UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 001-14043
OCWEN ASSET INVESTMENT CORP.
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(Exact name of registrant as specified in its charter)
Virginia 65-0736120
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
The Forum, Suite 1000
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1675 Palm Beach Lakes Boulevard, West Palm Beach, Florida 33401
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(Address of principal executive offices) (Zip Code)
(561) 682-8000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Number of shares of Common Stock, $.01 par value, outstanding at the close of
business on August 13, 1999: 18,965,000 shares.
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OCWEN ASSET INVESTMENT CORP.
FORM 10-Q
I N D E X
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PART I - FINANCIAL INFORMATION PAGE
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Item 1. Interim Consolidated Financial Statements (unaudited).......... 3
Consolidated Statements of Financial Condition................. 3
Consolidated Statements of Operations.......................... 4
Consolidated Statements of Comprehensive Income (Loss)......... 5
Consolidated Statements of Changes in Shareholders' Equity..... 6
Consolidated Statements of Cash Flows.......................... 7
Notes to Consolidated Financial Statements..................... 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 43
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................... 47
Signature............................................................... 48
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OCWEN ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, December 31,
1999 1998
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<S> <C> <C>
ASSETS:
Cash and amounts due from depository institutions ............ $ 5,162,989 $ 3,484,929
Interest-bearing deposits .................................... 27,210,332 49,880,276
Securities available for sale, at fair value ................. 284,488,118 351,153,971
Commercial and multi-family loan portfolio, net .............. 79,478,045 65,282,965
Residential loan portfolio, net .............................. 6,064,404 8,058,445
Match funded residential loans, net .......................... 135,857,672 173,609,873
Discount loan portfolio, net ................................. 5,618,022 5,618,022
Investment in real estate, net ............................... 211,368,063 208,058,721
Principal and interest receivable ............................ 4,352,684 7,475,795
Other assets ................................................. 19,008,588 15,702,816
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Total assets ............................................... $ 778,608,917 $ 888,325,813
============= =============
LIABILITIES:
Securities sold under agreements to repurchase ............... $ 73,847,048 $ 138,611,824
Obligations outstanding under lines of credit ................ 41,015,023 34,472,404
Obligations outstanding under lines of credit - secured by
real estate ................................................ 143,755,698 142,556,880
11.5% Redeemable Notes due 2005 ............................. 143,000,000 143,000,000
Bonds - match funded loan agreement ......................... 124,209,290 163,403,966
Accrued expenses, payables and other liabilities ............. 22,805,816 21,190,288
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Total liabilities .......................................... 548,632,875 643,235,362
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Minority interest ............................................... 21,967,987 23,914,058
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Commitments and Contingencies (Note 12)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; 25,000,000 shares authorized;
0 shares issued and outstanding ............................ -- --
Common Stock, $.01 par value; 200,000,000 shares authorized;
18,965,000 shares issued and outstanding ................... 189,650 189,650
Additional paid-in capital ................................... 294,492,203 294,492,203
Cumulative dividends declared ................................ (36,277,546) (36,277,546)
Accumulated deficit .......................................... (65,345,486) (46,394,403)
Accumulated other comprehensive income:
Unrealized gain on securities available for sale ........... 16,365,730 11,038,151
Cumulative translation adjustment .......................... (1,416,496) (1,871,662)
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Total other comprehensive income ......................... 14,949,234 9,166,489
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Total shareholders' equity ............................... 208,008,055 221,176,393
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$ 778,608,917 $ 888,325,813
============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
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3
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OCWEN ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
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For the Three Months Ended For the Six Months Ended
June 30, June 30,
---------------------------- ---------------------------
1999 1998 1999 1998
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INTEREST INCOME:
Repurchase agreements and interest bearing
deposits .................................... $ 326,219 $ 97,510 $ 820,823 295,648
Securities held for trading ................... -- (375,300) -- 106,892
Securities available for sale ................. 12,063,542 11,534,635 25,702,059 16,183,217
Commercial and multi-family loans ............. 2,220,840 1,467,916 3,869,354 2,273,702
Match funded residential loans ................ 3,000,208 -- 6,327,351 --
Residential loans ............................. 132,153 2,178,010 277,551 2,613,031
Discount loans ................................ 132,400 423,421 258,718 1,326,198
------------ ------------ ------------ -----------
17,875,362 15,326,192 37,255,856 22,798,688
------------ ------------ ------------ -----------
INTEREST EXPENSE:
Securities sold under agreements to repurchase. 2,039,165 3,302,044 4,681,167 3,966,815
Obligations outstanding under lines of credit.. 705,826 2,244,723 1,312,510 2,273,769
11.5% Redeemable Notes due 2005................ 4,111,250 -- 8,265,400 --
Bonds-match funded loan agreements ............ 2,252,778 -- 4,776,380 --
------------ ------------ ------------ -----------
9,109,019 5,546,767 19,035,457 6,240,584
------------ ------------ ------------ -----------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN
LOSSES ........................................ 8,766,343 9,779,425 18,220,399 16,558,104
Provision for loan losses ..................... 221,239 100,976 479,091 206,049
------------ ------------ ------------ -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES ...................................... 8,545,104 9,678,449 17,741,308 16,352,055
------------ ------------ ------------ -----------
REAL ESTATE-OPERATING INCOME:
Rental income ................................. 8,167,173 4,515,204 16,149,603 6,549,491
Other ......................................... 15,057 18,978 25,439 26,835
------------ ------------ ------------ -----------
8,182,230 4,534,182 16,175,042 6,576,326
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REAL ESTATE-OPERATING EXPENSES:
Rental operation .............................. 4,900,308 2,342,105 8,863,017 3,275,851
Depreciation and amortization ................. 1,259,927 758,484 2,453,904 1,062,921
Interest ...................................... 2,695,211 1,689,103 5,352,537 1,689,103
------------ ------------ ------------ -----------
8,855,446 4,789,692 16,669,458 6,027,875
------------ ------------ ------------ -----------
REAL ESTATE INCOME (EXPENSE), NET ............... (673,216) (255,510) (494,416) 548,451
------------ ------------ ------------ -----------
OTHER EXPENSES:
Management fees ............................... 1,530,662 1,704,751 3,055,091 2,533,632
Due diligence expenses ........................ -- 174,955 122,745 367,644
Foreign currency gain ......................... -- -- -- (116,953)
Other ......................................... 2,393,481 386,439 3,603,790 576,094
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3,924,143 2,266,145 6,781,626 3,360,417
------------ ------------ ------------ -----------
(LOSSES) GAINS ON SECURITIES .................... (23,906,787) 34 (31,362,420) (17,077,045)
------------ ------------ ------------ -----------
(LOSS) INCOME BEFORE MINORITY INTEREST .......... (19,959,042) 7,156,828 (20,897,154) (3,536,956)
Minority interest in net loss (income) of
consolidated Subsidiary ......................... 1,791,820 (510,696) 1,946,071 (321,154)
------------ ------------ ------------ -----------
NET (LOSS) INCOME ............................. $(18,167,222) $ 6,646,132 $(18,951,083) $(3,858,110)
============ ============ ============ ===========
LOSS PER SHARE:
Basic ......................................... $ (0.96) $ 0.35 $ (1.00) $ (0.20)
============ ============ ============ ===========
Diluted ....................................... $ (0.96) $ 0.35 $ (1.00) $ (0.20)
============ ============ ============ ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic ......................................... 18,965,000 18,965,000 18,965,000 18,965,000
============ ============ ============ ===========
Diluted ....................................... 18,965,000 19,088,026 18,965,000 18,965,000
============ ============ ============ ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
4
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OCWEN ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
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For the Three Months Ended For the Six Months Ended
June 30, June 30,
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1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Net (loss) income .............................. $(18,167,222) $ 6,646,132 $(18,951,083) $ (3,858,110)
Other comprehensive income:
Unrealized gain (loss) on securities available
for sale ................................... 5,567,933 (935,533) 5,327,579 7,409,111
Unrealized foreign currency translation
adjustment ................................. 324,956 (1,051,966) 455,166 (1,051,966)
------------ ------------ ------------ ------------
Other comprehensive
income ..................................... 5,892,889 (1,987,499) 5,782,745 6,357,145
------------ ------------ ------------ ------------
Comprehensive (loss) income .................... $(12,274,333) $ 4,658,633 $(13,168,338) $ 2,499,035
============ ============ ============ ============
Disclosure of reclassification adjustment:
Unrealized holding losses arising during the
period ..................................... $(18,338,854) $ (935,499) $(26,034,841) $ (9,667,934)
Add: Adjustment for losses included
in net loss ................................ 23,906,787 (34) 31,362,420 17,077,045
------------ ------------ ------------ ------------
Net unrealized (losses) gains on
securities ................................ $ 5,567,933 $ (935,533) $ 5,327,579 $ 7,409,111
============ ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
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5
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OCWEN ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND THE YEAR ENDED DECEMBER 31, 1998
Accumulated
Common Stock Additional Cumulative Retained other
-------------------- paid-in dividends earnings comprehensive
Shares Amount capital declared (deficit) income (loss) Total
---------- -------- ------------ ------------ ------------ -------------- ------------
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Balance at December 31, 1997 ...... 18,965,000 $189,650 $ 280,503,838 $ (13,898,849) $ 11,791,518 $ (7,327,890) $271,258,267
Capital contribution .............. -- -- 13,988,365 -- -- -- 13,988,365
Net loss .......................... -- -- -- -- (58,185,921) -- (58,185,921)
Dividends ......................... -- -- -- (22,378,697) -- -- (22,378,697)
Change in unrealized gain (loss) on
securities available for sale ... -- -- -- -- -- 18,366,041 18,366,041
Change in cumulative translation
adjustment ...................... -- -- -- -- -- (1,871,662) (1,871,662)
---------- -------- ------------- ------------- ------------- ------------ ------------
Balance at December 31, 1998 ...... 18,965,000 189,650 294,492,203 (36,277,546) (46,394,403) 9,166,489 221,176,393
Net loss .......................... -- -- -- -- (18,951,083) -- (18,951,083)
Change in unrealized gain (loss) on
securities available for sale ... -- -- -- -- -- 5,327,579 5,327,579
Change in cumulative translation
adjustment ...................... -- -- -- -- -- 455,166 455,166
---------- -------- ------------- ------------- ------------- ------------ ------------
Balance at June 30, 1999 .......... 18,965,000 $189,650 $ 294,492,203 $ (36,277,546) $ (65,345,486) $ 14,949,234 $208,008,055
========== ======== ============= ============= ============= ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
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6
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OCWEN ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months
Ended June 30,
-----------------------------
1999 1998
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Cash flows from operating activities:
Net loss ................................................................. $(18,951,083) $ (3,858,110)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Premium amortization (discount accretion), net ....................... 13,389,650 10,969,400
Depreciation ......................................................... 2,453,904 1,062,921
Foreign exchange gain ................................................ -- (116,953)
Provision for loan losses ............................................ 479,091 206,049
Proceeds from sale of securities ..................................... 12,708,996 36,288,836
Net losses on securities ............................................. 31,362,420 17,077,045
Decrease (Increase) in interest receivable ........................... 3,123,111 (10,639,556)
Increase in other assets ............................................. (3,283,257) (8,841,875)
Increase accrued expenses, payables and other liabilities ............ 1,615,528 1,917,010
(Decrease) Increase in minority interest in earnings (losses) ........ (1,946,071) 321,154
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Net cash provided by operating activities ................................... 40,952,289 44,385,921
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Cash flows from investing activities:
Purchase of securities available for sale ................................. -- (336,676,078)
Maturities and principal payments received on securities available for sale 9,998,074 16,268,838
Principal payments received from discount loans ........................... -- 973,325
Principal payments received from loans .................................... 43,586,358 8,425,556
Purchase of loans ......................................................... (14,002,510) (175,968,169)
Investment in real estate ................................................. (5,763,246) (114,932,518)
Deposits on pending asset acquisitions .................................... -- 496,500
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Net cash provided by (used by) investing activities ......................... 33,818,676 (601,412,546)
------------ -------------
Cash flows from financing activities:
Dividend payments on common stock ......................................... -- (12,283,750)
Proceeds from sale of securities to affiliates ............................ -- 13,957,595
Proceeds received from sale of operating partnership units ................ -- 27,593,302
Principal payments on bonds ............................................... (39,194,676) --
(Decrease) Increase in securities sold under agreements to repurchase ..... (64,764,776) 223,819,860
Increase in obligations outstanding under lines of credit ................. 7,741,437 269,414,987
------------ -------------
Net cash (used by) provided by financing activities ......................... (96,218,015) 522,501,994
------------ -------------
Net decrease in cash and cash equivalents ................................... (21,447,050) (34,524,631)
Change in cumulative translation adjustment ................................. 455,166 (1,051,966)
Cash and cash equivalents at beginning of period ............................ 53,365,205 48,677,123
------------ -------------
Cash and cash equivalents at end of period .................................. $ 32,373,321 $ 13,100,526
============ =============
Reconciliation of cash and cash equivalents at end of period:
Cash and amounts due from depository institutions ......................... $ 5,162,989 $ 11,764,015
Interest earning deposits ................................................. 27,210,332 1,336,511
------------ -------------
Total .................................................................. $ 32,373,321 $ 13,100,526
============ =============
Supplemental schedule of non-cash financing activities:
Interest paid ............................................................. 19,639,457 7,929,687
Non-cash activities:
Change in unrealized gain (loss) on securities available for sale ......... 5,327,579 7,409,111
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
7
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OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
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NOTE 1 ORGANIZATION
Ocwen Asset Investment Corp. ("OAC" or the "Company") has elected to be
taxed as a Real Estate Investment Trust ("REIT") under Sections 856 through 860
of the Internal Revenue Code of 1986, as amended (the "Code"). As such, the
Company 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. See Note 11 to the
Consolidated Financial Statements.
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 ("Common Stock"), 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
the Company and its subsidiaries. The Company directly owns two qualified REIT
subsidiaries, Ocwen General, Inc. (the "General Partner") and Ocwen Limited,
Inc. (the "Limited Partner"). General Partner and Limited Partner own 0.9% and
90.4%, respectively, of Ocwen Partnership, L.P. (the "Operating Partnership").
Additionally, through the General Partner and Limited Partner, the Company
established additional partnerships in Florida and California for real estate
investment purposes. The minority interest at June 30, 1999 represents a 8.7%
interest (1,808,733 units) in the Operating Partnership held by Investors
Mortgage Insurance Holding Company ("IMIHC"), a wholly-owned subsidiary of Ocwen
Financial Corporation ("OCN"). IMIHC also owns 1,540,000 shares, or 8.12%, of
the outstanding Common Stock.
The Company has entered into a management agreement with Ocwen Capital
Corporation ("OCC"), a wholly-owned subsidiary of OCN, under which OCC advises
the Company on various facets of its business and manages its day-to-day
operations, subject to the supervision of the Company's Board of Directors. For
its services, OCC receives a quarterly base management fee of 0.25% per quarter
on Average Invested Assets. The term "Average Invested Assets" for any period
means the average of the aggregate book value of the assets of the Company,
including the assets of all of its direct and indirect subsidiaries, before
reserves for depreciation or bad debts or other similar noncash reserves,
computed by taking the daily average of such values during such period;
provided, however, effective January 1, 1998, with respect to residential loans,
the phrase means average net equity invested. In addition, OCC is entitled to
receive an annual incentive fee in an amount equal to 25% of the dollar amount
by which Funds From Operations ("FFO"), as adjusted, exceeds certain defined
levels per the management agreement. During the three months ended June 30, 1999
and 1998, OCC earned from the Company $1.5 million and $1.7 million,
respectively, in base management fees. No incentive compensation has ever been
paid. On May 13, 1999, the Board of Directors approved extending the management
agreements between the Company and OCC, which was due to expire on May 19, 1999,
for an additional six months.
The Company also has entered into servicing agreements with Ocwen
Federal Bank, FSB (the "Bank"), a wholly-owned subsidiary of OCN, for the
servicing of all of the Company's mortgage loans. In addition, the Bank in its
capacity as servicer or special servicer receives fees from certain
mortgage-backed securities in which the Company owns a subordinate or residual
interest. As a special servicer, the Bank provides asset management and
resolution services with respect to defaulted mortgage loans subject to the
Company's right to direct the foreclosure, the management and disposal of
foreclosed properties and all other actions that a servicer may take in
connection with a defaulted loan. During the six months ended June 30, 1999 and
1998, the Bank earned from the Company $1.4 million and $0.1 in servicing fees,
respectively.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Company and its
subsidiaries follow United States generally accepted accounting principles
("GAAP"). The policies which materially affect the determination of the
Company's financial position, results of operations and cash flows are
summarized below.
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OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
================================================================================
PRINCIPLES OF CONSOLIDATION
The Company's consolidated financial statements include the accounts of
OAC and its subsidiaries as described in Note 1 above. All significant
intercompany transactions and balances have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Material estimates that are particularly susceptible to
significant change in the near or medium term relate to the valuation of
securities available for sale and determination of the allowance for losses on
loans and discount loans.
SECURITIES AVAILABLE FOR SALE
Securities are classified as available for sale when in management's
judgement they may be sold in response to or in anticipation of changes in
interest rates, and resulting prepayment risk, or other factors. Available for
sale securities are carried at fair value. Unrealized gains and losses on these
securities, along with any unrealized gains and losses on related risk
management instruments, are reported as a separate component of accumulated
other comprehensive income in shareholders' equity. Securities that the Company
has the positive intent and ability to hold to maturity are classified as
held-to-maturity and are carried at amortized cost. At June 30, 1999 and 1998,
the Company had no securities classified as held-to-maturity. Interest and
dividend income on securities, including amortization of premiums and accretion
of discounts, are reported in earnings. Interest income is recognized using the
interest method. The specific identification method is used to determine
realized gains and losses on sales of securities, which are reported in
earnings. The carrying value of individual securities is reduced through
write-downs in earnings to reflect other-than-temporary impairments in value.
LOAN PORTFOLIO
Loans are generally reported at the principal amount outstanding, net
of the allowance for loan losses, purchase premium or discount, and any net
deferred loan fees. Interest income is recognized using the interest method or
on a basis approximating a level yield over the term of the loan. Loans are
placed on nonaccrual status when the loan is past due 90 days or more. Interest
accrued but not collected at the date a loan is placed on nonaccrual status is
reversed against interest income. In addition, the amortization of net deferred
loan fees is suspended when a loan is placed on nonaccrual status. Interest
income on nonaccrual loans is recognized only to the extent received in cash.
However, where there is doubt regarding the ultimate collectibility of the loan
principal, cash receipts, whether designated as principal or interest, are
thereafter applied to reduce the carrying value of the loan. Loans are restored
to accrual status only when interest and principal payments are brought current
and future payments are reasonably assured.
DISCOUNT LOAN PORTFOLIO
Certain mortgage loans, for which the borrower is not current as to
principal and interest payments or for which there is a reason to believe the
borrower will be unable to continue to make its scheduled principal and interest
payments, are acquired at a discount. The acquisition cost for a pool of loans
is allocated to each loan within the pool based upon the Company's pricing
methodology. The acquisition cost for a pool of discount loans is allocated on a
relative fair value basis to each loan within the pool. The Company believes
that it is able to reasonably estimate the amounts and timing of collections on
all of its discounted loans. For those commercial real estate loans which are
current and for which the Company believes that collecting the acquisition
amount of the loan and discount is probable, the discount is accreted into
interest income as a yield adjustment using the interest method over the
contractual maturity of the loan. For those commercial discount loans that
become nonperforming, the Company ceases accretion of the discount. Gains on the
repayment or discharge of the discount loans, including any remaining discount,
are reported as interest income.
Discount loans are reported at their outstanding principal balance net
of any charge-offs and premiums or discounts. The Company periodically evaluates
loans in the discount loan portfolio for impairment. Individually identified
impaired loans are measured based on one of the following: the present value of
payments expected to be received (using a discount rate that equates the
9
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OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
================================================================================
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 June 30, 1999, the Company did not have any impaired loans.
ALLOWANCE FOR LOAN LOSSES
The allowance for estimated loan losses is maintained at a level that
management, based upon evaluation of known and inherent risks in the portfolio,
considers adequate to provide for inherent losses. Management's periodic
evaluation of the allowance for estimated loan losses is based upon an analysis
of the portfolio, historical loss experience, economic conditions and trends,
collateral values and other relevant factors. Future adjustments to the
allowance may be necessary if economic conditions and trends, collateral values
and other relevant factors differ substantially from the assumptions used in
making the evaluation.
INVESTMENT IN REAL ESTATE
Investment in real estate is recorded at cost less accumulated
depreciation. The Company reviews its investment in real estate for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. Depreciation is computed on a straight-line basis over
the estimated useful lives of the assets as follows:
Buildings and improvements 39 years
Tenant improvements Lesser of lease term or useful life
Furniture, fixtures and equipment 7 years
Expenditures for repairs and maintenance are charged to operations as
incurred. Significant renovations are capitalized. Fees and costs incurred in
the successful negotiation of leases are deferred and amortized on a
straight-line basis over the terms of the respective leases. Rental revenue is
reported on a straight-line basis over the terms of the respective leases.
FOREIGN CURRENCY TRANSACTIONS AND TRANSLATION
The Company's investment in foreign assets are translated into U.S.
dollars at current exchange rates, and related revenues and expenses are
translated at average exchange rates for the period. Transaction gains and
losses that arise from exchange rate fluctuations on transactions denominated in
a currency other than U.S. dollars are included in the results of operations.
The assets, liabilities and results of operations of the Company's
foreign subsidiaries which have functional currencies other than the U.S. dollar
are translated into U.S. dollars at current exchange rates for assets and
liabilities and average exchange rates for the period for the results of
operations. Resulting translation adjustments are included as a separate
component of accumulated other comprehensive income in shareholders' equity as
cumulative translation adjustments.
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.
Cash flows associated with hedges of identifiable transactions or events are
classified in the same category as the cash flows from the item being hedged.
10
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
================================================================================
BASIC AND DILUTED EARNINGS PER SHARE
Basic earnings per share is calculated based upon the weighted average
number of shares of Common Stock outstanding during the period. Diluted earnings
per share is calculated based upon the weighted average number of shares of
Common Stock outstanding and all dilutive potential common shares outstanding
during the period. The computation of diluted earnings per share includes the
impact of the exercise of the outstanding options to purchase Common Stock and
assumes that the proceeds from such issuance are used to repurchase common
shares at fair value. Common Stock equivalents would be excluded from the
diluted calculation if a net loss was incurred for the period as they would be
antidilutive.
RISKS AND UNCERTAINTIES
In the normal course of business, the Company encounters primarily two
significant types of economic risk: credit and market. Credit risk is the risk
of default on the company's loan portfolio that results from a borrowers'
inability or unwillingness to make contractually required payments. Market risk
reflects changes in the value of securities available for sale and investments
in real estate due to changes in interest rates or other market factors,
including the rate of prepayments of principal, the value of the collateral
underlying loans and the valuation of real estate held by the Company.
Additionally, the Company encounters significant tax risks. If OAC did
not qualify as a REIT in any taxable year, OAC would be subject to federal
income tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates, and distributions to shareholders would not
be deductible by OAC in computing its taxable income. Any such corporate tax
liability could be substantial and would reduce the amount of cash available for
distribution to shareholders, which in turn could have an adverse impact on the
value of, and trading prices for, the Company's common stock. Unless entitled to
relief under certain Code provisions, the Company could also be disqualified
from taxation as a REIT for the four taxable years following the year during
which OAC ceased to qualify as a REIT.
RECENT ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
which amends FASB Statements No. 52 and 107, and supersedes FASB Statements No.
80, 105 and 119. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. SFAS No. 133 requires an entity to
recognize all derivatives as either assets or liabilities in the statement of
financial condition and measure those instruments at fair value. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Subsequently, FASB issued SFAS No. 137 "Accounting for Derivative Instruments
and Hedging Activities- Deferral of the Effective Date of SFAS No. 133 an
amendment of SFAS No. 133," which defers the effective date of SFAS No. 133 for
fiscal years beginning after June 15, 2000. Earlier application of SFAS No. 133
is encouraged but is permitted only as of the beginning of any fiscal quarter
that begins after issuance of SFAS No. 133. The Company has not yet determined
the impact on its results of operations, financial position or cash flows as a
result of implementing SFAS No. 133.
NOTE 3 RISK MANAGEMENT INSTRUMENTS
The Company enters into derivatives, particularly interest rate swaps,
to hedge interest rate exposures arising from mismatches between assets and
liabilities. Under interest rate swaps, the Company agrees with other parties to
exchange, at specified intervals, the difference between fixed-rate and
floating-rate interest amounts calculated by reference to an agreed notional
principal amount and the London Interbank Offered Rate ("LIBOR"). The terms of
these interest rate swaps allow the Company to receive a floating rate of
interest equal to LIBOR and to pay fixed interest rates.
The interest rate swaps are used to hedge current LIBOR rate debt
incurred to fund the Company's acquisitions of real estate and subordinate and
residual securities. None of the Company's interest rate swaps are held for
trading purposes. As of June 30, 1999, the Company held interest rate swaps with
a notional amount of approximately $200.8 million. The fair value of the
interest rate swaps are not recognized in the consolidated financial statements.
11
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
================================================================================
To qualify for hedge accounting the interest rate swap must meet two
criteria:
o the Company is exposed to interest rate risk as the result of a
debt it has incurred; and
o the interest rate swap reduces the Company's exposure to such
risk.
If an interest rate swap does not qualify as a hedge, it is accounted
for as a trading asset at fair value, with any gain or loss included as a
component of current income.
The Company is exposed to credit loss if: (i) the counterparties to the
interest rate swap do not perform and (ii) the floating interest rate received
by the Company exceeds the fixed interest rate paid by it. All of the
counterparties have long-term debt ratings of A+ or above by Standard and Poor's
and A1 or above by Moody's. Although a swap generally may not be sold or
transferred without the consent of the counterparty, management does not believe
that this consent would be withheld. Although none of the Company's interest
rate swaps are exchange-traded, there are a number of financial institutions
which enter into these types of transactions as part of their day-to-day
activities.
The following table indicates the interest rate swaps outstanding at
June 30, 1999, pursuant to which the Company receives payments from a
counterparty based on a floating rate of interest equal to LIBOR and agrees to
pay a fixed rate of interest to such party on a specified notional amount.
<TABLE>
<CAPTION>
Notional LIBOR Floating Rate at
Maturity Amount Index Fixed Rate End of Period Fair Value
-------- -------- ------- ---------- ---------------- ----------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
2003 .... $ 100,000 1-month 5.75% 5.02% $ 1,323
2001 .... 17,000 1-month 6.00 4.93 (55)
2001 .... 75,000 1-month 6.00 4.94 (231)
2002 .... 8,780 1-month 6.04 4.93 (2)
--------- ---------
$ 200,780 $ 1,035
========= =========
</TABLE>
At June 30, 1999, the Company had foreign currency futures contracts to
hedge currency exposure in connection with its investment in residual interests
backed by residential mortgage loans originated in the United Kingdom, which are
held by a wholly-owned subsidiary of the Company. Currency futures contracts are
commitments to either purchase or sell foreign currency at a future date for a
specified price. At June 30, 1999, the fair value of the British Pounds futures
contracts was $0.5 million. In addition, the Company entered into foreign
currency futures contracts to hedge its exposure in connection with its
investment in the shopping center located in Halifax, Nova Scotia, which is held
by a wholly-owned subsidiary of the Company. At June 30, 1999, the fair value of
the Canadian currency contract was $(0.1) million. Gains and losses on these
foreign currency futures contracts are recorded in the Consolidated Statement of
Financial Condition offsetting the item being hedged.
The fair value of the interest rate swaps and the foreign currency
futures contracts represent the estimated amount that the Company would receive
or pay to terminate these agreements taking into account current interest and
exchange rates. Market quotes are available for these agreements.
12
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
================================================================================
NOTE 4 SECURITIES AVAILABLE FOR SALE
The following table sets forth the amortized cost, fair value and gross
unrealized gains and losses on the Company's securities available for sale at
the date indicated.
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
JUNE 30, 1999 Cost Gains Losses Value
------------- ------------- ------------- -------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Mortgage-related securities:
Single family residential:
Subprime residuals.................. $ 160,471 $ 13,072 $ -- $ 173,543
Subordinates........................ 9,078 -- (77) 9,001
------------- ------------- ------------- -------------
169,549 13,072 (77) 182,544
------------- ------------- ------------- -------------
Multi-family and commercial:
Non-rated interest only............. 3,162 373 -- 3,535
Non-rated principal only............ 276 176 -- 452
Subordinates........................ 95,135 2,822 -- 97,957
------------- ------------- ------------- -------------
98,573 3,371 -- 101,944
------------- ------------- ------------- -------------
$ 268,122 $ 16,443 $ (77) $ 284,488
============= ============= ============= =============
</TABLE>
During the three months and six months ended June 30, 1999, the Company
recorded a charge of $23.9 million and $31.4 million, respectively, against its
portfolio of securities available for sale. The losses were primarily recorded
against subprime residuals, reflecting continued market illiquidity for these
instruments.
NOTE 5 LOAN PORTFOLIO
The following table sets forth the components of the Company's loan
portfolio at the dates indicated.
June 30, December 31,
1999 1998
------------ ------------
Single family residential ................... $ 6,540,454 $ 8,419,265
Multi-family residential .................... 25,002,338 20,544,269
Commercial real estate:
Office .................................... 30,975,076 24,123,894
Hotel ..................................... 23,998,171 21,304,912
------------ ------------
Total loans ............................. 86,516,039 74,392,340
Deferred fees ............................... (336,418) (409,254)
Allowance for loan losses ................... (637,172) (641,676)
------------ ------------
Loans, net ................................ $ 85,542,449 $ 73,341,410
============ ============
The following table represents a summary of the Company's
non-performing loans (past due 90 days or more) at the dates indicated.
June 30, December 31,
1999 1998
------------ ------------
(Dollars in Thousands)
Non-performing loans:
Single family residential................. $ 3,865 $ 4,165
Multi-family ............................. -- --
Commercial ............................... -- --
------------ ------------
$ 3,865 $ 4,165
============ ============
13
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
================================================================================
If non-accrual loans had been current in accordance with their original
terms, additional interest income of approximately $0.1 million for the three
months ended June 30, 1999 would have been earned. No interest has been accrued
on loans greater than 89 days past due.
For the three months and the six months ended June 30, 1999 and 1998,
the Company had no investment in impaired loans as defined in accordance with
SFAS No. 114, as amended by SFAS No. 118.
The following table sets forth the geographic distribution of
properties securing the Company's loans at June 30, 1999:
<TABLE>
<CAPTION>
Single family Multi-family Commercial
Residential Residential Real Estate Total
------------- ------------- ------------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
California.................... $ 812 $ 6,010 $ -- $ 6,822
Delaware...................... -- -- 12,398 12,398
Florida....................... 461 -- -- 461
Massachusetts................. 52 -- 38,422 38,474
New York...................... 659 18,992 2,925 22,576
Other......................... 4,557 -- 1,228 5,785
------------- ----------- ------------- -----------
Total......................... $ 6,541 $ 25,002 $ 54,973 $ 86,516
============= =========== ============= ===========
</TABLE>
The following table sets forth certain information at June 30, 1999
regarding the dollar amount of loans maturing in the Company's loan portfolio
based on scheduled contractual amortization, as well as the dollar amount of
loans which have fixed or adjustable interest rates. Loan balances have not been
reduced for (i) undisbursed loan proceeds, unearned discounts and the allowance
for loan losses or (ii) nonperforming loans.
<TABLE>
<CAPTION>
Maturing in
-------------------------------------------------------------------------------
One After One Year After Five Years After Ten
Year or Less Through Five Years Through Ten Years Years Total
------------ ------------------ ----------------- ------------ ------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Single family residential loans....... $ 3,534 $ 2,410 $ 303 $ 294 $ 6,541
Multi-family residential loans........ 25,002 -- -- -- 25,002
Commercial real estate................ 54,973 -- -- -- 54,973
------------ ------------ ------------ ------------ ------------
Total.............................. $ 83,509 $ 2,410 $ 303 $ 294 $ 86,516
============ ============ ============ ============ ============
</TABLE>
Scheduled contractual principal repayments may not reflect the actual
maturities of loans because of prepayments and, in the case of conventional
mortgage loans, due-on-sale clauses. The average life of mortgage loans,
particularly fixed-rate loans, tends to increase when current mortgage loan
rates are substantially higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgages are substantially higher
than current mortgage loan rates.
14
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
================================================================================
The following table sets forth the activity in the Company's gross loan
portfolio during the periods indicated.
For the Six For the
Months Ended Year Ended
June 30, December 31,
--------------- ---------------
1999 1998
--------------- ---------------
Balance at beginning of period.............. $ 74,392,340 $ 16,290,404
Originations:
Single family residential loans.......... -- --
Multi-family residential loans........... 4,458,069 19,186,936
Commercial real estate loans............. 9,544,441 37,005,198
--------------- ---------------
Total loans originated................ 14,002,510 56,192,134
--------------- ---------------
Purchases:
Single family residential loans.......... -- 211,378,718
Secured borrowing (match funded loans)... -- (183,470,633)
Principal repayments, net................ (1,878,811) (25,998,283)
--------------- ---------------
Net increase in loan portfolio.............. 12,123,699 58,101,936
--------------- ---------------
Balance at end of period.................... $ 86,516,039 $ 74,392,340
=============== ===============
NOTE 6 MATCH FUNDED RESIDENTIAL LOANS
On November 13, 1998, the Company securitized and transferred to OAC
Mortgage Residential Securities, Inc., a real estate mortgage investment conduit
(the "Trust"), $173.6 million (1,808 mortgage loans) of its residential loan
portfolio. On that date, the Trust issued two classes of notes secured by the
related group of mortgage loans. Loan Group I consisted of approximately 1,078
mortgage loans with an aggregate principal balance of approximately $91.2
million and original terms of up to 30 years and which are secured by first
liens on single family residential properties. Loan Group II consists of
approximately 730 mortgage loans with an aggregate principal balance of
approximately $91.0 million and original terms of up to 30 years and which are
secured by first or second liens on single family residential properties. Upon
the transfer, the Company received approximately $173.9 million of proceeds. The
transfer did not qualify as a sale under FASB 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." Accordingly,
the amount of proceeds from the transfer are reported as a liability in the
consolidated statement of financial condition. During the three months and six
months ended June 30, 1999, the Company recorded a provision for loan losses
against the match funded residential loans of $0.2 million and $0.5 million,
respectively.
The following table sets forth the current unpaid principal balance,
excluding deferred fees of $4.4 million, and the geographic distribution of
properties securing the Company's match funded residential loans at June 30,
1999:
Match Funded
Residential
----------------
(Dollars In Thousands)
Michigan................................ $ 30,781
California.............................. 13,636
Florida................................. 7,907
Other................................... 79,590
----------------
Total................................... $ 131,914
================
NOTE 7 DISCOUNT LOAN PORTFOLIO
The Company has acquired, through private sales and auctions, mortgage
loans at a discount because the borrowers are either not current as to principal
and interest payments or there is doubt as to the borrowers' ability to pay in
full the contractual principal and interest. The Company estimates the amounts
it will realize through foreclosure, collection or other resolution efforts and
the length of time required to complete the collection process in determining
the amounts it will bid to acquire such loans.
15
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
================================================================================
The resolution alternatives applied to the discount loan portfolio are:
(i) the borrower brings the loan current in accordance with original or modified
terms; (ii) the borrower repays the loan or a negotiated amount; (iii) the
borrower agrees to a deed-in-lieu of foreclosure, in which case it is classified
as investment in real estate and held for sale by the Company and; (iv) the
Company forecloses on the loan and the property is either acquired at the
foreclosure sale by a third party or by the Company, in which case it is
classified as investment in real estate and held for sale. Upon receipt of title
to the property, the loans are transferred to investment in real estate.
The Company's discount loan portfolio remains unchanged at June 30,
1999 from December 31, 1998 and consists of the following:
LOAN TYPE:
Commercial real estate loans:
(Dollars In Thousands)
Office....................................... $ 6,859
Retail....................................... --
----------------
Total discount loans....................... 6,859
Discount (1)................................. (1,241)
----------------
Discount loans, net........................ $ 5,618
================
(1) Discount generally represents the difference between the purchase price
of discounted loans and their contractual face amount at the date of
acquisition.
NOTE 8 INVESTMENT IN REAL ESTATE
The investment in real estate at June 30, 1999 was comprised of four
commercial office properties in San Francisco, California; an office building in
Jacksonville, Florida; and three shopping plazas located in (i) Bradenton,
Florida; (ii) Halifax, Nova Scotia; and (iii) Havre, Montana. The following
table sets forth the Company's investment in real estate at the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------------- ----------------
<S> <C> <C>
Office buildings................................ $ 174,616,119 $ 174,587,772
Retail.......................................... 32,908,577 32,328,623
Building improvements........................... 4,571,087 1,223,185
Tenant improvements and lease commissions....... 5,469,914 3,682,602
Furniture and fixtures.......................... 33,853 --
---------------- ----------------
217,599,550 211,822,182
Accumulated depreciation........................ (6,231,487) (3,763,461)
---------------- ----------------
Investment in real estate, net................ $ 211,368,063 $ 208,058,721
================ ================
</TABLE>
NOTE 9 SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OBLIGATIONS
OUTSTANDING UNDER LINES OF CREDIT
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE. Securities sold under
agreements to repurchase were $73.8 million, with a weighted average interest
rate of 8.56%, at June 30, 1999, compared to $138.6 million with a weighted
average rate of 7.97% at December 31, 1998. These obligations are secured by
certain of the Company's investments in subordinated interests in commercial
mortgage-backed securities, residual interests in subprime residential loan
securitizations, and U.K. mortgage loan residual securities.
16
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
================================================================================
The following table summarizes the maturity dates of OAC's securities
sold under agreements to repurchase and the fair value of the related collateral
securities as of June 30, 1999:
<TABLE>
<CAPTION>
Outstanding Commercial Securities Residential Securities
Maturity Date Borrowing Fair Value Fair Value
------------- ----------- --------------------- ----------------------
(Dollars in Millions)
<S> <C> <C> <C> <C>
Within 1 month ......... $ 46.2 $ 74.4 $ 8.6
2-5 months (1) ......... 11.6 14.5 --
6-12 months ............ 4.4 -- 69.8
More than 1 year ....... 11.6 -- 49.3
------------ --------------- --------------
Total .................. $ 73.8 $ 88.9 $ 127.7
============ =============== ==============
</TABLE>
(1) Lenders have indicated that this borrowing will not be renewed as of
September 30, 1999.
Mortgage-related securities which are subject to repurchase agreements
which secure indebtedness periodically are revalued by the lender. A decline in
value of the securities may result in the lender periodically requiring the
Company to (i) provide additional collateral to secure the indebtedness or (ii)
deny an extension of the maturity of the debt. On May 10, 1999, the Company was
informed that the repurchase agreement on certain residuals would not be renewed
on the maturity date of May 17, 1999. The Company funded the maturity of this
debt of $19.4 million with available cash on hand. Although to date the Company
has had adequate cash, cash equivalents, and other unencumbered assets to meet
calls for additional collateral, to repay a portion of the related indebtedness,
and to meet its other operating and financing requirements, including its
current capital expenditure plans, there can be no assurance that sufficient
levels of such assets will continue to be available.
The Company periodically enters into sales of securities under
agreements to repurchase the same securities. Obligations to repurchase
securities sold are reflected as a liability in the accompanying consolidated
statement of financial condition. Interest expense with respect to these
obligations for the three months and the six months ended June 30, 1999 was $2.0
million and $4.7 million, respectively.
OBLIGATIONS OUTSTANDING UNDER LINES OF CREDIT. Obligations outstanding
under lines of credit amounted to $41.0 million at June 30, 1999. The borrowings
are pursuant to a three year agreement, which is collateralized by commercial
loans. The weighted average interest rate at June 30, 1999 was 6.94%. Interest
expense during the three months and the six months ended June 30, 1999 was $0.7
million and $1.3 million, respectively. See Note 1 to "--OBLIGATIONS OUTSTANDING
UNDER LINES OF CREDIT-REAL ESTATe" below.
OBLIGATIONS OUTSTANDING UNDER LINES OF CREDIT - REAL ESTATE.
Obligations outstanding under lines of credit secured by real estate amounted to
$143.8 million at June 30, 1999. These borrowings have a three-year term and an
interest rate that floats in accordance with LIBOR. Set forth below is
information regarding OAC's indebtedness relating to its investment in real
estate at June 30, 1999:
<TABLE>
<CAPTION>
Property Principal Amount Interest Rate Maturity Date
-------------------------------- ---------------- ------------- ---------------
(Dollars In Millions)
<S> <C> <C> <C>
Bush Street Property............ $ 75.0 LIBOR plus 1.75% April, 2001 (2)
Other........................... $ 68.8(1) LIBOR plus 1.75% June, 2001 (2)
</TABLE>
(1) Represents the portion of the outstanding balance under a $200 million
loan that is secured by real estate. As of June 30, 1999, OAC's
investments in Cortez Plaza, 450 Sansome Street, 10 U.N. Plaza,
Prudential Plaza and 690 Market Street secured this loan, and an
additional $41.0 million was borrowed and secured by commercial
mortgage loans under this line of credit.
(2) Subject to certain conditions, the Company may extend the maturity date
by one year.
Interest expense during the three months and six months ended June 30,
1999 was $2.7 million and $5.4 million, respectively.
17
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
================================================================================
NOTE 10 11.5% REDEEMABLE NOTES AND BONDS-MATCH FUNDED LOAN AGREEMENTS
In July, 1998, the Company completed the issuance of $150 million of
11.5% Redeemable Notes due 2005 (the "Old Notes") which were resold to
"qualified institutional buyers" in reliance on Rule 144A under the Securities
Act of 1933, as amended (the "Securities Act"). The Company completed an
exchange offer on March 15, 1999 whereby holders exchanged Old Notes for New
Notes with materially identical terms, except that the New Notes were registered
under the Securities Act. Old Notes and New Notes are herein referred to
together as the "Notes". Interest on the Notes is payable semi-annually on
January 1 and July 1, beginning January 1, 1999, at a rate per annum of 11.5%.
The Notes will mature on July 1, 2005 and will be redeemable, at the option of
the Company, in whole or part, on or after July 1, 2002, at the redemption
prices specified below (expressed as percentages of the principal amount
thereof), in each case, together with accrued and unpaid interest, if any,
thereon to the date of redemption, upon not less than 30 nor more than 60 days'
notice, if redeemed during the twelve-month period beginning on July 1 of the
years indicated below:
Year Redemption Rate
---------------------------------------- ---------------
2002.................................... 105.750%
2003.................................... 102.875
2004 and thereafter..................... 100.000
During the first 36 months after the date of original issue of the
Notes, the Company may use the net proceeds of one or more offerings of its
common stock to redeem up to 25% of the aggregate principal amount of the Notes
at a redemption price of 111.50% of the principal amount thereof, plus accrued
and unpaid interest to the date of redemption, provided that, after any such
redemption, the aggregate principal amount of the Notes outstanding must equal
at least $112.5 million. On September 30, 1998, the Company repurchased in the
open market $7.0 million of the $150.0 million outstanding Notes. At June 30,
1999, the outstanding balance of the Notes was $143.0 million. Interest expense
on the Notes for the three months and six months ended June 30, 1999 was $4.1
million and $8.3 million, respectively.
Concerning the Bonds-Match Loan Agreements, on November 13, 1998, the
Company securitized and transferred to the Trust $173.6 million of its
residential loan portfolio. Upon the transfer, the Company received
approximately $173.4 million of proceeds. The transfer did not qualify as a sale
under FAS 125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." Accordingly, the amount of proceeds from the
transfer are reported as a liability in the consolidated statement of Financial
Condition. For more information on the Company's residential loan portfolio
securitization, see Note 6 above.
At June 30, 1999, bonds-match funded loan agreements amounted to $124.2
million and with a weighted average interest rate of 6.57%. Interest expense for
the three months and six months ended June 30, 1999 was $2.3 million and $4.8
million, respectively.
NOTE 11 TAXATION
For 1998, the Company has sought to qualify as a REIT under Sections
856 through 860 of the Code, as amended. A REIT will generally not be subject to
federal income taxation on that portion of its income that is distributed to its
shareholders if it distributes at least 95% of its taxable income and meets
certain other income and asset tests. The Company has until the filing of its
tax return to satisfy the distribution requirement. Since the Company plans to
distribute 100% of its taxable income, no provision has been made for federal
income taxes for the Company and its subsidiaries in the accompanying
consolidated financial statements. At June 30, 1999, the Company had not
declared the final 1998 dividend to meet the 95% distribution requirement, which
is expected to be approximately $15.5 million, or $0.82 per share. There can be
no certainty that the dividend will be declared, that, if declared, the Company
will have sufficient funds to pay the dividend or that the dividend would not be
in a form other than cash. In addition, OAC will be subject to a 4%
nondeductible excise tax on the amount, if any, by which certain distributions
paid by it with respect to any calendar year are less than the sum of (i) 85% of
its ordinary income for that year, (ii) 95% of its capital gain net income for
that year and (iii) 100% of its undistributed taxable income from prior years.
OAC has incurred and paid a nondeductible excise tax for 1999.
18
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
================================================================================
On July 25, 1999 the Company entered into a definitive merger agreement
with OCN (the "Merger"). The Merger, which is structured to be taxable to the
Company's shareholders, is expected to close in the fourth quarter of 1999,
subject to antitrust approvals and the approval of the shareholders of each of
OCN and OAC. If the Merger is consummated, the Company will no longer qualify as
a REIT under the provisions of the Code, which requires a REIT to be owned by
100 or more persons. If the Company fails to qualify as a REIT, the Company will
be subject to tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates.
NOTE 12 COMMITMENTS AND CONTINGENCIES
At June 30, 1999, the Company had $44.7 million in outstanding
commitments to fund construction, multi-family and commercial loans. The
following table details the amounts committed at such date.
June 30, 1999
(Dollars In Thousands)
-------------------------------------------------------------------
Multi-family.................................... $ 20,283
Hotels.......................................... 22,298
Offices......................................... 2,083
-------------
Total committed amount........................ $ 44,664
=============
On April 20, 1999, a complaint was filed on behalf of a putative class
of public shareholders of the Company in the Circuit Court of the Fifteenth
Judicial Circuit, Palm Beach County, Florida against OCN and the Company. On
April 23, 1999, a complaint was filed on behalf of putative classes of public
shareholders of the company in the Circuit Court of the Fifteenth Judicial
Circuit, Palm Beach County, Florida against the Company and certain directors of
the Company. The plaintiffs in both complaints seek to enjoin the consummation
of the merger. Alternatively, in the event the merger is consummated, the
plaintiffs seek damages for alleged breaches of common law fiduciary duties.
On June 3, 1999, Walton Street Capital, L.L.C. ("Walton") filed suit
against the Company and the Operating Partnership in the Circuit Court of Cook
County, Illinois. Walton has alleged that the Company committed an anticipatory
breach of contract with respect to the proposed sale by the Company of all of
its interest in its commercial mortgage-backed securities portfolio to Walton.
Walton has claimed damages in an amount in excess of $20 million. The Company
believes this suit is without merit and intends to vigorously defend against the
same.
The Company is subject to various other pending legal proceedings.
Management is of the opinion that the resolution of these claims will not have a
material effect on the results of operations or financial condition of the
Company.
19
<PAGE>
ITEM 2. 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. See "Recent Developments" regarding OAC's status as a REIT. The
Company's primary investments have been:
o Commercial and residential subordinate and residual interests in
collateralized mortgage obligations and other mortgage-related
securities (collectively, "mortgage-related securities"); and
o Underperforming or otherwise distressed commercial and multi-family
real property, including properties acquired by mortgage lenders at
foreclosure or through deed-in-lieu thereof.
The Company also has invested, by way of purchase or origination, in
other real estate related assets including:
o Commercial, multifamily and single-family mortgage loans, including
construction and renovation loans and mezzanine loans, which comprise
the Company's loan portfolio; and
o Nonperforming and subperforming mortgage loans, which generally are
purchased at a discount to their aggregate unpaid principal amount and
comprise the Company's discount loan portfolio.
RECENT OPERATING LOSSES; DISCONTINUANCE OF INVESTMENT ACTIVITIES
The Company reported a net loss of $18.2 million or $0.96 per fully
diluted share for the three months ended June 30, 1999. These losses were
primarily attributable to a $23.9 million of losses on its securities available
for sale portfolio which were comprised of a $19.0 million writedown of its
residential subprime and residual mortgage-backed securities and a $4.9 million
writedown of its commercial mortgage-backed securities. During the first quarter
of 1999, the Company reported $8.3 million of losses on subordinates and
residual interests in mortgage related securities. In 1998 the Company reported
$65.1 million of losses on subordinate and residual securities and $17.1 million
of losses in conjunction with the Company's AAA- rated portfolio of agency
interest only and inverse floating rate interest only classes of
mortgage-related securities backed by single family residential loans. Losses in
these periods are attributable, in varying degrees, to increased prepayment
speeds on underlying mortgage loans, widening spreads on mortgage-related
securities and declining market liquidity for mortgage-related securities.
Moreover, as a result of these conditions, during the past year there has been a
general "flight to quality" by investors, with the result that the market for
the subordinate and residual mortgage-related securities has been substantially
reduced or eliminated. These factors have adversely affected the operations and
financial condition of numerous companies in the financial service, REIT and
mortgage-backed security sectors, including the Company.
As a result of the foregoing developments, particularly as they relate
to the Company's subordinate and residual mortgage-related securities, the
Company has been receiving requests from its lenders to pledge additional
collateral or post additional cash margins (referred to herein collectively as
"collateral") pursuant to the terms of its loan agreements, which it has been
able to meet as of the date hereof. The Company has decided that, for the
foreseeable future, it does not plan to acquire any additional assets or fund
any additional loans (beyond those which are currently committed), and it will
work to accelerate the stabilization of its existing assets and increase its
overall liquidity position.
RECENT DEVELOPMENTS
On July 25, 1999 the Company entered into a definitive merger agreement
with OCN (the "Merger") providing for OCN to acquire OAC for 0.71 shares of OCN
common stock for each outstanding share of OAC common stock (other than those
OAC shares owned by OCN or its subsidiaries). The Merger contemplates that,
except in certain circumstances, OAC would declare and set a record date for the
final 1998 dividend required for OAC to maintain its status as a REIT under the
federal tax provisions prior to the consummation of the merger. The final 1998
dividend has been deferred by the Board of Directors of OAC and is expected to
be approximately $15.5 million, or $0.82 per share. While OCN has agreed to
provide in certain circumstances up to $25 million in financing for the
Company's operations prior to the merger, there can be no certainty that the
dividend will be declared, that, if declared, the Company will have sufficient
funds to pay the dividend or that the dividend would not be in a form other than
cash. The Merger, which is structured to be taxable to the OAC shareholders, is
expected to close in the fourth quarter of 1999, subject to antitrust approvals
and the approval of the shareholders of each of OCN and OAC. In connection
therewith, on August 10, 1999, OCN filed a joint proxy and registration
statement on Form S-4 with the Securities and Exchange Commission ("SEC"). If
the Merger is consummated, the Company will no longer qualify as a REIT under
the provisions of the Code, which requires a REIT to be owned by 100 or more
persons. If the Company fails to qualify as a REIT, the Company will be subject
20
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
to tax (including any applicable alternative minimum tax) on its taxable income
at regular corporate rates. See Note 12 to the Consolidated Financial
Statements.
On August 12, 1999, the Company entered into an agreement to sell CSFB
1995-AEW1 F-1 and G-1. This transaction is expected to settle on August 17,
1999, and is expected to result in proceeds, net of financing to the Company of
approximately $6.8 million. On August 13, 1999, the Company entered into a
separate agreement to sell CSFB 1995-AEW1 E and G-2. This transaction is
expected to settle on August 18, 1999, and is expected to result in proceeds,
net of financing to the Company of approximately $9.8 million. See "Financial
Condition--Securities Available for Sale" below for more detail on these
commercial mortgage-backed securities.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS AND THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998
GENERAL. Net loss for the quarter ended June 30, 1999 was $18.2
million, or $0.96 per diluted share, compared to a net income of $6.6 million,
or $0.35 per diluted share, for the period ended June 30, 1998. The loss for the
three months ended June 30, 1999 was primarily due to net losses on securities
available for sale of $23.9 million. The losses on the securities available for
sale portfolio during the second quarter of 1999 were taken primarily against
residential subprime bonds, reflecting continuing market illiquidity for these
instruments. The Company prices its securities portfolio at fair value each
month based on the lower of broker/dealer marks or internal values. Net loss for
the six months ended June 30, 1999 was $19.0 million compared to $3.9 million
for the same period a year ago.
INTEREST INCOME. Interest income increased $2.6 million to $17.9 million
for the three months ended June 30, 1999 from $15.3 million for the comparable
period ended 1998. This increase was primarily due to additional interest income
of $1.4 million on loans and $0.5 million on the securities available for sale
portfolio. The increase in interest income resulted from additional investments
in interest earning assets. Residential loans (including match funded loans)
increased from an average balance of $118.3 million to $154.5 million and
commercial and multi-family loans increased from an average balance of $40.6
million to $76.2 million. Such increases were offset by a decrease in the
securities available for sale from an average balance of $319.9 million to
$299.2 million. Total interest earning assets yielded 12.6% at June 30, 1999, a
0.77% increase over the yield at June 30, 1998. Interest income for the six
months ended June 30, 1999 was $37.3 million compared to $22.8 million for the
same period a year ago.
INTEREST EXPENSE. Interest expense for the three months ended June 30,
1999 increased $3.6 million to $9.1 million as compared to the three months
ended June 30, 1998. This increase was primarily due to a $4.1 million increase
in interest expense associated with the issuance of the 11 1/2% Redeemable Notes
due 2005 (the "Notes") and a $2.3 million increase due to interest expense
related to the bonds-match funded loan agreements. Interest expense does not
include the expense associated with the borrowings secured by investments in
real estate, which is included in determining the operations of the Company's
real estate. See " -Real Estate Income, Net" below. Interest expense for the six
months ended June 30, 1999 was $19.0 million compared to $6.2 million for the
same period a year ago.
NET INTEREST INCOME. Net interest income represents the difference
between income on interest-earning assets and expense on interest-bearing
liabilities. Net interest income depends upon the relative amount of
interest-earning assets and interest-bearing liabilities, and the interest rate
earned or paid on them.
The following table sets forth certain information relating to the
Company's consolidated statements of financial condition and consolidated
statement of operations for the periods indicated and reflects the average yield
on assets and average cost of liabilities for the periods indicated. Such yields
and costs are derived by dividing income or expense by the average balance of
assets or liabilities, respectively, for the periods shown. Average balances are
derived from average daily balances. The yields include amortization of fees
which are considered adjustments to yields.
21
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
For the Three Months Ended June 30,
-----------------------------------------------------------------------------
(Dollars In Thousands) 1999 1998
-------------------------------------- ----------------------------------
Average Annualized Average Annualized
Balance Interest Yield/Rates Balance Interest Yield/Rates
-------- -------- ----------- ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Repurchase agreements and interest-bearing
deposits .................................... $ 31,597 $ 326 4.13% $ 9,781 $ 97 3.97%
Securities held for trading..................... -- -- -- 20,106 (375) (7.46)
Securities available for sale................... 299,152 12,064 16.13 319,909 11,535 14.42
Commercial and multi-family loan portfolio, net. 76,240 2,221 11.65 40,563 1,468 14.48
Match funded residential loans, net............. 148,110 3,000 8.10 -- -- --
Residential loan portfolio, net................. 6,427 132 8.22 118,348 2,178 7.36
Discount loans, net............................. 5,618 132 9.40 9,282 423 18.23
----------------------------------- ---------------------------------
Total interest-earning assets................. $ 567,144 $ 17,875 12.61% $ 517,989 $ 15,326 11.84%
----------------------------------- ---------------------------------
Interest-bearing liabilities:
Securities sold under agreements to repurchase.. $ 92,606 $ 2,039 8.81% $ 174,024 $ 3,302 7.59%
Obligations outstanding under lines of credit... 41,015 706 6.89 132,246 2,245 6.79
11.5% Redeemable Notes due 2005................. 143,000 4,111 11.50 -- -- --
Bonds match funded.............................. 136,488 2,253 6.60 -- -- --
----------------------------------- ---------------------------------
Total interest-bearing liabilities............ $ 413,109 $ 9,109 8.82% $ 306,270 $ 5,547 7.24%
----------------------------------- ---------------------------------
Net interest income/spread (1)..................... $ 8,766 3.79% $ 9,779 4.60%
========= ===========
Net interest margin (2)............................ 6.18% 7.55%
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
-----------------------------------------------------------------------------
(Dollars In Thousands) 1999 1998
-------------------------------------- ----------------------------------
Average Annualized Average Annualized
Balance Interest Yield/Rates Balance Interest Yield/Rates
-------- -------- ----------- ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Repurchase agreements and interest-bearing
deposits ..................................... $ 35,142 $ 821 4.67% $ 11,896 $ 296 4.98%
Securities held for trading...................... -- -- -- 36,929 (3,013) (16.32)
Securities available for sale.................... 310,201 25,702 16.57 227,304 16,183 14.24
Commercial and multi-family loan portfolio, net.. 72,415 3,869 10.69 32,964 2,274 13.80
Match funded residential loans, net.............. 156,406 6,327 8.09 -- -- --
Residential loan portfolio, net.................. 6,899 278 8.06 70,644 2,613 7.40
Discount loans, net.............................. 5,618 259 9.22 18,057 1,326 14.69
----------------------------------- ---------------------------------
Total interest-earning assets.................. $ 586,681 $ 37,256 12.70% $ 397,794 $ 19,679 9.89%
----------------------------------- ---------------------------------
Interest-bearing liabilities:
Securities sold under agreements to repurchase... $ 109,391 $ 4,681 8.56% $ 107,172 $ 3,967 7.40%
Obligations outstanding under lines of credit.... 37,834 1,313 6.94 67,393 2,274 6.75
11.5% Redeemable Notes due 2005.................. 143,000 8,265 11.56 -- -- --
Bonds match funded............................... 145,385 4,776 6.57 -- -- --
----------------------------------- ---------------------------------
Total interest-bearing liabilities............. $ 435,610 $ 19,035 8.74% $ 174,565 $ 6,241 7.15%
----------------------------------- ---------------------------------
Net interest income/spread (1)...................... $ 18,221 3.96% $ 13,438 2.74%
========= ===========
Net interest margin (2)............................. 6.21% 6.76%
</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.
PROVISION FOR LOAN LOSSES. The provision for loan losses during the
three months ended June 30, 1999 increased $0.1 million to $0.2 million from
$0.1 million during the three months ended June 30, 1998, which reflected the
Company's evaluation of current economic conditions, a credit review of loans,
22
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
an analysis of specific loan situations and the size and composition of the
commercial and multi-family loan portfolio. Provision for loan losses for the
six months ended June 30, 1999 was $0.5 million compared to $0.2 million for the
same period a year ago.
REAL ESTATE INCOME (EXPENSE), NET. Real estate income (expense), net
decreased $0.4 million to ($0.7) million for the three months ended June 30,
1999, compared to the same period in 1998. This decrease was primarily due to a
$2.6 million increase in rental operation expense, a $0.5 million increase in
depreciation and amortization expense, and a $1.0 million increase in interest
expense offset by a $3.7 million increase in rental income. These increases in
real estate operating income and expenses, compared to the same period in 1998,
were largely the result of an increase in the Company's investment in real
estate, and obtaining financing on these investments. Additionally, the Company
made a 1998 Canadian income tax return payment in June 1999 for $0.6 million
(CAD), which translated to $0.4 million (U.S.). Expenses related to buildings
and improvements are amortized over 39 years, while expenditures for repairs and
maintenance are charged to operations as incurred. Real estate income (expense),
net for the six months ended June 30, 1999 was ($0.5) million compared to $0.5
million for the same period a year ago.
OTHER EXPENSES. Other expenses increased $1.7 million to $3.9 million
for the quarter ended June 30, 1999, compared to the same period in 1998. This
increase was largely due to a $2.0 million increase in other expenses (which
consisted generally of servicing, accounting, audit, legal, excise tax, and bond
amortization expenses), which was offset in part by a $0.2 million decrease in
due diligence expense and a $0.2 million decrease in management fees. The
management fees payable by the Company to OCC totaled $1.5 million during the
quarter ended June 30, 1999 compared to $1.7 million during the quarter ended
June 30, 1998. Other expenses for the six months ended June 30, 1999 were $6.8
million compared to $3.4 million for the same period a year ago.
LOSSES ON SECURITIES. During the 1999 second quarter, the Company
incurred net losses of $23.9 million on its securities available for sale
portfolio which were comprised of a $19.0 million writedown of its residential
subprime and residual mortgage-backed securities and a $4.9 million writedown of
its commercial mortgage- backed securities. For the six months ended June 30,
1999, net losses on securities available for sale were $31.4 million, compared
to $17.1 million for the same period a year ago.
The Company's losses on its investments in mortgage-related securities
during the first and second quarters of 1999 were attributable to increased
prepayment speeds on underlying mortgage loans, widening spreads on mortgage-
related securities and declining market liquidity for mortgage- related
securities.
MINORITY INTEREST IN NET LOSS (INCOME) OF CONSOLIDATED SUBSIDIARY.
Minority interest in net loss (income) of consolidated subsidiary was $1.8
million during the quarter ended June 30, 1999 compared to ($0.5) million during
the same period in 1998. This minority interest represented the portion of the
Operating Partnership's loss attributed to the limited partnership interest
owned by IMIHC, an affiliate of OCC. The Company has a 91.3% ownership interest
in the Operating Partnership. Minority interest in net loss (income) of
consolidated subsidiary for the six months ended June 30, 1999 was $1.9 million
compared to ($0.3) million for the same period a year ago.
FINANCIAL CONDITION
SECURITIES AVAILABLE FOR SALE. The Company's investment in securities
available for sale at June 30, 1999 decreased by $66.7 million to $284.5 million
from $351.2 million at December 31, 1998.
At June 30, 1999, the Company's securities available for sale portfolio was
$284.5 million and consisted of:
o Non-investment grade and unrated subordinate commercial mortgage-backed
securities having an amortized cost of $98.6 million and a fair value
of $101.9 million,
o Unrated residential subprime residuals having an amortized cost of
$160.5 million and a fair value of $173.6 million, and
o Unrated subordinate residential mortgage-backed securities having an
amortized cost of $9.0 million and a fair value of $9.0 million.
The Company's unrated subprime residual portfolio of $173.6 million consisted
of:
o $83.3 million of seasoned residuals (securitized between 1994 and 1997)
with overcollateralization reserves funded at approximately $122.7
million, and
o $90.3 million of unseasoned residuals (securitized in 1998) with
overcollateralization reserves funded at approximately $29.7 million.
23
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
The following table sets forth the fair value and composition of the
Company's securities available for sale at the dates indicated.
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------- ----------
(Dollars In Thousands)
<S> <C> <C>
Mortgage-related securities:
Single family residential:
Subordinates...................................... $ 9,001 $ 15,390
Subprime residuals................................ 173,543 218,724
---------- ----------
Total single family residential............... 182,544 234,114
Multi-family residential and commercial:
AAA-rated interest-only........................... -- 441
A-rated interest-only............................. -- 222
Non-rated interest-only........................... 3,535 3,135
Non-rated principal-only.......................... 452 276
Subordinates...................................... 97.957 112,966
---------- ----------
Total multi-family residential and commercial... 101,944 117,040
---------- ----------
Total mortgage-related securities............... $ 284,488 $ 351,154
========== ==========
</TABLE>
The following tables detail the Company's securities available for sale
portfolio at June 30, 1999, and its estimates of expected yields on such
securities, taking into consideration expected prepayment and loss rates
together with other factors. Included in the tables are the following terms:
ACTUAL DELINQUENCY - Represents the total unpaid principal balance of
loans more than 30 days delinquent at the indicated date as a percentage of the
unpaid principal balance of the collateral at such date.
ACTUAL LIFE-TO-DATE CPR - The Constant Prepayment Rate is used to
measure the average prepayment rate for the underlying mortgage pool(s) over the
period of time lapsed since the issuance of the securities through the date
indicated and is calculated as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
_ _
| |
| |
| |
| ( 1 - Final Aggregate Balance ACTUAL ) ( 12 ) |
Actual Life-to-Date CPR = 100 X | ( --------------------------------- ) X ( ---------------- ) |
| ( Final Aggregate Balance SCHEDULED ) ( Months in Period ) |
| |
|_ _|
</TABLE>
ACTUAL LIFE-TO-DATE LOSSES - Represents cumulative losses expressed as
a percentage of the unpaid balance of the original collateral at the indicated
date.
CLASS DESIGNATION LETTER - Refers to the credit rating designated by
the rating agency for each securitization transaction. Classes designated "A"
have a superior claim on payment to those rated "B", which are superior to those
rated "C." Additionally, multiple letters have a superior claim to designations
with fewer letters. Thus, for example, "BBB" is superior to "BB," which in turn
is superior to "B." The lower class designations in any securitization will
receive interest payments subsequent to senior classes and will experience
losses prior to any senior class. The lowest potential class designation is not
rated ("NR") which, if included in a securitization, will always receive
interest last and experience losses first. IO securities receive the excess
interest remaining after the interest payments have been made on all senior
classes of bonds based on their respective principal balances. There is no
principal associated with IO securities and they are considered liquidated when
the particular class they are contractually tied to is paid down to zero.
Principal only ("PO") securities receive excess principal payments after the
principal has been made on all classes of bonds based on their respective
payment schedules. There is no interest associated with PO securities and they
are sold at a discount. The return on PO securities is earned through the
receipt of the payments and the collection of the discounted amount.
CLASS SIZE - Represents the percentage size of a particular class
relative to the total outstanding balance of all classes.
COLLATERAL BALANCE - represents, in the case of residuals, the unpaid
principal balance of the collateral of the entire securities at the indicated
date and, in the case of subordinates, the outstanding principal balance of the
entire securitization at the indicated date.
24
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
ISSUE DATE - Represents the date on which the indicated securities were
issued.
OVER-COLLATERIZATION LEVEL - For residual interests in residential
mortgage-backed securities, over-collaterization ("OC") is the amount by which
the collateral balance exceeds the sum of the bond principal amounts. OC is
achieved by applying monthly a portion of the interest payments of the
underlying mortgages toward the reduction of the class certificate principal
amounts, causing them to amortize more rapidly than the aggregate loan balance.
The OC percentage, expressed as a percentage of the outstanding collateral
balance, represents the first tier of loss protection afforded to the
non-residual holders. The OC percentage also determines whether the
over-collaterization target has been satisfied as of a specific date, such that
cash flows to the residual holder are warranted. To the extent not consumed by
losses on more highly rated bonds, OC is remitted to the residual holders.
Reserve funds ("RF") are actual cash reserves expressed as a percentage of the
original collateral balance at issuance.
RATING - Represents the rating, if any, on the security or securities
by the indicated rating agencies.
SECURITIZATION - Series description.
SECURITY - Represents the name of the class associated with each
securitization held by the Company. This has no relationship to a formal rating
but is for identification purposes (although the names are usually in
alphabetical or numeric order from the highest rated to the lowest rated).
SUBORDINATION LEVEL - Represents the credit support for each
mortgage-backed security by indicating the percentage of outstanding bonds whose
right to receive payment is subordinate to the referenced security. The
subordinate classes must experience a complete loss before any additional losses
would affect the particular referenced security.
WEIGHTED AVERAGE DSCR - Represents debt service coverage ratio, which
is calculated by dividing cash flow available for debt service by debt service.
WEIGHTED AVERAGE LTV- Represents the ratio of the loan amount to the
value of the underlying collateral.
YIELD TO MATURITY - Yield to maturity represents a measure of the
average rate of return that is earned on a security if held to maturity.
25
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
The following tables details the Company's securities available for sale
portfolio at June 30, 1999:
<TABLE>
<CAPTION>
OVER
CLASS COLLATERIZATION
ISSUE DESIGNATION RATING COLLATERAL BALANCE LEVEL AT PRODUCT TYPE AT
SECURITIZATION SECURITY DATE LETTER AGENCIES ISSUANCE 06/30/99 6/30/99 6/30/99
-------------- -------- ----- ----------- -------- ---------- -------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars In Thousands)
RESIDENTIAL MORTGAGE
BACKED SECURITIES
RESIDUALS:
SASCO 1998-2(1) X Jan-98 NR S&P, Fitch $600,052 $ 404,957 1.30% OC 26% Fixed, 69% 2/28 ARM
SASCO 1998-3(1) X Mar-98 NR S&P, Fitch 769,671 523,357 2.57% OC 10% Fixed, 77% 2/28 ARM
MLMI 1998-FF1(2) X Jun-98 NR S&P, Fitch 198,155 136,486 2.18% OC 10% 1/29 ARM, 88% 2/28 ARM
PANAM 1997-1(3) X Dec-97 NR S&P, Moody's 113,544 71,777 6.30% OC 26% 6mo ARM, 66% 2/28 ARM
Prepay Pen.
LHELT 1998-2(4) X Jun-98 NR Moody's, Fitch 209,225 154,635 4.97% OC 42% Fixed, 38% 2/28 ARM
EQUICON 1994-2(5) B Fix, B-2 Oct-94 NR S&P, Moody's, 78,846 21,197 6.10% OC 100% Fixed
Fitch
QS Fix, QS-2 NR
B Var., B-2 NR 32,306 5,586 19.54% OC 100% 6mo ARM
EQUICON 1995-1(5) B Fix, B-2 May-95 NR S&P, Moody's, 70,024 16,892 15.63% OC 100% Fixed
Fitch
B Var., B-2 NR 40,519 6,781 17.50% OC 100% 6mo ARM
EQUICON 1995-2(5) B Fix, B-2 Oct-95 NR S&P, Moody's 79,288 23,107 14.97% OC 100% Fixed
B Var., B-2 NR 39,667 7,349 17.81% OC 100% 6mo ARM
ACCESS 1996-1(6) B Fix, B-2 Feb-96 NR S&P, Moody's 120,015 39,103 8.24% OC 100% Fixed
B Var., B-2 NR 55,362 10,520 14.45% OC 100% 6mo ARM
ACCESS 1996-2(6) B-I, B-1 May-96 NR S&P, Moody's 142,259 49,722 13.68% OC 100% Fixed
BI-S, BI-S-1 NR
B-II, B-1 NR 68,345 13,162 16.32% OC 100% ARM
BII-S, NR
BII-S-1
ACCESS 1996-3(6) B-I, B-1 Aug-96 NR S&P, Moody's 107,712 38,640 13.17% OC 100% Fixed
BI-S, BI-S-1 NR
B-II, B-1 NR 99,885 20,634 23.74% OC 100% ARM
BII-S, NR
BII-S-1
ACCESS 1996-4(6) B, B-1 Nov-96 NR S&P, Moody's 239,778 72,774 17.30% OC 51% Fixed, 49% ARM
B-S, B-S-1 NR
ACCESS 1997-1(6) B, B-1 Feb-97 NR S&P, Moody's 276,442 103,859 19.16% OC 57% Fixed, 43% ARM
B-S, B-S-1 NR
ACCESS 1997-2(6) B, B-1 May-97 NR S&P, Moody's 185,197 74,366 12.45% OC 52% Fixed, 48% ARM
B-S, B-S-1 NR
ACCESS 1997-3(6) B, B-1 Oct-97 NR S&P, Moody's 199,884 92,176 7.95% OC 46% Fixed, 54% ARM
B-S, B-S-1 NR
OCWEN 98 - OAC-1 N/A Nov-98 NR S&P, Moody's 182,178 134,956 7.93% OC 24% Fixed, 72% 1/1 CMT
CMR1(8) Deferred Apr-96 NR S&P, Duff 47,802(9) 22,423 8.93% RF 100% Amortizing
Comp
CMR2(8) Deferred Nov-96 NR S&P, Duff, Fitch 106,692(9) 49,135 9.32% RF 89.97% Amort 10.03% IO
Comp mortgages
CMR3(8) Deferred Nov-96 NR S&P, Duff, Fitch 195,610(9) 92,541 12.89% RF 73.32% Amort 26.68% IO
Comp mortgages
CMR4(8) Deferred Feb-97 NR S&P, Duff, Fitch 108,630(9) 59,955 6.26% RF 89.80% Amort 10.20% IO
Comp mortgages
CMR6(8) Deferred May-97 NR S&P, Duff, Fitch 91,442(9) 50,665 6.52% RF 95.55% Amort 4.45% IO
Comp mortgages
</TABLE>
26
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
OVER
CLASS COLLATERIZATION
ISSUE DESIGNATION RATING COLLATERAL BALANCE LEVEL AT PRODUCT TYPE AT
SECURITIZATION SECURITY DATE LETTER AGENCIES ISSUANCE 06/30/99 6/30/99 6/30/99
-------------- -------- ----- ----------- -------- ---------- -------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SUBORDINATES: (Dollars In Thousands)
SBMS 1997-HUD1(11) B5 Apr-97 B2, n.a. Moody's, DCR 326,147 216,172 3.53% 97% Fixed
B6 Apr-97 NR -- -- None
ORMBS 1998-R1(12) B4 Mar-98 NR Moody's, DCR 565,411 514,342 None 98% Fixed
GECMS 1994-12(13) B4 Mar-94 NR Moody's, Fitch, S&P 516,732 247,688 None 100% Fixed
</TABLE>
27
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED ACTUAL ACTUAL ACTUAL
AVERAGE AVERAGE DELINQUENCY LIFE TO DATE LIFE TO DATE YIELD TO
INTEREST RATE LTV AT: AT: CPR AT: LOSSES AT: MATURITY AT:
SECURITIZATION SECURITY AT: 6/30/99 6/30/99 6/30/99 6/30/99 6/30/99 PURCHASE 6/30/99
-------------- -------- ------------- -------- ----------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RESIDENTIAL MORTGAGE
BACKED SECURITIES (Dollars In Thousands)
RESIDUALS:
SASCO 1998-2 X 10.13% 75.09% 12.28% 23.75% $1,452 16.00% 8.52%
SASCO 1998-3(1) X 9.75 76.96 9.32 26.09 1,104 17.04 7.70
MLMI 1998-FF1(2) X 9.39 77.58 7.71 28.64 46 18.57 11.84
PANAM 1997-1(3) X 10.13 81.18 17.52 26.52 1,380 22.45 6.45
Prepay Pen. 25.69 15.52
LHELT 1998-2(4) X 10.05 76.93 10.64 23.92 0 18.55 22.46
EQUICON 1994-2(5) B Fix, B-2 9.92 68.36 20.15 34.12 996 18.00 75.58
QS Fix, QS-2
B Var., B-2 10.62 81.88 18.00 29.83
EQUICON 1995-1(5) B Fix, B-2 12.06 66.45 34.80 32.62 2,181 18.00 15.90
B Var., B-2 11.20 77.14 18.00 75.29
EQUICON 1995-2(5) B Fix, B-2 10.84 72.79 31.65 37.16 2,016 18.00 32.80
B Var., B-2 11.19 73.10 18.00 63.30
ACCESS 1996-1(6) B Fix, B-2 10.87 73.33 29.64 35.11 2,488 18.00 27.81
B Var., B-2 11.17 77.67 18.00 19.18
ACCESS 1996-2(6) B-I, B-1 11.04 74.99 30.56 36.58 3,387 18.00 17.01
BI-S, BI-S-1
B-11, B-1 11.19 78.14 18.00 13.85
BII-S,
BII-S-1
ACCESS 1996-3(6) B-I, B-1 11.43 76.57 37.50 39.48 2,382 18.00 20.69
BI-S, BI-S-1
B-II, B-1 11.55 79.82 18.00 15.62
BII-S,
BII-S-1
ACCESS 1996-4(6) B, B-1 11.71 79.09 40.00 40.04 2,914 18.00 14.38
B-S, B-S-1
ACCESS 1997-1(6) B, B-1 11.46 81.16 39.52 39.46 4,512 18.00 13.76
B-S, B-S-1
ACCESS 1997-2(6) B, B-1 11.37 80.31 36.02 40.75 1,958 18.00 10.13
B-S, B-S-1
ACCESS 1997-3(6) B, B-1 11.16 80.20 30.75 39.48 1,194 18.00 16.40
B-S, B-S-1
OCWEN 98-OAC-1(7) N/A 8.66 79.87 6.09 35.64 2 N/A N/A
CMR1(8) Deferred Comp 13.44 N/A 37.88 21.05 610 18.00 128.06
CMR2(8) Deferred Comp 12.50 N/A 30.25 21.93 910 18.00 57.66
CMR3(8) Deferred Comp 13.63 N/A 18.08 17.94 2,312 18.00 20.92
CMR4(8) Deferred Comp 13.78 N/A 37.35 19.45 1,100 18.00 34.04
CMR6(8) Deferred Comp 13.61 N/A 36.40 21.58 607 18.00 38.07
SUBORDINATES:
SBMS 1997-HUD1(11) B5 9.80 108.29 10.50 15.23 8,842 16.87 19.81
B6 22.86 26.60
ORMBS 1998-R1(12) B4 8.94 90.80 21.18 7.26 11,364 13.75 5.92
GECMS 1994-12(13) B4 6.82 66.31 0.46 8.20 0 19.37 20.47
</TABLE>
28
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
ISSUERS:
(1) Structured Asset Securities Corp.
(2) Merrill Lynch Mortgage Investors, Inc.
(3) Pan American Bank, FSB.
(4) Lehman Home Equity Loan Trust.
(5) Equicon Mortgage Loan Trust.
(6) Access Financial Mortgage Loan Trust.
(7) Ocwen Residential Mortgage-Backed Securities.
(8) City Mortgage Receivable.
(9) Dollar equivalent of amounts in British pounds at the rate of exchange that
prevailed a the time of issuance.
(10) Dollar equivalent of amounts in British pounds at the rate of exchange at
3/31/99.
(11) Salomon Brothers Mortgage Securities.
(12) Ocwen Mortgage Loan Trust.
(13) GE Capital Mortgage Services, Inc.
(14) Not available.
<TABLE>
<CAPTION>
CLASS SUBORDINATION
DESIGNATION LEVEL AT
SECURITIZATION SECURITY ISSUE DATE LETTER RATING AGENCIES ISSUANCE 6/30/99
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMERCIAL MORTGAGE
BACKED SECURITIES
NASC 1996 MD-V 1 B-2 Apr-96 B S&P, Duff, Fitch 0.00% 0.00%
CSFB 1995-AEW1 2 E Oct-95 BB S&P, Fitch 13.75 36.59
F-1 B 4.80 12.98
G-1 NR 0.00 0.00
G-2 NR 0.00 0.00
MRAC 1996-C2 3 K Dec-96 B- Fitch, Moody's 2.50 2.72
L-1 NR-PO 0.00 0.00
L-2 NR-IO 0.00 0.00
BTC 1997-S1 4 E, F Dec-97 BB/B S&P, Fitch 19.00 45.17
Equity NR 0.00 0.00
</TABLE>
29
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
Actual Actual
Weighted Weighted Life to Life to
Average Average Actual Date Date Class Size % Yield to Collateral
DSCR at LTV at Delinquency CPR at CPR at Of Total as of Maturity at Balance at
Securitization Security Issuance Issuance 6/30/99 6/30/99 6/30/99 Issuance 6/30/99 Purchase 6/30/99 Issuance 6/30/99
- -------------- -------- -------- -------- ------- ------- --------- -------- ------- -------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMMERCIAL MORTGAGE
BACKED SECURITIES
NASC 1996 MD-V (1) B-2 1.69 62.0% 0.0% 0.0% $ 0 4.36% 4.50% 9.90% 9.98% $773,693 749,570
CSFB 1995-AEW1 (2) E 1.26 71.8% 5.1% n/a $ 708 11.00 29.75 7.93 7.80 $288,906 106,379
F-1 1.80 4.87 9.75 9.87
G-1 4.80 12.98 12.84 15.41
G-2 5.72 14.80 14.87 17.37
MRAC 1996-C2 (3) K 1.36 69.1% 0.3% n/a $ 0 1.50 1.63 12.10 12.43 $512,102 470,946
L-1 2.50 2.72 12.31 19.48
L-2 2.50 2.72 12.82 15.90
BTC 1997-S1 (4) E, F 1.27 106.0% 18.6% 48.37% $2,512 14.50 34.47 8.36 8.50 $303,946 127,853
Equity 19.00 45.17 21.19 26.53
</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) Merrill Lynch Mortgage Capital, Inc.
The following table sets forth the principal amount of mortgage loans
by the geographic location of the property securing the mortgages that underlie
the Company's securities available for sale portfolio at June 30, 1999.
<TABLE>
<CAPTION>
Description California Florida Texas New York Maryland Other (1)
- ------------------------------- -------------- ------------ -------------- ------------- ------------- ------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential properties....... $ 545,032 $ 249,330 $ 146,103 $ 88,796 $ 112,686 $ 1,775,324
Commercial properties........ 298,579 128,745 170,170 86,929 81,870 688,455
-------------- ------------ -------------- ------------- ------------- ------------
Total........................ $ 843,611 $ 378,075 $ 316,273 $ 175,725 $ 194,556 $ 2,463,779
============== ============ ============== ============= ============= ============
Percentage (2)............... 19.30% 8.65% 7.23% 4.02% 4.45% 56.35%
============== ============ ============== ============= ============= ============
</TABLE>
(1) No other individual state makes up more than 5% of the total.
(2) Based on a percentage of the total unpaid principal balance of the
underlying loans.
30
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
The following table summarizes information relating to the Company's
mortgage-related securities available for sale at June 30, 1999.
<TABLE>
<CAPTION>
ANTICIPATED ANTICIPATED
ORIGINAL UNLEVERAGED WEIGHTED
ANTICIPATED YIELD TO AVERAGE
RATING/ AMORTIZED PERCENT YIELD TO MATURITY AT REMAINING
DESCRIPTION COST FAIR VALUE OWNED MATURITY 6/30/99 (2) COUPON LIFE (3)
----------- ---- ---------- ----- -------- ----------- ------ -----------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
SINGLE FAMILY RESIDENTIAL
Unrated residuals................... $160,471 $173,543 100.00% 17.58% 19.26% 0.00% 6.58
B-rated subordinates................ 4,032 4,032 100.00 16.87 19.81 7.75 5.40
Unrated subordinates................ 5,046 4,969 51.40 15.92 11.07 7.01 3.76
-------- --------
Total single family............ 169,549 182,544
-------- --------
MULTI-FAMILY/COMMERCIAL
BB-rated subordinates............... 54,370 55,786 86.93 8.24 8.31 7.71 3.47
B-rated subordinates................ 23,163 23,157 77.61 10.32 10.40 8.44 9.79
Unrated subordinates................ 17,602 19,014 100.00 15.65 18.87 7.50 5.36
Unrated IOs (1)..................... 3,162 3,535 100.00 12.79 15.90 7.23 12.05
Unrated POs (1)..................... 276 452 100.00 12.31 19.48 0.00 12.05
-------- --------
Total multi-family/commercial 98,573 101,944
-------- --------
Total mortgage related
securities................... $268,122 $284,488
======== ========
</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 June 30, 1999 anticipated yield to maturity from that
originally anticipated are primarily the result of changes in
prepayment assumptions and to a lesser extent loss assumptions.
(3) Equals the weighted average duration based off of June 30, 1999 book
value.
The following table sets forth the property types of the Company's
commercial mortgage-backed securities at June 30, 1999, based upon the principal
amount.
Percentage
Property type Invested
------------------------------ ---------------
Retail........................ 29.4%
Multi-family.................. 19.3
Hotel......................... 16.1
Office........................ 6.7
Industrial.................... 5.0
Mixed use..................... 3.2
Other......................... 20.3
--------
Total......................... 100.0%
========
Subordinate and residual interests in mortgage-related securities
provide credit support to the more senior classes of the mortgage-related
securities. Principal from the underlying mortgage loans generally is allocated
first to the senior classes, with the most senior class having a priority right
to the cash flow from the mortgage loans until its payment requirements are
satisfied. To the extent that there are defaults and unrecoverable losses on the
underlying mortgage loans, resulting in reduced cash flows, the most subordinate
security will be the first to bear this loss. Because subordinate and residual
interests generally have no credit support, to the extent there are realized
losses on the mortgage loans comprising the mortgage collateral for such
securities, the Company may not recover the full amount or, indeed, any of its
initial investment in such subordinate and residual interests. The Company
generally owns the most subordinate classes of the securities in which it
invests and therefore will be the first to bear any credit losses.
The Company determines the present value of anticipated cash flows of
its mortgage-related securities utilizing valuation assumptions appropriate at
the time of each acquisition or securitization transaction. The significant
valuation assumptions include the anticipated prepayment speeds and the
anticipated credit losses related to the underlying mortgages. In order to
determine the present value of this estimated excess cash flow, the Company
currently applies a discount rate of 18% to the projected cash flows on the
unrated classes of securities. The annual prepayment rate of the securitized
loans is a function of full and partial prepayments and defaults. The Company
makes assumptions as to the prepayment rates of the underlying loans, which the
Company believes are reasonable, in estimating fair values of the subordinate
securities and residual securities retained. During the second quarter of 1999,
31
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
the Company utilized proprietary prepayment curves generated by the Company
(reaching an approximate range of annualized rates of 8%-56%). In its estimates
of annual loss rates, the Company utilizes assumptions that it believes are
reasonable. The Company estimates annual losses of between 0.60% and 4.72% of
the underlying loans.
The credit risk of mortgage-related securities is affected by the
nature of the underlying mortgage loans. In this regard, the risk of loss on
securities backed by commercial and multi-family loans and single family
residential loans made to borrowers who, because of prior credit problems, the
absence of a credit history or other factors, are unable or unwilling to qualify
as borrowers under guidelines established by the FHLMC and the FNMA for
purchases of loans by such agencies, generally involve more risk than securities
backed by single family residential loans which conform to the requirements
established by FHLMC and FNMA for their purchase by such agencies.
Subordinate and residual interests are affected by the rate and timing
of payments of principal (including prepayments, repurchase, defaults and
liquidations) on the mortgage loans underlying a series of mortgage-related
securities. The rate of principal payments may vary significantly over time
depending on a variety of factors, such as the level of prevailing mortgage loan
interest rates and economic, demographic, tax, legal and other factors.
Prepayments on the mortgage loans underlying a series of mortgage-related
securities are generally allocated to the more senior classes of
mortgage-related securities. Although in the absence of defaults or interest
shortfalls all subordinates receive interest, amounts otherwise allocable to
residuals generally are used to make payments on more senior classes or to fund
a reserve account for the protection of senior classes until
overcollateralization or the balance in the reserve account reaches a specified
level. In periods of declining interest rates, rates of prepayments on mortgage
loans generally increase, and if the rate of prepayments is faster than
anticipated, then the yield on subordinates will be positively affected and the
yield on residuals will be negatively affected. Continued market illiquidity on
subprime residential mortgage-backed securities was a significant factor in the
$23.9 million loss in the second quarter of 1999.
The Company marks its securities portfolio to fair value at the end of
each month based upon broker/dealer marks, subject to an internal review
process. For those securities which do not have an available market quotation,
the Company requests market values and underlying assumptions from the various
broker/dealers that underwrote, are currently financing the securities or have
had prior experience with the type of securities. Because the Company's
subordinate and residual securities are not readily marketable, trades can be
infrequent (and under some market conditions, non-existent) and most
broker/dealers do not have the securities modeled. In these circumstances the
market value is typically available from only a small group of broker/dealers,
and in most cases from only one broker/dealer. When valuations are obtained from
two or more broker/dealers, the average dealer mark is utilized. As of each
reporting period, the Company evaluates whether and to what extent any
unrealized loss is to be recognized as other than temporary. (See Note 2 to the
Consolidated Financial Statements above.) As a result there can be no assurance
that the Company will not take additional write-downs to the securities
available for sale portfolio in subsequent periods.
For additional information on commercial mortgage-backed securities,
see "Recent Developments" above and Note 12 to the Consolidated Financial
Statements.
COMMERCIAL AND MULTI-FAMILY LOAN PORTFOLIO. The Company's investment in
commercial and multi-family loans amounted to $79.5 million at June 30, 1999, a
$14.2 million increase over the $65.3 million investment at December 31, 1998.
See Note 12 to the Consolidated Financial Statements.
The following table sets forth the composition of the Company's
commercial and multi-family loan portfolio by type of loan at the dates
indicated.
June 30, December 31,
1999 1998
------------ ------------
Multi-family residential loans .............. $ 25,002,338 $ 20,544,269
Commercial real estate and land loans:
Hotels ................................. 23,998,171 21,304,912
Office buildings ....................... 30,975,076 24,123,894
------------ ------------
Total ................................. 79,975,585 65,973,075
Deferred fees ............................... (70,955) (48,434)
Allowance for loan losses ................... (426,585) (641,676)
------------ ------------
Commercial and multi-family loans, net.. $ 79,478,045 $ 65,282,965
============ ============
32
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
The Company maintains an allowance for loan losses at a level which
management considers adequate to provide for potential losses based upon an
evaluation of known and inherent risks. At June 30, 1999, the Company had an
allowance for loan losses in the amount of $0.4 million on the commercial and
multi-family loan portfolio.
The following table sets forth certain information regarding the loans
in the Company's commercial and multi-family loan portfolio at June 30, 1999.
<TABLE>
<CAPTION>
STABILIZED
LOAN AMOUNT RATIO OF LOAN PER DEBT
LOAN OUTSTANDING TYPE OF LOAN TO UNIT/SQUARE COVERAGE COUPON
LOAN LOCATION AMOUNT AT 6/30/99 LOAN COST FOOT RATIO(1) RATE SIZE
- --------------- ---------------- --------------------- --------- -------- ----------- ---------- ------ ---------
MULTI-FAMILY (Dollars In Thousands)
RESIDENTIAL:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fourth & Harrison San Francisco, CA $11,550 $ 6,010 Construction 85% 72 1.22 9.630% 160 units
241 Church Street New York, NY 30,280 15,957 Conversion 88 582 N/A 9.000 52 units
459 Washington
Street New York, NY 3,455 3,035 Conversion 61 314 N/A 10.500 11 units
COMMERCIAL:
Doubletree Hotel Lowell, MA 7,652 7,447 Renovation 85 31 1.9 10.000 249 rooms
Hawthorn Suites
Hotel Schaumburg, IL 7,629 1,228 Construction 65 56 1.59 8.750 136 suites
Thompson
Street Hotel New York, NY 17,715 2,925 Construction 80 209 1.66 10.000 100 rooms
Wyndham Garden
Hotel Wilmington, DE 13,300 12,398 Renovation 67 61 2.2 8.650 291 rooms
Landmark III-GTE Burlington, MA 33,058 30,975 Renovation 85 114 1.18 9.250 291,007 sq.ft.
-------- --------
$124,639 $ 79,975
======== ========
</TABLE>
(1) Represents the net income of the stabilized property divided by debt
service required by the loan.
RESIDENTIAL LOAN PORTFOLIO. The Company's investment in residential
loans decreased to $6.1 million at June 30, 1999 from an investment of $8.1
million at December 31, 1998. At June 30, 1999, $3.9 million of the residential
loan portfolio was past due 90 days or more, compared to $4.2 million at
December 31, 1998. During the second quarter of 1999, the Company recorded a
provision for loan losses of $0.2 million.
DISCOUNT LOAN PORTFOLIO. Nonperforming and subperforming mortgage loans
may presently be in default or may have a greater than normal risk of future
defaults and delinquencies, compared to newly-originated, high-quality loans of
comparable type, size and geographic concentration. Returns on an investment of
this type depend on the borrower's ability to make required payments or, in the
event of default, the ability of the loan's servicer to foreclose and liquidate
the mortgage loan. There can be no assurance that the Company will be able to
liquidate a defaulted mortgage loan successfully (through sale of the security
property or otherwise) or in a timely fashion.
At June 30, 1999 and December 31, 1998, the Company's net discount loan
portfolio amounted to $5.6 million or 0.7% of the Company's total assets. All of
the Company's discount loan portfolio is secured by first mortgage liens on real
estate.
33
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
At June 30, 1999 and December 31,1998, the Company's discount loans
consisted of a 13.83% participation interest in a loan pool, which had an
outstanding principal balance of $6.9 million. The collateral for the loans
consists of two office buildings located in midtown Manhattan, New York. The
loans are serviced by the Bank, which holds the remaining interest in these
loans.
The following table sets forth the activity in the Company's gross
discount loan portfolio during the periods indicated:
<TABLE>
<CAPTION>
For the Six
Months Ended For the Year Ended
June 30, December 31,
1999 1998
--------------- ------------------
(Dollars In Thousands)
<S> <C> <C>
Balance at beginning of period..................... $ 6,858,836 $ 42,528,782
Acquisitions....................................... -- --
Resolutions and repayments(1)...................... -- (2,349,969)
Loans transferred to investment in real estate..... -- (33,436,930)
Foreign exchange gain (loss)....................... -- 116,953
--------------- ---------------
Balance at end of period........................... $ 6,858,836 $ 6,858,836
=============== ===============
</TABLE>
(1) Resolutions and repayments consists of loans which were resolved in a
manner which resulted in partial or full repayment of the loan to the
Company, as well as principal payments on loans which have been brought
current in accordance with their original or modified terms (whether
pursuant to forbearance agreements or otherwise) or on other loans
which have not been resolved.
The acquisition cost for a pool of discount loans is allocated to each
individual loan within the pool based upon the Company's pricing methodology.
The discount which is associated with commercial real estate loans which are
current, and which the Company believes will remain current, is accreted into
interest income as a yield adjustment using the interest method over the
contractual maturity of the loan. For all other loans interest is earned as cash
is received. Gains on the repayment and discharge of loans are reported as
interest income on discount loans. Upon receipt of title to property securing a
discount loan, the loans are transferred to investment in real estate.
INVESTMENT IN REAL ESTATE. At June 30, 1999, and December 31, 1998, the
Company's investments in real estate consisted of eight properties which had an
aggregate carrying value of $211.4 million and $208.1 million, respectively. A
total of four of the properties currently owned by the Company with an aggregate
carrying value of approximately $146.3 million are located in San Francisco,
California. Three of these properties are located in the financial district of
San Francisco, and one property is located in the adjacent civic center district
of San Francisco. The Company believes that the office market in San Francisco,
particularly the financial district, is characterized by limited new supply and
significant barriers to entry. Low vacancy rates, coupled with lack of new
construction, are leading to increased rental rates. Government regulation of
development in conjunction with local construction costs and a lack of
developable land provide significant barriers to entry to this area. The Company
believes that its investments in real estate in San Francisco are well located
and benefit from their proximity to the majority of the city's office, retail
and hotel accommodations.
The Company's earthquake insurance relating to its four properties in
San Francisco is in the aggregate amount of $50 million, which is the probable
maximum loss estimated to be sustained in the event the most powerful earthquake
recorded in California were to occur at the properties, as determined by an
independent structural engineer. In the event of such probable maximum loss of
$50 million, such damage would be insured, less a deductible of approximately 5%
of total value at risk. In the event of a more catastrophic earthquake or
damages in excess of $50 million, the Company would not be insured for such
losses.
34
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
The Company's net investment in real estate increased to $211.4 million
at June 30, 1999 from $208.1 million at December 31, 1998 and is comprised of
the following properties:
<TABLE>
<CAPTION>
Date Book Value at
Acquired Property Location Square Feet Property Type June 30, 1999
----------- ----------------------- ----------------------- ----------- ------------- ---------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
04/08/98 225 Bush Street........ San Francisco, CA 570,637 Office Bldg. $ 105,028
09/23/97 450 Sansome Street..... San Francisco, CA 130,437 Office Bldg. 20,390
01/23/98 690 Market Street...... San Francisco, CA 124,692 Office Bldg. 14,934
09/03/97 10 U.N. Plaza.......... San Francisco, CA 71,636 Office Bldg. 10,450
07/22/98 841 Prudential Drive... Jacksonville, FL 488,080 Office Bldg. 32,839
11/10/97 Cortez Plaza........... Bradenton, FL 289,686 Shopping Ctr. 19,344
04/09/98 7075 Bayers Road....... Halifax, Nova Scotia 402,529 Shopping Ctr. 12,673
10/01/98 Holiday Village........ Havre, MT 223,355 Shopping Ctr. 1,941
Accumulated depreciation
and amortization (6,231)
-------------
$ 211,368
=============
</TABLE>
Set forth below is a brief description of each of the Company's
investments in real estate at June 30, 1999.
225 BUSH STREET. In April 1998, the Company acquired an existing
570,637 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 $17.0 million to
make tenant improvements and pay leasing commissions and to upgrade mechanical,
HVAC, and electrical systems, fire, and life/safety systems under the Americans
with Disabilities Act of 1990 (the "ADA"), as well as upgrades and improvements
to the ground floor retail and annex entrance lobby. Approximately $7.5 million
is budgeted for 1999. As of June 30, 1999, the Bush Street Property was 97%
leased.
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 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, leases on 86% of the space in the property expire. The Company plans
to invest approximately $7.3 million in this property in various renovations
including the entrance lobby, elevator cabs, bathrooms, hallways, certain
building systems and compliance with the ADA as well as tenant improvements and
pay leasing commissions. Approximately $4.0 million is budgeted for 1999. The
building was approximately 92% leased as of June 30, 1999. Three new leases
totaling approximately 21,400 square feet were executed in the second quarter of
1999.
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 releasing by the end of 1998, of which existing
rents averaged $14.06 per square foot. The Company has recently executed fifteen
new leases totaling approximately 29,000 square feet, which increased building
occupancy to 83% as of June 30, 1999. The Company is projecting to invest
approximately $7.0 million in structural upgrades, a sprinkler system and ADA
upgrades, deferred maintenance, tenant improvements and leasing commissions.
Approximately $5.0 million is budgeted for 1999.
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 12% leased as of June 30, 1999, but two
new leases totaling 31,227 square feet were executed during the first quarter of
1999 which will increase occupancy to approximately 55% when tenant improvements
are completed in July and September 1999, respectively. The remaining space is
35
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
currently being marketed for lease to tenants with full floor 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. Approximately $3.4 million is budgeted for 1999.
PRUDENTIAL BUILDING. In July 1998, the Company purchased the Prudential
Building, a 488,080 square foot, 22 story office building located in the central
business district of Jacksonville, Florida for an aggregate purchase price of
$36.0 million, plus closing costs. The purchase price was funded with cash on
hand and advances from a line of credit. Simultaneously with this closing, the
Company also leased 98% of the building back to the Prudential Insurance Co. of
America, and sold two adjacent parking areas to a neighboring hospital for
approximately $4.1 million. The Prudential lease has a term of four years with
options to vacate the premises during the term of the lease, as well as three
subsequent five-year extension options. 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 $0.7 million, which resulted in a
total investment in this property of $19.3 million. By simultaneously acquiring
fee simple title to a ground lease that encumbered a large part of the shopping
center's parking lot, the Company believes that it immediately improved the
value and marketability of the project. As of June 30, 1999, the shopping center
was 94.6% leased with national and regional tenants, including Publix, PetSmart,
Circuit City, Walgreens, Montgomery Ward (which petitioned bankruptcy court to
affirm their lease) and BankAmerica, comprising 75% of the leaseable area. Below
market leases covering approximately 9.4% of the center expire during the
remainder of 1999 and 2000.
BAYER'S ROAD SHOPPING CENTRE. In April 1998, the Company acquired the
Bayers Road Shopping Centre, which is located at 7075 Bayers Road in Halifax,
Nova Scotia. The property was acquired by foreclosure on the loans secured by
the property, which was acquired by the Company at a discount in September 1997.
The property contains 402,529 square feet of space, which consists primarily of
retail space but also includes some office space and storage space. The original
buildings were built in 1956 and were enclosed and expanded in several phases
between 1971 and 1987. Major tenants of the property currently consist of
Zellers, Lawton's and Mark's Work Warehouse. The property was approximately 73%
leased at June 30, 1999. The Company currently is implementing an operating plan
to establish the second level as a strong community shopping center anchored
with both national and regional value-oriented retailers, while filling the
lower level with service providers, discount retailers and entertainment uses.
The upper level would remain office space. Additional capital required for the
redevelopment and budgeted for 1999 totals $12.8 million.
HOLIDAY VILLAGE SHOPPING CENTRE. In October 1998, the Company acquired
the Holiday Village Shopping Centre, which is located at 1753 Highway 2 West in
Havre, Montana. The property was acquired by foreclosure on the loan secured by
the property, which was acquired by the Company at a discount in November 1997.
The property contains 223,355 square feet of retail space. The original building
was built in 1978. Ownership of the property is subject to two ground leases,
the disposition of which is currently being negotiated. The major tenant at the
property currently is Herberger's. The property was approximately 51% leased at
June 30, 1999. The Company currently is developing a leasing plan to stabilize
the property that will include leasing one of the vacant anchor spaces to a
national or regional anchor tenant and lease the balance of the in-line space to
local and regional tenants.
36
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
The following table sets forth the cost of improvements for each
investment in real estate through June 30, 1999.
<TABLE>
<CAPTION>
Budgeted Actual Cost Rents due
Initial Cost of of and accrued Total
Cost to Improvements Improvements Impairment Book Value Accumulated at end of Rental
Property Company for 1999 to Date Writedown Sales at 06/30/99 Depreciation period Income
- ------------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
225 Bush Street .... $101,632 $ 7,536 $ 3,396 $ -- $ -- $105,028 $2,945 $1,103 $ 5,782
450 Sansome Street . 17,205 3,988 3,185 -- -- 20,390 717 125 1,276
690 Market Street .. 13,707 5,014 1,227 -- -- 14,934 445 43 1,283
10 U.N. Plaza ...... 9,080 3,414 1,370 -- -- 10,450 360 3 80
841 Prudential Dr... 32,827 484 12 -- -- 32,839 608 1,622 4,185
Cortez Plaza ....... 19,244 1,354 100 -- -- 19,344 701 307 1,500
7075 Bayers Road ... 15,219 10,782 1,356 (3,902) -- 12,673 424 238 1,820
Holiday Village .... 1,791 350 150 -- -- 1,941 31 8 224
Park Center I ...... 1,534 -- -- -- (1,534) -- -- -- --
-------- ------- ------- ------- ------- -------- ------ ------ -------
Total ........... $212,239 $32,922 $10,796 $(3,902) $(1,534) $217,599 $6,231 $3,449 $16,150
======== ======= ======= ======= ======= ======== ====== ====== =======
</TABLE>
The following table sets forth a summary schedule of the total lease
expirations for the Company's investments in real estate for leases in place as
of June 30, 1999, assuming that none of the tenants exercise renewal options or
termination rights, if any, at or prior to the scheduled expirations.
<TABLE>
<CAPTION>
Percentage of Average Base Percentage of
Aggregate Annualized Rent per Aggregate
Number of Square Footage Portfolio Base Rent of Square Foot of Portfolio
Year of Lease Leases Of Expiring Leased Square Expiring Expiring Annualized Base
Expiration Expiring Leases Feet Leases Leases(3) Rent
------------- --------- -------------- ------------- ------------ -------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
1999(1) 42 208,858 11.69% $ 1,302,376(2) 6.24 8.78%
2000 49 152,066 8.51 1,624,860 10.69 10.96
2001 50 123,120 6.89 1,196,923 9.72 8.07
2002 54 605,314 33.86 5,271,294 8.71 35.55
2003 19 32,289 1.81 451,567 13.99 3.04
2004 15 91,682 5.13 1,047,598 11.43 7.06
2005 4 29,120 1.63 103,035 3.54 0.69
2006 9 117,223 6.56 500,101 4.27 3.37
2007 5 93,387 5.23 769,962 8.24 5.19
2008 7 138,778 7.77 1,779,377 12.82 12.00
2009 & beyond 8 195,122 10.92 785,033 4.02 5.29
----- ---------- -------- ----------- -------
262 1,786,959 100.00% $14,832,126 100.00%
===== ========== ======== =========== =======
</TABLE>
(1) Lease year runs from January 1 to December 31 for all years except for
1999, in which the lease year is July 1 to December 31, 1999.
(2) Annualized base rent is calculated based on the amount of rent
scheduled from January 1 of the listed year to the lease expiration,
except for 1999 in which the amount is based on the rent schedule from
July 1 to the lease expiration.
(3) Average base rent per square foot is calculated using the annualized
base rent divided by the square footage.
The Company regularly engages in negotiations with existing tenants to
extend leases due to expire as well as to enter into new leases with other
interested parties. Square footage involved in such negotiations may vary from a
small sub-tenancy to substantially all the available space at any given
property.
37
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
Noncancelable operating leases with tenants expire on various dates
through 2028. The future minimum rental income (base rent) to be received under
leases existing as of June 30, 1999, are as follows:
(Dollars In Thousands)
1999.......................................... $ 13,053
2000.......................................... 23,000
2001.......................................... 20,629
2002.......................................... 15,566
2003.......................................... 10,273
Thereafter.................................... 45,582
--------
Total $128,103
========
INDEBTEDNESS-GENERAL. The Company's investments in real estate,
subordinate and residual interests in mortgage-related securities and other
assets, such as single family residential loans, generally depend upon
short-term borrowings such as repurchase agreements and warehouse
facilities/lines of credit with financial institutions or institutional lenders
to finance the Company's acquisition of such assets on a short-term basis in the
case of repurchase agreements and on a one to three-year basis in the case of
warehouse facilities/lines of credit. There can be no assurance that such
financing will continue to be available on terms reasonably satisfactory to the
Company. The inability of the Company to arrange additional borrowings such as
repurchase agreements and warehouse facilities/lines of credit or to repay,
extend or replace existing borrowings when they expire would have a material
adverse effect on the Company's business, financial condition and results of
operations and on the Company's outstanding securities. See Note 9 to the
Consolidated Financial Statements above, which is hereby incorporated by
reference.
At June 30, 1999, the Company had total consolidated indebtedness of
$548.6 million, of which all but $143.0 million of outstanding Notes was secured
indebtedness, as well as $22.8 million of other liabilities. This consolidated
indebtedness consisted of: (i) $73.8 million of repurchase agreements, of which
$62.2 million was scheduled to mature in one year; (ii) lines of credit
aggregating $184.8 million, which mature in 2001 (subject to extension by the
Company under certain conditions until 2002) and are secured by real estate,
loans and/or securities; (iii) $143.0 million of outstanding Redeemable Notes,
which mature in 2005; and (iv) $124.2 million of match funded indebtedness which
is secured by $135.9 million of match funded residential loans, net, which was
incurred in November 1998 as a result of the securitization of 1,808 first and
second single family residential mortgage loans and the retention by the Company
of an approximately $9.6 million non-investment grade security in the special
purpose entity which was established to effect the securitization. See Note 6 to
the Consolidated Financial Statements above.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE. Securities sold under
agreements to repurchase decreased $64.7 million to $73.9 million at June 30,
1999, from $138.6 million at December 31, 1998. This decrease was due to certain
repurchase agreements with the Company's lenders which require all cashflows
from the bonds to be used to pay down outstanding debt and the repricing of the
repurchase agreements as the collateral amortizes, and the scheduled maturity of
certain other repurchase agreements. These obligations are secured by certain of
the Company's investments in subordinated interests in commercial
mortgage-backed securities, residual interests in subprime residential loan
securitizations, and U.K. mortgage loan residual securities.
OBLIGATIONS OUTSTANDING UNDER LINES OF CREDIT. Obligations outstanding
under lines of credit increased $6.5 million to $41.0 million at June 30, 1999,
from $34.5 million at December 31, 1998. The borrowing is pursuant to a three
year agreement, which is collateralized by commercial loans.
OBLIGATIONS OUTSTANDING UNDER LINES OF CREDIT - REAL ESTATE.
Obligations outstanding under lines of credit secured by real estate increased
$1.2 million to $143.8 million at June 30, 1999 from $142.6 million at December
31, 1998. These borrowings have a three-year term and an interest rate that
floats in accordance with LIBOR.
MINORITY INTEREST. At June 30, 1999, minority interest totaled $22.0
million and represented OCN's ownership through IMIHC of 1,808,733 units in the
Operating Partnership.
SHAREHOLDERS' EQUITY. Shareholders' equity decreased by $13.2 million
from $221.2 million at December 31, 1998 to $208.0 million at June 30, 1999. The
decrease was due to a net loss of $19.0 million, partially offset by a
cumulative currency translation adjustment of $1.4 million and a $5.3 million
increase in unrealized gain on securities available for sale.
38
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
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 second quarter of
1999 consisted of cash provided by operating activities, principal payments
received from loans, sales of securities available for sale, increases in
obligations outstanding under lines of credit, and principal and interest
payments received on the Company's securities portfolio.
The Company's operating activities provided cash flows of $41.0 million
during the second quarter of 1999. At the same time, the Company's investing
activities provided cash flows of $33.8 million during the second quarter of
1999. During the second quarter of 1999, cash provided by investing activities
primarily consisted of principal payments on securities available for sale of
$10.0 million and principal payments on loans of $43.6 million. The Company's
financing activities used cash flows of $96.2 million during the second quarter
of 1999 and primarily consisted of repayments of $64.8 million on borrowings
collateralized by securities sold under agreements to repurchase, and principal
payments of $39.2 million on bonds-match funded loan agreements.
At June 30, 1999, OAC's total closed transactions since the IPO, net of
repayments, were $767.6 million. Of this amount, $722.9 million has been funded
and the remaining $44.7 million is to be funded over the construction and
renovation periods, which range from two to 18 months. In addition, for 1999,
the Company has budgeted $32.9 million of capital expenditures on its
investments in real estate in order to reposition such properties in the market.
In connection with, and prior to the proposed merger, OCN has agreed,
in certain circumstances, to provide up to $25 million in secured financing on
an arm's-length basis and on terms consistent with market conditions and
applicable debt covenants for the Company's operations. The Company will be
obligated to repay this financing immediately upon termination of the Merger
Agreement. See "Recent Developments" above.
Based upon its current balance of cash and cash equivalents, and
projected cashflows from operations, potential cash inflows from the sale or
refinancing of assets, and its available lines of credit, the Company believes
that its sources of funds will be adequate for the purpose of meeting its short
term and long term liquidity requirements. However, there can be no assurance
that this will be the case. Material increases in interest expense or operating
expenses, collateral calls on its secured financings, the inability of the
Company to renew or replace maturing sources of financing, and the inability to
sell assets to raise additional cash, among other factors, generally would
negatively impact the Company's liquidity. On the other hand, sales of assets,
increases in operating cash flows and in the valuation of its securities
portfolio, and the execution of new financing transactions, would generally
positively affect the Company's liquidity. See also "Recent Developments",
"Indebtedness-General", and "Other Trends and Contingencies."
OTHER TRENDS AND CONTINGENCIES
Fluctuations in interest rates will continue to impact the Company's
net interest income to the extent the Company's fixed rate assets are funded by
variable rate debt or the Company's variable rate assets reprice on a different
schedule, or in relation to a different index than its floating rate debt. At
June 30, 1999, the Company had interest rate swap agreements with a notional
amount of $200.8 million and a fair value of $1.0 million in order to limit
partially the adverse effects of rising interest rates on the remaining
floating-rate debt. For a tabular presentation of these agreements and other
information, see Note 3 to the Consolidated Financial Statements above. When the
Company's swap agreements expire, the Company will have interest rate risk to
the extent interest rates increase on any floating-rate borrowings unless the
swaps are replaced or other steps are taken to mitigate this risk.
39
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
The Company's ability to raise additional debt is dependent upon, among
other things, the value of unencumbered assets, which are inherently linked to
prevailing interest rates and changes in the credit of the underlying assets. At
June 30, 1999, the Company had unencumbered residential loans and securities
having a fair value totaling approximately $290.5 million ($182.5 million of
subordinate and residual mortgage-backed securities, $101.9 million of
commercial mortgage-backed securities, and $6.1 million of residential loans).
In certain circumstances, including, among other things, increases in
interest rates, changes in market spreads, or decreases in the 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 second quarter of 1999, the Company was required to and
did fund requests for additional collateral calls on outstanding repurchase
agreements collateralized by securities available for sale which aggregated $1.6
million. During February 1999, $1.1 million of cash was returned to the Company
in connection with its cash margin deposits with its swaps and futures
counterparties. During April 1999, the Company funded requests for additional
collateral calls on outstanding repurchase agreements collateralized by
securities available for sale in the amount of $3.3 million.
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.
The Company's decision to discontinue future investment activities
effectively means that the Company's future profitability, and its ability to
meet its indebtedness obligations, will be dependent on its existing assets.
Circumstances which result in decreased income from the Company's assets,
including without limitation market and economic conditions which adversely
affect leasing income from the Company's investments in real estate, payments on
its loans, and yield on its securities, could adversely affect the ability of
the Company to meet its indebtedness obligations, as could market and economic
conditions which increase the cost of the Company's variable rate or short-term
liabilities, as noted above.
If the Company is unable to fund additional collateral needs or to
repay, renew or replace maturing indebtedness on terms reasonably satisfactory,
the Company would be required to sell, under adverse market conditions, a
portion of its assets, and could incur losses as a result. Furthermore, an
extremely limited market for subordinate and residual interests in
mortgage-related securities currently exists and there can be no assurance that
a liquid market for such securities will fully develop. Therefore, the Company's
ability to dispose of such securities promptly in such situations may be
limited. Nevertheless, the Company continues to evaluate opportunities to sell
individual securities or groups of securities as they arise.
The indenture under which the Redeemable Notes were issued (the
"Indenture") prohibits the Company from incurring or issuing debt, other than
certain permitted indebtedness ("Permitted Indebtedness"), if certain financial
tests are not satisfied. One such test requires that the ratio of adjusted FFO
to adjusted fixed charges for the previous four fiscal quarters exceeds 1.25 to
1.00. Given that FFO for the four quarters ended June 30, 1999 was $(69.6)
million, the Company does not expect this financial test to be satisfied during
1999. Permitted Indebtedness, the incurrence of which is not limited under the
Indenture, includes: (i) up to $150 million of debt that may be incurred under
certain warehouse lines of credit or mortgage loan repurchase agreements; (ii)
match funded debt that may be incurred by a special purpose, bankruptcy remote
subsidiary of the Company; (iii) renewals or refinancings of existing debt
structured to meet certain conditions; (iv) debt that may be incurred in hedge
transactions; (v) up to $10 million of capital lease and purchase money
financing; and (vi) up to $50 million of additional debt. The Company believes
that it can meet its financing needs from sources of Permitted Indebtedness
during 1999, although there can be no assurance that this will be the case.
In addition to payment and, in the case of the Company's secured
indebtedness, collateralization requirements, the Company is subject to various
other covenants in the agreements evidencing its indebtedness, including the
maintenance of specified amounts of equity. At June 30, 1999 and at July 31,
1999, the Company was in compliance with all obligations under the agreements
evidencing its indebtedness with respect to the Company's equity and the
Operating Partnership's equity, as defined in the applicable agreement. In
recent months, various lenders have agreed to decrease the amount of net worth
required to satisfy the financial covenants in the applicable indebtedness
agreements. As of July 31, 1999 the Operating Partnership's equity was $7.5
million in excess of the highest such net worth covenant. However, there can be
no certainty that additional operating losses will not result in the Company's
violation of certain minimum net worth covenants in the future. In the event of
a default in such covenants, the lender generally would be able to accelerate
repayment of the indebtedness and pursue other available remedies, which could
result in defaults on other indebtedness of the Company, unless the applicable
lender or lenders allowed the Company to remain in violation of the agreements.
Were a default to be declared, the Company would not be able to continue to
operate without the consent of its lenders. In addition to the Merger, the
Company currently is considering various alternatives to enhance its ability to
meet its payment and other obligations under its indebtedness and the funding
requirements discussed above, including the sale of certain assets and the
potential tax and other consequences associated therewith. There can be no
certainty that the Company will have sufficient liquidity to meet these
obligations on a short-term or long-term basis.
40
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
YEAR 2000 DATE CONVERSION
A critical business issue is whether existing application software
programs and operating systems can accommodate the year 2000 change date value.
Many existing application software products in the marketplace were designed to
accommodate only two-digit date entries. Beginning in the year 2000, these
systems and products will need to be able to accept four-digit entries to
distinguish years beginning with 2000 from prior years. As a result, computer
systems and software used by many companies may need to be upgraded to comply
with such Year 2000 requirements.
The Company is dependent upon data processing systems and software to
conduct its business. The data processing systems and software include those
developed, purchased and maintained by OCC, as well as OCN and its other
subsidiaries, which provide management services to the Company. The Company does
not own nor maintain computer equipment or software.
OCN has established a project plan to achieve Year 2000 readiness of
its mission critical and non-mission critical systems, including hardware
infrastructure and software applications. During 1998, OCN substantially
completed the systems identification and evaluation phases of the project, as
well as remediation and validation of its mission critical systems. During 1999,
OCN is focusing on any remaining validation tasks, including remediation and
validation of its non-mission critical systems and end-to-end testing with third
parties.
The Company could experience disruptions across all business segments
as a result of year 2000 systems failures at government agencies, utilities,
telecommunications providers, couriers and financial services vendors, among
others. Concerning specific Company business functions, data acquired from
third-parties might contain year 2000 incompatible components, which could
impact the timeliness of third-party loan servicing functions such as payment
processing or loan resolution. In addition, loans previously acquired by the
Company could experience increased borrower or tenant defaults stemming from
year 2000 related business shortfalls, dislocations or delays. Such risks could
also impact the value of the Company's portfolio of mortgage-backed securities,
as these are dependent upon the underlying pool of mortgage loans. There can be
no assurance that such risks, if realized individually or collectively, would
not have a material adverse effect on the Company's business, results of
operations or financial condition.
FUNDS FROM OPERATIONS
The Company generally considers FFO to be a useful financial
performance measure of the operating performance of a REIT because such measure
does not recognize: (i) depreciation and amortization of real estate assets as
operating expenses, which management believes are not meaningful in evaluating
income-producing real estate because such real estate historically has not
depreciated; and (ii) gains/losses from debt restructuring and sales of
property. In addition, FFO, together with net income and cash flow, provides
investors with an additional basis to evaluate the ability of a REIT to incur
and service debt and to fund acquisitions and other capital expenditures. FFO
does not represent cash provided by operating activities in accordance with GAAP
and should not be considered an alternative to net income as an indication of
the results of the Company's performance or to cash flows as a measure of
liquidity. For a discussion of the Company's operating, investing and financing
activities under GAAP, see "-Capital Resources and Liquidity" above. In 1995,
NAREIT established new guidelines clarifying its definition of FFO and requested
that REITs adopt this new definition beginning in 1996. As defined, FFO consists
of net income applicable to common shareholders (computed in accordance with
GAAP) excluding gains (losses) from debt restructuring and sales of property
(including furniture and equipment) plus real estate related depreciation and
amortization (excluding amortization of deferred financing costs) and after
adjustments for unconsolidated partnerships and joint ventures. Since other
REITs may calculate FFO in a different manner, there can be no assurance that
the Company's FFO is comparable with the FFO reported by other entities. FFO
differs from cash made available to holders of the Common Stock, which is based
on the Company's net taxable income.
FFO for the three months and the six months ended June 30, 1999 was
($16.9) million and ($17.3) million compared to $7.4 million and $11.2 million
for the comparable periods in 1998.
41
<PAGE>
The following table reconciles FFO and net income during the periods
indicated.
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------------- ------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Net loss income...................... $ (18,167) $ 6,646 $ (18,951) $ (3,858)
Depreciation and amortization..... 1,260 759 2,454 1,063
Loss on sale of IO portfolio...... -- -- -- 13,957
Gain on sale of securities........ -- -- (851) --
------------- ------------- ------------- -------------
FFO.................................. $ (16,907) $ 7,405 $ (17,348) $ 11,162
============= ============= ============= =============
</TABLE>
REIT STATUS
The Company has qualified and intends to continue to qualify through
calendar 1998 as a REIT under Sections 856 through 860 of Code. Qualification
for treatment as a REIT requires the Company to meet certain criteria, including
certain requirements regarding the nature of its ownership, assets, income, and
distributions of taxable income. A REIT generally will not be subject to federal
income taxation on that portion of its income that is distributed to its
shareholders if it distributes at least 95% of its taxable income and meets
certain other income and asset tests. The Company 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. At June 30, 1999, the Company had not
declared the final 1998 dividend to meet the 95% distribution requirement, which
is expected to be approximately $15.5 million, or $0.82 per share. There can be
no certainty that the dividend will be declared, that, if declared, the Company
will have sufficient funds to pay the dividend or that the dividend would not be
in a form other than cash.
For further discussion on the Company's status as a REIT, see "Recent
Developments" above.
RISK OF LOSS OF INVESTMENT COMPANY ACT EXEMPTION
The Company believes that it is not, and intends to conduct its
operations so as not to become, regulated as an investment company under the
Investment Company Act of 1940, as amended (the "Investment Company Act"). Under
the Investment Company Act, an investment company is required to register with
the Commission and is subject to extensive, restrictive and potentially adverse
regulations. The Investment Company Act exempts entities, however, that are
"primarily engaged in the business of purchasing or otherwise acquiring
mortgages and other liens on and interests in real estate" ("Qualifying
Interests"). Under current interpretations by the staff of the Commission,
qualifying for this exemption requires the Company, among other things, to
maintain at least 55% of its assets in Qualifying Interests and to maintain an
additional 25% in Qualifying Interests or other real estate-related assets. The
Company's investments in real estate and mortgage loans generally constitute
Qualifying Interests, and the Company believes that subordinate and residual
interests in mortgage-related securities constitute Qualifying Interests when
the Company acquires the right to direct the foreclosure upon any defaulted loan
which backs such securities and to take all other actions that a servicer
generally may take in connection with a defaulted loan.
At June 30, 1999, the Company believes that its Qualifying Interests,
including subordinate and residual interests, comprised over 88% of the
Company's total assets and over 93% when combined with other real-estate related
assets. As a result, the Company believes that it was and is not required to
register as an investment company under the Investment Company Act. The Company
does not intend, however, to seek an exemptive order, no-action letter or other
form of interpretive guidance from the Commission on this position, and if the
Commission were to take a different position, the Company could be required
either (i) to change the manner in which it conducts its operations in order to
avoid investment company registration or (ii) to register as an investment
company, either of which could have a material adverse effect on the Company and
its securities, could subject the Company to monetary penalties and injunctive
relief in an action brought by the Commission, could cause the Company to be
unable to enforce contracts with third parties and could cause third parties to
seek recission of relevant transactions.
42
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
================================================================================
MARKET RISK
Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, commodity prices, and equity prices. The
primary market risk to which the Company is exposed is interest rate risk, which
is highly sensitive to many factors, including governmental monetary and tax
policies, domestic and international economic and political considerations, and
other factors beyond the control of the Company. Changes in the general level of
interest rates can affect the Company's net interest income, which is the
difference between the interest income earned on interest-earning assets and the
interest expense incurred in connection with its interest-bearing liabilities,
by affecting the spread between the Company's interest-earning assets and
interest-bearing liabilities. Changes in the level of interest rates also can
affect, among other things, the ability of the Company to originate and acquire
loans, the value of the Company's mortgage-related securities and other
interest-earning assets, and its ability to realize gains from the sale of such
assets.
The Company may utilize a variety of financial instruments, including
interest rate swaps, caps, floors, and other interest rate contracts, in order
to limit the effects of interest rates on its operations. The use of these types
of derivatives to hedge interest-earning assets and/or interest-bearing
liabilities carries certain risks, including the risk that losses on a hedge
position will reduce the funds available for payments to holders of securities
and, indeed, that such losses may exceed the amount invested in such
instruments. A hedge may not perform its intended purpose of offsetting losses
or increased costs. Moreover, with respect to certain of the instruments used as
hedges, the Company is exposed to the risk that the counterparties with which
the Company trades may cease making markets and quoting prices in such
instruments, which may render the Company unable to enter into an offsetting
transaction with respect to an open position. If the Company anticipates that
the income from any such hedging transaction will not be qualifying income for
REIT income test purposes, the Company may conduct part or all of its hedging
activities through a to-be-formed corporate subsidiary that is fully subject to
federal corporate income taxation. The profitability of the Company may be
adversely affected during any period as a result of changing interest rates.
The following table quantifies the potential changes in net interest
income and net portfolio value should interest rates go up or down (shocked) by
100 to 400 basis points, assuming the yield curves of the rate shocks will be
parallel to each other. Net portfolio value is calculated as the sum of the
value of off-balance sheet instruments and the present value of cash in-flows
generated from interest-earning assets net of cash out-flows in respect of
interest-bearing liabilities. The cash flows associated with the loan portfolios
and securities available for sale are calculated based on prepayment and default
rates that vary by asset. Projected losses, as well as prepayments, are
generated based upon the actual experience with the subject pool, as well as
similar, more seasoned pools. To the extent available, loan characteristics such
as loan-to-value ratio, interest rate, credit history, prepayment penalty term
and product types are used to produce the projected loss and prepayment
assumptions that are included in the cash flow projections of the securities.
When interest rates are shocked, these projected loss and prepayment
assumptions are further adjusted. For example, under current market conditions,
a 100 basis point decline in the market interest rate is estimated to result in
a 200 basis point increase in the prepayment rate of a typical subprime
residential loan. Most commercial and multi-family loans are not subject to
prepayments as a result of prepayment penalties and contractual terms that
prohibit prepayments during specified periods. However, for those commercial and
multi-family loans where prepayments are not currently precluded by contract,
declines in interest rates are associated with steep increases in prepayment
speeds in computing cash flows. A risk premium is then calculated for each
asset, which, when added to the interest rate being modeled, results in a matrix
of discount rates that are applied to the cash flows computed by the model.
Since the net portfolio value consists of both fixed and adjustable components,
an inverse relationship between the market value of the net portfolio and net
interest income is possible. This could happen if more assets reprice during the
first year. In this case, more liabilities would be funded at the new lower
rates over a longer period of time during the year. The base interest rate
scenario assumes interest rates at June 30, 1999. Actual results could differ
significantly from those estimated in the table.
43
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
================================================================================
Projected Percentage Change In
====================================================================
Change in Interest Rate Net Interest Income (1) Net Portfolio Value
====================================================================
-400 Basis Points (26.15)% (6.96)%
-300 Basis Points (19.61) (4.94)
-200 Basis Points (13.08) (1.99)
-100 Basis Points (6.54) (0.03)
Base Interest Rate 0.00 0.00
+100 Basis Points 6.54 (0.13)
+200 Basis Points 13.08 1.97
+300 Basis Points 19.61 3.26
+400 Basis Points 26.15 4.75
(1) Represents the estimated percentage change in net interest income over
the next twelve months, assuming that balances are rolled over and
reinvested at the shocked level of interest rate. For purposes of this
calculation, net interest income includes interest expense associated
with the investments in real estate.
ASSET AND LIABILITY MANAGEMENT
Asset and liability management involves managing the timing and
magnitude of the repricing of assets and liabilities. It is the objective of the
Company to attempt to control risks associated with interest rate movements. In
general, management's strategy is to match asset and liability balances within
maturity categories to limit the Company's exposure to earnings variations and
variations in the value of assets and liabilities as interest rates change over
time.
The Company utilizes a variety of off-balance sheet financing
techniques to assist it in the management of interest rate risk. These
techniques may include interest rate futures and interest rate swaps, pursuant
to which the parties exchange the difference between fixed-rate and
floating-rate interest payments on a specified principal amount (referred to as
the "notional amount") for a specified period without the exchange of the
underlying principal amount. Interest rate swaps are utilized by the Company to
protect against the increase in borrowing cost from floating rate debt or a
short-term, fixed-rate liability, such as reverse repurchase agreements, in an
increasing interest-rate environment. At June 30, 1999, the Company was a party
to interest rate swap agreements with an aggregate notional amount of $200.8
million. See Note 4 to the Consolidated Financial Statements above.
Methods for evaluating interest rate risk include an analysis of the
Company's interest rate sensitivity "gap," which is defined as the difference
between interest-earning assets and interest-bearing liabilities maturing or
repricing within a given time period. A gap is considered positive when the
amount of interest-rate sensitive assets exceeds the amount of interest-rate
sensitive liabilities. A gap is considered negative when the amount of
interest-rate sensitive liabilities exceeds interest-rate sensitive assets.
During a period of rising interest rates, a negative gap would tend to adversely
affect net interest income, while a positive gap would tend to result in an
increase in net interest income. During a period of falling interest rates, a
negative gap would tend to result in an increase in net interest income, while a
positive gap would tend to affect net interest income adversely. Since different
types of assets and liabilities with the same or similar maturities may react
differently to changes in overall market rates or conditions, changes in
interest rates may affect net interest income positively or negatively even if
an institution were perfectly matched in each maturity category.
44
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
================================================================================
The following table sets forth the estimated maturity or repricing of
the Company's interest-earning assets and interest-bearing liabilities at June
30, 1999. The amounts of assets and liabilities shown within a particular period
were determined in accordance with the contractual terms of the assets and
liabilities, except: (i) adjustable-rate loans, and securities are included in
the period in which their interest rates are first scheduled to adjust and not
in the period in which they mature, (ii) fixed-rate mortgage-related securities
reflect estimated prepayments, which were estimated based on analyses of broker
estimates, the results of a prepayment model utilized by the Company and
empirical data, (iii) non-performing discount loans reflect the estimated timing
of resolutions which result in repayment to the Company, and (iv) fixed-rate
loans reflect scheduled contractual amortization, with no estimated prepayment.
Management believes that these assumptions approximate actual experience and
considers them reasonable; however, the interest rate sensitivity of the
Company's assets and liabilities in the table could vary substantially if
different assumptions were used or actual experience differs from the historical
experience on which the assumptions are based.
<TABLE>
<CAPTION>
June 30, 1999
-------------------------------------------------------------
More than 1
Within 4 to 12 Year to 3 Years
3 Months Months 3 Years and Over Total
--------- ------- --------- --------- --------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Rate-Sensitive Assets:
Interest-earning cash and repurchase
agreements .................................. $ 27,210 $ -- $ -- $ -- $ 27,210
Securities available for sale ............... 11,881 32,309 71,213 169,085 284,488
Loan portfolio, net (1) ..................... 72,395 10,360 1,680 1,108 85,543
Match funded loan agreements ................ 34,197 44,954 32,400 24,307 135,858
Discount loan portfolio, net (1) ............ -- 5,618 -- -- 5,618
--------- ------- --------- --------- --------
Total rate-sensitive assets ............... 145,683 93,241 105,293 194,500 538,717
--------- ------- --------- --------- --------
Rate-Sensitive Liabilities:
Securities sold under agreements
to repurchase ............................. 73,847 -- -- -- 73,847
Bonds-match funded loan agreements .......... 124,209 -- -- -- 124,209
Obligations outstanding under lines of credit 184,771 -- -- -- 184,771
Notes, debentures and other
interest-bearing obligations .............. -- -- -- 143,000 143,000
--------- ------- --------- --------- --------
Total rate-sensitive liabilities .......... 382,827 -- -- 143,000 525,827
Interest rate sensitivity gap before
Off-balance sheet financial instruments ... (237,144) 93,241 105,293 51,500 12,890
Off-Balance Sheet Financial Instruments:
Interest rate swaps ......................... 200,780 -- (100,780) (100,000) --
--------- ------- --------- --------- --------
Interest rate sensitivity gap ................. (36,364) 93,241 4,513 (48,500) $ 12,890
--------- ------- --------- --------- --------
Cumulative interest rate sensitivity gap ...... $ (36,364) $56,877 $ 61,390 $ 12,890
========= ======= ========= =========
Cumulative interest rate sensitivity gap as a
percentage of total rate-sensitive assets ... (6.75%) 10.56% 11.40% 2.39%
</TABLE>
(1) Balances have not been reduced for non-performing loans.
As of June 30, 1999, the cumulative volume of assets maturing or
repricing within one year exceeded liabilities by $56.9 million, or 10.6% of
assets, implying moderate current-year income sensitivity to movements in the
level of interest rates.
45
<PAGE>
FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED HEREIN ARE NOT BASED ON HISTORICAL FACTS
AND ARE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED. THESE FORWARD-LOOKING STATEMENTS MAY BE IDENTIFIED BY
REFERENCE TO A FUTURE PERIOD(S) OR BY THE USE OF FORWARD-LOOKING TERMINOLOGY
SUCH AS "ANTICIPATE," "BELIEVE," "COMMITMENT," "CONSIDER," "CONTINUE,"
"ESTIMATE," "EXPECT," "FORESEE," "INTEND," "MAY," "PLAN," "WHETHER," "WILL,"
"WOULD," FUTURE OR CONDITIONAL VERB TENSES, SIMILAR TERMS, VARIATIONS ON SUCH
TERMS OR NEGATIVES OF SUCH TERMS. ALTHOUGH OAC BELIEVES THE ANTICIPATED RESULTS
OR OTHER EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON
REASONABLE ASSUMPTIONS, ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
INDICATED IN SUCH STATEMENTS DUE TO RISKS, UNCERTAINTIES AND CHANGES WITH
RESPECT TO A VARIETY OF FACTORS, INCLUDING, BUT NOT LIMITED TO, THE ABILITY OF
OCN AND OAC TO CONSUMMATE THE MERGER, MARKET PRICES OF THE COMMON STOCK OF OCN
AND OAC, INTERNATIONAL, NATIONAL, REGIONAL OR LOCAL ECONOMIC ENVIRONMENTS,
GOVERNMENT FISCAL AND MONETARY, PREVAILING INTEREST OR CURRENCY EXCHANGE RATES,
EFFECTIVENESS OF INTEREST RATE, CURRENCY EXCHANGE RATE AND OTHER HEDGING
STRATEGIES, LAWS AND REGULATIONS AFFECTING REAL ESTATE INVESTMENT TRUSTS,
INVESTMENT COMPANIES AND REAL ESTATE (INCLUDING CAPITAL REQUIREMENTS, INCOME AND
PROPERTY TAXATION, ACCESS FOR DISABLED PERSONS AND ENVIRONMENTAL COMPLIANCE),
UNCERTAINTY OF FOREIGN LAWS, COMPETITIVE PRODUCTS, PRICING AND CONDITIONS
(INCLUDING FROM COMPETITORS THAT HAVE SIGNIFICANTLY GREATER RESOURCES THAN OAC),
CREDIT, PREPAYMENT, BASIS, DEFAULT, SUBORDINATION AND ASSET/LIABILITY RISKS,
LOAN SERVICING EFFECTIVENESS, SATISFACTORY DUE DILIGENCE RESULTS, SATISFACTION
OR FULFILLMENT OF AGREED UPON TERMS AND CONDITIONS OF CLOSING OR PERFORMANCE,
TIMING OF TRANSACTION CLOSINGS, THE DECISION TO CURTAIL EACH BUSINESS LINE AND
DISCONTINUE INVESTMENT ACTIVITY, AVAILABILITY OF AND COSTS ASSOCIATED WITH
OBTAINING ADEQUATE AND TIMELY SOURCES OF LIQUIDITY, DEPENDENCE ON EXISTING
SOURCES OF FUNDING, ABILITY TO REPAY OR REFINANCE INDEBTEDNESS (AT MATURITY OR
UPON ACCELERATION), TO MEET COLLATERAL CALLS BY LENDERS (UPON RE-VALUATION OF
THE UNDERLYING ASSETS OR OTHERWISE), TO GENERATE REVENUES SUFFICIENT TO MEET
DEBT SERVICE PAYMENTS AND OTHER OPERATING EXPENSES AND TO SECURITIZE WHOLE
LOANS, TAXABLE INCOME EXCEEDING CASH FLOW, SIZE OF, NATURE OF AND YIELDS
AVAILABLE WITH RESPECT TO THE SECONDARY MARKET FOR MORTGAGE LOANS AND FINANCIAL,
SECURITIES AND SECURITIZATION MARKETS IN GENERAL, ALLOWANCES FOR LOAN LOSSES,
GEOGRAPHIC CONCENTRATIONS OF ASSETS (TEMPORARY OR OTHERWISE), TIMELY LEASING OF
UNOCCUPIED SQUARE FOOTAGE (GENERALLY AND UPON LEASE EXPIRATION), CHANGES IN REAL
ESTATE MARKET CONDITIONS (INCLUDING LIQUIDITY, VALUATION, REVENUES, RENTAL
RATES, OCCUPANCY LEVELS AND COMPETING PROPERTIES), ADEQUACY OF INSURANCE
COVERAGE IN THE EVENT OF A LOSS, KNOWN OR UNKNOWN ENVIRONMENTAL CONDITIONS,
EXTERNAL MANAGEMENT, CONFLICTS OF INTEREST, YEAR 2000 COMPLIANCE, OTHER FACTORS
GENERALLY UNDERSTOOD TO AFFECT THE REAL ESTATE ACQUISITION, MORTGAGE AND LEASING
MARKETS, SECURITIES INVESTMENTS AND RAPID GROWTH COMPANIES, AND OTHER RISKS
DETAILED FROM TIME TO TIME IN OAC'S REPORTS AND FILINGS WITH THE SEC, INCLUDING
ITS REGISTRATION STATEMENTS ON FORMS S-3, S-4 AND S-11 AND ITS PERIODIC REPORTS
ON FORMS 10-Q, 8-K AND 10-K. SPECIFIC REFERENCE IS MADE TO EXHIBIT 99.2 INCLUDED
WITH THE FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 AND FILED WITH THE SEC,
FOR A DESCRIPTION OF MATERIAL RISKS FACED BY THE COMPANY AND ITS SECURITIES
HOLDERS. GIVEN THESE UNCERTAINTIES, READERS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON SUCH STATEMENTS, OAC DOES NOT UNDERTAKE TO REVISE, AND SPECIFICALLY
DISCLAIMS ANY OBLIGATION, TO PUBLICLY RELEASE THE RESULT OF ANY REVISIONS WHICH
MAY BE MADE TO, ANY FORWARD-LOOKING STATEMENTS TO REFLECT THE OCCURRENCE OF
ANTICIPATED OR UNANTICIPATED EVENTS OR CIRCUMSTANCES AFTER THE DATE OF SUCH
STATEMENTS.
46
<PAGE>
================================================================================
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Amended and Restated Bylaws (2)
4.1 Form of Common Stock certificate (1)
4.2 Form of Indenture between the Company and Norwest Bank
Minnesota, National Association, as Trustee thereunder for
the 11.5% Redeemable Notes due 2005 (3)
10.1 First Amended and Restated Management Agreement (4)
10.2 Form of Registration Rights Agreement (1)
10.3 Third Amended and Restated Agreement of Limited
Partnership of Ocwen Partnership L.P. (4)
10.4 Form of Stock Option Plan (1)
10.5 Loan Agreement between OAIC Bush Street, LLC and Salomon
Brothers Realty Corp. as of April 7, 1998 (5)
10.6 Loan Agreement between OAC and Greenwich Financial
Products Inc. as of April 24, 1998 (4)
10.7 Amended and Restated Loan Agreement by and among, inter
alia, OAIC California Partnership, L.P., OAIC California
partnership II, L.P., Saloman Brothers Realty Corp. and
LaSalle National Bank, dated as of June 10, 1998. (4)
10.8 Extension of First Amended and Restated Management
Agreement (filed herewith)
10.9 Compensation and Indemnification Agreement between the
Company and the independent committee of the Board of
Directors, dated May 6, 1999 (filed herewith)
10.10 Agreement of Merger dated as of July 25, 1999 among OCN,
Ocwen Acquisition Company and the Registrant (6)
27 Financial Data Schedule for the period ended June 30, 1998
(filed herewith)
99.1 Investment Guidelines (4)
99.2 Risk Factors (2)
===================================================================
(1) Incorporated by reference to the Company's Registration
Statement on Form S-11 (File No. 333-21965), as amended,
declared affective by the Commission on May 14, 1997.
(2) Incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended December 31, 1998.
(3) Incorporated by reference to the Company's Registration
Statement on Form S-4 (File No. 333-64047), as amended, as
declared effective by the Commission on February 12, 1999.
(4) Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June
30, 1998.
(5) Incorporated by reference to the Current Report on Form
8-K filed by the Company with the Commission on April 23,
1998.
(6) Incorporated by reference to Exhibit 2.1 to OCN's current
Report on Form 8-K filed with the Commission on July 26,
1999.
(b) Reports on Form 8-K filed during the quarter ended June 30, 1999.
(1) A Form 8-K filed on April 16, 1999, announcing a receipt
of a proposal from OCN regarding a business combination.
(2) A Form 8-K filed on May 10, 1999, which contained a news
release announcing the Company's financial results for the
three months ended March 31, 1999.
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
OCWEN ASSET INVESTMENT CORP.
By: /s/ MARK S. ZEIDMAN
-------------------------------------------------
Mark S. Zeidman
Senior Vice President and
Chief Financial Officer (On behalf of the
Registrant and as its principal financial officer)
Date: August 16, 1999
48
EXTENSION OF TERM AGREEMENT
This Extension of Term Agreement is made as of May 19, 1999 by and
between OCWEN ASSET INVESTMENT CORP., a Virginia corporation (the "REIT"), and
OCWEN CAPITAL CORPORATION, a Florida corporation (the "Manager"), with respect
to the First Amended and Restated Management Agreement, dated as of May 19,
1997, and amended and restated as of May 5, 1998 (the "Management Agreement"),
between the REIT and the Manager.
W I T N E S S E T H:
WHEREAS, the REIT and the Manager are parties to the
Management Agreement;
WHEREAS, Section 13 of the Management Agreement provides that
the Management Agreement shall continue in force until May 19, 1999, and
thereafter may be extended only with the consent of the Manager and by the
affirmative vote of a majority of the Board of Directors, including a majority
of the Independent Directors, of the REIT, that each extension shall be executed
in writing by the parties to the Management Agreement prior to the expiration
thereof and that such extension shall not exceed twelve months;
WHEREAS, the parties desire to extend the term of the
Management Agreement by six months; and
WHEREAS, the Board of Directors of the REIT, including all of
the Independent Directors, approved the extension of the term of the Management
Agreement by six months.
NOW THEREFORE, in consideration of the premises, the parties
hereto agree as follows:
SECTION 1. EXTENSION OF TERM. The first paragraph of Section
13 of the Management Agreement is hereby deleted in its entirety and replaced by
the following paragraph:
This Agreement shall continue in force until November 19,
1999, and thereafter, it may be extended only with the consent
of the Manager and by the affirmative vote of a majority of
the Board of Directors, including a majority of the
Independent Directors.
SECTION 2. EFFECT OF EXTENSION. Except as expressly set forth
herein, this Extension of Term Agreement shall not by implication alter, modify,
amend or in any way affect any of the other terms, conditions, obligations,
covenants or agreements contained in the Management Agreement, all of which
shall continue in full force and effect.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Extension of Term Agreement as of the date first written above.
OCWEN ASSET INVESTMENT CORP.
By: /s/ CHRISTINE A. REICH
-----------------------------
Name: Christine A. Reich
Title: President
OCWEN CAPITAL CORPORATION
By: /s/ JOHN R. ERBEY
-----------------------------
Name: John R. Erbey
Title: Senior Managing Director
COMPENSATION AND INDEMNIFICATION AGREEMENT
This COMPENSATION AND INDEMNIFICATION AGREEMENT is made and
entered into as of the 6th day of May, 1999 (the "Agreement") among OCWEN ASSET
INVESTMENT CORP., a Virginia corporation (the "Company"), and STUART L. SILPE
and PETER M. SMALL (each, a "Director" and together, the "Directors").
WHEREAS, the Company's Board of Directors, pursuant to a
resolution adopted on May 6th, 1999, appointed the Directors as the members of
an independent committee of the Board of Directors of the Company (the "Special
Committee") for the purpose of considering and/or making recommendations to the
Company's Board of Directors with respect to a possible transaction involving
the Company;
WHEREAS, in order to induce the Directors to serve as the
members of the Special Committee and to accept the additional duties,
responsibilities and burdens of such service, the Company wishes to provide them
with the compensation and indemnification arrangements set forth herein; and
WHEREAS, the Directors are willing to serve and continue to
serve as the members of the Special Committee on the terms set forth herein;
NOW, THEREFORE, in consideration of the foregoing, the parties
hereto do hereby agree as follows:
1. SERVICE ON THE SPECIAL COMMITTEE. Each Director hereby
agrees to serve as a member of the Special Committee on the terms provided for
herein so long as such appointment by the Board shall remain in effect. Each
Director may, however, resign from such position at any time and for any reason
and the Special Committee may dissolve by recommending such dissolution to the
Board. The Company's obligation to indemnify each Director as set forth in this
Agreement shall continue in full force and effect notwithstanding any such
termination of appointment, resignation or dissolution.
2. COMPENSATION AND EXPENSE REIMBURSEMENT. In return for his
services as a member of the Special Committee, each Director shall be entitled
to receive from the Company a fee of $1,000.00 for each day such director
performs services as a member of the Special Committee, such per day fee is to
be prorated to reflect the actual amount of time spent by such director during
such day on such services. Such fees shall be payable to the Director upon
submission to the Company's Chief Financial Officer of a written statement
setting forth the dates on which such services were performed. In addition, each
Director shall be reimbursed by the Company for his reasonable out-of-pocket
travel and other expenses incurred in connection with his service on the Special
Committee, in a manner consistent with the Company's reimbursement of expenses
for members of its Board of Directors.
3. INDEMNITY. The Company hereby agrees to hold harmless and
indemnify each Director with respect to his service as a director of the
Company, including without limitation with respect to his service on the Special
Committee and any matter or transaction presented to or considered by the
Special Committee or the Board of Directors, to the full extent authorized or
<PAGE>
permitted by law, as such may be amended from time to time, by the Restated and
Amended Articles of Incorporation of the Company (the "Articles"), as such may
be amended from time to time, and by the Bylaws of the Company (the "Bylaws"),
as such may be amended from time to time. In furtherance of the foregoing
indemnification, and without limiting the generality thereof:
(a) PROCEEDINGS AGAINST THE DIRECTOR. Each Director shall
be entitled to the rights of indemnification provided in this Section 3(a) if,
by reason of his Corporate Status (as hereinafter defined), he is, or is
threatened to be made, a party to or participant in any Proceeding (as
hereinafter defined). Pursuant to this Section 3(a), each Director shall be
indemnified against all judgments, penalties, fines, settlements and Expenses
(as hereinafter defined) actually incurred by him or on his behalf in connection
with such Proceeding, unless it is finally judicially established that:
(A) (i) his act or omission was material to the
matter giving rise to the Proceeding; and (ii) either (x) in
the case of conduct in his official capacity with the Company,
he did not believe that his conduct was in the best interests
of the Company, and in all other proceedings, he did not
believe that his conduct was not opposed to the best interests
of the Company or (y) he failed to conduct himself in good
faith; or
(B) (i) in the case of a Proceeding by or in the
right of the Company, he is liable to the Company, or (ii) in
the case of a Proceeding other than by or in the right of the
Company in which it is charged that he received an improper
personal benefit, he is liable to the Company on the basis
that he actually received an improper personal benefit in
money, property or services; or
(C) in the case of any criminal Proceeding, he
had reasonable cause to believe that the act or omission was
unlawful.
(b) INDEMNIFICATION FOR EXPENSES OF A PARTY WHO IS WHOLLY
OR PARTLY SUCCESSFUL. Notwithstanding any other provision of this Agreement, to
the extent that a Director is, by reason of his Corporate Status, a party to and
is successful, on the merits or otherwise, in any Proceeding, he shall be
indemnified to the maximum extent permitted by law against all Expenses incurred
by him or on his behalf in connection with such Proceeding. If a Director is not
wholly successful in such Proceeding but is successful, on the merits or
otherwise, as to one or more but less than all claims, issues or matters in such
Proceeding, the Company shall indemnify such Director against all Expenses
incurred by him or on his behalf in connection with each successfully resolved
claim, issue or matter. For purposes of this Section and without limitation, the
termination of any claim, issue or matter in such a Proceeding by dismissal,
with or without prejudice, shall be deemed to be a successful result as to such
claim, issue or matter.
4. ADDITIONAL INDEMNITY. In addition to, and without regard
to any limitations on, the indemnification provided for in Section 3, the
Company shall and hereby does indemnify and hold harmless each Director against
all judgments, penalties, fines, settlements and Expenses actually incurred by
him or on his behalf if, by reason of his Corporate Status he is, or is
threatened to be made, a party to or participant in any Proceeding (including a
Proceeding by or in the right of the Company). The only limitation that shall
exist upon the Company's obligations pursuant to this Agreement shall be that
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the Company shall not be obligated to make any payment to a Director that is
finally determined (under the procedures, and subject to the presumptions, set
forth in Sections 8 and 9 hereof) to be unlawful under Virginia law or be
prohibited by the Articles or Bylaws as they exist at the time of execution of
this Agreement; provided, however, that if such Indemnity or advancement of
Expenses is prohibited by the Articles and Bylaws as they exist at the time of
this Agreement but permitted by the Articles and Bylaws as they exist at the
time that such Indemnity or advancement of Expenses is sought, then such
Indemnity or advancement of Expenses shall be permitted.
5. CONTRIBUTION IN THE EVENT OF JOINT LIABILITY. (a) Whether
or not the indemnification provided in Sections 3 and 4 hereof is available, in
respect of any threatened, pending or completed Proceeding in which the Company
is jointly liable with any Director (or would be if joined in such Proceeding),
the Company shall pay, in the first instance, the entire amount of any judgment
or settlement of such Proceeding without requiring such Director to contribute
to such payment and the Company hereby waives and relinquishes any right of
contribution it may have against such Director. The Company shall not enter into
any settlement of any Proceeding in which the Company is jointly liable with a
Director (or would be if joined in such Proceeding) unless such settlement
provides for a full and final release of all claims asserted against such
Director.
(b) Without diminishing or impairing the obligations of the
Company set forth in the preceding subparagraph, if, for any reason, a Director
shall elect or be required to pay all or any portion of any judgment or
settlement in any threatened, pending or completed Proceeding in which the
Company is jointly liable with such Director (or would be if joined in such
Proceeding), the Company shall contribute to the amount of Expenses, judgments,
fines and amounts paid in settlement actually incurred and paid or payable by
such Director in proportion to the relative benefits received by the Company and
all officers, directors or employees of the Company (other than such Director)
who are jointly liable with him (or would be if joined in such Proceeding), on
the one hand, and the Director, on the other hand, from the transaction from
which such Proceeding arose; PROVIDED, HOWEVER, that the proportion determined
on the basis of relative benefit may, to the extent necessary to conform to law,
be further adjusted by reference to the relative fault of the Company and all
officers, directors or employees of the Company (other than such Director) who
are jointly liable with the Director (or would be if joined in such Proceeding),
on the one hand, and the Director, on the other hand, in connection with the
events that resulted in such Expenses, judgments, fines or settlement amounts,
as well as any other equitable considerations which the law may require to be
considered. The relative fault of the Company and all officers, directors or
employees of the Company (other than the Director) who are jointly liable with
him (or would be if joined in such Proceeding), on the one hand, and the
Director, on the other hand, shall be determined by reference to, among other
things, the degree to which their actions were motivated by intent to gain
personal profit or advantage, the degree to which their liability is primary or
secondary, and the degree to which their conduct is active or passive.
(c) The Company hereby agrees to fully indemnify and hold each
Director harmless from any claims of contribution which may be brought by
officers, directors or employees of the Company who may be jointly liable with
such Director.
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6. INDEMNIFICATION FOR EXPENSES OF A WITNESS. Notwithstanding
any other provision of this Agreement, to the extent that a Director is, by
reason of his Corporate Status, a witness in any Proceeding to which such
Director is not a party or participant, he shall be indemnified against all
Expenses incurred by him or on his behalf in connection therewith.
7. ADVANCEMENT OF EXPENSES. Notwithstanding any other
provision of this Agreement, the Company shall advance all Expenses incurred by
or on behalf of a Director in connection with any Proceeding by reason of such
Director's Corporate Status within ten days after the receipt by the Company of
a statement or statements from such Director requesting such advance or advances
from time to time, whether prior to or after final disposition of such
Proceeding. Such statement or statements shall reasonably evidence the Expenses
incurred by the Director and shall include or be preceded or accompanied by a
written affirmation by such Director of his good faith belief that the standard
of conduct necessary for indemnification by the Company has been met and a
written undertaking by or on behalf of such Director to repay any Expenses
advanced if it shall ultimately be finally judicially determined that the
applicable standard of conduct has not been met. Any undertakings to repay
pursuant to this Section 7 shall be unlimited, unsecured general obligations of
the Director and shall be interest free; any advances pursuant to this Section 7
shall be unsecured and interest free. Notwithstanding the foregoing, the
obligation of the Company to advance Expenses pursuant to this Section 7 shall
be subject to the condition that, if, when and to the extent that the Company
determines that a Director would not be permitted to be indemnified under
applicable law, the Company shall be entitled to be reimbursed, within thirty
(30) days of such determination, by him for all such amounts theretofore paid;
PROVIDED, HOWEVER, that if such Director has commenced or thereafter commences
legal proceedings in a court of competent jurisdiction to secure a determination
that he should be indemnified under applicable law, any determination made by
the Company that such Director would not be permitted to be indemnified under
applicable law shall not be binding and such Director shall not be required to
reimburse the Company for any advance of Expenses until a final judicial
determination is made with respect thereto.
8. PROCEDURES AND PRESUMPTIONS FOR DETERMINATION OF
ENTITLEMENT TO INDEMNIFICATION. It is the intent of this Agreement to secure for
each Director rights of indemnity that are as favorable as may be permitted
under the law and public policy of the State of Virginia. Accordingly, the
parties agree that the following procedures and presumptions shall apply in the
event of any question as to whether a Director is entitled to indemnification
under this Agreement:
(a) To obtain indemnification (including, but not limited
to, the advancement of Expenses and contribution by the Company) under this
Agreement, a Director shall submit to the Company a written request, including
therein or therewith such documentation and information as is reasonably
available to such Director and is reasonably necessary to determine whether and
to what extent a Director is entitled to indemnification. The Secretary of the
Company shall, promptly upon receipt of such a request for indemnification,
advise the Board of Directors in writing that such Director has requested
indemnification.
(b) Upon written request by a Director for
indemnification pursuant to the first sentence of Section 8(a) hereof, a
determination, if required by applicable law, with respect to a Director's
entitlement thereto shall be made in the specific case by one of the following
three methods, which shall be at the election of such Director: (1) by the Board
of Directors by a majority vote of a quorum consisting of the Disinterested
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Directors, or, if such a quorum cannot be obtained, then by a majority vote of a
committee of the Board of Directors consisting solely of two or more
Disinterested Directors duly designated to act in the matter by a majority vote
of the full Board of Directors in which the Directors who are parties to or
participants in the Proceeding may participate, or (2) by Special Counsel, or
(3) by vote of the stockholders of the Company in which shares held by Directors
who are parties to or participants in the Proceeding may not be voted.
(c) If the determination of entitlement to
indemnification is to be made by Special Counsel pursuant to Section 8(b)
hereof, the Special Counsel shall be selected as provided in this Section 8(c).
The Special Counsel shall be selected by the Board of Directors by a majority
vote of a quorum consisting of the Disinterested Directors, or, if such a quorum
cannot be obtained, then by a majority vote of a committee of the Board of
Directors consisting solely of two or more Disinterested Directors duly
designated to act in the matter by a majority vote of the full Board of
Directors in which the Directors who are parties to or participants in the
Proceeding may participate, or, if the requisite quorum of the full Board of
Directors cannot be obtained therefor and the committee cannot be established,
by a majority vote of the full Board of Directors in which the Directors who are
parties to or participants in the Proceeding may participate. The Company shall
pay any and all reasonable fees and expenses of Special Counsel incurred by such
Special Counsel in connection with acting pursuant to Section 8(b) hereof, and
the Company shall pay all reasonable fees and expenses incident to the
procedures of this Section 8(c), regardless of the manner in which such Special
Counsel was selected or APPOINTED. Notwithstanding the foregoing, in the event
there has been a change in the composition of a majority of the Board of
Directors after the date of the alleged act or omission with respect to which
indemnification is claimed, any determination as to indemnification and
advancement of expenses with respect to any claim for indemnification made
pursuant to this Article shall be made only by Special Counsel agreed upon by
the Board of Directors and the applicant. If the Board of Directors and the
applicant are unable to agree upon such special legal counsel the Board of
Directors and the applicant each shall select a nominee, and the nominees shall
select such Special Counsel.
(d) In making a determination with respect to entitlement
to indemnification hereunder, the person or persons or entity making such
determination shall presume (unless there is clear and convincing evidence to
the contrary) that a Director is entitled to indemnification under this
Agreement if such Director has submitted a request for indemnification in
accordance with Section 8(a) of this Agreement.
(e) A Director's act or omission shall not be deemed to
be material to the matter giving rise to the Proceeding if his act or omission
was not a significant and substantial factor in bringing about the Proceeding,
and a Director shall not be deemed to have failed to conduct himself in good
faith if such Director's action is based on the records or books of account of
the Company, including financial statements, or on information supplied to such
Director by the officers of the Company in the course of their duties whom the
Director believes in good faith to be reliable and competent, or on the advice
of legal counsel for the Company or the Special Committee which the Director
believes in good faith to be within the professional or expert competence of
such counsel, or on information or records given or reports made to the Company
or the Special Committee by an independent certified public accountant, by a
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financial advisor or by an appraiser or other expert selected with reasonable
care by the Company or the Special Committee. In addition, the knowledge and/or
actions, or failure to act, of any director, officer, agent or employee of the
Company shall not be imputed to a Director for purposes of determining the right
to indemnification under this Agreement. Whether or not the foregoing provisions
of this Section 8(e) are satisfied, it shall in any event be presumed (unless
there is clear and convincing evidence to the contrary) that each Director's
acts or omissions have not been material to the matter giving rise to the
Proceeding, that each Director has conducted himself in good faith, and the
Director did not receive an improper personal benefit in money, property or
services.
(f) The Company acknowledges that a settlement or other
disposition short of final judgment may be successful if it permits a party to
avoid expense, delay, distraction, disruption and uncertainty. In the event that
any Proceeding to which a Director is a party is resolved in any manner other
than by a final adverse judgment against such Director (including, without
limitation, settlement of such Proceeding with or without payment of money or
other consideration) it shall be presumed (unless there is clear and convincing
evidence to the contrary) that such Director has been successful on the merits
or otherwise in such Proceeding; provided, however, that such settlement will
not be entered into without the prior consent of the Board of Directors of the
Company by a majority vote of a quorum consisting of the Disinterested
Directors, or, if such a quorum cannot be obtained, then by a majority vote of a
committee of the Board of Directors consisting solely of two or more
Disinterested Directors duly designated to act in the matter by a majority vote
of the full Board of Directors in which the Directors who are parties to or
participants in the Proceeding may participate, or, if the requisite quorum of
the full Board of Directors cannot be obtained therefor and the committee cannot
be established, by a majority vote of the full Board of Directors in which the
Directors who are parties to or participants in the Proceeding may participate.
(g) Each Director shall cooperate with the person,
persons or entity making such determination with respect to such Director's
entitlement to indemnification, including providing to such person, persons or
entity upon reasonable advance request any documentation or information which is
not privileged or otherwise protected from disclosure and which is reasonably
available to such Director and reasonably necessary to such determination. Any
Special Counsel, member of the Board of Directors, or stockholder of the Company
shall act reasonably and in good faith in making a determination under the
Agreement of a Director's entitlement to indemnification. Any costs or expenses
(including attorneys' fees and disbursements) incurred by a Director in so
cooperating with the person, persons or entity making such determination shall
be borne by the Company (irrespective of the determination as to such Director's
entitlement to indemnification) and the Company hereby indemnifies and agrees to
hold each Director harmless therefrom.
(h) The authorization of indemnification shall be made in
the same manner enumerated in Section 8(b) hereof as the determination of a
Director's entitlement to indemnification; PROVIDED, HOWEVER, that if the
determination of entitlement to indemnification is made by Special Counsel
pursuant to Section 8(b)(2) hereof, the authorization of indemnification shall
be made by the Board of Directors by a majority vote of a quorum consisting of
the Disinterested Directors, or, if such a quorum cannot be obtained, then by a
majority vote of a committee of the Board of Directors consisting solely of two
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or more Disinterested Directors duly designated to act in the matter by a
majority vote of the full Board of Directors in which the Directors who are
parties to or participants in the Proceeding may participate, or, if the
requisite quorum of the full Board of Directors cannot be obtained therefor and
the committee cannot be established, by a majority vote of the full Board of
Directors in which the Directors who are parties to or participants in the
Proceeding may participate.
9. REMEDIES.
(a) In the event that (i) a determination is made
pursuant to Section 8 of this Agreement that a Director is not entitled to
indemnification under this Agreement, (ii) a Director determines to seek court
ordered indemnification pursuant to Section 13.1-700.1 of the Virginia Stock
Corporation Act, (iii) advancement of Expenses is not timely made pursuant to
Section 7 of this Agreement, (iv) no determination of entitlement to
indemnification shall have been made pursuant to Section 8(b) of this Agreement
within 90 days after receipt by the Company of the request for indemnification,
(v) payment of indemnification is not made pursuant to this Agreement within ten
(10) days after receipt by the Company of a written request therefor, or (vi)
payment of indemnification is not made within ten (10) days after a
determination has been made that a Director is entitled to indemnification or
such determination is deemed to have been made pursuant to Section 8 of this
Agreement, such Director shall be entitled to an adjudication in an appropriate
court of the Commonwealth of Virginia, or in any other court of competent
jurisdiction, of his entitlement to such indemnification. The Company shall not
oppose a Director's right to seek any such adjudication; provided, however that
in the circumstances described in subsections (i) and (ii) hereof, this sentence
shall not operate to prevent the Company from contesting the Director's
substantive right to be indemnified.
(b) In the event that a determination shall have been
made pursuant to Section 8(b) of this Agreement that a Director is not entitled
to indemnification, any judicial proceeding commenced pursuant to this Section 9
shall be conducted in all respects as a de novo trial, on the merits and such
Director shall not be prejudiced by reason of that adverse determination.
(c) If a determination shall have been made pursuant to
Section 8(b) of this Agreement that a Director is entitled to indemnification,
the Company shall be bound by such determination in any judicial proceeding
commenced pursuant to this Section 9, absent a prohibition of such
indemnification under applicable law.
(d) In the event that a Director, pursuant to this
Section 9, seeks a judicial adjudication of his rights under, or to recover
damages for breach of, or otherwise to enforce the terms of, this Agreement or
the Articles or Virginia law with respect to indemnification or advancement of
Expenses, or to recover under any directors' and officers' liability insurance
policies maintained by the Company, the Company shall pay on his behalf, in
advance, any and all expenses (of the types described in the definition of
Expenses in Section 15 of this Agreement) incurred by him in such judicial
adjudication, regardless of whether such Director ultimately is determined to be
entitled to such indemnification, advancement of expenses or insurance recovery.
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(e) The Company shall be precluded from asserting in any
judicial proceeding commenced pursuant to this Section 9 that the procedures and
presumptions of this Agreement are not valid, binding and enforceable and shall
stipulate in any such court that the Company is bound by all the provisions of
this Agreement.
10. NON-EXCLUSIVITY; SURVIVAL OF RIGHTS; INSURANCE;
SUBROGATION.
(a) The rights of indemnification as provided by this
Agreement shall not be deemed exclusive of any other rights to which a Director
may at any time be entitled under applicable law, the Articles, the Bylaws, a
resolution of stockholders or directors, an agreement or otherwise. No
amendment, alteration or repeal of this Agreement or of any provision hereof
shall limit or restrict any right of any Director under this Agreement in
respect of any action taken or omitted by such Director in his Corporate Status
prior to such amendment, alteration or repeal. To the extent that a change in
the law, whether by statute or judicial decision, or a change in the Articles or
Bylaws, permits greater indemnification than would be afforded currently under
the Articles and Bylaws and this Agreement, it is the intent of the parties
hereto that each Director shall enjoy by this Agreement the greater benefits so
afforded by such change. No right or remedy herein conferred is intended to be
exclusive of any other right or remedy, and every other right and remedy shall
be cumulative and in addition to every other right and remedy given hereunder or
now or hereafter existing at law or in equity or otherwise. The assertion or
employment of any right or remedy hereunder, or otherwise, shall not prevent the
concurrent assertion or employment of any other right or remedy.
(b) To the extent that the Company, directly or through a
subsidiary or an affiliate, maintains an insurance policy or policies providing
liability insurance (or similar protection, including, to the extent not
inconsistent with applicable law, a trust fund, letter of credit, or surety
bond) for directors, officers, employees, or agents or fiduciaries of the
Company or directors, officers, partners, trustees, employees, or agents or
fiduciaries of any other corporation, partnership, joint venture, trust, other
enterprise or employee benefit plan which directors, officers, employees, or
agents or fiduciaries of the Company serve at the request of the Company, each
Director shall be covered by such policy or policies in accordance with its or
their terms to the maximum extent of the coverage available for any such
director, officer, employee or agent under such policy or policies.
(c) In the event of any payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of a Director, who shall execute all papers required and take all
action necessary to secure such rights, including execution of such documents as
are necessary to enable the Company to bring suit to enforce such rights.
(d) The Company shall not be liable under this Agreement
to make any payment of amounts otherwise indemnifiable hereunder if and to the
extent that a Director has otherwise actually received such payment under any
insurance policy, contract, agreement or otherwise.
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(e) The Company shall at all times maintain a directors
indemnity insurance policy insuring the Directors with aggregate coverage (both
as to dollar limits of coverage, and as to the subject matter insured against)
not less than that in effect at the time of this Agreement. Such indemnity
insurance policy shall be maintained in force for not less than six years from
the date of consummation or abandonment of the transaction or transactions which
the Special Committee was appointed to consider or does consider. If at any time
during the period commencing on the date of renewal of the policy in effect on
the date of execution of this Agreement and ending at the end of such sixth
year, such coverage is not reasonably available in the insurance market, the
Company shall be obligated to purchase for the Directors such directors
indemnity insurance insuring only the Directors as it is able to purchase for an
annual premium equal to twice the annual insurance premium paid by the Company
for directors indemnity insurance during the year 1999, provided that in the
sixth year the Company shall not be obligated to pay a premium for such
insurance in excess of the premium paid in the fifth year.
11. EXCEPTION TO RIGHT OF INDEMNIFICATION. Notwithstanding any
other provision of this Agreement, a Director shall not be entitled to
indemnification under this Agreement with respect to any Proceeding brought by
him against the Company, either in his own right or in the right of the Company,
or any claim in such Proceeding, unless (a) the bringing of such Proceeding or
making of such claim shall have been approved unanimously by the Board of
Directors or (b) such Proceeding is being brought by such Director to assert his
rights under this Agreement.
12. DURATION OF AGREEMENT. All agreements and obligations of
the Company contained herein shall continue during the period a Director is
serving as a member of the Special Committee or as an officer or director of the
Company (or is or was serving at the request of the Company as a director,
officer, partner, trustee, employee or agent or fiduciary of another
corporation, partnership, joint venture, trust, other enterprise or employee
benefit plan) and shall continue thereafter so long as such Director shall be
subject to any Proceeding (or any proceeding commenced under Section 8 hereof)
by reason of his Corporate Status, whether or not he is acting or serving in any
such capacity at the time any liability or expense is incurred for which
indemnification can be provided under this Agreement. This Agreement shall be
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors (including any direct or indirect
successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business or assets of the Company), assigns, spouses,
heirs, executors and personal and legal representatives. This Agreement shall
continue in effect regardless of whether a Director continues to serve as a
member of the Special Committee or as an officer or director of the Company or
any other enterprise at the Company's request.
13. SECURITY. To the extent requested by a Director and
approved by the Board of Directors, the Company may at any time and from time to
time provide security to a Director for the Company's obligations hereunder
through an irrevocable bank line of credit, funded trust or other collateral.
Any such security, once provided to a Director, may not be revoked or released
without the prior written consent of such Director.
14. ENFORCEMENT. (a) The Company expressly confirms and agrees
that it has entered into this Agreement and assumed the obligations imposed on
it hereby in order to induce the Director to serve as a member of the Special
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Committee, and the Company acknowledges that such Director is relying upon this
Agreement in serving as a member of the Special Committee.
(b) This Agreement constitutes the entire agreement between
the parties hereto with respect to the subject matter hereof and supersedes all
prior agreements and understandings, oral, written and implied, between the
parties hereto with respect to the subject matter hereof.
15. DEFINITIONS. For purposes of this Agreement:
(a) "Corporate Status" describes the status of a person who is
or was a director of the Company or a member of the Special Committee or was
otherwise a director, officer, partner, trustee, employee, agent or fiduciary of
any other corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise of which such person is or was serving at the express
written request of the Company.
(b) "Disinterested Director" means a director of the Company
who is not at the relevant time a party to the Proceeding in respect of which
indemnification is sought by a Director.
(c) "Expenses" shall include all attorneys' fees, retainers,
court costs, transcript costs, fees of experts, witness fees, travel expenses,
duplicating costs, printing and binding costs, telephone charges, postage,
delivery service fees, and all other disbursements or expenses of the types
customarily incurred in connection with prosecuting, defending, preparing to
prosecute or defend, investigating, participating, or being or preparing to be a
witness in a Proceeding.
(d) "Special Counsel" means a law firm, or a member of a law
firm, that is experienced in matters of corporation law and neither presently
is, nor in the past five years has been, retained to represent: (i) the Company
or any Director in any matter material to either such party (other than with
respect to matters concerning any such Director under this Agreement), or (ii)
any other party to the Proceeding giving rise to a claim for indemnification
hereunder. Notwithstanding the foregoing, the term "Special Counsel" shall not
include any person who, under the applicable standards of professional conduct
then prevailing, would have a conflict of interest in representing either the
Company or any Director in an action to determine such Director's rights under
this Agreement. The Company agrees to pay the reasonable fees of the Special
Counsel referred to above and to fully indemnify such counsel against any and
all Expenses, claims, liabilities and damages arising out of or relating to this
Agreement or its engagement pursuant hereto.
(e) "Proceeding" includes any threatened, pending or completed
action, suit, arbitration, alternate dispute resolution mechanism,
investigation, inquiry, administrative hearing or any other actual, threatened
or completed proceeding, whether brought by or in the right of the Company or
otherwise and whether civil, criminal, administrative or investigative, in which
a Director was, is or will be involved as a party or otherwise, by reason of the
fact that such Director is or was a member of the Special Committee or a member
of any committee of the Board of Directors or a director of the Company, by
reason of any action taken by him or of any inaction on his part while acting as
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a member of the Special Committee or as a member of any committee of the Board
of Directors or as a director of the Company, or by reason of the fact that he
is or was serving at the request of the Company as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise; in each case whether or not he is acting or serving in any such
capacity at the time any liability or expense is incurred for which
indemnification can be provided under this Agreement; and excluding one
initiated by a Director pursuant to Section 8 of this Agreement to enforce his
rights under this Agreement.
16. SEVERABILITY. If any provision or provisions of this
Agreement shall be held by a court of competent jurisdiction to be invalid,
void, illegal or otherwise unenforceable for any reason whatsoever: (a) the
validity, legality and enforceability of the remaining provisions of this
Agreement (including, without limitation, each portion of any section of this
Agreement containing any such provision held to be invalid, illegal or
unenforceable, that is not itself invalid, illegal or unenforceable) shall not
in any way be affected or impaired thereby and shall remain enforceable to the
fullest extent permitted by law; and (b) to the fullest extent possible, the
provisions of this Agreement (including, without limitation, each portion of any
section of this Agreement containing any such provision held to be invalid,
illegal or unenforceable, that is not itself invalid, illegal or unenforceable)
shall be construed so as to give effect to the intent manifested thereby.
17. MODIFICATION AND WAIVER. No supplement, modification,
termination or amendment of this Agreement shall be binding unless executed in
writing by the parties hereto. No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any other provisions
hereof (whether or not similar) nor shall such waiver constitute a continuing
waiver.
18. NOTICE BY DIRECTORS. Each Director agrees promptly to
notify the Company in writing upon being served with any summons, citation,
subpoena, complaint, indictment, information or other document relating to any
Proceeding or matter which may be subject to indemnification covered hereunder.
The failure to so notify the Company shall not relieve the Company of any
obligation which it may have to such Director under this Agreement or otherwise.
19. NOTICES. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if (i) delivered by and receipted for by the party to whom said
notice or other communication shall have been directed or if (ii) mailed by
certified or registered mail with postage prepaid, on the third business day
after the date on which it is so mailed:
(a) If to Mr. Silpe, to:
Stuart L. Silpe
C/O David H. Pankey, Esq.
McGuire Woods Battle & Boothe LLP
Washington Square
1050 Connecticut Avenue, NW
Suite 1200
Washington, DC 20036
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with a copy to:
David H. Pankey, Esq.
McGuire Woods Battle & Boothe LLP
Washington Square
1050 Connecticut Avenue, NW
Suite 1200
Washington, DC 20036
(b) If to Mr. Small, to:
Peter M. Small
Spaulding and Slye Company
1 Main Street
Concord, MA 01742
with a copy to:
David H. Pankey, Esq.
McGuire Woods Battle & Boothe LLP
Washington Square
1050 Connecticut Avenue, NW
Suite 1200
Washington, DC 200036
(c) If to the Company, to:
Ocwen Asset Investment Corp.
1675 Palm Beach Lakes Boulevard
Suite 1000
West Palm Beach, Florida 33401
Attn: William C. Erbey
with a copy to:
Ocwen Asset Investment Corp.
Attn: Secretary
1675 Palm Beach Lakes Blvd.
Suite 1000
West Palm Beach, Florida 33401
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or to such other address as may have been furnished to the Directors by the
Company or to the Company by a Director, as the case may be.
20. IDENTICAL COUNTERPARTS. This Agreement may be executed in
one or more counterparts, each of which shall for all purposes be deemed to be
an original but all of which together shall constitute one and the same
Agreement. Only one such counterpart signed by the party against whom
enforceability is sought needs to be produced to evidence the existence of this
Agreement.
21. HEADINGS. The headings of the paragraphs of this Agreement
are inserted for convenience only and shall not be deemed to constitute part of
this Agreement or to affect the construction thereof.
22. GOVERNING LAW. The parties agree that this Agreement shall
be governed by, and construed and enforced in accordance with, the laws of the
Commonwealth of Virginia without application of the conflict of laws principles
thereof.
23. ARTICLES AND BYLAWS. Notwithstanding any provision in this
Agreement, no Indemnity nor advancement of Expenses shall be provided hereunder
to any Director to the extent that such indemnity or advancement is prohibited
by the Articles and Bylaws as they exist at the time of this Agreement;
provided, however, that if such Indemnity or advancement of Expenses is
prohibited by the Articles and Bylaws as they exist at the time of this
Agreement but permitted by the Articles and Bylaws as they exist at the time
that such Indemnity or advancement of Expenses is sought, then such Indemnity or
advancement of Expenses shall be permitted.
(The remainder of this page is intentionally left blank)
13
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
Ocwen Asset Investment Corp.
By: /s/ CHRISTINE A. REICH
-----------------------
Name: Christine A. Reich
Title: President
/s/ STUART L. SILPE
-----------------------
Stuart L. Silpe
/s/ PETER M. SMALL
-----------------------
Peter M. Small
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Financial Condition at June 30, 1999 and the
Consolidated Statement of Operations for the Six Months Ended June 30, 1999 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001033643
<NAME> OCWEN ASSET INVESTMENT CORP.
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 32,373
<SECURITIES> 284,488
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 778,609
<CURRENT-LIABILITIES> 22,806
<BONDS> 525,827
190
0
<COMMON> 0
<OTHER-SE> 207,818
<TOTAL-LIABILITY-AND-EQUITY> 778,609
<SALES> 0
<TOTAL-REVENUES> 55,377
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 54,814
<LOSS-PROVISION> 479
<INTEREST-EXPENSE> 19,035
<INCOME-PRETAX> (18,951)
<INCOME-TAX> 0
<INCOME-CONTINUING> (18,951)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,951)
<EPS-BASIC> (1.00)
<EPS-DILUTED> (1.00)
</TABLE>
