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 March 31, 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 April 30, 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 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....... 42
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................. 46
Signature................................................................. 48
2
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<CAPTION>
OCWEN ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
March 31, December 31,
1999 1998
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<S> <C> <C>
ASSETS:
Cash and amounts due from depository institutions ..................... $ 3,641,241 $ 3,484,929
Interest-bearing deposits ............................................. 57,605,709 49,880,276
Securities available for sale, at fair value .......................... 316,198,972 351,153,971
Commercial and multi-family loan portfolio, net ....................... 70,339,922 65,282,965
Residential loan portfolio, net ....................................... 6,558,614 8,058,445
Match funded residential loans, net ................................... 154,164,052 173,609,873
Discount loan portfolio, net .......................................... 5,618,022 5,618,022
Investment in real estate, net ........................................ 208,733,751 208,058,721
Principal and interest receivable ..................................... 4,056,990 7,475,795
Other assets .......................................................... 15,850,394 15,702,816
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Total assets ........................................................ $ 842,767,667 $ 888,325,813
============= =============
LIABILITIES:
Securities sold under agreements to repurchase ........................ $ 113,991,304 $ 138,611,824
Obligations outstanding under line of credit .......................... 41,015,023 34,472,404
Obligations outstanding under line 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 ................................... 143,298,397 163,403,966
Accrued expenses, payables and other liabilities ...................... 13,665,050 21,190,288
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Total liabilities ................................................... 598,725,472 643,235,362
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Minority interest ........................................................ 23,759,807 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, $.01 par value; 200,000,000 shares authorized;
18,965,000 shares issued and outstanding .......................... 189,650 189,650
Additional paid-in capital ............................................ 294,492,203 294,492,203
Cumulative dividends declared ......................................... (36,277,546) (36,277,546)
Accumulated deficit ................................................... (47,178,264) (46,394,403)
Accumulated other comprehensive income:
Unrealized gain on securities available for sale .................... 10,797,797 11,038,151
Cumulative translation adjustment ................................... (1,741,452) (1,871,662)
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Total other comprehensive income .................................. 9,056,345 9,166,489
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Total shareholders' equity ........................................ 220,282,388 221,176,393
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$ 842,767,667 $ 888,325,813
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
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3
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<CAPTION>
OCWEN ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months Ended
March 31,
1999 1998
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<S> <C> <C>
INTEREST INCOME:
Repurchase agreements and interest bearing deposits .......... $ 494,604 $ 198,138
Securities held for trading................................... -- 482,192
Securities available for sale................................. 13,638,517 4,648,582
Commercial and Multi-family loans ............................ 1,648,514 805,786
Match funded residential loans................................ 3,327,143 --
Residential loans............................................. 145,398 435,021
Discount loans ............................................... 126,318 902,777
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19,380,494 7,472,496
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INTEREST EXPENSE:
Securities sold under agreements to repurchase................ 2,642,002 665,269
Obligations outstanding under lines of credit ................ 606,684 28,548
11.5% Redeemable Notes due 2005 ............................. 4,154,150 --
Bonds-match funded loan agreements............................ 2,523,602 --
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9,926,438 693,817
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NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES............. 9,454,056 6,778,679
Provision for loan losses..................................... 257,852 105,073
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES........... 9,196,204 6,673,606
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REAL ESTATE-OPERATING INCOME:
Rental income................................................. 7,982,430 2,034,287
Other......................................................... 10,382 7,857
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7,992,812 2,042,144
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REAL ESTATE-OPERATING EXPENSES:
Rental operation.............................................. 3,962,709 933,746
Depreciation and amortization................................. 1,193,977 304,437
Interest...................................................... 2,657,326 --
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7,814,012 1,238,183
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REAL ESTATE INCOME, NET.......................................... 178,800 803,961
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OTHER EXPENSES:
Management fees............................................... 1,524,429 828,881
Due diligence expenses........................................ 122,745 192,689
Foreign currency gain......................................... -- (116,953)
Other......................................................... 1,210,309 189,655
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2,857,483 1,094,272
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LOSSES ON SECURITIES............................................. (7,455,633) (17,077,079)
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LOSS BEFORE MINORITY INTEREST.................................... (938,112) (10,693,784)
Minority interest in net loss of consolidated
subsidiary................................................... 154,251 189,542
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NET LOSS...................................................... $ (783,861) $(10,504,242)
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LOSS PER SHARE:
Basic......................................................... $ (0.04) $ (0.55)
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Diluted....................................................... $ (0.04) $ (0.55)
============= ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic......................................................... 18,965,000 18,965,000
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Diluted....................................................... 18,965,000 18,965,000
============= ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
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4
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<CAPTION>
OCWEN ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS
For the Three For the Three
Months Ended Months Ended
March 31, March 31,
1999 1998
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<S> <C> <C>
Net loss $ (783,861) $(10,504,212)
Other comprehensive income:
Unrealized gain (loss) on securities available for sale................... (240,354) 8,344,644
Unrealized foreign currency translation adjustment ....................... 130,210 --
Other comprehensive income................................................ (110,144) 8,344,644
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Comprehensive loss........................................................... $ (894,005) $ (2,159,568)
============ ============
Disclosure of reclassification adjustment:
Unrealized holding losses arising during the period.................... $ (7,695,987) $ (8,732,435)
Add: Adjustment for losses included in net loss....................... 7,455,633 17,077,079
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Net unrealized (losses) gains on securities............................ $ (240,354) $ 8,344,644
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
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5
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<CAPTION>
OCWEN ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND THE YEAR ENDED DECEMBER 31, 1998
Accumulated
Common Stock Additional Cumulative Retained other
------------------- paid-in dividends earnings comprehensive
Shares Amount capital declared (deficit) income (loss) Total
---------- -------- ------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997... 18,965,000 $189,650 $280,503,838 $(13,898,849) $ 11,791,518 $(7,327,890) $271,258,267
Capital contribution........... 13,988,365 13,988,365
Net loss....................... (58,185,921) (58,185,921)
Dividends...................... (22,378,697) (22,378,697)
Change in unrealized gain (loss)
on securities available for sale 18,366,041 18,366,041
Change in cumulative translation
adjustment..................... (1,871,662) (1,871,662)
---------- -------- ------------ ------------ ------------ ----------- ------------
Balance at December 31, 1998... 18,965,000 189,650 294,492,203 (36,277,546) (46,394,403) 9,166,489 221,176,393
Net loss....................... (783,861) (783,861)
Change in unrealized gain (loss)
on securities available for sale (240,354) (240,354)
Change in cumulative translation
adjustment..................... 130,210 130,210
---------- -------- ------------ ------------ ------------ ----------- ------------
Balance at March 31, 1999...... 18,965,000 $189,650 $294,492,203 $(36,277,546) $(47,178,264) $ 9,056,345 $220,282,388
========== ======== ============ ============ ============ =========== ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
6
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<CAPTION>
OCWEN ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Three Months Ended
March 31,
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net loss .................................................................... $ (783,861) $ (10,504,242)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Premium amortization (discount accretion), net .......................... 8,601,099 5,315,514
Depreciation ............................................................ 1,193,977 304,437
Foreign exchange gain ................................................... -- (116,953)
Provision for loan losses ............................................... 257,852 105,073
Net losses on securities ................................................ 7,455,633 17,077,079
(Increase) decrease in interest receivable .............................. 3,418,805 (2,564,566)
(Increase) decrease in other assets ..................................... (22,137) 627,270
Decrease in accrued expenses, payables and other liabilities ............ (7,525,230) (719,935)
Minority interest in losses ............................................. (154,251) (189,542)
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Net cash provided by operating activities ...................................... 12,441,887 9,334,135
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Cash flows from investing activities:
Purchase of securities available for sale .................................... -- (72,771,240)
Sale of securities available for sale ........................................ 12,708,996 --
Maturities and principal payments received on securities available for sale... 6,280,742 4,003,330
Principal payments received from discount loans .............................. -- 6,915
Principal payments received from loans ....................................... 20,136,324 366,932
Purchase of loans ............................................................ (4,962,755) (129,054,935)
Investment in real estate .................................................... (1,869,007) (13,740,162)
Deposits on pending asset acquisitions ....................................... -- (2,003,500)
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Net cash provided by (used by) investing activities ............................ 32,294,300 (213,192,660)
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Cash flows from financing activities:
Dividend payments on common stock ............................................ -- (7,458,750)
Principal payments on bonds .................................................. (20,105,569) --
Proceeds from sale of operating partnership units ............................ -- 3,085,548
Increase (decrease) in securities sold under agreements to repurchase ........ (24,620,520) 85,274,000
Increase in obligations outstanding under lines of credit .................... 7,741,437 81,890,207
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Net cash provided by (used in) financing activities ............................ (36,984,652) 162,791,005
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Change in cumulative translation adjustment .................................... 130,210 --
Net increase (decrease) in cash and cash equivalents ........................... 7,751,535 (41,067,520)
Cash and cash equivalents at beginning of period ............................... 53,365,205 48,677,123
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Cash and cash equivalents at end of period ..................................... $ 61,246,950 $ 7,609,603
============= =============
Reconciliation of cash and cash equivalents at end of period:
Cash and amounts due from depository institutions ............................ $ 3,641,241 $ 373,097
Interest earning deposits .................................................... 57,605,709 7,236,506
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Total ..................................................................... $ 61,246,950 $ 7,609,603
============= =============
Supplement schedule of non-cash financing activities:
Interest paid ............................................................. 13,958,058 552,817
Non-cash activities:
Change in unrealized gain (loss) on securities available for sale ......... 240,354 8,344,644
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
7
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OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
================================================================================
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 865 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 above.
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 March 31, 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 March 31,
1999 and 1998, OCC earned from the Company $1.5 million and $0.8 million,
respectively in base management fees. No incentive compensation was paid during
the three months ended March 31, 1999 and 1998. In addition, for such periods,
OCC was reimbursed $0.1 million and $0.2 million, respectively for out-of-pocket
costs and salary allocations for due diligence tasks. On May 13, 1999, the Board
of Directors approved extending the Management Agreement 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 three months ended March 31, 1999
and 1998, the Bank earned from the Company $0.2 million and $23,948 in servicing
fees, respectively.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Company and its
subsidiaries follow 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.
8
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OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 March 31, 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
9
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OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
================================================================================
payments expected to be received (using a discount rate that equates the
Company's estimate of expected future cash flows to the acquisition price),
observable market prices, or the estimated fair value of the collateral (for
loans that are solely dependent on the collateral for repayment). If the
recorded investment in the impaired loan exceeds the measure of estimated fair
value, a valuation allowance is established as a component of the allowance for
loan losses. At March 31, 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
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OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 were
to fail to 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 that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial condition and measure those instruments at fair value. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Initial application of SFAS No. 133 should be as of the beginning of an entity's
fiscal quarter; on that date, hedging relationships must be designated anew and
documented pursuant to the provisions of SFAS No. 133. Earlier application of
SFAS No. 133 is encouraged but is permitted only as of the beginning of any
fiscal quarter that begins after issuance of SFAS No. 133. The Company has not
yet determined the impact on its results of operations, financial position or
cash flows as a result of implementing SFAS No. 133.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise", an amendment of FASB Statement
No. 65. This statement is effective for the first fiscal quarter beginning after
December 15, 1998. This Statement standardizes how mortgage banking firms
account for certain securities and other interests they retain after
securitizing mortgage loans that were held for sale. Adoption of this
pronouncement did not have a material impact on the Company's consolidated
financial statements.
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.
11
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
================================================================================
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 March 31, 1999, the Company held interest rate swaps
with a notional amount of approximately $200.8 million. The fair value of the
interest rate swaps are not recognized in the consolidated financial statements.
To qualify for hedge accounting the interest rate swap must meet two
criteria:
o the Company is exposed to interest rate risk as the result of a debt
it has incurred; and
o the interest rate swap reduces the Company's exposure to such risk.
If an interest rate swap does not qualify as a hedge, it is accounted
for as a trading asset at fair value, with any gain or loss included as a
component of current income.
The Company is exposed to credit loss if: (i) the counterparties to the
interest rate swap do not perform and (ii) the floating interest rate received
by the Company exceeds the fixed interest rate paid by it. All of the
counterparties have long-term debt ratings of A+ or above by Standard and Poor's
and A1 or above by Moody's. Although a swap generally may not be sold or
transferred without the consent of the counterparty, management does not believe
that this consent would be withheld. Although none of the Company's interest
rate swaps are exchange-traded, there are a number of financial institutions
which enter into these types of transactions as part of their day-to-day
activities.
The following table indicates the interest rate swaps outstanding at
March 31, 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% 4.93% $ (564)
2001 17,000 1-month 6.00 4.96 (213)
2001 75,000 1-month 6.00 4.96 (930)
2002 8,780 1-month 6.04 4.96 (135)
--------- ---------
$ 200,780 $ (1,842)
========= =========
</TABLE>
At March 31, 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 March 31, 1999, the fair value of the
British Pounds future contract was $0.6 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 March 31,
1999, the fair value of the Canadian currency contract was $(0.2) million. Gains
and losses on these foreign currency future 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
MARCH 31, 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.
Gross Gross
Amortized Unrealized Unrealized Fair
MARCH 31, 1999 Cost Gains Losses Value
--------- --------- --------- ---------
(Dollars In Thousands)
Mortgage-related securities:
Single family residential:
Subprime residuals ....... $ 187,090 $ 10,082 $ -- $ 197,172
Subordinates ............. 14,639 -- (347) 14,292
--------- --------- --------- ---------
201,729 10,082 (347) 211,464
--------- --------- --------- ---------
Multi-family and commercial:
Non-rated interest only .. 3,157 -- (30) 3,127
Non-rated principal only.. 276 24 -- 300
Subordinates ............. 100,242 1,066 -- 101,308
--------- --------- --------- ---------
103,675 1,090 (30) 104,735
--------- --------- --------- ---------
$ 305,404 $ 11,172 $ (377) $ 316,199
========= ========= ========= =========
During the quarter ended March 31, 1999, the Company recorded a charge
of $8.3 million against its portfolio of securities available for sale, which
was partially offset by a $0.8 million gain on the sale of commercial
mortgage-backed securities. The losses were recorded against subprime residuals,
reflecting continued market illiquidity for these instruments. Additionally one
of the bonds had stopped cash flowing, which resulted in a decline in its fair
value.
During the quarter ended March 31, 1999, cash proceeds from the sale of
securities was $12.7 million at a gross realized gain of $0.9 million.
NOTE 5 LOAN PORTFOLIO
The following table sets forth the components of the Company's loan
portfolio at the dates indicated.
March 31, December 31,
1999 1998
------------ ------------
Single family residential $ 6,934,620 $ 8,419,265
Multi-family residential 21,741,464 20,544,269
Commercial real estate:
Office ................ 27,049,347 24,123,894
Hotel ................. 22,145,020 21,304,912
------------ ------------
Total loans ......... 77,870,451 74,392,340
Deferred fees ........... (526,228) (409,254)
Allowance for loan losses (445,687) (641,676)
------------ ------------
Loans, net ............ $ 76,898,536 $ 73,341,410
============ ============
13
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
================================================================================
The following table represents a summary of the Company's
non-performing loans (past due 90 days or more) at the dates indicated.
March 31, December 31,
1999 1998
------------ -----------
Non-performing loans: (Dollars in Thousands)
Single family residential............ $ 4,039 $ 4,165
Multi-family......................... -- --
Commercial........................... -- --
------------ -----------
$ 4,039 $ 4,165
============ ===========
If non-accrual loans had been current in accordance with their original
terms, additional interest income of approximately $51,000 for the three months
ended March 31, 1999 would have been earned. No interest has been accrued on
loans greater than 89 days past due.
At and for the three months ended March 31, 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 March 31, 1999:
Single family Multi-family Commercial
Residential Residential Real Estate Total
------------- ------------ ----------- -------
(Dollars in Thousands)
California .. $ 871 $ 5,288 $ -- $ 6,159
Delaware .... -- -- 12,274 12,274
Florida ..... 462 -- -- 462
Massachusetts 52 -- 34,496 34,548
New York .... -- 16,453 2,424 18,877
Other ....... 5,550 -- -- 5,550
------------- ------------ ----------- -------
Total ....... $ 6,935 $ 21,741 $ 49,194 $77,870
============= ============ =========== =======
The following table sets forth certain information at March 31, 1999
regarding the dollar amount of loans maturing in the Company's loan portfolio
based on scheduled contractual amortization, as well as the dollar amount of
loans which have fixed or adjustable interest rates. Loan balances have not been
reduced for (i) undisbursed loan proceeds, unearned discounts and the allowance
for loan losses or (ii) nonperforming loans.
<TABLE>
<CAPTION>
Maturing in
--------------------------------------------------------------------------------
After One Year After Five Years
One Through Five Through Ten After Ten
Year or Less Years Years Years Total
------------ ------------ ------------ ------------ ------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Single family residential loans....... $ 4,158 $ 1,530 $ 402 $ 845 $ 6,935
Multi-family residential loans........ 21,741 -- -- -- 21,741
Commercial real estate................ 49,194 -- -- -- 49,194
------------ ------------ ------------ ------------ ------------
Total.............................. $ 75,093 $ 1,530 $ 402 $ 845 $ 77,870
============ ============ ============ ============ ============
</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
MARCH 31, 1999
================================================================================
The following table sets forth the activity in the Company's gross loan
portfolio during the periods indicated.
For the Three For the
Months Ended Year Ended
March 31, December 31,
1999 1998
------------- -------------
Balance at beginning of period ....... $ 74,392,340 $ 16,290,404
Originations:
Single family residential loans ... -- --
Multi-family residential loans .... 1,197,194 19,186,936
Commercial real estate loans ...... 3,765,561 37,005,198
------------- -------------
Total loans originated ......... 4,962,755 56,192,134
------------- -------------
Purchases:
Single family residential loans ... -- 211,378,718
Secured borrowing (match funded loans) -- (183,470,633)
Principal repayments, net ............ (1,484,644) (25,998,283)
------------- -------------
Net increase in net loans ............ 3,478,111 58,101,936
------------- -------------
Balance at end of period ............. $ 77,870,451 $ 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 quarter ended March
31, 1999, the Company recorded a provision for loan losses of $0.5 million.
The following table sets forth the current unpaid principal balance,
excluding deferred fees of $1.6 million, and the geographic distribution of
properties securing the Company's match funded residential loans at March 31,
1999:
Single Family
Residential
-------------
(Dollars In Thousands)
Michigan................ $ 36,646
California.............. 15,575
Florida................. 8,427
Other................... 92,398
-------------
Total................... $ 153,046
=============
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
MARCH 31, 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 March 31,
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 March 31, 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:
March 31, December 31,
1999 1998
------------- -------------
Office Buildings .......................... $ 174,616,119 $ 174,587,772
Retail .................................... 32,563,088 32,328,623
Building improvements ..................... 2,374,574 1,223,185
Tenant improvements and lease commissions . 4,140,299 3,682,602
------------- -------------
213,694,080 211,822,182
Accumulated depreciation .................. (4,960,329) (3,763,461)
------------- -------------
Investment in real estate, net .......... $ 208,733,751 $ 208,058,721
============= =============
16
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
================================================================================
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 $114.0 million, with a weighted average interest
rate of 8.36%, at March 31, 1999, compared to $138.6 million with a weighted
average rate of 7.97% at December 31, 1998. These obligations are secured by
certain of the Company's investments in subordinated interests in commercial
mortgage-backed securities, residual interests in subprime residential loan
securitizations, and U.K. mortgage loan residual securities. The following table
summarizes the maturity dates of OAC's securities sold under agreements to
repurchase and the fair value of the related collateral securities as of March
31, 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 $ 46.9 $ 76.2 $ 11.3
2-5 months 26.8 -- 37.9
6-12 months 17.8 15.6 33.2
More than 1 year 22.5 -- 96.8
------------ ---------------- --------------
Total $ 114.0 $ 91.8 $ 179.2
============ ================ ==============
</TABLE>
Mortgage-related securities which are subject to repurchase agreements
which secure indebtedness periodically are revalued by the lender. A decline in
value of the securities may result in the lender periodically requiring the
Company to (i) provide additional collateral to secure the indebtedness or, (ii)
deny an extension of the maturity of the debt. 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 ended March 31, 1999 was $2.6 million.
OBLIGATIONS OUTSTANDING UNDER LINES OF CREDIT. Obligations outstanding
under lines of credit amounted to $41.0 million at March 31, 1999. The
borrowings are pursuant to a three year agreement, which is collateralized by
commercial loans. The weighted average interest rate at March 31, 1999 was 7.0%.
Interest expense during the three months ended March 31, 1999 was $0.6 million.
17
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
================================================================================
OBLIGATIONS OUTSTANDING UNDER LINES OF CREDIT - REAL ESTATE. Obligations
outstanding under lines of credit secured by real estate amounted to $143.8
million at March 31, 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 March 31, 1999:
<TABLE>
<CAPTION>
Property Principal Amount Interest Rate Maturity Date
--------------------------------------------------------------------------------------------------
(Dollars In Millions)
<S> <C> <C> <C> <C>
Bush Street Property............ $ 75.0(1) LIBOR plus 1.75% April, 2001 (3)
Other........................... $ 68.8(2) LIBOR plus 1.75% June, 2001 (3)
</TABLE>
1) Plus up to $5.0 million of additional advances for capital improvements
to the Bush Street Property.
2) Represents the portion of the outstanding balance under a $200 million
loan that is secured by real estate. As of March 31, 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.
3) Subject to certain conditions, the Company may extend the maturity date
by one year.
Interest expense during the three months ended March 31, 1999 was $2.7
million.
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:
REDEMPTION
YEAR 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. This resulted
in the Company realizing an extraordinary gain of $0.6 million. At March 31,
1999, the outstanding balance of the Notes was $143.0 million. Interest expense
on the Notes for the three months ended March 31, 1999 was $4.2 million.
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.
At March 31, 1999, bonds-match funded loan agreements amounted to
$143.3 million and with a weighted average interest rate of 8.08%. Interest
expense for the three months ended March 31, 1999 was $2.5 million.
18
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
================================================================================
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 March 31, 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.
On April 16, 1999, the Company announced the receipt of a proposal from
OCN regarding a possible business combination between them. If this business
combination 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.
Because the Special Committee of the Board is investigating a variety
of strategic alternatives in addition to a business combination with OCN, there
can be no assurance that if a business combination is effected, the Company will
cease to be a REIT.
NOTE 12 COMMITMENTS AND CONTINGENCIES
At March 31, 1999, the Company had $53.7 million in outstanding
commitments to fund construction, multi-family and commercial loans. The
following table details the amounts committed at such date.
March 31, 1999
--------------------------------------------------------------------
(Dollars In Thousands)
Multi-family..................................... $ 23,543
Hotels........................................... 24,151
Offices.......................................... 6,009
-------------
Total committed amount......................... $ 53,703
=============
The Company is subject to various 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. But see "Recent Developments regarding OAC's status as a REIT. The
Company's primary investments include:
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 $0.8 million or $0.04 per fully
diluted share for the three months ended March 31, 1999. These losses were
primarily attributable to $8.3 million of losses on subordinate and residual
interests in mortgage-related securities, which were adversely affected by
continued market illiquidity. Moreover, as a result of these conditions, in
recent months there has been a general "flight to quality" by investors, with
the result that the market for the subordinate and residual mortgage-related
securities has been substantially reduced or eliminated. These factors have
adversely affected the operations and financial condition of numerous companies
in the financial service, 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. As a result, the Company has curtailed each of its
business lines, which include the acquisition of subordinate and residual
interests in residential and commercial mortgage-related securities,
underperforming real estate and residential and commercial real estate loans,
including construction and renovation loans.
RECENT DEVELOPMENTS
As previously announced on April 16, 1999, the Company received a
proposal from OCN regarding a possible business combination between OCN and the
Company.
Under OCN's proposal, a newly-formed subsidiary would merge into the
Company in a taxable transaction, and each outstanding share of common stock of
the Company (other than those owned by OCN or its subsidiaries) would be
converted into 0.57 shares of common stock of OCN. OCN has indicated that its
proposal requires OAC to pay its final 1998 dividend (which has been deferred by
the Board of Directors of OAC and is expected to be approximately $15.5 million,
or $0.82 per share) prior to the consummation of the proposed transaction
between OCN and the Company. There can be no assurance, however, as to whether
or when that dividend will actually be paid. OCN's proposal is subject to, among
other things, the satisfactory negotiation of final terms of an acquisition
agreement. There can be no assurance that the parties will agree to final terms
or that any possible business combination will be consummated. Consummation of
OCN's proposal would be subject to approval by the Company's shareholders.
OAC has formed a Special Committee of its Board, consisting of two
independent directors; a third independent director, Benjamin Navarro, resigned
from the Board on April 26, 1999. The Special committee intends to consider the
OCN proposal as well as OAC's other strategic alternatives, including, but not
limited to, recapitalization, restructuring, and sale of the Company to another
20
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
party. Since OCN's proposal would be subject to approval by the OAC
shareholders, OAC has postponed its 1999 Annual Meeting of the shareholders,
originally scheduled for May 12, 1999 and has deferred independent consideration
by its shareholders of terminating OAC's status as a REIT. See also Note 11 to
the Consolidated Financial Statements above.
Under the Company's Articles of Incorporation, a majority of the Board
of Directors must be independent directors. In response to Mr. Navarro's
resignation, Christine A. Reich, resigned from the Board on May 12, 1999, in
order to ensure continued compliance with the Company's Articles of
Incorporation. Ms. Reich will continue to serve as President of the Company.
Two suits have been filed against OAC, OCN and their directors in state
court in Florida seeking to enjoin the consummation of the proposed business
combination between OCN and OAC. The Company believes these suits are without
merit and intends to vigorously contest the plaintiff's claims.
On May 10, 1999, the Company was informed that a repurchase agreement
on certain residuals in the amount of $19.4 million would not be renewed on the
maturity date of May 17, 1999. The Company funded the maturity of this debt with
available cash on hand.
On May 13, 1999, for an additional six months the Board of Directors
approved extending the management agreement between the Company and OCC, which
was due to expire on May 19, 1999. See also Note 1 to the Consolidated Financial
Statements above.
OAC has entered into a nonbinding letter of intent to sell
substantially all of its commercial mortgage-backed securities portfolio. The
closing of the proposed transaction is subject to the prospective buyer's
completion of its due diligence to its satisfaction.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND
1998
GENERAL. Net loss for the quarter ended March 31, 1999 was $0.8
million, or $0.04 per diluted share, compared to a net loss of $10.5 million, or
$0.55 per diluted share, for the period ended March 31, 1998. The loss for the
three months ended March 31, 1999 was primarily due to a $8.3 million writedown
of its subordinate and residual mortgage-backed securities, offset by a $0.8
million gain on the sale of commercial mortgage-backed securities. For the
quarter ended March 31, 1998, net losses on securities were $17.1 million. The
losses on the securities available for sale portfolio during the first quarter
of 1999 were taken against residential subprime bonds, reflecting continuing
market illiquidity for these instruments.
INTEREST INCOME. Interest income increased $11.9 million to $19.4
million for the three months ended March 31, 1999 from $7.5 million for the
comparable period ended 1998. This increase was primarily due to additional
interest income of $3.1 million on loans and $8.9 million on the securities
available for sale portfolio. The increase in interest income resulted from
additional investments in interest earning assets. Securities available for sale
increased from an average balance of $125.2 million to $321.3 million,
residential loans increased from an average balance of $22.4 million to $172.2
million and commercial and multi-family loans increased from an average balance
of $25.1 million to $68.2 million. Total interest earning assets yielded 12.78%
at March 31, 1999, a 2.0% increase over the yield at March 31, 1998.
INTEREST EXPENSE. Interest expense for the three months ended March 31,
1999 increased $9.2 million to $9.9 million for the three months ended March 31,
1998. This increase was primarily due to a $2.0 million increase in securities
sold under agreements to repurchase expense, a $4.2 million increase in interest
expense associated with the issue of the 11 1/2% Redeemable Notes due 2005 (the
"Notes") and a $2.5 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.
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.
21
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
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.
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
---------------------------------------------------------------
(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 ...................................... $ 38,728 $ 495 5.11% $ 14,446 $ 198 5.48%
Securities held for trading ..................... -- -- -- 62,586 482 3.08
Securities available for sale ................... 321,281 13,638 16.98 125,241 4,649 14.85
Commercial and multi-family loan portfolio, net.. 68,590 1,649 9.62 25,109 806 12.84
Match funded residential loans, net ............. 164,795 3,327 8.08 -- -- --
Residential loan portfolio, net ................. 7,370 145 7.87 22,396 435 7.77
Discount loans, net ............................. 5,618 126 8.97 26,921 903 13.42
--------------------------- ---------------------------
Total interest-earning assets ................. $606,382 $ 19,380 12.78% $276,699 $ 7,473 10.80%
--------------------------- ---------------------------
Interest-bearing liabilities:
Securities sold under agreements to repurchase .. $126,363 $ 2,642 8.36% $ 39,577 $ 665 6.72%
Obligations outstanding under lines of credit ... 34,618 607 7.01 1,820 29 6.37
11.5% Redeemable Notes due 2005 ................. 143,000 4,154 11.62 -- -- --
Bonds match funded .............................. 154,380 2,523 6.54 -- -- --
--------------------------- ---------------------------
Total interest-bearing liabilities ............ $458,361 $ 9,926 8.66% $ 41,397 $ 694 6.71%
--------------------------- ---------------------------
Net interest income/spread (1)...................... $ 9,454 4.12% $ 6,779 4.09%
======== ========
Net interest margin (2)............................. 6.24% 9.80%
</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 March 31, 1999 increased $0.2 million to $0.3 million from
$0.1 million during the three months ended March 31, 1998, which reflected the
Company's evaluation of current economic conditions, a credit review of loans,
an analysis of specific loan situations and the size and composition of the
commercial and multi-family loan portfolio.
REAL ESTATE INCOME, NET. Real estate income, net decreased $0.6 million
to $0.2 million for the three months ended March 31, 1999, compared to the same
period in 1998. This decrease was primarily due to a $5.9 million increase in
rental income, offset by a $3.0 million increase in rental operation expense, a
$0.9 million increase in depreciation and amortization expense, and a $2.7
million increase in interest expense. These increases in real estate operating
income and expenses, compared to same period in 1998, were largely the result of
an increase in the Company's investment in real estate, net of $208.7 million at
March 31, 1999, compared to $58.9 million at March 31, 1998, which was not
leveraged. After the Company acquires distressed real property, the Company's
goal generally is to improve the positioning so as to increase the cash flow
from the property. Expenses related to buildings and improvements are amortized
over 39 years, while expenditures for repairs and maintenance are charged to
operations as incurred.
OTHER EXPENSES. Other expenses increased $1.8 million to $2.9 million
for the quarter ended March 31, 1999, compared to the same period in 1998. This
increase was largely due to a $0.7 million increase in management fees, a $1.0
million increase in other expenses (which consisted generally of servicing,
accounting, audit, legal, excise tax, and bond amortization expenses), and which
were offset in part by a $0.07 million decrease in due diligence expense. The
management fees payable by the Company to OCC totaled $1.5 million during the
quarter ended March 31, 1999 compared to $0.8 million during the quarter ended
March 31, 1998.
22
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
LOSSES ON SECURITIES. The losses on the securities available for sale
portfolio during the first quarter of 1999 were taken against residential
subprime bonds, reflecting continuing market illiquidity for these instruments.
MINORITY INTEREST IN NET LOSS OF CONSOLIDATED SUBSIDIARY. Minority
interest in net loss of consolidated subsidiary was $0.2 million during the
quarter ended March 31, 1999 which was comparable to the amount recorded during
the same period in 1998, and 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.
FINANCIAL CONDITION
SECURITIES AVAILABLE FOR SALE. The Company's investment in securities
available for sale at March 31, 1999 decreased by $35.0 million to $316.2
million from $351.2 million at December 31, 1998.
At March 31, 1999, the Company's securities available for sale portfolio was
$316.2 million and consisted of:
o Non-investment grade and unrated subordinate commercial mortgage-backed
securities having an amortized cost of $103.7 million and a fair value
of $104.7 million,
o Unrated residential subprime residuals having an amortized cost of
$187.1 million and a fair value of $197.2 million, and
o Unrated subordinate residential mortgage-backed securities having an
amortized cost of $14.6 million and a fair value of $14.3 million.
The Company's unrated subprime residual portfolio of $197.2 million consisted
of:
o $97.8 million of seasoned residuals (securitized between 1994 and 1997)
with overcollateralization reserves funded at approximately $140.2
million, and
o $99.4 million of unseasoned residuals (securitized in 1998) with
overcollateralization reserves funded at approximately $28.5 million.
The following table sets forth the fair value and composition of the
Company's securities available for sale at the dates indicated.
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- ------------
<S> <C> <C>
Mortgage-related securities:
Single family residential: (Dollars In Thousands)
Subordinates......................................... $ 14,292 $ 15,390
Subprime residuals................................... 197,172 218,724
---------- ----------
Total single family residential.................. 211,464 234,114
Multi-family residential and commercial:
AAA-rated interest-only.............................. -- 441
A-rated interest-only................................ -- 222
Non-rated interest-only.............................. 3,127 3,135
Non-rated principal-only............................. 300 276
Subordinates......................................... 101,308 112,966
---------- ----------
Total multi-family residential and commercial...... 104,735 117,040
---------- ----------
Total mortgage-related securities.................. $ 316,199 $ 351,154
========== ==========
</TABLE>
The following tables detail the Company's securities available for sale
portfolio at March 31, 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.
23
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
ACTUAL LIFE-TO-DATE CPR - The Constant Prepayment Rate is used to
measure the average prepayment rate for the underlying mortgage pool(s) over the
period of time lapsed since the issuance of the securities through the date
indicated and is calculated as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Actual Life-to-Date CPR = 100 x [(1 - Final Aggregate Balance actual ) ( 12 ) ]
------------------------------------- ---------------
Final Aggregate Balance scheduled months in period
</TABLE>
ACTUAL LIFE-TO-DATE LOSSES - Represents cumulative losses expressed as
a percentage of the unpaid balance of the original collateral at the indicated
date.
CLASS DESIGNATION LETTER - Refers to the credit rating designated by
the rating agency for each securitization transaction. Classes designated "A"
have a superior claim on payment to those rated "B", which are superior to those
rated "C." Additionally, multiple letters have a superior claim to designations
with fewer letters. Thus, for example, "BBB" is superior to "BB," which in turn
is superior to "B." The lower class designations in any securitization will
receive interest payments subsequent to senior classes and will experience
losses prior to any senior class. The lowest potential class designation is not
rated ("NR") which, if included in a securitization, will always receive
interest last and experience losses first. IO securities receive the excess
interest remaining after the interest payments have been made on all senior
classes of bonds based on their respective principal balances. There is no
principal associated with IO securities and they are considered liquidated when
the particular class they are contractually tied to is paid down to zero.
Principal only ("PO") securities receive excess principal payments after the
principal has been made on all classes of bonds based on their respective
payment schedules. There is no interest associated with PO securities and they
are sold at a discount. The return on PO securities is earned through the
receipt of the payments and the collection of the discounted amount.
CLASS SIZE - Represents the percentage size of a particular class
relative to the total outstanding balance of all classes.
COLLATERAL BALANCE - represents, in the case of residuals, the unpaid
principal balance of the collateral of the entire securities at the indicated
date and, in the case of subordinates, the outstanding principal balance of the
entire securitization at the indicated date.
ISSUE DATE - Represents the date on which the indicated securities were
issued.
OVER-COLLATERIZATION LEVEL - For residual interests in residential
mortgage-backed securities, over-collaterization ("OC") is the amount by which
the collateral balance exceeds the sum of the bond principal amounts. OC is
achieved by applying monthly a portion of the interest payments of the
underlying mortgages toward the reduction of the class certificate principal
amounts, causing them to amortize more rapidly than the aggregate loan balance.
The OC percentage, expressed as a percentage of the outstanding collateral
balance, represents the first tier of loss protection afforded to the
non-residual holders. The OC percentage also determines whether the
over-collaterization target has been satisfied as of a specific date, such that
cash flows to the residual holder are warranted. To the extent not consumed by
losses on more highly rated bonds, OC is remitted to the residual holders.
Reserve funds ("RF") are actual cash reserves expressed as a percentage of the
original collateral balance at issuance.
RATING - Represents the rating, if any, on the security or securities
by the indicated rating agencies.
SECURITIZATION - Series description.
SECURITY - Represents the name of the class associated with each
securitization held by the Company. This has no relationship to a formal rating
but is for identification purposes (although the names are usually in
alphabetical or numeric order from the highest rated to the lowest rated).
SUBORDINATION LEVEL - Represents the credit support for each
mortgage-backed security by indicating the percentage of outstanding bonds whose
right to receive payment is subordinate to the referenced security. The
subordinate classes must experience a complete loss before any additional losses
would affect the particular referenced security.
WEIGHTED AVERAGE DSCR - Represents debt service coverage ratio, which
is calculated by dividing cash flow available for debt service by debt service.
WEIGHTED AVERAGE LTV- Represents the ratio of the loan amount to the
value of the underlying collateral.
YIELD TO MATURITY - Yield to maturity represents a measure of the
average rate of return that is earned on a security if held to maturity.
24
<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 March 31, 1999:
<TABLE>
<CAPTION>
OVER
CLASS COLLATERIZATION
ISSUE DESIGNATION RATING COLLATERAL BALANCE LEVEL AT PRODUCT TYPE AT
SECURITIZATION SECURITY DATE LETTER AGENCIES ISSUANCE 03/31/99 3/31/99 3/31/99
-------------- -------- ----- ------ -------- -------- -------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RESIDENTIAL MORTGAGE
BACKED SECURITIES (Dollars In Thousands)
RESIDUALS:
SASCO 1998-2(1) X Jan-98 NR S&P, Fitch $600,052 $ 441,212 1.19% OC 25% Fixed, 69% 2/28 ARM
SASCO 1998-3(1) X Mar-98 NR S&P, Fitch 769,671 579,284 2.33% OC 10% Fixed, 26% 2/28 ARM
MLMI 1998-FF1(2) X Jun-98 NR S&P, Fitch 198,155 156,211 1.91% OC 14% 1/29 ARM, 83% 2/28 ARM
PANAM 1997-1(3) X Dec-97 NR S&P, Moody's 113,544 83,254 5.70% OC 31% 6mo ARM, 62% 2/28 ARM
Prepay Pen.
LHELT 1998-2(4) X Jun-98 NR Moody's, Fitch 209,225 170,653 3.99% OC 41% Fixed, 38% 2/28 ARM
EQUICON 1994-2(5) B Fix, B-2 Oct-94 NR S&P, Moody's, 78,846 24,354 6.08% OC 100% Fixed
Fitch
QS Fix, QS-2 NR
B Var., B-2 NR 32,306 6,549 19.31% OC 100% 6mo ARM
EQUICON 1995-1(5) B Fix, B-2 May-95 NR S&P, Moody's, 70,024 18,905 16.15% OC 100% Fixed
Fitch
B Var., B-2 NR 70,519 7,420 18.16% OC 100% 6mo ARM
EQUICON 1995-2(5) B Fix, B-2 Oct-95 NR S&P, Moody's 79,288 27,041 14.04% OC 100% Fixed
B Var., B-2 NR 39,667 9,094 17.50% OC 100% 6mo ARM
ACCESS 1996-1(6) B Fix, B-2 Feb-96 NR S&P, Moody's 120,015 43,484 6.87% OC 100% Fixed
B Var., B-2 NR 55,362 12,541 15.05% OC 100% 6mo ARM
ACCESS 1996-2(6) B-I, B-1 May-96 NR S&P, Moody's 142,259 54,745 12.77% OC 100% Fixed
BI-S, BI-S-1 NR
B-II, B-1 NR 68,345 15,682 12.41% 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 42,323 11.71% OC 100% Fixed
BI-S, BI-S-1 NR
B-II, B-1 NR 99,885 23,327 20.40% 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 81,653 15.39% OC 49% Fixed, 51% ARM
B-S, B-S-1 NR
ACCESS 1997-1(6) B, B-1 Feb-97 NR S&P, Moody's 276,442 116,444 17.16% 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 85,902 10.40% OC 51% Fixed, 49% ARM
B-S, B-S-1 NR
ACCESS 1997-3(6) B, B-1 Oct-97 NR S&P, Moody's 199,884 103,520 6.51% OC 46% Fixed, 54% ARM
B-S, B-S-1 NR
OCWEN 98 - OAC-1 N/A Nov-98 NR S&P, Moody's 182,178 153,043 6.33% OC 23% Fixed, 77% ARM
CMR1(8) Deferred Apr-96 NR S&P, Duff 47,802(9) 24,655 8.29%RF 100% Amortizing
Comp
CMR2(8) Deferred Nov-96 NR S&P, Duff, Fitch 106,692(9) 54,426 8.59% RF 90.4% Amort 9.6% IO mortgages
Comp
CMR3(8) Deferred Nov-96 NR S&P, Duff, Fitch 195,610(9) 102,153 11.92% RF 74.1% Amort 25.9% IO mortgages
Comp
CMR4(8) Deferred Feb-97 NR S&P, Duff, Fitch 108,630(9) 66,615 5.76% RF 90.0% Amort 10.0% IO mortgages
Comp
CMR6(8) Deferred May-97 NR S&P, Duff, Fitch 91,442(9) 56,537 5.96% RF 95.7% Amort 4.3% IO mortgages
Comp
25
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OVER
CLASS COLLATERIZATION
ISSUE DESIGNATION RATING COLLATERAL BALANCE LEVEL AT PRODUCT TYPE AT
SECURITIZATION SECURITY DATE LETTER AGENCIES ISSUANCE 03/31/99 3/31/99 3/31/99
-------------- -------- ----- ------ -------- ---------- -------- --------------- ---------------
<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 9,785 9,426 4.09% 97% Fixed
B6 Apr-97 NR 16,998 9,713 None
ORMBS 1998-R1(12) B4 Mar-98 NR Moody's, DCR 32,718 30,363 None 98% Fixed
GECMS 1994-12(13) B4 Mar-94 NR Moody's, Fitch, 2,069 1,535 None 100% Fixed
S&P
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED ACTUAL ACTUAL
AVERAGE AVERAGE ACTUAL LIFE TO DATE LIFE TO DATE YIELD TO
INTEREST RATE LTV AT: DELINQUENCY CPR AT: LOSSES AT: MATURITY AT:
SECURITIZATION SECURITY AT: 3/31/99 3/31/99 AT: 3/31/99 3/31/99 3/31/99 PURCHASE 3/31/99
- -------------- -------- ----------- ------- ----------- ------- ------- -------- -------
RESIDENTIAL MORTGAGE
BACKED SECURITIES (Dollars In Thousands)
RESIDUALS:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SASCO 1998-2 X 10.14% 75.00% 8.42% 22.68% $ 315 16.00% 10.26%
SASCO 1998-3(1) X 9.78 76.87 8.20 24.27 194 17.04 7.88
MLMI 1998-FF1(2) X 9.40 78.07 7.75 24.44 46 18.57 12.83
PANAM 1997-1(3) X 10.14 79.69 19.73 22.29 296 22.45 36.55
Prepay Pen. 25.69 9.27
LHELT 1998-2(4) X 10.07 76.79 9.66 21.32 0 18.55 23.22
EQUICON 1994-2(5) B Fix, B-2 9.95 72.92 24.87 34.35 932 18.00 63.88
QS Fix, QS-2
B Var., B-2 10.83 76.77 18.00 21.82
EQUICON 1995-1(5) B Fix, B-2 12.05 72.00 38.65 32.71 1,667 18.00 17.73
B Var., B-2 11.45 75.30 18.00 60.24
EQUICON 1995-2(5) B Fix, B-2 10.84 75.23 36.44 34.46 1,363 18.00 36.78
B Var., B-2 11.41 74.54 18.00 83.55
ACCESS 1996-1(6) B Fix, B-2 10.88 75.17 33.80 34.68 1,754 18.00 38.61
B Var., B-2 11.39 77.06 18.00 22.51
ACCESS 1996-2(6) B-I, B-1 11.05 74.99 34.58 36.84 2,672 18.00 21.92
BI-S, BI-S-1
B-11, B-1 11.39 76.89 18.00 14.07
BII-S,
BII-S-1
ACCESS 1996-3(6) B-I, B-1 11.45 76.14 39.22 40.84 1,805 18.00 26.38
BI-S, BI-S-1
B-II, B-1 11.60 77.38 18.00 25.30
BII-S,
BII-S-1
ACCESS 1996-4(6) B, B-1 11.85 76.52 40.51 40.82 1,776 18.00 16.13
B-S, B-S-1
ACCESS 1997-1(6) B, B-1 11.49 77.85 42.18 40.14 2,860 18.00 15.71
B-S, B-S-1
ACCESS 1997-2(6) B, B-1 11.35 76.22 37.70 40.17 1,259 18.00 16.01
B-S, B-S-1
ACCESS 1997-3(6) B, B-1 11.16 76.90 31.82 40.06 655 18.00 17.94
B-S, B-S-1
OCWEN 98-OAC-1(7) N/A 8.69 77.51 4.18 33.54 0 N/A N/A
CMR1(8) Deferred Comp 13.44 N/A 36.50 20.76 595 18.00 65.84
CMR2(8) Deferred Comp 12.50 N/A 31.85 21.50 811 18.00 32.76
CMR3(8) Deferred Comp 13.63 N/A 18.76 17.56 2,136 18.00 22.22
CMR4(8) Deferred Comp 13.78 N/A 38.57 18.50 986 18.00 32.95
CMR6(8) Deferred Comp 13.61 N/A 36.89 20.60 449 18.00 40.01
SUBORDINATES:
SBMS 1997-HUD1(11) B5 9.80 107.64 18.73 14.50 5,798 16.87 19.37
B6 22.86 26.60
ORMBS 1998-R1(12) B4 8.97 90.78 20.63 5.82 5,613 13.75 9.91
GECMS 1994-12(13) B4 6.82 48.30 0.49 7.60 0 19.37 20.49
</TABLE>
27
<PAGE>
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 3/31/99
- -------------- -------- ---------- ------ --------------- -------- -------
COMMERCIAL MORTGAGE
BACKED SECURITIES
<S> <C> <C> <C> <C> <C> <C>
NASC 1996 MD-V (1) B-2 Apr-96 B S&P, Duff, Fitch 0.00% 0.00%
CSFB 1995-AEW1 (2) E Oct-95 BB S&P, Fitch 13.75 29.43
F-1 B 4.80 10.46
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 2.70
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 32.34
Equity NR 0.00 0.00
MLMCI 1993-M1 (5) B Sep-93 NR Moody's, S&P 2.00 6.21
</TABLE>
28
<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 3/31/99 3/31/99 3/31/99 Issuance 3/31/99 Purchase 3/31/99 Issuance 3/31/99
- -------------- -------- -------- -------- ------- ------- --------- -------- ------- -------- ------- -------- -------
(Dollars in thousands)
COMMERCIAL MORTGAGE
BACKED SECURITIES
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NASC 1996 MD-V (1) B-2 1.69 62.0% 0.0% 0.0% $ 0 4.36% 4.48% 9.90% 9.98% $752,598 752,598
CSFB 1995-AEW1 (2) E 1.26 71.8% 2.1% n/a $ 708 11.00 23.98 7.93 7.87 $131,988 130,465
F-1 1.80 3.92 9.75 9.86
G-1 4.80 10.46 12.84 13.70
G-2 5.72 11.93 14.87 14.89
MRAC 1996-C2 (3) K 1.36 69.1% 2.3% n/a $ 0 1.50 1.62 12.10 14.96 $473,294 472,713
L-1 2.50 2.70 12.31 12.48
L-2 2.50 2.70 12.82 15.97
BTC 1997-S1 (4) E, F 1.27 106.0% 17.8% n/a $ 6,158 14.50 24.68 8.36 8.50 $178,597 73,991
Equity 19.00 32.34 21.19 26.81
MLMCI 1993-M1 (5) B 1.51 56.0% 55.3% N/a $ 0 9.00 27.00 13.65 9.74 $ 9,090 6,034
</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 underly
the Company's securities available for sale portfolio at March 31, 1999.
<TABLE>
<CAPTION>
Description California Florida Texas New York Maryland Other (1)
----------- ------------- ------------ ------------- ------------ ------------ ------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Single family residential...... $ 486,021 $ 213,971 $ 140,001 $ 79,637 $ 103,919 $ 2,172,331
Multi-family and commercial.... 181,556 117,536 152,981 95,692 84,468 888,284
------------- ------------ ------------- ------------ ------------ ------------
Total.......................... $ 667,577 $ 331,507 $ 292,982 $ 175,329 $ 188,387 $3,060,615
============= ============ ============= ============ ============ ============
Percentage (2)................. 14.2% 7.0% 6.2% 3.7% 4.0% 64.9%
============= ============ ============= ============ ============ ============
</TABLE>
(1) No other individual state makes up more than 5% of the total. Includes
$52.3 million of loans secured by single family residences located in
United Kingdom which back the securities issued by City Mortgage
Receivable 1-6, which were acquired by the Company from the United
Kingdom operations of Cityscape Financial Corp.
(2) Based on a percentage of the total unpaid principal balance of the
underlying loans.
29
<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 March 31, 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 3/31/99 (2) COUPON LIFE (3)
----------- --------- ---------- ----- -------- ------------ ------ --------
SINGLE FAMILY RESIDENTIAL (Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Unrated residuals................ $187,090 $197,172 100% 17.90% 13.63% 0.00% 6.77
B-rated subordinates............. 4,772 4,430 100 16.87 19.37 7.75 6.66
Unrated subordinates............. 9,867 9,862 44 15.16 12.30 7.03 6.56
-------- --------
Total single family......... 201,729 211,464
-------- --------
MULTI-FAMILY/COMMERCIAL
BB-rated subordinates............ 55,284 58,108 86 8.67 8.33 7.78 3.84
B-rated subordinates............. 26,441 24,238 76 10.42 10.36 8.68 10.24
Unrated subordinates............. 18,517 18,962 100 14.04 17.15 8.02 5.49
Unrated IOs (1).................. 3,157 3,127 100 12.82 15.83 7.23 12.22
Unrated POs (1).................. 276 300 100 12.31 13.40 0.00 12.18
-------- --------
Total multi-family/commercial 103,675 104,735
-------- --------
Total mortgage related
securities.................. $305,404 $316,199
======== ========
</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 March 31, 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 March 31,
1999 book value.
The following table sets forth the property types of the Company's
commercial mortgage-backed securities at March 31, 1999, based upon the
principal amount.
Percentage
Property type Invested
--------------------------------- ----------
Multi-family.................. 27.0%
Retail........................ 26.0
Hotel......................... 13.5
Office........................ 7.4
Industrial.................... 3.7
Mixed use..................... 2.1
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
30
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
Company believes are reasonable, in estimating fair values of the subordinate
securities and residual securities retained. During the first quarter of 1999,
the Company utilized proprietary prepayment curves generated by the Company
(reaching an approximate range of annualized rates of 30%-40%). In its estimates
of annual loss rates, the Company utilizes assumptions that it believes are
reasonable. The Company estimates annual losses of between 0.22% and 2.06% of
the underlying loans.
The credit risk of mortgage-related securities is affected by the
nature of the underlying mortgage loans. In this regard, the risk of loss on
securities backed by commercial and 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
$8.3 million in the first quarter of 1999. Accelerated prepayment speeds largely
contributed to the $17.1 million losses on securities recorded by the Company
during the first quarter of 1998.
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.
COMMERCIAL AND MULTI-FAMILY LOAN PORTFOLIO. The Company's investment in
commercial and multi-family loans amounted to $70.3 million at March 31, 1999, a
$5.1 million increase over the $65.3 million investment at December 31, 1998.
The Company's commercial lending activities focus on real estate
lending opportunities in selected major metropolitan markets throughout the
United States where the Company believes there are significant supply
constraints and where employment and/or population growth and other demand
generators are expected to remain strong. The Company's general approach to
commercial lending is to capitalize on the core capabilities of the Manager and
its affiliates, which include an ability to assess the value creation potential
of underutilized real estate and to oversee and manage the conversion,
rehabilitation and/or construction process. The Company seeks to make loans to
borrowers who have a proven ability to acquire such assets and enhance value
through a process of repositioning or development. Loans are usually structured
to provide current income along with either exit fees or gross revenue
participation features. Loans may be originated as first mortgage loans or
structured as subordinated debt or mezzanine financing.
31
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
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.
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------------- --------------
<S> <C> <C>
Multi-family residential loans.................. $ 21,741,464 $ 20,544,269
Commercial real estate and land loans:
Hotels..................................... 22,145,020 21,304,912
Office buildings........................... 27,049,347 24,123,894
-------------- --------------
Total..................................... 70,935,831 65,973,075
Deferred fees................................... (213,857) (48,434)
Allowance for loan losses....................... (382,052) (641,676)
-------------- --------------
Commercial and multi-family loans, net..... $ 70,339,922 $ 65,282,965
============== ==============
</TABLE>
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 March 31, 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 March 31, 1999.
<TABLE>
<CAPTION>
LOAN PER STABILIZED
LOAN AMOUNT RATIO OF UNIT/ DEBT
LOAN OUTSTANDING TYPE OF LOAN TO SQUARE COVERAGE COUPON
LOAN LOCATION AMOUNT AT 03/31/99 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 $ 5,289 Construction 85% 72 1.22 9.630% 160 units
241 Church Street New York, NY 30,280 13,684 Conversion 88 582 N/A 9.000 52 units
459 Washington New York, NY 3,455 2,769 Conversion 61 314 N/A 10.500 11 units
Street
COMMERCIAL:
Doubletree Hotel Lowell, MA 7,652 7,447 Renovation 85 31 1.9 10.000 249 rooms
Hawthorn Suites Schaumburg, IL 7,629 -- Construction 65 56 1.59 8.750 136 suites
Hotel
Thompson Street New York, NY 17,715 2,424 Construction 80 209 1.66 10.000 100 rooms
Hotel
Wyndham Garden Wilmington, DE 13,300 12,274 Renovation 67 61 2.2 8.650 291 rooms
Hotel
Landmark III-GTE Burlington, MA 33,058 27,049 Renovation 85 114 1.18 9.250 291,007 sq.ft.
-------- --------
$124,639 $ 70,936
======== ========
</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 $6.6 million at March 31, 1999 from an investment of $8.1
million at December 31, 1998. At March 31, 1999, $4.0 million of the residential
loan portfolio was past due 90 days or more, compared to $4.2 million at
December 31, 1998. During the first quarter of 1999, the Company recorded a
provision for loan losses of $0.1 million.
32
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
DISCOUNT LOAN PORTFOLIO. The Company believes that, under appropriate
circumstances, the acquisition of nonperforming and underperforming mortgage
loans at discounts offers significant opportunities to the Company. Discount
loans generally have collateral coverage which is sufficiently in excess of the
purchase price of the loan, such that successful resolutions can produce total
returns which are in excess of an equivalent investment in performing mortgage
loans.
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 March 31, 1999, 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.
At March 31, 1999, 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 Three
Months Ended For the Year Ended
March 31, 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. The Company's real estate investment
approach had sought value creation opportunities that can be realized through
increased management focus and capital investment. The Company generally has
sought underperforming properties that can be acquired and renovated at
discounts to replacement cost. In evaluating opportunities, the Company has
focused on a series of key investment criteria. These include analysis of the
level of proposed new supply and development constraints in the markets where it
is considering investing. An underlying premise of the Company's real estate
investment philosophy has been that, while demand for real estate has remained
relatively constant over time, sudden and dramatic increases in supply have
driven boom and bust real estate cycles.
33
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
At March 31, 1999, the Company's investments in real estate consisted
of eight properties which had an aggregate carrying value of $208.7 million. A
total of four of the properties currently owned by the Company with an aggregate
carrying value of approximately $144.4 million are located in San Francisco,
California. Three of these properties are located in the financial district of
San Francisco, and one property is located in the adjacent civic center district
of San Francisco. The Company believes that the office market in San Francisco,
particularly the financial district, satisfies its general real estate
investment philosophy because in management's view it is characterized by
limited new supply and significant barriers to entry. Low vacancy rates, coupled
with lack of new construction, 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
$12.8 million. In the event of a more catastrophic earthquake or damages in
excess of $50 million, the Company would not be insured for such losses.
The Company's net investment in real estate increased to $208.7 million
at March 31, 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 March 31, 1999
----------- ----------------------- ----------------------- ----------- ------------- ---------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
04/08/98 225 Bush Street........ San Francisco, CA 570,637 Office Bldg. $ 104,786
09/23/97 450 Sansome Street..... San Francisco, CA 130,437 Office Bldg. 19,308
01/23/98 690 Market Street...... San Francisco, CA 124,692 Office Bldg. 14,231
09/03/97 10 U.N. Plaza.......... San Francisco, CA 71,636 Office Bldg. 9,580
07/22/98 841 Prudential Drive... Jacksonville, FL 488,080 Office Bldg. 32,836
11/10/97 Cortez Plaza........... Bradenton, FL 289,686 Shopping Ctr. 19,338
04/09/98 7075 Bayers Road....... Halifax, Nova Scotia 402,529 Shopping Ctr. 11,824
10/01/98 Holiday Village........ Havre, MT 223,355 Shopping Ctr. 1,791
Accumulated depreciation
and amortization (4,960)
-------------
$ 208,734
=============
</TABLE>
Set forth below is a brief description of each of the Company's
investments in real estate at March 31, 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 March 31, 1999, the Bush Street Property was 96%
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
34
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
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 75% leased as of March 31, 1999. Two new leases totaling
approximately 12,800 square feet were executed in December 1998 and have
resulted in an increased occupancy level of 86% as of April 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 ten new
leases totaling approximately 15,000 square feet, which increased building
occupancy to 83% as of March 31, 1999. The Company is investing approximately
$6.0 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 9% leased as of March 31, 1999, but two
new leases totaling 31,227 square feet were executed during the first quarter of
1999 which will increase occupancy to approximately 53%. The remaining space is
currently being marketed for lease to tenants with full floor space
requirements. The Company is investing approximately $3.6 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 March 31, 1999, the shopping
center was 94% leased with national and regional tenants, including Publix,
PetSmart, Circuit City, Montgomery Ward (which currently is in bankruptcy but
paying rent) and BankAmerica, comprising 70.5% of the leaseable area. Below
market leases covering approximately 15% of the center expire during 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 81%
leased at December 31, 1998. 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 $10.8 million.
35
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
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 47% leased at
March 31, 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.
The following table sets forth the cost of improvements for each
investment in real estate through March 31, 1999.
<TABLE>
<CAPTION>
Rents due
Budgeted Actual Cost and
Initial Cost of of Book accrued at Total
Cost to Improvements Improvements Impairment Value at Accumulated end of Rental
Property Company for 1999 to Date Writedown Sales 03/31/99 Depreciation period Income
- ----------------------- ------------ ------------ ------------ ----------- ----------- -------- ------------ ---------- ---------
(Dollars In Thousands)
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
225 Bush Street..... $ 101,632 $ 7,536 $ 3,154 $ $ $ 104,786 $ 2,265 $ 775 $ 2,838
450 Sansome Street.. 17,205 3,988 2,103 19,308 580 104 573
690 Market Street... 13,707 5,014 524 14,231 351 70 626
10 U.N. Plaza....... 9,080 3,414 500 9,580 298 3 35
841 Prudential Dr... 32,827 484 9 32,836 494 1,072 2,104
Cortez Plaza........ 19,244 1,354 94 19,338 612 285 776
7075 Bayers Road.... 15,219 10,782 507 (3,902) 11,824 341 228 921
Holiday Village..... 1,791 350 -- 1,791 19 24 109
Park Center I....... 1,534 -- -- (1,534) -- -- -- --
---------- ---------- ---------- --------- --------- ---------- ---------- --------- ---------
Total............ $ 212,239 $ 32,922 $ 6,891 $ (3,902) $ (1,534) $ 213,694 $ 4,960 $ 2,561 $ 7,982
========== ========== ========== ========= ========= ========== ========== ========= =========
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 March 31, 1999, assuming that none of the tenants exercise renewal options or
termination rights, if any, at or prior to the scheduled expirations.
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) 78 227,438 13.10% $ 2,811,873(2) 12.36 17.23%
2000 40 138,783 7.99 1,527,321 11.01 9.36
2001 46 118,078 6.80 1,216,421 10.30 7.46
2002 49 584,671 33.68 5,187,308 8.87 31.78
2003 16 28,178 1.62 434,987 15.44 2.67
2004 11 83,492 4.81 969,737 11.61 5.94
2005 4 29,120 1.68 102,069 3.51 0.63
2006 7 108,902 6.27 412,105 3.78 2.53
2007 9 116,019 6.68 1,162,714 10.02 7.13
2008 7 142,122 8.18 1,797,177 12.65 11.02
2009 & beyond 6 159,573 9.19 693,430 4.35 4.25
----- ---------- -------- ----------- -------
273 1,736,376 100.00% $16,315,142 100.00%
===== ========== ======== =========== =======
</TABLE>
(1) Lease year runs from April 1 to December 31 for all properties for 1999
only.
(2) Annualized base rent is calculated based on the amount of rent
scheduled from April 1 to December 31 for all properties for 1999 only.
(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.
36
<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 March 31, 1999, are as follows:
(Dollars In Thousands)
1999.................................... $ 19,393
2000.................................... 22,791
2001.................................... 20,521
2002.................................... 15,438
2003.................................... 10,208
Thereafter.............................. 47,476
---------
Total $ 135,827
=========
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.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE. Securities sold under
agreements to repurchase decreased $24.6 million to $114.0 million at March 31,
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 cash flows
from the bonds be used to pay down outstanding debt and the repricing of the
repurchase agreements as the collateral amortizes. 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 March 31, 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 March 31, 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 March 31, 1999, minority interest totaled $23.8
million and represented OCN's ownership through IMIHC of 1,808,733 units in the
Operating Partnership.
SHAREHOLDERS' EQUITY. Shareholders' equity decreased by $0.9 million
from December 31, 1998 to March 31, 1999. The decrease was due to a net loss of
$0.8 million, a $0.2 million decrease in unrealized gain on securities available
for sale and partially offset by cumulative currency translation adjustment of
$0.1 million.
CAPITAL RESOURCES AND LIQUIDITY
Liquidity is a measurement of the Company's ability to meet potential
cash requirements, including ongoing commitments to repay borrowings, fund
investments, engage in loan acquisition and lending activities, and for other
general business purposes. Additionally, to maintain its status as a REIT under
the Code, the Company must distribute annually at least 95% of its taxable
income. The primary sources of funds for liquidity during the first quarter of
1999 consisted of cash provided by operating activities principal payments
received from loans, sales of securities available for sale, increases in
obligations oustanding 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 $12.4 million
during the first quarter of 1999. At the same time, the Company's investing
activities provided cash flows of $32.3 million during the first quarter of
1999. During the first quarter of 1999, cash provided by investing activities
37
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FIANANCIAL CONDITION AND
RESULTS OF OPREATIONS
================================================================================
primarily consisted of sale of securities available for sale of $12.7 million
and principal payments on loans of $20.1 million. The Company's financing
activities used cash flows of $37.0 million during the first quarter of 1999 and
primarily consisted of repayments of $24.6 million on borrowings collateralized
by securities sold under agreements to repurchasers and principal payments of
$20.1 million on bonds-match funded loan agreements.
At March 31, 1999, OAC's total closed transactions since the Initial
Public Offering, net of repayments, were $875.5 million. Of this amount, $811.8
million has been funded and the remaining $53.7 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.
Based upon its current balance of cash and cash equivalents, and
projected cash flows from operations, potential cash on flows from the sale or
refinancing of assets, and available lines of credit, the Company believes that
its sources of funds will be adequate for the purposes 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
March 31, 1999, the Company had interest rate swap agreements with a notional
amount of $200.8 million and a fair value of ($1.8) million in order to limit
partially the adverse effects of rising interest rates on the remaining
floating-rate debt. For a tabular presentation of these agreements and other
information, see Note 3 to the Consolidated Financial Statements above. When the
Company's swap agreements expire, the Company will have interest rate risk to
the extent interest rates increase on any floating-rate borrowings unless the
swaps are replaced or other steps are taken to mitigate this risk.
The Company's ability to raise additional debt is dependent upon, among
other things, the value of unencumbered assets, which are inherently linked to
prevailing interest rates and changes in the credit of the underlying assets. At
March 31, 1999, the Company had unencumbered residential loans and securities
having a fair value totaling approximately $51.6 million ($32.1 million of
subordinate and residual mortgage-backed securities, $12.9 million of commercial
mortgage-backed securities, and $6.6 million of residential loans).
In certain circumstances, including, among other things, increases in
interest rates, changes in market spreads, or decreases in credit quality of
underlying assets, the Company would be required to provide additional
collateral in connection with its short-term, floating-rate borrowing
facilities. During the first 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 margin deposits with its swaps and future 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.
At March 31, 1999, the Company had total consolidated indebtedness of
$598.7 million, of which all but $143.0 million of outstanding Redeemable Notes
was secured indebtedness, as well as $13.7 million of other liabilities. This
consolidated indebtedness consisted of: (i) $114.0 million of repurchase
agreements, of which $91.5 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) $143.3 million of match funded
indebtedness which is secured by $154.2 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 $10.1 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.
38
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FIANANCIAL CONDITION AND
RESULTS OF OPREATIONS
================================================================================
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 recent decision to discontinue future investment
activities effectively means that the Company's future profitability, and its
ability to meet its indebtedness obligations, will be dependent on its existing
assets. Circumstances which result in decreased income from the Company's
assets, including without limitation market and economic conditions which
adversely affect leasing income from the Company's investments in real estate,
payments on its loans, and yield on its 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 March 31, 1999 was $(45.3)
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 March 31, 1999 and at April 30,
1999, the Company was in compliance with all obligations under the agreements
evidencing its indebtedness with respect to the Company's equity and the
Operating Partnership's equity, as defined in the applicable agreement. There
can be no assurance that additional operating losses will not result in the
Company's violation of its financial and non-financial covenants in the future.
In the event of a default in such covenants, the lender generally would be able
to accelerate repayment of the indebtedness and pursue other available remedies,
which could result in defaults on other indebtedness of the Company, unless the
applicable lender or lenders allowed the Company to remain in violation of the
agreements. Were a default to be declared, the Company would not be able to
continue to operate without the consent of its lenders. The Company currently is
considering various alternatives to enhance its ability to meet its payment and
other obligations under its indebtedness and the funding requirements discussed
above, including the sale of certain assets and the potential tax and other
consequences associated therewith. There can be no assurance that the Company
will have sufficient liquidity to meet these obligations on a short-term or
long-term basis.
YEAR 2000 DATE CONVERSION
A critical business issue is whether existing application software
programs and operating systems can accommodate the year 2000 change date value.
Many existing application software products in the marketplace were designed to
accommodate only two-digit date entries. Beginning in the year 2000, these
systems and products will need to be able to accept four-digit entries to
distinguish years beginning with 2000 from prior years. As a result, computer
systems and software used by many companies may need to be upgraded to comply
with such Year 2000 requirements.
39
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
The Company is dependent upon data processing systems and software to
conduct its business. The data processing systems and software include those
developed, purchased and maintained by OCC, as well as OCN and its other
subsidiaries, which provide management services to the Company. The Company does
not own nor maintain computer equipment or software.
OCN has established a project plan to achieve Year 2000 readiness of
its mission critical and non-mission critical systems, including hardware
infrastructure and software applications. The project plan is divided into six
phases: identification, evaluation, remediation, validation, risk assessment and
contingency planning. 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.
As part of the identification and evaluation phases of the project, the
Company has documented critical operating functions within each business unit,
as well as strategic third-party and vendor relationships. OCN has retained a
business continuity expert to prepare contingency plans and assist with the
testing and validation of these plans. OCN expects to complete its Year 2000
risks assessment and contingency planning efforts during the first half of 1999.
The cost of OCN's Year 2000 project, which is budgeted at $2.0 million, will be
borne by OCN. The Company does not expect to incur any costs in connection with
achieving Year 2000 compliance. Until the risk assessment phase is completed,
the Company will not know the complete extent of the risks associated with Year
2000 issues, including an analysis of the most reasonable likely worst case Year
2000 scenario, nor can the Company prepare a contingency plan. As a result,
neither is ready at this time.
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 ended March 31, 1999 was ($0.4) million
compared to $3.8 million for the comparable quarter in 1998.
The following table reconciles FFO and net income during the
periods indicated.
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
----------------------------------
1999 1998
------------- ------------
(Dollars in Thousands)
<S> <C> <C>
Net income................................. $ (784) $ (10,504)
Depreciation and amortization........... 1,194 304
Loss on sale of IO portfolio............ -- 13,958
Gain on sale of securities.............. (851) --
------------- ------------
FFO........................................ $ (441) $ 3,758
============= ============
</TABLE>
40
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FIANANCIAL CONDITION AND
RESULTS OF OPREATIONS
================================================================================
REIT STATUS
The Company has qualified and intends to continue to qualify through
calendar 1998 (but not thereafter) 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 March 31, 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.
On April 16, 1999, the Company announced the receipt of a proposal from
OCN regarding a possible business combination between them. If this business
combination 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. See "Recent Developments" above.
Because the Special Committee of the Board is investigating a variety
of strategic alternatives in addition to a business combination with OCN, there
can be no assurance that if a business combination is effected, the Company will
cease to be a REIT.
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 Securities and
Exchange Commission (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 March 31, 1999, the Company believes that its Qualifying Interests,
including subordinate and residual interests, comprised over 84% of the
Company's total assets and over 90% 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.
41
<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 March 31, 1999. Actual results could differ
significantly from those estimated in the table.
42
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
================================================================================
<TABLE>
<CAPTION>
Projected Percentage Change In
- -------------------------------------------------------------------------------------------------
Change in Interest Rate Net Interest Income (1) Net Portfolio Value
=================================================================================================
<S> <C> <C> <C>
-400 Basis Points (17.25)% 18.61%
-300 Basis Points (12.94) 13.57
-200 Basis Points (8.63) 8.27
-100 Basis Points (4.31) 2.95
Base Interest Rate 0 0
+100 Basis Points 4.31 (2.73)
+200 Basis Points 8.63 (6.13)
+300 Basis Points 12.94 (8.92)
+400 Basis Points 17.25 (11.90)
</TABLE>
(1) Represents the estimated percentage change in net interest income over
the next twelve months, assuming that balances are rolled over and
reinvested at the shocked level of interest rate. For purposes of this
calculation, net interest income includes 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 March 31, 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.
43
<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 March
31, 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>
March 31, 1999
More than 1
Within 4 to 12 Year to 3 Years
3 Months Months 3 Years and Over Total
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Rate-Sensitive Assets: (Dollars In Thousands)
Interest-earning cash and repurchase
Agreements................................. $ 57,606 $ -- $ -- $ -- $ 57,606
Securities available for sale................ 13,135 37,265 75,492 190,307 316,199
Loan portfolio, net (1)...................... 46,321 28,177 1,164 1,236 76,898
Match funded loan agreements................. 28,265 57,866 39,581 28,452 154,164
Discount loan portfolio, net (1)............. -- 5,618 -- -- 5,618
------------ ------------ ------------ ---------- ----------
Total rate-sensitive assets................ 145,327 128,926 116,237 219,995 610,485
------------ ------------ ------------ ---------- ----------
Rate-Sensitive Liabilities:
Securities sold under agreements
To repurchase.............................. 113,991 -- -- -- 113,991
Bonds-match funded loan agreements........... 143,298 -- -- -- 143,298
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........... 442,060 -- -- 143,000 585,060
Interest rate sensitivity gap before
Off-balance sheet financial instruments.... (296,733) 128,926 116,237 76,995 25,425
Off-Balance Sheet Financial Instruments:
Interest rate swaps.......................... 200,780 -- (92,000) (108,780) --
------------ ------------ ------------ ---------- ----------
Interest rate sensitivity gap.................. (95,953) 128,926 24,237 (31,785) $ 25,425
------------ ------------ ------------ ---------- ----------
Cumulative interest rate sensitivity gap....... $ (95,953) $ 32,973 $ 57,210 $ 25,425
============ ============ ============ ==========
Cumulative interest rate sensitivity gap as a
percentage of total rate-sensitive assets.... (15.72%) 5.40% 9.37% 4.16%
</TABLE>
(1) Balances have not been reduced for non-performing loans.
As of March 31, 1999, the cumulative volume of assets maturing or
repricing within one year exceeded liabilities by $33.0 million, or 5.4% of
assets, implying moderate current-year income sensitivity to movements in the
level of interest rates.
44
<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 "BELIEVE" "COMMITMENT," "CONTINUE," "EXPECT," "FORESEE," "MAY," "PLAN,"
"WILL," FUTURE OR CONDITIONAL VERB TENSES, SIMILAR TERMS, VARIATIONS ON SUCH
TERMS OR NEGATIVES OF SUCH TERMS. ALTHOUGH OAC BELIEVES THE ANTICIPATED RESULTS
OR OTHER EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON
REASONABLE ASSUMPTIONS, ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
INDICATED IN SUCH STATEMENTS DUE TO RISKS, UNCERTAINTIES AND CHANGES WITH
RESPECT TO A VARIETY OF FACTORS, INCLUDING, BUT NOT LIMITED TO, INTERNATIONAL,
NATIONAL, REGIONAL OR LOCAL ECONOMIC ENVIRONMENTS, GOVERNMENT FISCAL AND
MONETARY, PREVAILING INTEREST OR CURRENCY EXCHANGE RATES, EFFECTIVENESS OF
INTEREST RATE, CURRENCY EXCHANGE RATE AND OTHER HEDGING STRATEGIES, LAWS AND
REGULATIONS AFFECTING REAL ESTATE INVESTMENT TRUSTS, INVESTMENT COMPANIES AND
REAL ESTATE (INCLUDING CAPITAL REQUIREMENTS, INCOME AND PROPERTY TAXATION,
ACCESS FOR DISABLED PERSONS AND ENVIRONMENTAL COMPLIANCE), UNCERTAINTY OF
FOREIGN LAWS, COMPETITIVE PRODUCTS, PRICING AND CONDITIONS (INCLUDING FROM
COMPETITORS THAT HAVE SIGNIFICANTLY GREATER RESOURCES THAN OAC), CREDIT,
PREPAYMENT, BASIS, DEFAULT, SUBORDINATION AND ASSET/LIABILITY RISKS, LOAN
SERVICING EFFECTIVENESS, SATISFACTORY DUE DILIGENCE RESULTS, SATISFACTION OR
FULFILLMENT OF AGREED UPON TERMS AND CONDITIONS OF CLOSING OR PERFORMANCE,
TIMING OF TRANSACTION CLOSINGS, THE DECISION TO CURTAIL EACH BUSINESS LINE AND
DISCONTINUE INVESTMENT ACTIVITY, AVAILABILITY OF AND COSTS ASSOCIATED WITH
OBTAINING ADEQUATE AND TIMELY SOURCES OF LIQUIDITY, DEPENDENCE ON EXISTING
SOURCES OF FUNDING, ABILITY TO REPAY OR REFINANCE INDEBTEDNESS (AT MATURITY OR
UPON ACCELERATION), TO MEET COLLATERAL CALLS BY LENDERS (UPON RE-VALUATION OF
THE UNDERLYING ASSETS OR OTHERWISE), TO GENERATE REVENUES SUFFICIENT TO MEET
DEBT SERVICE PAYMENTS AND OTHER OPERATING EXPENSES AND TO SECURITIZE WHOLE
LOANS, TAXABLE INCOME EXCEEDING CASH FLOW, SIZE OF, NATURE OF AND YIELDS
AVAILABLE WITH RESPECT TO THE SECONDARY MARKET FOR MORTGAGE LOANS AND FINANCIAL,
SECURITIES AND SECURITIZATION MARKETS IN GENERAL, ALLOWANCES FOR LOAN LOSSES,
GEOGRAPHIC CONCENTRATIONS OF ASSETS (TEMPORARY OR OTHERWISE), TIMELY LEASING OF
UNOCCUPIED SQUARE FOOTAGE (GENERALLY AND UPON LEASE EXPIRATION), CHANGES IN REAL
ESTATE MARKET CONDITIONS (INCLUDING LIQUIDITY, VALUATION, REVENUES, RENTAL
RATES, OCCUPANCY LEVELS AND COMPETING PROPERTIES), ADEQUACY OF INSURANCE
COVERAGE IN THE EVENT OF A LOSS, KNOWN OR UNKNOWN ENVIRONMENTAL CONDITIONS,
EXTERNAL MANAGEMENT, CONFLICTS OF INTEREST, YEAR 2000 COMPLIANCE, OTHER FACTORS
GENERALLY UNDERSTOOD TO AFFECT THE REAL ESTATE ACQUISITION, MORTGAGE AND LEASING
MARKETS, SECURITIES INVESTMENTS AND RAPID GROWTH COMPANIES, AND OTHER RISKS
DETAILED FROM TIME TO TIME IN OAC'S REPORTS AND FILINGS WITH THE SEC, INCLUDING
ITS REGISTRATION STATEMENTS ON FORMS S-3, S-4 AND S-11 AND ITS PERIODIC REPORTS
ON FORMS 10-Q, 8-K AND 10-K. SPECIFIC REFERENCE IS MADE TO EXHIBIT 99.2 INCLUDED
WITH THE FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 AND FILED WITH THE SEC,
FOR A DESCRIPTION OF MATERIAL RISKS FACED BY THE COMPANY AND ITS SECURITIES
HOLDERS. GIVEN THESE UNCERTAINTIES, READERS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON SUCH STATEMENTS, OAC DOES NOT UNDERTAKE TO REVISE, AND SPECIFICALLY
DISCLAIMS ANY OBLIGATION, TO PUBLICLY RELEASE THE RESULT OF ANY REVISIONS WHICH
MAY BE MADE TO, ANY FORWARD-LOOKING STATEMENTS TO REFLECT THE OCCURRENCE OF
ANTICIPATED OR UNANTICIPATED EVENTS OR CIRCUMSTANCES AFTER THE DATE OF SUCH
STATEMENTS.
45
<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 (3)
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
(2)
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)
27 Financial Data Schedule for the period ended March
31, 1998 (3)
99.1 Investment Guidelines (4)
99.2 Risk Factors (3)
--------------------------------------------------------------
(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
Registration Statement on Form S-4 (File No.
333-64047), as amended, as declared effective by the
Commission on February 12, 1999.
46
<PAGE>
(3) Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31,
1998.
(4) Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended
June 30, 1998.
(b) Reports on Form 8-K filed during the quarter ended March 31,
1999.
(1) A Form 8-K/A on January 28, 1999, which contained
Financial Statements related to certain acquired
properties.
(2) A Form 8-K filed on February 1, 1999, which contained
a news release announcing the Company's financial
results for the three months ended December 31, 1998.
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: May 17, 1999
48
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001033643
<NAME> OCWEN ASSET INVESTMENT CORP.
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 61,247
<SECURITIES> 316,199
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 842,768
<CURRENT-LIABILITIES> 13,665
<BONDS> 585,060
0
0
<COMMON> 190
<OTHER-SE> 220,093
<TOTAL-LIABILITY-AND-EQUITY> 842,768
<SALES> 0
<TOTAL-REVENUES> 27,527
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 18,127
<LOSS-PROVISION> 258
<INTEREST-EXPENSE> 9,926
<INCOME-PRETAX> (784)
<INCOME-TAX> 0
<INCOME-CONTINUING> (784)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (784)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
