2% per annum from the date hereof until maturity. The Company will pay
interest semi-annually on January 1 and July 1 of each year, or if any such day
is not a Business Day, on the next succeeding Business Day (each an "Interest
Payment Date"). Interest will be payable in cash. Interest on the Notes will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the date of issuance; provided that if there is no
existing Default in the payment of interest, and if this Note is authenticated
between a record date referred to on the face hereof and the next succeeding
Interest Payment Date, interest shall accrue from such next succeeding Interest
Payment Date. The Company shall pay interest (including post-petition interest
in any proceeding under any Bankruptcy Law) on overdue principal and premium, if
any, from time to time on demand at a rate that is the rate then in effect; it
shall pay interest (including post-petition interest in any proceeding under any
Bankruptcy Law) on overdue installments of interest (without regard to any
applicable grace periods) from time to time on demand at the same rate to the
extent lawful. Interest will be computed on the basis of a 360-day year of
twelve 30-day months. In the event that the Company is obligated to pay
Liquidated Damages to Holders, the interest rate otherwise applicable to the
Notes shall be increased for the period during which the Company is obligated to
pay Liquidated Damages by the amount of such Liquidated Damages and all
references herein to interest shall include such Liquidated Damages, if any.
2. Method Of Payment. The Company will pay interest on the Notes
(except defaulted interest) to the Persons who are registered Holders of Notes
at the close of business on the December 15 or June 15 next preceding the
Interest Payment Date, even if such Notes are canceled after such record date
and on or before such Interest Payment Date, except as provided in Section 2.12
of the Indenture with respect to defaulted interest. Any such interest
installment not punctually paid or duly provided for shall forthwith cease to be
payable to the registered Holders on such Interest Payment Date, and may be paid
to the registered Holders at the close of business on a special interest payment
date to be fixed by the Company for the payment of such defaulted interest,
notice whereof shall be given to the registered Holders not less than 15 days
prior to such special interest payment date, or may be paid at any time in any
other lawful manner not inconsistent with the requirements of any securities
exchange on which the Notes may be listed, and upon such notice as may be
required by such exchange, all as more fully provided in the Indenture. The
Notes will be payable as to principal, premium, interest, if any, at the office
or agency of the Company maintained for such purpose within or without the City
and State of New York, or, at the option of the Company, payment of interest, if
any, may be made by check mailed to the Holders at their addresses set forth in
the register of Holders, and provided that payment by wire transfer of
immediately available funds will be required with respect to principal of and
interest and premium, if any, on, all global Notes and all other Notes the
Holders of which shall have provided wire transfer instructions to the Company
or the Paying Agent. Such payment shall be in such coin or currency of the
United States of America as at the time of payment is legal tender for payment
of public and private debts.
3. Paying Agent And Registrar. Initially, Norwest Bank Minnesota,
National Association, the Trustee under the Indenture, will act as Paying Agent
and Registrar. The Company may change any Paying Agent or Registrar without
notice to any Holder. The Company may act in any such capacity.
4. Issuance and Ranking. The Company issued the Notes under an
Indenture dated as of July 14, 1998 (the "Indenture") between the Company and
the Trustee. The terms of the Notes include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of
1939, as amended (15 U.S. Code Sections 77aaa-77bbbb) (the "TIA"). The Notes are
subject to all such terms, and Holders are referred to the Indenture and the TIA
for a statement of such terms. The Notes are general, unsecured obligations of
the Company limited to $150,000,000 in aggregate principal amount, on
outstanding Notes as set forth in Paragraph 2 hereof.
4
<PAGE> 5
5. Redemption.
The Notes are not redeemable at the Company's option prior to July
1, 2002. Thereafter, the Notes will be subject to redemption at the option of
the Company, in whole or in part, upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed as percentages of principal amount)
set forth below plus accrued and unpaid interest, if any, thereon to the
applicable redemption date, if redeemed during the twelve-month period beginning
on July 1 of the years indicated below:
<TABLE>
<CAPTION>
Year Redemption Rate
---- ---------------
<S> <C>
2002 ....................................................105.750%
2003 ....................................................102.875%
2004 and thereafter......................................100.000%
</TABLE>
(a) Notwithstanding the foregoing, during the first 36 months after
the Closing Date, the Company may, on any one or more occasions, 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 (whether in lieu of cash interest
payments) at the 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; and provided further, that any such
redemption shall occur within 90 days of the date of closing of such offering of
Common Stock of the Company.
6. Mandatory Redemption. Except as set forth in Paragraph 7 below,
the Company shall not be required to make mandatory redemption or sinking fund
payments with respect to the Notes.
7. Repurchase At Option Of Holder. Upon the occurrence of a Change
of Control, each Holder of Notes shall have the right to require the Company to
repurchase all or any part (but not, in the case of any Holder requiring the
Company to purchase less than all of the Notes held by such Holder, any Note in
principal amount less than $1,000) of such Holder's Notes pursuant to an offer
(the "Change of Control Offer") at an offer price equal to 101% of the aggregate
principal amount thereof plus accrued and unpaid interest, if any, thereon to
the date of purchase (the "Change of Control Payment"). Within 10 days following
any Change of Control, the Company shall mail a notice to each Holder setting
forth the procedures governing the Change of Control Offer as required by the
Indenture.
8. Notice Of Redemption. Notice of redemption will be mailed at
least 30 days but not more than 60 days before the redemption date to each
Holder whose Notes are to be redeemed at its registered address. Notes in
denominations larger than $1,000 may be redeemed in part but only in whole
multiples of $1,000, unless all of the Notes held by a Holder are to be
redeemed. On and after the redemption date interest ceases to accrue on Notes or
portions thereof called for redemption.
9. Denominations, Transfer, Exchange. The Notes are in registered
form without coupons in all appropriate denominations. The transfer of Notes may
be registered and Notes may be exchanged as provided in the Indenture. The
Registrar and the Trustee may require a Holder, among other things, to furnish
appropriate endorsements and transfer documents and the Company may require a
Holder to pay any taxes and fees required by law or permitted by the Indenture.
The Company need not transfer or exchange any Note selected for redemption,
except for the unredeemed portion of any Note being redeemed in part. Also, it
need not transfer or exchange any Note for a period of 15 Business Days before a
selection of Notes to be redeemed or during the period between a record date and
the corresponding Interest Payment Date.
10. Persons Deemed Owners. The registered Holder of a Note may be
treated as its owner for all purposes.
11. Amendment, Supplement And Waiver. Subject to certain exceptions,
the Indenture or the Notes may be amended or supplemented with the consent of
the Holders of at least a majority in principal amount of the then outstanding
Notes, and, subject to Sections 6.4 and 6.7 of the Indenture, any existing
default or compliance with any provision of the Indenture or the Notes may be
waived with the consent of the Holders of a majority in principal amount of the
then outstanding Notes. Without the consent of any Holder of a Note, the
Indenture or the Notes may be amended or supplemented to cure any ambiguity,
defect or inconsistency, to provide for uncertificated Notes in addition to or
in place of certificated Notes, to provide for the assumption of the Company's
obligations to Holders of the Notes
5
<PAGE> 6
in case of a merger or consolidation, to make any change that would provide any
additional rights or benefits to the Holders of the Notes or that does not
adversely affect the legal rights under the Indenture of any such Holder, or to
comply with the requirements of the SEC in order to effect or maintain the
qualification of the Indenture under the TIA.
12. Defaults And Remedies. Events of Default include: (i) a default
by the Company in the payment of interest on the Notes when the same becomes due
and payable and the Default continues for a period of 30 days; (ii) default by
the Company in the payment of the principal of or premium, if any, on the Notes
when the same becomes due and payable at maturity, upon redemption or otherwise;
(iii) failure by the Company to comply with the provisions described under
Section 4.10 of the Indenture; (iv) failure by the Company for 60 days after
notice to comply with any of its other agreements in the Indenture or the Notes;
(v) default under any mortgage, indenture or instrument under which there may be
issued or by which there may be secured or evidenced any Debt for money borrowed
by the Company or any of its Restricted Subsidiaries (or the payment of which is
guaranteed by the Company or any of its Restricted Subsidiaries), whether such
Debt or guarantee now exists, or shall be created hereafter, which default is
caused by a failure to pay principal of or premium, if any, or interest on such
Debt prior to the expiration of the grace period provided in such Indebtedness
on the date of such default (a "Payment Default") the principal amount of such
Debt together with the principal amount of any other such Debt under which there
has been a Payment Default which has been so accelerated, aggregates $10.0
million or more; (vi) a final judgment or final judgments for the payment of
money are entered by a court or courts of competent jurisdiction against the
Company or any Restricted Subsidiary that would be a Significant Subsidiary and
such judgment or judgments remain unpaid, undischarged or unstayed for a period
of 60 days; provided that the aggregate of all such undischarged judgments
exceeds $10.0 million; (vii) certain events of bankruptcy or insolvency with
respect to the Company, any Restricted Subsidiary that would constitute a
Significant Subsidiary or any group of Restricted Subsidiaries that, taken
together, would constitute a Significant Subsidiary. If any Event of Default
occurs and is continuing, the Trustee or the Holders of at least 25% in
principal amount of the then outstanding Notes may declare all the Notes to be
due and payable immediately. Notwithstanding the foregoing, in the case of an
Event of Default arising from certain events of bankruptcy or insolvency, all
outstanding Notes will become due and payable without further action or notice.
Holders may not enforce the Indenture or the Notes except as provided in the
Indenture. Subject to certain limitations, Holders of a majority in principal
amount of the then outstanding Notes may direct the Trustee in its exercise of
any trust or power. The Trustee may withhold from Holders of the Notes notice of
any continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or interest) if it determines that
withholding notice is in their interest. The Holders of a majority in aggregate
principal amount of the Notes then outstanding by notice to the Trustee may on
behalf of the Holders of all of the Notes waive any existing Default or Event of
Default and its consequences under the Indenture except a continuing Default or
Event of Default in the payment of interest and premium, if any, on, or the
principal of, the Notes. The Company is required to deliver to the Trustee
annually a statement regarding compliance with the Indenture, and the Company is
required upon becoming aware of any Default or Event of Default, to deliver to
the Trustee a statement specifying such Default or Event of Default.
13. Trustee Dealings With The Company. Subject to Section 7.3 of the
Indenture, the Trustee, in its individual or any other capacity, may become the
owner or pledgee of Notes and may otherwise deal with the Company or any
Affiliate of the Company with the same rights it would have if it were not
Trustee.
14. No Recourse Against Others. No past, present or future director,
officer, employee, incorporator or stockholder of the Company, as such, shall
have any liability for any obligations of the Company under the Notes, the
Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder of Notes by accepting a Note waives
and releases all such liability. The waiver and release are part of the
consideration for the issuance of the Notes.
15. Authentication. This Note shall not be valid until authenticated
by the manual signature of the Trustee or an authenticating agent.
16. Abbreviations. Customary abbreviations may be used in the name
of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (=
tenants by the entireties), JT TEN (= joint tenants with right of survivorship
and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts
to Minors Act).
The Company will furnish to any Holder upon written request and
without charge a copy of the Indenture. Requests may be made to Investor
Relations at the executive offices of the Company.
6
<PAGE> 7
ASSIGNMENT FORM
To assign this Note, fill in the form below: (I) or (we) assign and transfer
this Note to
- --------------------------------------------------------------------------------
(Insert assignee's soc. sec. or tax I.D. no.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
and irrevocably appoint
- --------------------------------------------------------------------------------
to transfer this Note on the books of the Company. The agent may substitute
another to act for him.
- --------------------------------------------------------------------------------
Date:
-----------------------------------
Your Signature:
---------------------------------------
(Sign exactly as your name appears on
the face of this Note)
Signature Guarantee:
--------------------------------
7
<PAGE> 8
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Company
pursuant to Section 4.10 of the Indenture, check the box: [ ]
If you want to elect to have only part of the Note purchased by the
Company pursuant to Section 4.10 of the Indenture, state the amount you elect to
have purchased:
$
------------
Date:
------------------------
Your Signature:
-----------------------------------------------
(Sign exactly as your name appears on the Note)
Tax Identification No.
-----------------------------------------------
Signature Guarantee:
-----------------------------------------------
8
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the inclusion in the Prospectus included in this
Registration Statement on Form S-4 of Ocwen Asset Investment Corp. of our
reports: (a) dated January 26, 1998, on the financial statements of Ocwen Asset
Investment Corp. as of December 31, 1997 and for the period from May 14, 1997 to
December 31, 1997; (b) dated June 3, 1998 on the Statement of Revenue and
Certain Expenses for the year ended December 31, 1997 for the 225 Bush Street
Property; (c) dated July 23, 1998 on the Statement of Revenue and Certain
Expenses for the year ended December 31, 1997 for the 841 Prudential Drive
Property; (d) dated June 26, 1998 on the Statement of Revenue and Certain
Expenses for the year ended December 31, 1996 for the 450 Sansome Street
Property; (e) dated June 19, 1998 on the Statement of Revenue and Certain
Expenses for the year ended December 31, 1997 for the Cortez Plaza Property;
(f) dated June 23, 1998 on the Statement of Revenue and Certain Expenses for
the year ended December 31, 1997 for the Bayers Road Shopping Centre Property
and (g) dated January 6, 1999 on the Statement of Revenue and Certain Expenses
for the year ended December 31, 1996 for the 10 U.N. Plaza Property. We also
consent to the reference to our firm under the heading "Experts" in such
Prospectus.
/s/ PricewaterhouseCoopers LLP
Fort Lauderdale, Florida
January 26, 1999
9
<PAGE> 1
EXHIBIT 99.1
LETTER OF TRANSMITTAL
OCWEN ASSET INVESTMENT CORP.
OFFER TO EXCHANGE ITS
11 1/2% REDEEMABLE NOTES DUE 2005
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ANY AND ALL OF ITS OUTSTANDING
11 1/2% REDEEMABLE NOTES DUE 2005
RESOLD PURSUANT TO RULE 144A
PURSUANT TO THE PROSPECTUS
DATED ________ ___, 1999
---------------
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE
AT 5:00 P.M., NEW YORK CITY TIME, ON __________ ___, 1999, UNLESS
THE OFFER IS EXTENDED.
---------------
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
By Registered or Certified Mail: In Person:
Norwest Bank Minnesota, Northstar East Bldg.
National Association 608 2nd Ave. S.
Corporate Trust Operations 12th Floor
P.O. Box 1517 Corporate Trust Services
Minneapolis, MN 55480-1517 Minneapolis, MN 55479-0113
By Hand or Overnight Courier: By Facsimile (for Eligible
Institutions only):
Norwest Bank Minnesota, (612) 667-4927
National Association
Corporate Trust Operations Confirm Receipt of Notice of
Norwest Center Guaranteed Delivery by Telephone:
Sixth and Marquette
Minneapolis, MN 55479-0113 (612) 667-9764
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE OR TRANSMISSION OF THIS LETTER OF TRANSMITTAL VIA FACSIMILE TO A
NUMBER OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY.
THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS
LETTER OF TRANSMITTAL IS COMPLETED.
<PAGE> 2
Capitalized terms used but not defined herein shall have the same meaning
given them in the Prospectus (as defined below).
This Letter of Transmittal is to be completed by holders of Old Notes (as
defined below) either if (i) Old Notes are to be forwarded herewith or (ii)
tenders of Old Notes are to be made by book-entry transfer to an account
maintained by Norwest Bank Minnesota, National Association (the "Exchange
Agent") at The Depository Trust Company ("DTC") pursuant to the procedures set
forth in "The Exchange Offer--Procedures for Tendering Old Notes" in the
Prospectus.
Holders of Old Notes whose certificates (the "Certificates") for such Old
Notes are not immediately available or who cannot deliver their Certificates and
all other required documents to the Exchange Agent on or prior to the Expiration
Date (as defined in the Prospectus) or who cannot complete the procedures for
book-entry transfer on or prior to the Expiration Date, must tender their Old
Notes according to the guaranteed delivery procedures set forth in "The Exchange
Offer--Procedures for Tendering Old Notes" in the Prospectus.
DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE
AGENT.
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
ALL TENDERING HOLDERS COMPLETE THIS BOX:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF OLD NOTES TENDERED
(See Instruction 4)
- ------------------------------------------------------------------------------------------------------------------------------------
Old Notes tendered
If blank, please print name and address of registered holder. (Attach additional list if necessary)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Principal Amount of Old Notes
Tendered
Certificate Aggregate Principal (if less than all are
Number(s)* Amount of Old Notes tendered)**
------------- --------------------- -------------------------------
------------- --------------------- -------------------------------
------------- --------------------- -------------------------------
------------- --------------------- -------------------------------
Total
Amount
Tendered:
- ------------------------------------------------------------------------------------------------------------------------------------
* Need not be completed by book-entry holders.
** Old Notes may be tendered in whole or in part in integral
multiples of $1,000 principal amount. All Old Notes held
shall be deemed tendered unless a lesser number is
specified in this column.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE> 3
(BOXES BELOW TO BE CHECKED BY ELIGIBLE INSTITUTIONS ONLY)
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH DTC AND
COMPLETE THE FOLLOWING:
Name of Tendering Institution_________________________________
DTC Account Number__________________________________________
Transaction Code Number_______________________________________
[ ] CHECK HERE AND ENCLOSE A PHOTOCOPY OF THE NOTICE OF GUARANTEED DELIVERY IF
TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED
DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING:
Name of Registered Holder(s)_________________________________
Window Ticket Number (if any)________________________________
Date of Execution of Notice of Guaranteed Delivery__________________
Name of Institution which Guaranteed Delivery______________________
If Guaranteed Delivered is to be made by Book-Entry Transfer:
Name of Tendering Institution___________________________
DTC Account Number______________________________________
Transaction Code Number_________________________________
[ ] CHECK HERE IF TENDERED BY BOOK-ENTRY TRANSFER AND NONEXCHANGED OR
NONTENDERED OLD NOTES ARE TO BE RETURNED BY CREDITING THE DTC ACCOUNT
NUMBER SET FORTH ABOVE.
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER WHO ACQUIRED THE OLD NOTES FOR ITS
OWN ACCOUNT AS A RESULT OF MARKET MAKING OR OTHER TRADING ACTIVITIES (A
"PARTICIPATING BROKER-DEALER") AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF
THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO.
Name:___________________________________
Address:________________________________
___________________________________
Area Code and Telephone Number:______________
Contact Person:__________________________
3
<PAGE> 4
Ladies and Gentlemen:
The undersigned hereby tenders to Ocwen Asset Investment Corp. (the
"Company"), a Virginia corporation, the above-described aggregate principal
amount of its 11 1/2% Redeemable Notes due 2005 resold in reliance on Rule 144A
(the "Old Notes") in exchange for a like aggregate principal amount of its 11
1/2% Redeemable Notes due 2005 (the "New Notes") which have been registered
under the Securities Act of 1933, as amended (the "Securities Act"), upon the
terms and subject to the conditions set forth in the Prospectus, dated
_____________ ___, 1999 (as the same may be amended or supplemented from time to
time, the "Prospectus"), receipt of which is acknowledged, and in this Letter of
Transmittal (which, together with the Prospectus, constitute the "Exchange
Offer").
Subject to and effective upon the acceptance for exchange of all or any
portion of the Old Notes tendered herewith in accordance with the terms and
conditions of the Exchange Offer (including, if the Exchange Offer is extended
or amended, the terms and conditions of any such extension or amendment), the
undersigned hereby sells, assigns and transfers to or upon the order of the
Company all right, title and interest in and to such Old Notes as are being
tendered herewith. The undersigned hereby irrevocably constitutes and appoints
the Exchange Agent as its agent and attorney-in-fact (with full knowledge that
the Exchange Agent also is acting as agent of the Company in connection with the
Exchange Offer) with respect to the tendered Old Notes, with full power of
substitution (such power of attorney being deemed to be an irrevocable power
coupled with an interest), subject only to the right of withdrawal described in
the Prospectus, to (i) deliver Certificates for Old Notes to the Company
together with all accompanying evidences of transfer and authenticity to, or
upon the order of, the Company, upon receipt by the Exchange Agent, as the
undersigned's agent, of the New Notes to be issued in exchange for such Old
Notes, (ii) present Certificates for such Old Notes for transfer, and to
transfer the Old Notes on the books of the Company, and (iii) receive for the
account of the Company all benefits and otherwise exercise all rights of
beneficial ownership of such Old Notes, all in accordance with the terms and
conditions of the Exchange Offer.
THE UNDERSIGNED HEREBY REPRESENTS AND WARRANTS THAT THE UNDERSIGNED HAS
FULL POWER AND AUTHORITY TO TENDER, EXCHANGE, SELL, ASSIGN AND TRANSFER THE OLD
NOTES TENDERED HEREBY AND THAT, WHEN THE SAME ARE ACCEPTED FOR EXCHANGE, THE
COMPANY WILL ACQUIRE GOOD, MARKETABLE AND UNENCUMBERED TITLE THERETO, FREE AND
CLEAR OF ALL LIENS, RESTRICTIONS, CHARGES AND ENCUMBRANCES, AND THAT THE OLD
NOTES TENDERED HEREBY ARE NOT SUBJECT TO ANY ADVERSE CLAIMS OR PROXIES. THE
UNDERSIGNED WILL, UPON REQUEST, EXECUTE AND DELIVER ANY ADDITIONAL DOCUMENTS
DEEMED BY THE COMPANY OR THE EXCHANGE AGENT TO BE NECESSARY OR DESIRABLE TO
COMPLETE THE EXCHANGE, ASSIGNMENT AND TRANSFER OF THE OLD NOTES TENDERED HEREBY,
AND THE UNDERSIGNED WILL COMPLY WITH ITS OBLIGATIONS UNDER THE REGISTRATION
RIGHTS AGREEMENT (AS DEFINED IN THE PROSPECTUS). THE UNDERSIGNED HAS READ AND
AGREES TO ALL OF THE TERMS OF THE EXCHANGE OFFER.
The name(s) and address(es) of the registered holder(s) of the Old Notes
tendered hereby should be printed above, if they are not already set forth
above, as they appear on the Certificates representing such Old Notes. The
Certificate number(s) of the Old Notes that the undersigned wishes to tender
should be indicated in the appropriate boxes above.
If any tendered Old Notes are not exchanged pursuant to the Exchange
Offer for any reason, or if Certificates are submitted for more Old Notes than
are tendered or accepted for exchange, Certificates for such nonexchanged or
nontendered Old Notes will be returned (or, in the case of Old Notes tendered by
book-entry transfer, such Old Notes will be credited to an account maintained at
DTC), without expense to the tendering holder, promptly following the expiration
or termination of the Exchange Offer.
The undersigned understands that tenders of Old Notes pursuant to any one
of the procedures described in "The Exchange Offer--Procedures for Tendering Old
Notes" in the Prospectus and in the Instructions herein will, upon the Company's
acceptance for exchange of such tendered Old Notes, constitute a binding
agreement between the undersigned and the Company upon the terms and subject to
the conditions of the Exchange Offer. The undersigned recognizes that, under
certain circumstances set forth in the Prospectus, the Company may not be
required to accept for exchange any of the Old Notes tendered hereby.
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions" below, the undersigned hereby directs that the New Notes be issued
in the name(s) of the undersigned or, in the case of a book-entry transfer of
Old Notes, that such New Notes be credited to the account indicated above
maintained at DTC. If applicable, substitute Certificates representing Old Notes
not exchanged or not accepted for exchange will be issued to the undersigned or,
in the case of a book-entry transfer of Old Notes, will be credited to the
account indicated above maintained at DTC. Similarly, unless otherwise indicated
under "Special Delivery Instructions," please deliver New Notes to the
undersigned at the address shown below the undersigned's signature.
4
<PAGE> 5
BY TENDERING OLD NOTES AND EXECUTING THIS LETTER OF TRANSMITTAL, THE
UNDERSIGNED HEREBY REPRESENTS AND AGREES THAT (i) THE UNDERSIGNED IS NOT AN
"AFFILIATE" OF THE COMPANY WITHIN THE MEANING OF RULE 405 UNDER THE SECURITIES
ACT, (ii) ANY NEW NOTES TO BE RECEIVED BY THE UNDERSIGNED ARE BEING ACQUIRED IN
THE ORDINARY COURSE OF ITS BUSINESS, (iii) THE UNDERSIGNED HAS NO ARRANGEMENT OR
UNDERSTANDING WITH ANY PERSON TO PARTICIPATE IN THE DISTRIBUTION (WITHIN THE
MEANING OF THE SECURITIES ACT) OF NEW NOTES TO BE RECEIVED IN THE EXCHANGE OFFER
AND (iv) IF THE UNDERSIGNED IS NOT A BROKER-DEALER, THE UNDERSIGNED IS NOT
ENGAGED IN, AND DOES NOT INTEND TO ENGAGE IN, A DISTRIBUTION (WITHIN THE MEANING
OF THE SECURITIES ACT) OF SUCH NEW NOTES. BY TENDERING OLD NOTES PURSUANT TO THE
EXCHANGE OFFER AND EXECUTING THIS LETTER OF TRANSMITTAL, A HOLDER OF OLD NOTES
WHICH IS A BROKER-DEALER REPRESENTS AND AGREES, CONSISTENT WITH CERTAIN
INTERPRETIVE LETTERS ISSUED BY THE STAFF OF THE DIVISION OF CORPORATION FINANCE
OF THE SECURITIES AND EXCHANGE COMMISSION TO THIRD PARTIES, THAT (a) SUCH OLD
NOTES HELD BY THE BROKER-DEALER ARE HELD ONLY AS A NOMINEE OR (b) SUCH OLD NOTES
WERE ACQUIRED BY SUCH BROKER-DEALER FOR ITS OWN ACCOUNT AS A RESULT OF
MARKET-MAKING ACTIVITIES OR OTHER TRADING ACTIVITIES (AND DO NOT REPRESENT AN
UNSOLD ALLOTMENT FROM THE ORIGINAL SALE OF THE OLD NOTES) AND IT WILL DELIVER A
PROSPECTUS (AS AMENDED OR SUPPLEMENTED FROM TIME TO TIME) MEETING THE
REQUIREMENTS OF THE SECURITIES ACT IN CONNECTION WITH ANY RESALE OF SUCH NEW
NOTES (PROVIDED THAT, BY SO ACKNOWLEDGING AND BY DELIVERING A PROSPECTUS, SUCH
BROKER-DEALER WILL NOT BE DEEMED TO ADMIT THAT IT IS AN "UNDERWRITER" WITHIN THE
MEANING OF THE SECURITIES ACT).
THE COMPANY HAS AGREED THAT, SUBJECT TO THE PROVISIONS OF THE
REGISTRATION RIGHTS AGREEMENT, THE PROSPECTUS, AS IT MAY BE AMENDED OR
SUPPLEMENTED FROM TIME TO TIME, MAY BE USED BY A PARTICIPATING BROKER-DEALER (AS
DEFINED BELOW) IN CONNECTION WITH RESALES OF NEW NOTES RECEIVED IN EXCHANGE FOR
OLD NOTES, WHERE SUCH OLD NOTES WERE ACQUIRED BY SUCH PARTICIPATING
BROKER-DEALER FOR ITS OWN ACCOUNT AS A RESULT OF MARKET-MAKING ACTIVITIES OR
OTHER TRADING ACTIVITIES (AND WHICH DO NOT REPRESENT AN UNSOLD ALLOTMENT FROM
THE ORIGINAL SALE OF THE OLD NOTES), FOR A PERIOD ENDING 180 DAYS AFTER THE
EXPIRATION DATE (SUBJECT TO EXTENSION UNDER CERTAIN LIMITED CIRCUMSTANCES
DESCRIBED IN THE PROSPECTUS) OR, IF EARLIER, WHEN ALL SUCH NEW NOTES HAVE BEEN
DISPOSED OF BY SUCH PARTICIPATING BROKER-DEALER. IN THAT REGARD, EACH
BROKER-DEALER WHO ACQUIRED OLD NOTES FOR ITS OWN ACCOUNT AND AS A RESULT OF
MARKET-MAKING OR OTHER TRADING ACTIVITIES (A "PARTICIPATING BROKER-DEALER"), BY
TENDERING SUCH OLD NOTES AND EXECUTING THIS LETTER OF TRANSMITTAL, AGREES THAT,
UPON RECEIPT OF NOTICE FROM THE COMPANY OF THE OCCURRENCE OF ANY EVENT OR THE
DISCOVERY OF ANY FACT WHICH MAKES ANY STATEMENT CONTAINED OR INCORPORATED BY
REFERENCE THEREIN, IN LIGHT OF THE CIRCUMSTANCES UNDER WHICH THEY WERE MADE, NOT
MISLEADING OR OF THE OCCURRENCE OF CERTAIN OTHER EVENTS SPECIFIED IN THE
REGISTRATION RIGHTS AGREEMENT, SUCH PARTICIPATING BROKER-DEALER WILL SUSPEND THE
SALE OF NEW NOTES PURSUANT TO THE PROSPECTUS UNTIL THE COMPANY HAS AMENDED OR
SUPPLEMENTED THE PROSPECTUS TO CORRECT SUCH MISSTATEMENT OR OMISSION AND HAS
FURNISHED COPIES OF THE AMENDED OR SUPPLEMENTED PROSPECTUS TO THE PARTICIPATING
BROKER-DEALER OR THE COMPANY HAS GIVEN NOTICE THAT THE SALE OF THE NEW NOTES MAY
BE RESUMED, AS THE CASE MAY BE. IF THE COMPANY GIVES SUCH NOTICE TO SUSPEND THE
SALE OF THE NEW NOTES, IT SHALL EXTEND THE 180-DAY PERIOD REFERRED TO ABOVE
DURING WHICH PARTICIPATING BROKER-DEALERS ARE ENTITLED TO USE THE PROSPECTUS IN
CONNECTION WITH THE RESALE OF NEW NOTES BY THE NUMBER OF DAYS DURING THE PERIOD
FROM AND INCLUDING THE DATE OF THE GIVING OF SUCH NOTICE TO AND INCLUDING THE
DATE WHEN PARTICIPATING BROKER-DEALERS SHALL HAVE RECEIVED COPIES OF THE
SUPPLEMENTED OR AMENDED PROSPECTUS NECESSARY TO PERMIT RESALES OF THE NEW NOTES
OR TO AND INCLUDING THE DATE ON WHICH THE COMPANY HAS GIVEN NOTICE THAT THE SALE
OF NEW NOTES MAY BE RESUMED, AS THE CASE MAY BE.
As a result, a Participating Broker-Dealer who intends to use the
Prospectus in connection with resales of New Notes received in exchange for Old
Notes pursuant to the Exchange Offer must notify the Company, or cause the
Company to be notified, on or prior to the Expiration Date, that it is a
Participating Broker-Dealer. Such notice may be given in the space provided
above or may be delivered to the Exchange Agent at the address set forth in the
Prospectus under "The Exchange Offer--Exchange Agent."
Holders of New Notes as of the record date for the payment of interest
on July 1, 1999 will be entitled to interest accumulated from and after January
1, 1999. Holders of Old Notes whose Old Notes are accepted for exchange will
not receive interest on such Old Notes accumulated from and after January 1,
1999 and the undersigned waives the right to receive any interest on such Old
Notes accumulated from and after January 1, 1999. Consequently, holders who
exchange their Old Notes or New Notes will receive the same interest payment on
July 1, 1999 that they would have received had they not accepted the Exchange
Offer.
All authority herein conferred or agreed to be conferred in this Letter
of Transmittal shall survive the death or incapacity of the undersigned and any
obligation of the undersigned hereunder shall be binding upon the heirs,
executors, administrators, personal representatives, trustees in bankruptcy,
legal representatives, successors and assigns of the undersigned. Except as
stated in the Prospectus, this tender is irrevocable.
5
<PAGE> 6
HOLDER(S) SIGN HERE
(See Instructions 2, 5 and 6)
(Please Complete Substitute Form W-9 Below)
(Note: Signature(s) must be guaranteed if required by Instruction 2)
Must be signed by registered holder(s) exactly as name(s) appear(s) on
Certificates(s) for the Old Notes hereby tendered or on a security position
listing, or by any person(s) authorized to become the registered holder(s) by
endorsements and documents transmitted herewith (including such opinions of
counsel, certificates and other information as may be required by the Company or
the Exchange Agent to comply with the restrictions on transfer applicable to the
Old Notes). If signature is by an attorney-in-fact, executor, administrator,
trustee, guardian, officer of a corporation or another acting in a fiduciary
capacity or representative capacity, please set forth the signer's full title.
See Instruction 5.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(SIGNATURE(s) OF HOLDER(s))
Date___________________, 1999
Name(s)
-------------------------------------------------------------------------
(PLEASE PRINT)
- --------------------------------------------------------------------------------
Area Code(s) and Telephone Number
--------------------------------------------
- --------------------------------------------------------------------------------
(TAX IDENTIFICATION OR SOCIAL SECURITY NUMBER(s))
GUARANTEE OF SIGNATURE(S)
(See Instructions 2 and 5)
Authorized Signature
------------------------------------------------------------
Name
----------------------------------------------------------------------------
(PLEASE PRINT)
Date___________________, 1998
Capacity or Title
---------------------------------------------------------------
Name of Firm
--------------------------------------------------------------------
Address
-------------------------------------------------------------------------
(INCLUDE ZIP CODE)
Area Code and Telephone Number
-----------------------------------------------
6
<PAGE> 7
<TABLE>
<CAPTION>
- ------------------------------------------------- ------------------------------------------------------------
<S> <C>
SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(See Instructions 1, 5 and 6) (See Instructions 1, 5 and 6)
To be completed ONLY if New Notes and/or any To be completed ONLY if New Notes and/or any Old
Old Notes that are not tendered are to be issued Notes that are not tendered are to be sent to someone
in the name of someone other than the registered other than the registered holder of the Old Notes whose
holder of the Old Notes whose name(s) appear(s) name(s) appear(s) above, or to the registered holder(s) at
above. an address other than that shown above.
Issue: Mail:
[ ] New Notes to: [ ] New Notes to:
[ ] Old Notes not tendered to: [ ] Old Notes not tendered to:
Name___________________________________________ Name___________________________________________
(PLEASE PRINT) (PLEASE PRINT)
Address________________________________________ Address________________________________________
_______________________________________________ _______________________________________________
_______________________________________________ _______________________________________________
(INCLUDE ZIP CODE) (INCLUDE ZIP CODE)
_______________________________________________ _______________________________________________
(TAXPAYER IDENTIFICATION OR SOCIAL SECURITY NO.) (TAXPAYER IDENTIFICATION OR SOCIAL SECURITY NO.)
- ------------------------------------------------- ------------------------------------------------------------
</TABLE>
7
<PAGE> 8
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES; GUARANTEED DELIVERY
PROCEDURES. This Letter of Transmittal is to be completed either if (a) tenders
are to be made pursuant to the procedures for tender by book-entry transfer set
forth under "The Exchange Offer--Procedures for Tendering Old Notes" in the
Prospectus and an Agent's Message is not delivered or (b) Certificates are to be
forwarded herewith. Timely confirmation of a book-entry transfer of such Old
Notes into the Exchange Agent's account at DTC, or Certificates as well as this
Letter of Transmittal (or facsimile thereof), properly completed and duly
executed, with any required signature guarantees, and any other documents
required by this Letter of Transmittal, must be received by the Exchange Agent
at its addresses set forth herein on or prior to the Expiration Date. Tenders by
book-entry transfer also may be made by delivering an Agent's Message in lieu of
this Letter of Transmittal. The term "book-entry confirmation" means a
confirmation of book-entry transfer of Old Notes into the Exchange Agent's
account at DTC. The term "Agent's Message" means a message transmitted by DTC to
and received by the Exchange Agent and forming a part of a book-entry
confirmation, which states that DTC has received an express acknowledgment from
the tendering participant, which acknowledgment states that such participant has
received and agrees to be bound by the Letter of Transmittal (including the
representations contained herein) and that the Company may enforce the Letter of
Transmittal against such participant. Old Notes may be tendered in whole or in
part in integral multiples of $1,000 principal amount.
Holders who wish to tender their Old Notes and (i) who cannot complete
the procedures for delivery by book-entry transfer on or prior to the Expiration
Date, (ii) who cannot deliver their Old Notes, this Letter of Transmittal and
all other required documents to the Exchange Agent on or prior to the Expiration
Date or (iii) whose Old Notes are not immediately available, may tender their
Old Notes by properly completing and duly executing a Notice of Guaranteed
Delivery pursuant to the guaranteed delivery procedures set forth under "The
Exchange Offer--Procedures for Tendering Old Notes" in the Prospectus. Pursuant
to such procedures: (a) such tender must be made by or through an Eligible
Institution (as defined below); (b) a properly completed and duly executed
Notice of Guaranteed Delivery, substantially in the form made available by the
Company, must be received by the Exchange Agent on or prior to the Expiration
Date; and (c) the Certificates (or a book-entry confirmation (as defined above
and in the Prospectus)) representing all tendered Old Notes, in proper form for
transfer, together with a Letter of Transmittal (or facsimile thereof), properly
completed and duly executed, with any required signature guarantees and any
other documents required by this Letter of Transmittal, must be received by the
Exchange Agent within three New York Stock Exchange, Inc. trading days after the
date of execution of such Notice of Guaranteed Delivery, all as provided in "The
Exchange Offer--Procedures for Tendering Old Notes" in the Prospectus.
The Notice of Guaranteed Delivery may be delivered by hand or transmitted
by facsimile or mail to the Exchange Agent, and must include a guarantee by an
Eligible Institution in the form set forth in such Notice. For Old Notes to be
properly tendered pursuant to the guaranteed delivery procedure, the Exchange
Agent must receive a Notice of Guaranteed Delivery on or prior to the Expiration
Date. As used herein and in the Prospectus, "Eligible Institution" means a firm
or other entity identified in Rule 17Ad-15 under the Exchange Act as "an
eligible guarantor institution," including (as such terms are defined therein)
(i) a bank; (ii) a broker, dealer, municipal securities broker or dealer or
government securities broker or dealer; (iii) a credit union; (iv) a national
securities exchange, registered securities association or clearing agency; or
(v) a savings association that is a participant in a Securities Transfer
Association.
THE METHOD OF DELIVERY OF CERTIFICATES, THIS LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING HOLDER AND
THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE
AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED,
PROPERLY INSURED, OR OVERNIGHT DELIVERY SERVICE IS RECOMMENDED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
The Company will not accept any alternative, conditional or contingent
tenders. Each tendering holder, by execution of a Letter of Transmittal (or
facsimile thereof), waives any right to receive any notice of the acceptance of
such tender.
2.GUARANTEE OF SIGNATURES. No signature guarantee on this Letter of
Transmittal is required if:
(i) this Letter of Transmittal is signed by the registered holder (which
term, for purposes of this document, shall include any participant in DTC whose
name appears on a security position listing as the owner of the Old Notes) of
Old Notes tendered herewith,
8
<PAGE> 9
unless such holder(s) has completed either the box entitled "Special Issuance
Instructions" or the box entitled "Special Delivery Instructions" above, or
(ii) such Old Notes are tendered for the account of a firm that is an Eligible
Institution.
In all other cases, an Eligible Institution must guarantee the
signature(s) on this Letter of Transmittal. See Instruction 5.
3. INADEQUATE SPACE. If the space provided in the box captioned
"Description of Old Notes" is inadequate, the Certificate number(s) and/or the
principal amount of Old Notes and any other required information should be
listed on a separate signed schedule which is attached to this Letter of
Transmittal.
4. PARTIAL TENDERS AND WITHDRAWAL RIGHTS. Tenders of Old Notes will be
accepted only in integral multiples of $1,000 principal amount. If less than all
the Old Notes evidenced by any Certificate submitted are to be tendered, fill in
the principal amount of Old Notes which are to be tendered in the box entitled
"Principal Amount of Old Notes Tendered (if less than all are tendered)." In
such case, a new Certificate(s) for the remainder of the Old Notes that were
evidenced by your Old Certificate(s) will be sent to the holder of the Old
Notes, promptly after the Expiration Date, unless the appropriate boxes on this
Letter of Transmittal are completed. All Old Notes represented by Certificates
delivered to the Exchange Agent will be deemed to have been tendered unless
otherwise indicated.
Except as otherwise provided herein, tenders of Old Notes may be
withdrawn at any time on or prior to the Expiration Date. In order for a
withdrawal to be effective on or prior to that time, a written or facsimile
transmission of such notice of withdrawal must be received by the Exchange Agent
at one of its addresses set forth above or in the Prospectus on or prior to the
Expiration Date. Any such notice of withdrawal must specify the name of the
person who tendered the Old Notes to be withdrawn, the aggregate principal
amount of Old Notes to be withdrawn, and (if Certificates for Old Notes have
been tendered) the name of the registered holder of the Old Notes as set forth
on the Certificate for the Old Notes, if different from that of the person who
tendered such Old Notes. If Certificates for the Old Notes have been delivered
or otherwise identified to the Exchange Agent, then prior to the physical
release of such Certificates for the Old Notes, the tendering holder must submit
the serial numbers shown on the particular Certificates for the Old Notes to be
withdrawn and the signature on the notice of withdrawal must be guaranteed by an
Eligible Institution, except in the case of Old Notes tendered for the account
of an Eligible Institution. If Old Notes have been tendered pursuant to the
procedures for book-entry transfer set forth under "The Exchange
Offer--Procedures for Tendering Old Notes" in the Prospectus, the notice of
withdrawal must specify the name and number of the account at DTC to be credited
with the withdrawal of Old Notes, in which case a notice of withdrawal will be
effective if delivered to the Exchange Agent by written or facsimile
transmission on or prior to the Expiration Date. Withdrawals of tenders of Old
Notes may not be rescinded. Old Notes properly withdrawn will not be deemed
validly tendered for purposes of the Exchange Offer, but may be retendered at
any subsequent time on or prior to the Expiration Date by following any of the
procedures described in the Prospectus under "The Exchange Offer--Procedures for
Tendering Old Notes."
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company in its
sole discretion, whose determination shall be final and binding on all parties.
None of the Company, any affiliates or assigns of the Company, the Exchange
Agent nor any other person shall be under any duty to give any notification of
any irregularities in any notice of withdrawal or incur any liability for
failure to give any such notification. Any Old Notes which have been tendered
but which are withdrawn will be returned to the holder thereof without cost to
such holder promptly after withdrawal.
5. SIGNATURES ON LETTER OF TRANSMITTAL, ASSIGNMENTS AND ENDORSEMENTS. If
this Letter of Transmittal is signed by the registered holder(s) of the Old
Notes tendered hereby, the signature(s) must correspond exactly with the name(s)
as written on the face of the Certificate(s) without alteration, enlargement or
any change whatsoever.
If any of the Old Notes tendered hereby are owned of record by two or
more joint owners, all such owners must sign this Letter of Transmittal.
If any tendered Old Notes are registered in different name(s) on several
Certificates, it will be necessary to complete, sign and submit as many separate
Letters of Transmittal (or facsimiles thereof) as there are different
registrations of Certificates.
If this Letter of Transmittal or any Certificates or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing and must submit proper
evidence satisfactory to the Company in its sole discretion, of such persons'
authority to so act.
9
<PAGE> 10
When this Letter of Transmittal is signed by the registered holder(s) of
the Old Notes listed and transmitted hereby, no endorsement(s) of Certificate(s)
or separate bond power(s) are required unless New Notes are to be issued in the
name of a person other than the registered holder(s). Signature(s) on such
Certificate(s) or bond power(s) must be guaranteed by an Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered holder(s) of the Old Notes listed, the Certificates must be endorsed
or accompanied by appropriate bond powers, signed exactly as the name or names
of the registered owner(s) appear(s) on the Certificates, and also must be
accompanied by such opinions of counsel, certifications and other information as
the Company or the Exchange Agent may require in accordance with the
restrictions on transfer applicable to the Old Notes. Signatures on such
Certificates or bond powers must be guaranteed by an Eligible Institution.
6. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. If New Notes are to be
issued in the name of a person other than the signer of this Letter of
Transmittal, or if New Notes are to be sent to someone other than the signer of
this Letter of Transmittal or to an address other than that shown above, the
appropriate boxes on this Letter of Transmittal should be completed.
Certificates for Old Notes not exchanged will be returned by mail or, if
tendered by book-entry transfer, by crediting the account indicated above
maintained at DTC. See Instruction 4.
7. IRREGULARITIES. The Company will determine, in its sole discretion,
all questions as to the form of documents, validity, eligibility (including time
of receipt) and acceptance for exchange of any tender of Old Notes, which
determination shall be final and binding on all parties. The Company reserves
the absolute right, in its sole and absolute discretion, to reject any and all
tenders determined by it not to be in proper form or the acceptance of which, or
exchange for, may, in the view of counsel to the Company be unlawful. The
Company also reserves the absolute right, subject to applicable law, to waive
any of the conditions of the Exchange Offer set forth in the Prospectus under
"The Exchange Offer--Certain Conditions to the Exchange Offer" or any conditions
or irregularity in any tender of Old Notes of any particular holder whether or
not similar conditions or irregularities are waived in the case of other
holders. The Company's interpretation of the terms and conditions of the
Exchange Offer (including this Letter of Transmittal and the instructions
hereto) will be final and binding. No tender of Old Notes will be deemed to have
been validly made until all irregularities with respect to such tender have been
cured or waived. None of the Company, any affiliates or assigns of the Company,
the Exchange Agent, or any other person shall be under any duty to give
notification of any irregularities in tenders or incur any liability for failure
to give such notification.
8. QUESTIONS, REQUESTS FOR ASSISTANCE AND ADDITIONAL COPIES. Questions
and requests for assistance may be directed to the Exchange Agent at its address
and telephone number set forth on the front of this Letter of Transmittal.
Additional copies of the Prospectus, this Letter of Transmittal and the Notice
of Guaranteed Delivery may be obtained from the Exchange Agent or from your
broker, dealer, commercial bank, trust company or other nominee.
9. 31% BACKUP WITHHOLDING; SUBSTITUTE FORM W-9. Under U.S. Federal income
tax law, a holder whose tendered Old Notes are accepted for exchange is required
to provide the Exchange Agent with such holder's correct taxpayer identification
number ("TIN") on Substitute Form W-9 below. If the Exchange Agent is not
provided with the correct TIN, the Internal Revenue Service (the "IRS") may
subject the holder or other payee to a $50 penalty. In addition, payments to
such holders or other payees with respect to Old Notes exchanged pursuant to the
Exchange Offer may be subject to 31% backup withholding.
The box in Part 2 of the Substitute Form W-9 may be checked if the
tendering holder has not been issued a TIN and has applied for a TIN or intends
to apply for a TIN in the near future. If the box in Part 2 is checked, the
holder or other payee must also complete the Certificate of Awaiting Taxpayer
Identification Number below in order to avoid backup withholding.
Notwithstanding that the box in Part 2 is checked and the Certificate of
Awaiting Taxpayer Identification Number is completed, the Exchange Agent will
withhold 31% of all payments made prior to the time a properly certified TIN is
provided to the Exchange Agent. The Exchange Agent will retain such amounts
withheld during the 60 day period following the date of the Substitute Form W-9.
If the holder furnishes the Exchange Agent with its TIN within 60 days after the
date of the Substitute Form W-9, the amounts retained during the 60 day period
will be remitted to the holder and no further amounts shall be retained or
withheld from payments made to the holder thereafter. If, however, the holder
has not provided the Exchange Agent with its TIN within such 60 day period,
amounts withheld will be remitted to the IRS as backup withholding. In addition,
31% of all payments made thereafter will be withheld and remitted to the IRS
until a correct TIN is provided.
The holder is required to give the Exchange Agent the TIN (e.g., social
security number or employer identification number) of the registered owner of
the Old Notes or of the last transferee appearing on the transfers attached to,
or endorsed on, the Old Notes. If the Old Notes are registered in more than one
name or are not in the name of the actual owner, consult the enclosed
"Guidelines for Certification of Taxpayer Identification Number on Substitute
Form W-9" for additional guidance on which number to report.
10
<PAGE> 11
Certain holders (including, among others, corporations, financial
institutions and certain foreign persons) may not be subject to these backup
withholding and reporting requirements. Such holders should nevertheless
complete the attached Substitute Form W-9 below, and write "exempt" on the face
thereof, to avoid possible erroneous backup withholding. A foreign person may
qualify as an exempt recipient by submitting a properly completed IRS Form W-8,
signed under penalties of perjury, attesting to that holder's exempt status.
Please consult the enclosed "Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9" for additional guidance on which
holders are exempt from backup withholding.
Backup withholding is not an additional U.S. Federal income tax. Rather,
the U.S. Federal income tax liability of a person subject to backup withholding
will be reduced by the amount of tax withheld. If withholding results in an
overpayment of taxes, a refund may be obtained.
10. LOST, DESTROYED OR STOLEN CERTIFICATES. If any Certificate(s)
representing Old Notes have been lost, destroyed or stolen, the holder should
promptly notify the Exchange Agent. The holder will then be instructed as to the
steps that must be taken in order to replace the Certificate(s). This Letter of
Transmittal and related documents cannot be processed until the procedures for
replacing lost, destroyed or stolen Certificate(s) have been followed.
11. SECURITY TRANSFER TAXES. Holders who tender their Old Notes for
exchange will not be obligated to pay any transfer taxes in connection
therewith. If, however, New Notes are to be delivered to, or are to be issued in
the name of, any person other than the registered holder of the Old Notes
tendered, or if a transfer tax is imposed for any reason other than the exchange
of Old Notes in connection with the Exchange Offer, then the amount of any such
transfer tax (whether imposed on the registered holder or any other persons)
will be payable by the tendering holder. If satisfactory evidence of payment of
such taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed directly to such
tendering holder.
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR FACSIMILE THEREOF) AND ALL
OTHER REQUIRED DOCUMENTS MUST BE RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO
THE EXPIRATION DATE.
11
<PAGE> 12
TO BE COMPLETED BY ALL
TENDERING SECURITY HOLDERS
(SEE INSTRUCTION 9)
PAYER'S NAME: OCWEN ASSET INVESTMENT CORP.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
SUBSTITUTE Part 1 - PLEASE PROVIDE YOUR TIN________________________
Form W-9 TIN IN THE BOX AT RIGHT AND Social Security Number or
CERTIFY BY SIGNING AND DATING BELOW Employer Identification Number
---------------------------------------------------------------------------------------
Department of the Treasury Part 2
Internal Revenue Service Awaiting TIN [ ]
---------------------------------
CERTIFICATION - UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT (1) the number shown on
this form is my correct taxpayer identification number (or I am waiting for a number to
be issued to me), (2) I am not subject to backup withholding either because (i) I am
exempt from backup withholding, (ii) I have not been notified by the Internal Revenue
Service ("IRS") that I am subject to backup withholding as a result of a failure to
report all interest or dividends, or (iii) the IRS has notified me that I am no longer
subject to backup withholding, and (3) any other information provided on this form is
true and correct.
SIGNATURE______________________________________________________________________________
Payer's Request for Taxpayer DATE___________________________________________________________________________________
Identification Number (TIN)
and Certification You must cross out item (iii) in Part (2) above if you have been notified by the IRS
that you are subject to backup withholding because of underreporting interest or
dividends on your tax return and you have not been notified by the IRS that you are no
longer subject to backup withholding.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY IN CERTAIN CIRCUMSTANCES
RESULT IN BACKUP WITHHOLDING OF 31% OF ANY AMOUNTS PAID TO YOU PURSUANT
TO THE EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR
CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9
FOR ADDITIONAL DETAILS.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (1) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or (2)
I intend to mail or deliver an application in the near future. I understand that
if I do not provide a taxpayer identification number by the time of payment, 31%
of all payments made to me on account of the New Notes shall be retained until I
provide a taxpayer identification number to the Exchange Agent and that, if I do
not provide my taxpayer identification number within 60 days, such retained
amounts shall be remitted to the Internal Revenue Service as backup withholding
and 31% of all reportable payments made to me thereafter will be withheld and
remitted to the Internal Revenue Service until I provide a taxpayer
identification number.
Signature Date
----------------------------------- -------------------------
12
<PAGE> 1
EXHIBIT 99.2
NOTICE OF GUARANTEED DELIVERY
FOR TENDER OF
11 1/2% REDEEMABLE NOTES DUE 2005
OF
OCWEN ASSET INVESTMENT CORP.
This Notice of Guaranteed Delivery, or one substantially equivalent to
this form, must be used to accept the Exchange Offer (as defined below) if (i)
the procedures for delivery by book-entry transfer cannot be completed on or
prior to the Expiration Date (as defined in the Prospectus referred to below),
(ii) certificates for the Company's (as defined below) 11 1/2% Redeemable Notes
due 2005 resold in reliance on Rule 144A under the Securities Act of 1933, as
amended (the "Old Notes"), are not immediately available or (iii) Old Notes, the
Letter of Transmittal and all other required documents cannot be delivered to
Norwest Bank Minnesota, National Association (the "Exchange Agent") on or prior
to the Expiration Date. This Notice of Guaranteed Delivery may be delivered by
hand, overnight courier or mail, or transmitted by facsimile transmission, to
the Exchange Agent. See "The Exchange Offer--Procedures for Tendering Old Notes"
in the Prospectus.
The Exchange Agent for the Exchange Offer is:
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
By Registered or Certified Mail: In Person:
Norwest Bank Minnesota, Northstar East Bldg.
National Association 608 2nd Ave. S.
Corporate Trust Operations 12th Floor
P.O. Box 1517 Corporate Trust Services
Minneapolis, MN 55480-1517 Minneapolis, MN 55479-0113
By Hand or Overnight Courier: By Facsimile (for Eligible
Institutions only):
Norwest Bank Minnesota, (612) 667-4927
National Association
Corporate Trust Operations Confirm Receipt of Notice of
Norwest Center Guaranteed Delivery by Telephone:
Sixth and Marquette
Minneapolis, MN 55479-0113 (612) 667-9764
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN
AS SET FORTH ABOVE OR TRANSMISSION OF THIS NOTICE OF GUARANTEED DELIVERY VIA A
FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID
DELIVERY.
THIS NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO GUARANTEE
SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO BE
GUARANTEED BY AN "ELIGIBLE INSTITUTION" UNDER THE INSTRUCTIONS THERETO, SUCH
SIGNATURE GUARANTEE MUST APPEAR IN THE APPLICABLE SPACE PROVIDED IN THE
SIGNATURE BOX ON THE LETTER OF TRANSMITTAL.
LADIES AND GENTLEMEN:
The undersigned hereby tenders to Ocwen Asset Investment Corp. (the
"Company"), a Virginia corporation, upon the terms and subject to the conditions
set forth in the Prospectus, dated __________ ___, 1999 (as the same may be
amended or supplemented from time to time, the "Prospectus"), and the related
Letter of Transmittal (which together constitute the "Exchange Offer"), receipt
of which is hereby acknowledged, the aggregate principal amount of Old Notes set
forth below pursuant to the guaranteed delivery procedures set forth in the
Prospectus under the caption "The Exchange Offer--Procedures for Tendering Old
Notes."
Aggregate Principal Amount Name(s) of Registered Holder(s):
Tendered:
-----------------------------------
----------------------------------
Certificate No(s). (if available):
---------- Address(es):
- -------------------------------------------- ----------------------------------
If Old Notes will be tendered by book-entry
transfer, provide the following information: ----------------------------------
Area Code and Telephone Number(s):
DTC Account Number:
------------------------- ----------------------------------
Date:
--------------------------------------- Signature(s):
---------------------
----------------------------------
----------------------------------
THE GUARANTEE ON THE REVERSE SIDE MUST BE COMPLETED
<PAGE> 2
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm or other entity identified in Rule 17Ad-15 under the
Securities Exchange Act of 1934, as amended, as an "eligible guarantor
institution," including (as such terms are defined therein): (a) bank; (b) (i)
a broker, dealer, municipal securities broker, municipal securities dealer,
government securities broker, government securities dealer; (c)(i) a credit
union; (d)(i) a national securities exchange, registered securities
association or clearing agency; or (ii)(e) a savings association that is a
participant in a Securities Transfer Association recognized program (each of
the foregoing being referred to as an "Eligible Institution"), hereby
guarantees to deliver to the Exchange Agent, at one of its addresses set forth
above, either the Old Notes tendered hereby in proper form for transfer, or
confirmation of the book-entry transfer of such Old Notes to the Exchange
Agent's account at The Depository Trust Company ("DTC"), pursuant to the
procedures for book-entry transfer set forth in the Prospectus, in either case
together with one or more properly completed and duly executed Letter(s) of
Transmittal (or facsimile thereof) and any other required documents within
three business days after the date of execution of this Notice of Guaranteed
Delivery.
The undersigned acknowledges that it must deliver the Letter(s) of Transmittal
and the Old Notes tendered hereby to the Exchange Agent within the time period
set forth above and that failure to do so could result in a financial loss to
the undersigned.
Name of Firm:
-------------------------- -------------------------------------
(Authorized Signature)
Address: Title:
------------------------------- -------------------------------
Name:
--------------------------------
--------------------------------------- (Please type or print)
(Zip Code)
Area Code and Date:
Telephone Number: --------------------------------
----------------------
NOTE: DO NOT SEND OLD NOTES WITH THIS NOTICE OF GUARANTEED DELIVERY. ACTUAL
SURRENDER OF OLD NOTES MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED BY, A
PROPERLY COMPLETED AND DULY EXECUTED LETTER OF TRANSMITTAL AND ANY OTHER
REQUIRED DOCUMENTS.
2
