================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from: _____________to _____________
Commission File No. 1-14043
OCWEN ASSET INVESTMENT CORP.
-------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Florida 65-078313
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
The Forum, Suite 1000
1675 Palm Beach Lakes Boulevard
West Palm Beach, Florida 33401
--------------------------------------- ----------
(Address of principal executive office) (Zip Code)
(561) 682-8000
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: Not applicable.
Securities registered pursuant to Section 12 (g) of the Act: Not Applicable.
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 [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
At December 31, 1999, there were 6,100 shares of common stock of the Registrant
outstanding, all of which are owned indirectly by Ocwen Financial Corporation.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS (I)(1)(a)
AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE REDUCED
DISCLOSURE FORMAT.
================================================================================
1
<PAGE>
OCWEN ASSET INVESTMENT CORP.
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business ................................................... 4
Item 2. Properties ................................................. 4
Item 3. Legal Proceedings........................................... 4
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters ........................................ 5
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................ 5
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.. 20
Item 8. Financial Statements........................................ 23
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 50
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K ................................................... 51
Signatures.................................................. 53
2
<PAGE>
FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED HEREIN ARE NOT, AND CERTAIN STATEMENTS
CONTAINED IN FUTURE FILINGS BY THE COMPANY WITH THE SECURITIES AND EXCHANGE
COMMISSION (THE "COMMISSION"), IN THE COMPANY'S PRESS RELEASES OR IN THE
COMPANY'S OTHER PUBLIC OR SHAREHOLDER COMMUNICATIONS MAY NOT BE, BASED ON
HISTORICAL FACTS AND ARE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE FORWARD-LOOKING STATEMENTS,
WHICH ARE BASED ON VARIOUS ASSUMPTIONS (SOME OF WHICH ARE BEYOND THE COMPANY'S
CONTROL), MAY BE IDENTIFIED BY REFERENCE TO A FUTURE PERIOD(S) OR BY THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "ANTICIPATE," "BELIEVE," "COMMITMENT,"
"CONSIDER," "CONTINUE," "COULD," "ENCOURAGE," "ESTIMATE," "EXPECT," "FORESEE,"
"INTEND," "IN THE EVENT OF," "MAY," "PLAN," "PRESENT," "PROPOSE," "PROSPECT,"
"UPDATE," "WHETHER," "WILL," "WOULD," FUTURE OR CONDITIONAL VERB TENSES, SIMILAR
TERMS, VARIATIONS ON SUCH TERMS OR NEGATIVES OF SUCH TERMS. ALTHOUGH THE COMPANY
BELIEVES THE ANTICIPATED RESULTS OR OTHER EXPECTATIONS REFLECTED IN SUCH
FORWARD-LOOKING STATEMENTS ARE BASED ON REASONABLE ASSUMPTIONS, IT CAN GIVE NO
ASSURANCE THAT THOSE RESULTS OR EXPECTATIONS WILL BE ATTAINED. ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE INDICATED IN SUCH STATEMENTS DUE TO RISKS,
UNCERTAINTIES AND CHANGES WITH RESPECT TO A VARIETY OF FACTORS, INCLUDING, BUT
NOT LIMITED TO, INTERNATIONAL, NATIONAL, REGIONAL OR LOCAL ECONOMIC ENVIRONMENTS
(PARTICULARLY IN THE MARKET AREAS WHERE THE COMPANY OPERATES), GOVERNMENT FISCAL
AND MONETARY POLICIES (PARTICULARLY IN THE MARKET AREAS WHERE THE COMPANY
OPERATES), PREVAILING INTEREST OR CURRENCY EXCHANGE RATES, EFFECTIVENESS OF
INTEREST RATE, CURRENCY AND OTHER HEDGING STRATEGIES, LAWS AND REGULATIONS
AFFECTING INVESTMENT COMPANIES AND REAL ESTATE (INCLUDING 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 THE COMPANY), CREDIT, PREPAYMENT, BASIS,
DEFAULT, SUBORDINATION AND ASSET/LIABILITY RISKS, LOAN SERVICING EFFECTIVENESS,
COURSE OF NEGOTIATIONS AND ABILITY TO REACH AGREEMENT WITH RESPECT TO MATERIAL
TERMS OF ANY PARTICULAR TRANSACTION, SATISFACTION OR FULFILLMENT OF AGREED UPON
TERMS AND CONDITIONS OF CLOSING OR PERFORMANCE, TIMING OF TRANSACTION CLOSINGS,
DISCONTINUATION OF INVESTMENT ACTIVITIES, 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) AND TO GENERATE REVENUES SUFFICIENT TO MEET
DEBT SERVICE PAYMENTS AND OTHER OPERATING EXPENSES, 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 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, OTHER FACTORS GENERALLY UNDERSTOOD TO AFFECT THE REAL
ESTATE ACQUISITION, MORTGAGE AND LEASING MARKETS AND SECURITIES INVESTMENTS, AND
OTHER RISKS DETAILED FROM TIME TO TIME IN THE COMPANY'S REPORTS AND FILINGS WITH
THE COMMISSION, INCLUDING ITS REGISTRATION STATEMENTS ON FORMS, S-4 AND S-11,
PERIODIC REPORTS ON FORMS 10-Q, 8-K, AND 10-K AND EXHIBIT 99.2, RISK FACTORS,
FILED HEREWITH. GIVEN THESE UNCERTAINTIES, READERS ARE CAUTIONED NOT TO PLACE
UNDUE RELIANCE ON SUCH STATEMENTS. THE COMPANY DOES NOT UNDERTAKE, AND
SPECIFICALLY DISCLAIMS ANY OBLIGATION, TO PUBLICLY RELEASE THE RESULTS OF ANY
REVISIONS WHICH MAY BE MADE TO ANY FORWARD-LOOKING STATEMENTS TO REFLECT THE
OCCURRENCE OF ANTICIPATED OR UNANTICIPATED EVENTS OR CIRCUMSTANCES AFTER THE
DATE OF SUCH STATEMENTS.
3
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
On October 7, 1999, Ocwen Acquisition Company ("Acquisition Sub"), a
Virginia corporation and an indirect wholly-owned subsidiary of Ocwen Financial
Corporation ("OCN"), merged (the "Merger") with and into Ocwen Asset Investment
Corp., a Virginia corporation (together with its successor by merger, as
described below, either "OAC" or the "Company"), in accordance with that certain
Agreement of Merger (the "Merger Agreement") dated as of July 25, 1999 among
OAC, OCN, and Acquisition Sub. In accordance with the Merger Agreement, OAC
shareholders (except for OCN or its subsidiaries) received in the merger 0.71
shares of OCN common stock for each outstanding share of OAC common stock. On
October 20, 1999, the Company merged (the "Subsequent Merger") into Small
Commercial Properties Corporation I, a Florida corporation and an indirect
wholly-owned subsidiary of OCN which immediately thereafter changed its name to
Ocwen Asset Investment Corp. As a result of the Subsequent Merger, on October
20, 1999, OAC ceased to qualify as a real estate investment trust ("REIT") under
the Internal Revenue Code of 1986, as amended (the "Code").
The Company has sought to capitalize on inefficiencies in the real
estate and mortgage markets by investing in several categories of real estate
and real estate related assets, including (i) subordinate interests in
commercial and residential mortgage-backed securities; (ii) distressed
commercial and multi-family real property, including properties acquired by a
mortgage lender at foreclosure (or deed in lieu of foreclosure); (iii)
commercial, multi-family and single-family residential mortgage loans, including
construction and rehabilitation loans and mezzanine loans; (iv) interest-only
and inverse interest-only mortgage-related securities supported by residential
and commercial mortgage loans; and (v) mortgage loans that are in default or for
which default is likely or imminent or for which the borrower is currently
making monthly payments in accordance with a forbearance plan (collectively,
"discount loans"). The Company also has acquired real property or mortgage loans
secured by such real property and other real property interests that: (i) may be
environmentally distressed; or (ii) are located outside the United States.
ITEM 2. PROPERTIES
The Company does not maintain an office. It relies on the facilities
provided by its Manager, Ocwen Capital Corporation, a Florida corporation
wholly-owned by OCN ("OCC" or the "Manager"). For information regarding real
estate acquired by the Company for investment, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Investment in Real
Estate" under Item 7.
ITEM 3. LEGAL PROCEEDINGS
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
adverse effect on the results of operations or financial condition of the
Company. See Note 14 to the Consolidated Financial Statements, which is
incorporated herein by reference.
4
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS.
Effective October 7, 1999, the Company's stock was no longer publicly
traded. OCN indirectly holds all of the Company's 6,100 outstanding shares. The
following table sets forth the amounts of cash dividends declared on the common
stock during the periods indicated:
1999 1998 1997
---- ---- ----
First Quarter $ -- $0.25 $ --
Second Quarter -- 0.49 0.10
Third Quarter 0.82 0.44 0.24
Fourth Quarter -- -- 0.39
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RECENT DEVELOPMENTS
On January 4, 2000 the Company repurchased in the open market $20.0
million of its $143.0 million par outstanding 11.5% Redeemable Notes due 2005.
On January 18, 2000, the Company purchased OAIC-Commercial Assets,
Inc., a direct subsidiary of OCN for approximately $22.1 million. The acquired
company consisted of equity participations in real estate ventures and various
loans.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
In connection with the Merger, all of the assets and liabilities of the
Company were revalued as of October 7, 1999 using purchase accounting. For
presentation purposes and for use in Management's Discussion and Analysis of the
Changes in Financial Condition and Results of Operations, the following table
combines the January 1, 1999 to October 6, 1999 (pre-Merger period) with the
October 7, 1999 to December 31, 1999 (post-Merger period) for comparison to the
year ended December 31, 1998. To the extent the application of purchase
accounting results in a lack of comparability between the periods presented, the
impact is included in the narrative.
5
<PAGE>
<TABLE>
<CAPTION>
Predecessor Successor | Combined
--------------------------------- ---------------- |------------------
Period Period | Period
For the January 1, 1999 October 7, 1999 | January 1, 1999
Year Ended To To | To
December 31 1998 October 6, 1999 December 31, 1999 | December 31, 1999
---------------- --------------- ----------------- |------------------
INTEREST INCOME: |
<S> <C> <C> <C> <C>
Interest bearing deposits ..................... $ 1,212,517 $ 1,028,339 $ 256,246 |$ 1,284,585
Repurchase agreements ......................... -- 80,648 470,248 | 550,896
Securities held for trading ................... 106,892 -- -- | --
Securities available for sale ................. 43,446,423 35,908,207 5,165,211 | 41,073,418
Commercial and multi-family loans ............. 5,736,214 6,250,607 3,990,970 | 10,241,577
Match funded residential loans and securities.. 1,915,071 8,765,332 3,598,473 | 12,363,805
Residential loans ............................. 8,424,325 391,802 126,293 | 518,095
Discount loans ................................ 2,116,564 748,497 55,056 | 803,553
--------------- --------------- --------------- |---------------
62,958,006 53,173,432 13,662,497 | 66,835,929
--------------- --------------- --------------- |---------------
INTEREST EXPENSE: |
Securities sold under agreements to repurchase. 11,682,824 6,154,263 749,209 | 6,903,472
Securities sold short ......................... -- 251,891 335,227 | 587,118
Obligations outstanding under lines of credit.. 6,515,925 2,097,709 686,530 | 2,784,239
11.5% Redeemable Notes due 2005 .............. 7,798,597 12,376,650 4,225,501 | 16,602,151
Bonds-match funded loan agreements ............ 1,530,467 6,880,040 2,101,146 | 8,981,186
--------------- --------------- --------------- |---------------
27,527,813 27,760,553 8,097,613 | 35,858,166
--------------- --------------- --------------- |---------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN ... 35,430,193 25,412,879 5,564,884 | 30,977,763
Provision for loan losses ..................... 641,677 1,076,841 (331,134) | 745,707
--------------- --------------- --------------- |---------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN .. 34,788,516 24,336,038 5,896,018 | 30,232,056
--------------- --------------- --------------- |---------------
|
REAL ESTATE INCOME (EXPENSE), NET ............... 1,139,952 (665,593) (963,399) | (1,628,992)
--------------- --------------- --------------- |---------------
|
OTHER EXPENSES (INCOME): |
Management fees ............................... 5,892,468 4,470,498 1,347,472 | 5,817,970
Servicing fees ................................ 2,399,778 2,059,175 926,541 | 2,985,716
Due diligence expenses ........................ 1,817,924 122,745 -- | 122,745
Foreign currency gain (loss) .................. (116,953) -- -- | --
Amortization of goodwill ...................... -- -- (3,201,416) | (3,201,416)
Other ......................................... 3,323,672 5,508,536 849,547 | 6,358,083
--------------- --------------- --------------- |---------------
13,316,889 12,160,954 (77,856) | 12,083,098
Losses on securities, derivatives and real estate (86,267,429) (35,582,326) (944,257) | (36,526,583)
--------------- --------------- --------------- |---------------
|
INCOME (LOSS) BEFORE TAXES AND MINORITY INTEREST. (63,655,850) (24,072,835) 4,066,218 | (20,006,617)
Income tax benefit (expense) .................... -- -- (539,137) | (539,137)
Minority interest in net loss (income) of |
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ... (58,800,966) (22,276,910) 3,527,081 | (18,749,829)
Extraordinary gain on repurchase of debt ...... 615,047 -- -- | --
--------------- --------------- --------------- |---------------
NET INCOME (LOSS) ............................. $ (58,185,919) $ (22,276,910)$ 3,527,081 |$ (18,749,829)
=============== =============== =============== |===============
</TABLE>
GENERAL. Net loss for the year ended 1999 was $18.7 million compared to
a net loss of $58.2 million for the year ended December 31, 1998. The loss for
year ended December 31, 1999 was primarily due to impairment losses on
securities, derivatives and real estate of $36.5 million compared to $86.3
million for the year ended December 31, 1998. The impairment losses for the year
ended 1999 were taken against residential subprime bonds, reflecting continuing
market illiquidity for these instruments.
INTEREST INCOME. Interest income increased $3.9 million, or 6.2%, to
$66.8 million for the year ended December 31, 1999 compared to $62.9 million for
the comparable period ended 1998. This increase was primarily due to an
additional $10.4 million in interest income from match funded loans and
securities offset by a $7.9 million decrease in interest from the residential
6
<PAGE>
loans portfolio during 1999 as compared to 1998. The increase in interest income
from match funded residential loans and securities and the decrease in interest
income from residential loans reflects the securitization on November 13, 1998
of $173.6 million of residential loans in a transaction structured as a
financing (see Note 8 to the Consolidated Financial Statements, which is
incorporated herein by reference). Interest income from commercial and
multi-family loans increased $4.5 million during 1999 as compared to 1998, the
result of higher average balances in this portfolio. The average balances in
match funded loans and securities increased $32.9 million from $43.9 million in
1998 to $76.8 million in 1999. Interest income on the securities available for
sale portfolio decreased by $2.4 million on the securities available for sale
portfolio, which resulted from higher than expected amortization in the
residential securities portfolio and the sale and securitization of some
securities.
INTEREST EXPENSE. Interest expense for the year ended December 31, 1999
increased $8.4 million to $35.9 million as compared to $27.5 million for the
same period a year ago. This increase was primarily due to an additional $8.8
million in interest on the 11.5% redeemable Notes due 2005 and an additional
$7.4 million in interest paid on bonds match-funded during 1999 as compared to
1998. This increase was offset by a $3.7 million decrease in interest expense
associated with the pay down of obligations outstanding under lines of credit
and a $4.8 million decrease in interest incurred from securities sold under
agreements to repurchase, primarily due to the sale of securities. Interest
expense does not include the expense associated with the borrowings secured by
investments in real estate, which is included in the operations of the Company's
real estate. See " -Real Estate Income (Expense), Net" below.
NET INTEREST INCOME. Net interest income during 1999 decreased $4.4
million to $31.0 million from $35.4 million in 1998 (as discussed above).
PROVISION FOR LOAN LOSSES. The provision for loan losses during 1999
was $0.7 million, compared to $0.6 million for 1998. This change reflects the
Company's evaluation of current economic conditions, a credit review of loans,
an analysis of specific loan situations and the size and composition of the
commercial and multi-family loan portfolio.
REAL ESTATE INCOME (EXPENSE), NET. Real estate income, net decreased
$2.7 million to a loss of $1.6 million for the year ended December 31 1999,
compared to income of $1.1 million for 1998. This loss was primarily due to a
$6.8 million increase in rental operation expense, a $1.8 million increase in
depreciation expense, and a $3.8 million increase in interest reflecting the
acquisition of real estate during the second half of 1998. These increases were
offset by additional rental income of $9.6 million during 1999.
OTHER EXPENSES. Other expenses decreased $1.2 million during 1999 to
$12.1 million from $13.3 million in 1998. This decrease was primarily due to the
amortization of excess of net assets over purchase price for $3.2 million,
offset by the Company's Merger expenses in the amount of $2.1 million during
1999.
LOSSES ON SECURITIES, DERIVATIVES, AND REAL ESTATE. During 1999, the
Company incurred a net loss of $36.5 million on securities, derivatives, and
real estate, a decrease of $49.8 million compared to a net loss of $86.3 million
in 1998. The $36.5 million charge to earnings in 1999 was primarily comprised of
$1.6 million impairment charges to real estate, $4.9 million of impairment
charges against commercial securities, and $33.4 million of impairment charges
against residential securities, offset by a $3.3 million gain on the sale of
securities. The impairment charges on the securities in 1999 were primarily a
result of accelerated prepayment speeds, widening annual losses in excess of
previous expectations, and declining market liquidity.
FINANCIAL CONDITION
SECURITIES AVAILABLE FOR SALE. The Company's investment in securities
available for sale at December 31, 1999 was $103.4 million. See Note 6 to the
Consolidated Financial Statements, which is incorporated by reference. The
portfolio consisted of:
o Non-investment grade and unrated subordinate commercial
mortgage-backed securities having an amortized cost of $41.7 million
and a fair value of $41.7 million,
o Unrated residential subprime residuals having an amortized cost of
$56.2 million and a fair value of $56.1 million, which consisted of
seasoned residuals (securitized between 1994 and 1997) with
overcollateralization reserves funded at approximately $120.4
million, and
o Unrated subordinate residential mortgage-backed securities having an
amortized cost of $5.9 million and a fair value of $5.6 million.
The following tables detail the Company's securities available for sale
portfolio at December 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.
7
<PAGE>
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.
8
<PAGE>
The following table details the Company's securities available for sale
portfolio at December 31, 1999:
<TABLE>
<CAPTION>
Over
Class Collateral Balance Collaterization Product
Issue Designation Rating -------------------- Level at Type at
Securitization Security Date Letter Agencies Issuance 12/31/99 12/31/99 12/31/99
-------------- -------- ---- ------ -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
RESIDENTIAL MORTGAGE
BACKED SECURITIES
RESIDUALS:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PANAM 1997-1 (1) X Dec-97 NR S&P, Moody's 113,544 52,615 8.48% OC 100% ARM
Prepay Pen.
LHELT 1998-2 (2) X Jun-98 NR Moody's, Fitch 209,225 128,873 6.11% OC 43% Fixed, 57% ARM
EQUICON 1994-2 (3) B Fix, B-2 Oct-94 NR S&P, Moody's, 78,846 19,051 6.15% OC 100% Fixed
Fitch
QS Fix, QS-2 NR
B Var., B-2 NR 32,306 4,024 25.73% OC 100% ARM
EQUICON 1995-1 B Fix, B-2 May-95 NR S&P, Moody's, 70,024 13,899 12.42% OC 100% Fixed
Fitch
B Var., B-2 NR 40,519 5,833 14.76% OC 100% ARM
EQUICON 1995-2 B Fix, B-2 Oct-95 NR S&P, Moody's 79,288 19,589 14.22% OC 100% Fixed
B Var., B-2 NR 39,667 5,674 15.65% OC 100% ARM
ACCESS 1996-1 (4) B Fix, B-2 Feb-96 NR S&P, Moody's 120,015 31,984 7.07% OC 100% Fixed
B Var., B-2 NR 55,362 9,190 18.79% OC 100% ARM
ACCESS 1996-2 B-I, B-1 May-96 NR S&P, Moody's 142,259 41,243 12.95% OC 100% Fixed
BI-S, BI-S-1 NR
B-II, B-1 NR 68,345 10,792 17.43% OC 100% ARM
BII-S, NR
ACCESS 1996-3 B-I, B-1 Aug-96 NR S&P, Moody's 107,712 31,768 16.21% OC 100% Fixed
BI-S, BI-S-1 NR
B-II, B-1 NR 99,885 16,411 23.92% OC 100% ARM
BII-S, NR
ACCESS 1996-4 B, B-1 Nov-96 NR S&P, Moody's 239,778 57,446 22.73% OC 51% Fixed, 49% ARM
B-S, B-S-1 NR
ACCESS 1997-1 B, B-1 Feb-97 NR S&P, Moody's 276,442 84,271 23.99% OC 58% Fixed, 42% ARM
B-S, B-S-1 NR
ACCESS 1997-2 B, B-1 May-97 NR S&P, Moody's 185,197 57,774 16.89% OC 54% Fixed, 46% ARM
B-S, B-S-1 NR
ACCESS 1997-3 B, B-1 Oct-97 NR S&P, Moody's 199,884 67,973 11.68% OC 50% Fixed, 50% ARM
B-S, B-S-1 NR
CMR1 (5) Deferred Apr-96 NR S&P, Duff 47,802(6) 19,180(7) 10.70% RF 100% Amortizing
Comp
CMR2 Deferred Nov-96 NR S&P, Duff, 106,692(6) 41,120(7) 11.42% RF 89.86% Amort 10.14% IO
Comp Fitch mortgages
CMR3 Deferred Nov-96 NR S&P, Duff, 195,610(6) 79,196(7) 15.44% RF 62.25% Amort 27.75% IO
Comp Fitch mortgages
CMR4 Deferred Feb-97 NR S&P, Duff, 108,630(6) 49,803(7) 7.73% RF 89.05% Amort 10.95% IO
Comp Fitch mortgages
CMR6 Deferred May-97 NR S&P, Duff, 91,442(6) 41,745(7) 8.11% RF 95.61% Amort 4.39% IO
Comp Fitch mortgages
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Over
Class Collateral Balance Collaterization Product
Issue Designation Rating -------------------- Level at Type at
Securitization Security Date Letter Agencies Issuance 12/31/99 12/31/99 12/31/99
-------------- -------- ---- ------ -------- -------- -------- -------- --------
SUBORDINATES: (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SBMS 1997-HUD1 (8) B5 Apr-97 B2, n.a. Moody's, DCR 326,147 192,444 2.17% 97% Fixed
B6 Apr-97 NR -- -- None
ORMBS 1998-R1 (9) B4 Mar-98 NR Moody's, DCR 565,411 224,138 None 98% Fixed
GECMS 1994-12 (10) B4 Mar-94 NR Moody's, Fitch, 516,732 470,738 None 100% Fixed
S&P
Weighted Weighted Actual Actual Actual Yield to
Average Average Delinquency Life to Date Life to Date Maturity at:
Interest Rate LTV at: at CPR at: Losses at: -----------------
Securitization Security at: 12/31/99 12/31/99 12/31/99 12/31/99 12/31/99 Purchase 12/31/99
- -------------- -------- ------------ -------- ----------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
RESIDENTIAL MORTGAGE
BACKED SECURITIES
RESIDUALS:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PANAM 1997-(1) X 10.93 81.93 21.45 31.95 2,828 22.45 3.39
Prepay Pen. 25.69 13.58
LHELT 1998-(2) X 10.08 75.81 12.08 25.87 593 18.55 17.17
EQUICON 1994-(2) B Fix, B-2 9.95 71.91 20.67 32.87 1,228 18.00 103.64
B Var., B-2 10.97 81.97 18.00 34.01
EQUICON 1995-(1) B Fix, B-2 12.00 70.36 33.41 31.39 2,621 18.00 28.26
B Var., B-2 11.73 75.54 18.00 98.06
EQUICON 1995-(2) B Fix, B-2 10.79 75.01 33.54 35.24 2,420 18.00 33.28
B Var., B-2 11.42 73.25 18.00 83.76
ACCESS 1996-(1) B Fix, B-2 10.82 75.05 29.93 33.70 3,137 18.00 25.40
B Var., B-2 11.47 77.21 18.00 30.75
ACCESS 1996-(2) B-I, B-1 11.01 76.00 30.15 34.99 4,174 18.00 18.05
BI-S, BI-S-1
B-11, B-1 11.63 78.09 18.00 14.88
BII-S,
BII-S-1
ACCESS 1996-(3) B-I, B-1 11.43 78.12 38.15 37.86 3,283 18.00 13.70
BI-S, BI-S-1
B-II, B-1 11.68 79.41 18.00 13.11
BII-S,
BII-S-1
ACCESS 1996-(4) B, B-1 11.97 78.04 39.15 39.27 4,428 18.00 10.77
B-S, B-S-1
ACCESS 1997-(1) B, B-1 11.56 80.71 38.27 37.95 6,874 18.00 10.71
ACCESS 1997-(2) B, B-1 11.50 79.62 34.73 40.32 3,153 18.00 4.68
ACCESS 1997-(3) B, B-1 11.40 81.39 32.94 41.03 2,400 18.00 11.92
CMR(1) Deferred Comp 13.37 N/A 38.12 22.60 814 19.80 19.89
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Weighted Weighted Actual Actual Actual Yield to
Average Average Delinquency Life to Date Life to Date Maturity at:
Interest Rate LTV at: at CPR at: Losses at: -----------------
Securitization Security at: 12/31/99 12/31/99 12/31/99 12/31/99 12/31/99 Purchase 12/31/99
- -------------- -------- ------------ -------- ----------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
RESIDENTIAL MORTGAGE
BACKED SECURITIES
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CMR(2) Deferred Comp 12.55 N/A 27.60 24.03 1,259 18.00 25.39
CMR(3) Deferred Comp 13.49 N/A 16.39 20.45 2,917 18.00 32.68
CMR(4) Deferred Comp 13.71 N/A 35.73 22.28 1,548 18.00 25.72
CMR(6) Deferred Comp 13.58 N/A 34.48 24.42 1,063 18.00 24.67
SUBORDINATES:
SBMS 1997-HUD(1) B5 9.79 105.16 11.29 15.85 12,106 16.87 5.00
ORMBS 1998-R(1) B4 8.92 119.47 23.45 9.58 23,347 13.75 (29.33)
GECMS 1994-1(2) B4 6.81 45.30 0.24 8.50 0 19.37 21.08
ISSUERS:
(1) Pan American Bank, FSB. (6) Dollar equivalent of amounts in British pounds at the rate of exchange
(2) Lehman Home Equity Loan Trust. that prevailed at the time of issuance.
(3) Equicon Mortgage Loan Trust. (7) Dollar equivalent of amounts in British pounds at the rate of exchange at 12/31/99.
(4) Access Financial Mortgage Loan Trust. (8) Salomon Brothers Mortgage Securities.
(5) City Mortgage Receivable. (9) Ocwen Mortgage Loan Trust.
(10) GE Capital Mortgage Services, Inc.
The following table summarizes information relating to the Company's
mortgage-related securities available for sale at December 31, 1999.
Anticipated Anticipated
Original Unleveraged Weighted
Anticipated Yield to Weighted Average
Rating/ Amortized Fair Percent Yield to Maturity At Average Remaining
Description Cost Value Owned Maturity 12/31/99 (1) Coupon Life (2)
- ---------------------------------------- --------- -------- ------- ----------- ------------ -------- -----------
SINGLE FAMILY RESIDENTIAL (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Unrated residuals ...................... $ 56,175 $ 56,148 100.00% 17.58% 15.37% 0.00% 3.37 years
B-rated subordinates ................... 2,550 2,535 100.00 16.87 21.01 7.75 2.47
Unrated subordinates ................... 3,332 3,024 51.40 15.92 15.08 6.89 1.50
-------- --------
Total single family ............... 62,057 61,707
-------- --------
MULTI-FAMILY/COMMERCIAL
BB-rated subordinates .................. 38,234 38,234 86.93 8.24 8.50 7.37 3.67
Unrated subordinates ................... 3,504 3,504 100.00 15.65 26.52 0.00 1.78
-------- --------
Total multi-family/commercial .......... 41,738 41,738
-------- --------
Total mortgage related securities.. $103,795 $103,445
======== ========
</TABLE>
(1) Changes in the December 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.
(2) Equals the weighted average duration based on the
December 31, 1999 book value.
11
<PAGE>
The following table sets forth the property types of the Company's
commercial mortgage-backed securities at December 31, 1999, based upon the
principal amount.
Percentage
Property type Invested
------------------------------ ----------
Retail........................ 19.71%
Multi-family.................. 46.70
Hotel......................... 1.37
Office........................ 16.61
Industrial.................... 5.59
Mixed use..................... 8.77
Other......................... 1.25
------
Total......................... 100.00%
======
Subordinate and residual interests in mortgage-related securities
provide credit support to the more senior classes of the mortgage-related
securities. Principal from the underlying mortgage loans generally is allocated
first to the senior classes, with the most senior class having a priority right
to the cash flow from the mortgage loans until its payment requirements are
satisfied. To the extent that there are defaults and unrecoverable losses on the
underlying mortgage loans, resulting in reduced cash flows, the most subordinate
security will be the first to bear this loss. Because subordinate and residual
interests generally have no credit support, to the extent there are realized
losses on the mortgage loans comprising the mortgage collateral for such
securities, the Company may not recover the full amount or, indeed, any of its
initial investment in such subordinate and residual interests. The Company
generally owns the most subordinate classes of the securities in which it
invests and therefore will be the first to bear any credit losses.
The Company determines the present value of anticipated cash flows of
its mortgage-related securities utilizing valuation assumptions appropriate at
the time of each acquisition or securitization transaction. The significant
valuation assumptions include the anticipated prepayment speeds and the
anticipated credit losses related to the underlying mortgages. In order to
determine the present value of this estimated excess cash flow, the Company
currently applies a discount rate of 18% to the projected cash flows on the
unrated classes of securities. The annual prepayment rate of the securitized
loans is a function of full and partial prepayments and defaults. The Company
makes assumptions as to the prepayment rates of the underlying loans, which the
Company believes are reasonable, in estimating fair values of the subordinate
securities and residual securities retained. During the third quarter of 1999,
the Company utilized proprietary prepayment curves generated by the Company
(reaching an approximate range of annualized rates of 8%-56%). In its estimates
of annual loss rates, the Company utilizes assumptions that it believes are
reasonable. The Company estimates annual losses of between 0.60% and 4.72% of
the underlying loans.
The credit risk of mortgage-related securities is affected by the
nature of the underlying mortgage loans. In this regard, the risk of loss on
securities backed by commercial and multi-family loans and single family
residential loans made to borrowers who, because of prior credit problems, the
absence of a credit history or other factors, are unable or unwilling to qualify
as borrowers under guidelines established by the Federal Home Loan Mortgage
Corporation ("FHLMC") and the Federal National Mortgage Association ("FNMA") for
purchases of loans by such agencies, generally involve more risk than securities
backed by single family residential loans which conform to the requirements
established by FHLMC and FNMA for their purchase by such agencies.
Subordinate and residual interests are affected by the rate and timing
of payments of principal (including prepayments, repurchase, defaults and
liquidations) on the mortgage loans underlying a series of mortgage-related
securities. The rate of principal payments may vary significantly over time
depending on a variety of factors, such as the level of prevailing mortgage loan
interest rates and economic, demographic, tax, legal and other factors.
Prepayments on the mortgage loans underlying a series of mortgage-related
securities are generally allocated to the more senior classes of
mortgage-related securities. Although in the absence of defaults or interest
shortfalls all subordinates receive interest, amounts otherwise allocable to
residuals generally are used to make payments on more senior classes or to fund
a reserve account for the protection of senior classes until
overcollateralization or the balance in the reserve account reaches a specified
level. In periods of declining interest rates, rates of prepayments on mortgage
loans generally increase, and if the rate of prepayments is faster than
anticipated, then the yield on subordinates will be positively affected and the
yield on residuals will be negatively affected.
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 will request market values and underlying assumptions from the
various securities dealers that underwrote the securities, are currently
financing the securities or have had prior experience with the type of
securities. See Note 3 to the Consolidated Financial Statements, which is
incorporated herein by reference.
12
<PAGE>
COMMERCIAL AND MULTI-FAMILY LOAN PORTFOLIO. The Company's investment in
commercial and multi-family loans, net amounted to $59.5 million at December 31,
1999. See Note 7 to the Consolidated Financial Statements, which is incorporated
herein by reference.
MATCH FUNDED LOANS AND SECURITIES. At December 31, 1999, the Company
had $105.1 million of match funded loans. These loans were previously
securitized and transferred by the Company to a real estate mortgage investment
conduit. The transfer did not qualify as a sale under Financial Accounting
Standards Board ("FASB") No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("SFAS No. 125").
Accordingly, the remaining proceeds received from the transfer are reported as a
liability in the Consolidated Statement of Financial Condition.
Additionally, at December 31, 1999, the Company held $52.7 million of
match funded securities resulting from the Company's transfer of four unrated
residual securities to a trust on December 16, 1999 in exchange for non-recourse
notes. Upon the transfer, the Company received approximately $40.1 million of
proceeds. The transfer did not qualify as a sale under SFAS No. 125.
Accordingly, the amount of proceeds from the transfer are reported as a
liability in the Consolidated Statement of Financial Condition. See Note 8 to
the Consolidated Financial Statements, which is incorporated herein by
reference.
The following tables details the Company's match funded securities at December
31, 1999:
<TABLE>
<CAPTION>
Over
Class Collateral Balance Collaterization Product Type
Issue Designation Rating ------------------ Level at at
Securitization Security Date Letter Agencies Issuance 12/31/99 12/31/99 12/31/99
-------------- -------- ---- ------ -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SASCO 1998-2(1) X Jan-98 NR S&P, Fitch $600,052 $284,235 1.85% OC 31% Fixed, 69% ARM
SASCO 1998-3(1) X Mar-98 NR S&P, Fitch 769,671 405,880 3.32% OC 11% Fixed, 89% ARM
MLMI 1998-FF1(2) X Jun-98 NR S&P, Fitch 198,155 109,319 2.72% OC 100% ARM
LHELT 1998-2(3) X Jun-98 NR Moody's, Fitch 209,225 128,873 6.11% OC 43% Fixed, 57% ARM
OCWEN 98-OAC-1(4) N/A Nov-98 NR S&P, Moody's 182,178 112,600 16.70% OC 26% Fixed, 74% ARM
Weighted Weighted Actual Actual Actual
Average Average Delinquency Life to Date Life to Date Yield to
Interest Rate LTV at: at: CPR at: Losses at: Maturity at:
Securitization Security at: 12/31/99 12/31/99 12/31/99 12/31/99 12/31/99 Purchase 12/31/99
- -------------- -------- ------------ -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SASCO 1998-(2) X 11.10% 73.74% 17.81% 31.84% $4,969 16.00% 1.26%
SASCO 1998-(3) X 10.20 75.67 11.81 30.19 4,116 17.04 3.29
MLMI 1998-FF(1) X 9.39 77.63 10.94 30.85 200 18.57 10.12
LHELT 1998-(2) X 10.08 75.81 12.08 25.87 593 18.55 17.17
OCWEN 98-OAC-(1) N/A 8.65 80.30 6.16 33.22 181 N/A N/A
ISSUERS:
(1) Structured Asset Securities Corp.
(2) Merrill Lynch Mortgage Investors, Inc.
(3) Lehman Home Equity Loan Trust.
(4) Ocwen Mortgage Loan Trust.
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Anticipated Anticipated
Original Unleveraged Weighted
Anticipated Yield to Weighted Average
Rating/ Amortized Fair Percent Yield to Maturity at Average Remaining
Description Cost Value Owned Maturity 12/31/99 (1) Coupon Life (2)
----------- ---- ----- ----- -------- ------------ ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Match-funded securities........... $ 53,561 $52,693 100.00% 17.24% 6.07% 0.00% 8.89 years
-------- -------
</TABLE>
RESIDENTIAL LOAN PORTFOLIO. The Company's investment in residential
loans was $2.4 million at December 31, 1999 compared to $8.1 million at December
31, 1998. See Note 7 to the Consolidated Financial Statements, which is
incorporated herein by reference. On November 1, 1999, the Company sold for $2.9
million a pool of 36 residential loans.
INVESTMENT IN REAL ESTATE. At December 31, 1999, the Company's
investments in real estate consisted of eight properties which had an aggregate
carrying value of $252.6 million. Four of the properties currently owned by the
Company with an aggregate carrying value of approximately $190.3 million are
located in San Francisco, California. Three of these properties are located in
the financial district of San Francisco, and one property is located in the
adjacent civic center district of San Francisco. The Company believes that the
office market in San Francisco, particularly the financial district, is
characterized by limited new supply and significant barriers to entry. Low
vacancy rates, coupled with lack of new construction, are leading to increased
rental rates. Government regulation of development in conjunction with local
construction costs and a lack of developable land provide significant barriers
to entry to this area. The Company believes that its investments in real estate
in San Francisco are well located and benefit from their proximity to the
majority of the city's office, retail and hotel accommodations.
The Company's earthquake insurance relating to its four properties in
San Francisco is in the aggregate amount of $50 million, which is the probable
maximum loss estimated to be sustained in the event the most powerful earthquake
recorded in California were to occur at the properties, as determined by an
independent structural engineer. In the event of such probable maximum loss of
$50 million, such damage would be insured, less a deductible of approximately 5%
of total value at risk. In the event of a more catastrophic earthquake or
damages in excess of $50 million, the Company would not be insured for such
losses.
The Company's net investment in real estate at December 31, 1999 is
comprised of the following properties:
<TABLE>
<CAPTION>
Date Book Value at
Acquired Property Location Square Feet Property Type December 31, 1999
- -------- -------- -------- ----------- ------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
04/08/98 225 Bush Street........ San Francisco, CA 570,637 Office Bldg. $ 127,640
09/23/97 450 Sansome Street..... San Francisco, CA 130,437 Office Bldg. 28,913
01/23/98 690 Market Street...... San Francisco, CA 124,692 Office Bldg. 21,381
09/03/97 10 U.N. Plaza.......... San Francisco, CA 71,636 Office Bldg. 12,349
07/22/98 841 Prudential Drive... Jacksonville, FL 550,000 Office Bldg. 32,366
11/10/97 Cortez Plaza........... Bradenton, FL 289,686 Shopping Ctr. 22,617
04/09/98 7075 Bayers Road....... Halifax, Nova Scotia 402,529 Shopping Ctr. 14,844
10/01/98 Holiday Village........ Havre, MT 223,355 Shopping Ctr. 1,505
Accumulated depreciation (9,011)
-------------
$ 252,604
=============
</TABLE>
Set forth below is a brief description of each of the Company's
investments in real estate at December 31, 1999.
225 BUSH STREET. In April 1998, the Company acquired an existing
570,637 square foot, 22-story office building located at 225 Bush Street in the
financial district of San Francisco for $100.2 million. Bush Street was
originally constructed in 1923 and brought up to 1992 building code seismic
standards during 1992-94. Originally built as the world headquarters of Chevron
of USA, Inc. ("Chevron"), it was sold in 1994 as Chevron sought to relocate its
executive offices. The Company is projecting to make tenant improvements,
leasing commissions, and to upgrade mechanical, HVAC, electrical, fire, and
life/safety systems under the Americans with Disabilities Act of 1990 (the
"ADA"), as well as upgrades and improvements to the ground floor retail and
annex entrance lobby. Approximately $9.0 million of the capital budget will be
spent for tenant improvements and other upgrades to the premises as a result of
a new 10 year lease executed in August 1999 with XOOM.com for approximately
187,000 square feet. As of December 31, 1999, the Bush Street Property was 95%
leased.
450 SANSOME STREET. In September 1997, the Company acquired a 130,437
square foot, 16-story office building located at 450 Sansome Street in the
financial district of San Francisco. The Company purchased this property for
$17.2 million. The property was built in 1967 and upgraded in certain respects
in 1989 and 1990. The property was acquired from a lender who had taken title
through foreclosure. Average rent per square foot was approximately $18.00 at
the date of acquisition. The Company has to date renovated the entrance lobby,
elevator cabs, life safety systems, and certain building systems on four floors,
completed improvements required for compliance with the ADA, as well as paid
tenant improvements and leasing commissions. The building was fully leased as of
December 31, 1999 with average contract rents of $24.78 per square foot.
14
<PAGE>
690 MARKET STREET. In January 1998, the Company acquired a 124,692
square foot, 16-story office building located at 690 Market Street in the
financial district of San Francisco. The property was purchased for $13.7
million. The property was originally constructed in 1884 and has undergone
numerous renovations. At the date of acquisition, existing rents averaged $14.06
per square foot. Since the date of acquisition, the Company has executed new
leases totaling approximately 35,000 square feet, which increased building
occupancy to 97% as of December 31, 1999, and average rents have increased to
approximately $24.60 per square foot. The Company is continuing to invest in
structural upgrades, a sprinkler system and ADA upgrades, deferred maintenance,
tenant improvements and leasing commissions from the date at acquisition through
its ownership period.
10 UNITED NATIONS PLAZA. In September 1997, the Company acquired a
71,636 square foot, six-story, office building located at 10 United Nations
Plaza in the Civic Center district of San Francisco. The Company purchased this
property, which was built in 1982, for $9.1 million. At the date of acquisition,
the property was substantially leased and the average rent per square foot was
$13.76. The building was 64% leased as of December 31, 1999 at average rents of
approximately $24.19 per square foot. The remaining space is currently being
marketed. The Company has invested additional funds in this property to fund
improvements to enhance the appearance of the lobby and hallways, install ADA
upgrades, fund deferred maintenance and tenant improvements, and pay leasing
commissions.
PRUDENTIAL BUILDING. In July 1998, the Company purchased the Prudential
Building, a 550,000 square foot, 22 story office building located in the central
business district of Jacksonville, Florida for an aggregate purchase price of
$36.0 million, plus closing costs. The purchase price was funded with cash on
hand and advances from a line of credit. Simultaneously with this closing, the
Company also leased 98% of the building back to the Prudential Insurance Co. of
America and sold two adjacent parking areas to a neighboring hospital for
approximately $4.1 million. The Prudential lease has a term of four years with
options to vacate the premises during the term of the lease, as well as three
subsequent five-year extension options. On August 6, 1999, Prudential Healthcare
was sold to Aetna.
CORTEZ PLAZA. In November 1997, the Company purchased Cortez Plaza, a
289,686 square foot shopping center located in Bradenton, Florida, a suburb of
Tampa. The Company purchased this property, which was built in 1956 and
renovated in 1988, for $18.4 million. In a separate transaction, the fee simple
title to a large portion of the shopping center that had been subject to a
ground lease was purchased simultaneously for $0.9 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 December 31, 1999, the shopping
center was 94.5% leased with national and regional tenants comprising 75% of the
leaseable area. Below market leases covering approximately 2.2% of the center
expire during 2000.
BAYER'S ROAD SHOPPING CENTRE. In April 1998, the Company acquired the
Bayers Road Shopping Centre, which is located at 7075 Bayers Road in Halifax,
Nova Scotia. The property was acquired by foreclosure on the loans secured by
the property, which were acquired by the Company at a discount in September
1997. The property contains 402,529 square feet of space, which consists
primarily of retail space but also includes some office space and storage space.
The original buildings were built in 1956 and were enclosed and expanded in
several phases between 1971 and 1987. The property was approximately 67% leased
at December 31, 1999. The Company currently is implementing a renovation plan to
establishing the second level as a community shopping center anchored with
value-oriented retailers, while filling the lower level with service providers,
discount retailers and entertainment uses. The third level will remain office
space. In August 1999, the Company purchased for $1.9 million the neighboring
IGA Store which will be destroyed in order to increase visibility to the
Shopping Centre.
HOLIDAY VILLAGE SHOPPING CENTRE. In October 1998, the Company acquired
the Holiday Village Shopping Centre, which is located at 1753 Highway 2 West in
Havre, Montana. The property was acquired by foreclosure on the loan secured by
the property, which was acquired by the Company at a discount in November 1997.
The property contains 223,355 square feet of retail space. The original building
was built in 1978. The property was approximately 47% leased at December 31,
1999. The Company currently is developing a leasing plan to stabilize the
property.
15
<PAGE>
The following table sets forth the cost of improvements for each
investment in real estate through December 31, 1999.
<TABLE>
<CAPTION>
Budgeted Actual Gross Rents due 1999
Initial Cost of Cost of Impairment Fair Book and accrued Total
Cost to Improvements Improvements Writedown/ Value Value at Accumulated at end of Rental
Property Company for 1999 to Date Sales Adjustment 12/31/99 Depreciation period Income
-------- ------- -------- ------- ----- ---------- -------- ------------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
225 Bush Street ....... $101,632 $ 6,514 $ 9,962 $ -- $16,046 $127,640 $4,372 $ 894 $11,186
450 Sansome Street .... 17,205 3,988 4,010 -- 7,698 28,913 1,038 562 894
690 Market Street ..... 13,707 5,014 3,433 -- 4,241 21,381 673 70 2,577
10 U.N. Plaza ......... 9,080 3,414 2,529 -- 740 12,349 576 104 526
841 Prudential Dr. .... 32,827 484 275 -- (736) 32,366 838 2,148 8,316
Cortez Plaza .......... 19,244 1,354 285 -- 3,088 22,617 886 235 3,118
7075 Bayers Road ...... 15,219 12,755 5,444 (3,902) (1,917) 14,844 581 125 3,149
Holiday Village ....... 1,791 350 860 (1,601) 455 1,505 47 13 472
Park Center I ......... 1,534 -- -- (1,534) -- -- -- -- --
-------- -------- -------- ------- ------- -------- ------ ------ -------
Total .............. $212,239 $ 33,873 $ 26,798 $(7,037) $29,615 $261,615 $9,011 $4,151 $32,238
======== ======== ======== ======= ======= ======== ====== ====== =======
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 December 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 Square Footage Portfolio Base Rent Square Foot Portfolio
Year of Lease of Leases of Expiring Leased of Expiring of Expiring Annualized
Expiration (1) Expiring Leases Square Feet Leases (2) Leases (3) Base Rent
-------------- -------- ------ ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
2000(4) 47 173,653 10.22% $ 1,177 6.78 7.35%
2001 46 136,405 8.03% 1,625 11.92 10.14%
2002 52 604,393 35.57% 5,321 8.80 33.19%
2003 21 55,999 3.30% 1,045 18.66 6.52%
2004 24 119,827 7.05% 1,448 12.08 9.03%
2005 5 42,901 2.52% 365 8.50 2.27%
2006 10 118,123 6.95% 494 4.18 3.08%
2007 5 94,556 5.56% 778 8.23 4.86%
2008 6 137,027 8.06% 1,810 13.21 11.29%
2009 4 34,356 2.02% 625 18.18 3.90%
2010 & beyond(5) 7 182,116 10.72% 1,342 7.37 8.37%
----- ---------- ------ ------- ------
227 1,699,356 100.00% $16,030 100.00%
===== ========== ====== ======= ======
</TABLE>
(1) Lease year runs from January 1 to December 31 for all years.
(2) Annualized base rent is calculated based on the amount of rent scheduled
from January 1 of the listed year to the lease expiration.
(3) Average base rent per square foot is calculated using the annualized base
rent divided by the square footage.
(4) In October 1999, tenant IGA exercised a termination option effective April
30, 2000 at Bayers Road Shopping Center, which requires IGA to pay
termination fees following expiration of the lease agreement.
(5) On August 13, 1999, XOOM.com, a new tenant, executed a 10 year lease at
225 Bush Street for approximately 187,000 square feet. However, the table
only includes space that was occupied on December 31, 1999. As of December
31, 1999, XOOM.com physically occupied 24,157 square feet. The remaining
square footage is under construction with occupancy scheduled during the
first quarter of 2000.
16
<PAGE>
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.
Noncancelable operating leases with tenants expire on various dates
through 2028. The future minimum rental income (base rent) to be received under
leases existing as of December 31, 1999, is as follows:
(DOLLARS IN THOUSANDS)
2000....................................... $ 25,572
2001....................................... 23,768
2002....................................... 18,411
2003....................................... 13,212
2004....................................... 11,173
Thereafter................................. 41,526
--------
Total $133,662
========
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 Notes 8 and 11 to
the Consolidated Financial Statements, which are incorporated herein by
reference.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE. Securities sold under
agreements to repurchase decreased $110.3 million to $28.3 million at December
31, 1999, from $138.6 million at December 31, 1998. This decrease was due to
certain repurchase agreements with the Company's lenders requiring all cash
flows from the bonds be used to pay down outstanding debt, the repricing of
certain repurchase agreements as the collateral amortizes, and the scheduled
maturity of certain other repurchase agreements. These obligations are secured
by certain of the Company's investments in subordinated interests in commercial
mortgage-backed securities, residual interests in subprime residential loan
securitizations, and U.K. mortgage loan residual securities. See Note 11 to the
Consolidated Financial Statements, which is incorporated herein by reference.
OBLIGATIONS OUTSTANDING UNDER LINES OF CREDIT. Obligations outstanding
under lines of credit decreased $16.5 million to $18.0 million at December 31,
1999, from $34.5 million at December 31, 1998. This decrease was primarily due
to the sale of a commercial loan. The borrowing is pursuant to a three year
agreement, which is rescheduled to terminate on June 1, 2001, which is
collateralized by commercial loans. See Note 11 to the Consolidated Financial
Statements, which is incorporated herein by reference.
OBLIGATIONS OUTSTANDING UNDER LINES OF CREDIT - REAL ESTATE.
Obligations outstanding under lines of credit secured by real estate decreased
$1.4 million to $141.2 million at December 31, 1999, from $142.6 million at
December 31, 1998. These borrowings have a three-year term, which is rescheduled
to terminate on June 1, 2001, and an interest rate that floats in accordance
with LIBOR. See Note 11 to the Consolidated Financial Statements, which is
incorporated herein by reference.
BONDS-MATCH FUNDED AGREEMENTS. At December 31, 1999, the Company held
$101.0 of bonds-match funded agreements which arose in connection with a
previous securitization of loans accounted as a financing transaction. In
addition, on December 16, 1999, the Company transferred four unrated residual
securities to a trust in exchange for non-recourse notes. Upon the transfer, the
Company received approximately $40.1 million of proceeds. The transfer did not
qualify as a sale under SFAS No. 125. Accordingly, the amount of proceeds from
the transfers are reported as a liability. See Notes 8 and 12 to the
Consolidated Financial Statements, which are incorporated herein by reference.
SHAREHOLDER'S EQUITY. Shareholder's equity amounted to $138.7 million
at December 31, 1999.
17
<PAGE>
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, and other general business purposes. Additionally, to maintain its
status as a REIT under the Code prior to the merger with OCN, the Company
previously had to distribute annually at least 95% of its taxable income. The
primary sources of funds for liquidity during 1999 consisted of cash provided by
operating activities, principal payments received from and sales of loans, sales
and securitization of securities available for sale, and principal and interest
payments received on the Company's securities portfolio.
The Company's operating activities provided cash flows of $46.9 million
during 1999. At the same time, the Company's investing activities provided cash
flows of $147.3 million during 1999. During 1999, cash provided by investing
activities primarily consisted of principal payments on securities available for
sale of $17.7 million, principal payments on loans of $73.7 million and proceeds
from sale of securities of $67.9 million. The Company's financing activities
used cash flows of $168.2 million during 1999 and primarily consisted of
repayments of $110.3 million on borrowings collateralized by securities sold
under agreements to repurchase and principal payments of $62.9 million on
bonds-match funded loan agreements.
Based upon its current balance of cash and cash equivalents, and
projected cash flows from operations, potential cash inflows from the sale or
refinancing of assets, and its available lines of credit, the Company believes
that its sources of funds will be adequate for the purpose of meeting its short
term and long term liquidity requirements. However, there can be no assurance
that this will be the case. Material increases in interest expense or operating
expenses, collateral calls on its secured financings, the inability of the
Company to renew or replace maturing sources of financing, and the inability to
sell assets to raise additional cash, among other factors, generally would
negatively impact the Company's liquidity. On the other hand, sales of assets,
increases in operating cash flows and in the valuation of its securities
portfolio, and the execution of new financing transactions, would generally
positively affect the Company's liquidity. See also "Indebtedness-General" and
"Other Trends and Contingencies."
In addition, for 2000, the Company has budgeted $33.9 million of
capital expenditures on its investments in real estate in order to reposition
such properties in the market.
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
December 31, 1999, the Company had interest rate swap agreements with a notional
amount of $200.8 million and a fair value of $3.7 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 5 to the Consolidated Financial Statements, which is
incorporated herein by reference. 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. See Note 11 to the Consolidated Financial
Statements, which is incorporated herein by reference..
Mortgage-related securities which are subject to repurchase agreements,
as well as loans and real estate which secure other indebtedness, periodically
are revalued by the lender, and a decline in such value may result in the lender
requiring the Company to provide additional collateral to secure the
indebtedness. Although to date the Company has had adequate cash, cash
equivalents and other unencumbered assets to meet calls for additional
collateral, to repay a portion of the related indebtedness, or to meet its other
operating and financing requirements, including its current capital expenditure
plans, there can be no assurance that sufficient levels of such assets will
continue to be available.
If the Company is unable to fund additional collateral needs or to
repay, renew or replace maturing indebtedness on terms reasonably satisfactory,
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.
18
<PAGE>
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 Funds
from Operations ("FFO") to adjusted fixed charges for the previous four fiscal
quarters exceeds 1.25 to 1.00. Given that adjusted FFO to adjusted fixed charges
for the four quarters ended December 31, 1999 was 0.56, the Company does not
expect this financial test to be satisfied for some time to come. Permitted
Indebtedness, the incurrence of which is not limited under the Indenture,
includes: (i) up to $150 million of debt that may be incurred under certain
warehouse lines of credit or mortgage loan repurchase agreements; (ii) match
funded debt that may be incurred by a special purpose, bankruptcy remote
subsidiary of the Company; (iii) renewals or refinancings of existing debt
structured to meet certain conditions; (iv) debt that may be incurred in hedge
transactions; (v) up to $10 million of capital lease and purchase money
financing; and (vi) up to $50 million of additional debt. The Company believes
that it can meet its financing needs from sources of Permitted Indebtedness
during 2000 although there can be no assurance that this will be the case. The
Indenture also prohibits the Company from making certain restricted payments,
including dividends. As of December 31, 1999, the Company was not permitted to
pay dividends under the Indenture [and the Company does not expect that it will
be able to pay dividends in the foreseeable future.]
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 December 31, 1999, the Company
was in compliance with all obligations under the agreements evidencing its
indebtedness with respect to the Company's equity and that of its operating
partnership's equity (see Note 2 to the Consolidated Financial Statements, which
is incorporated herein by reference), as defined in the applicable agreement. In
recent months, various lenders have agreed to decrease the amount of net worth
required to satisfy the financial covenants in the applicable indebtedness
agreements. However, there can be no certainty that additional operating losses
will not result in the Company's violation of certain minimum net worth
covenants in the future. In the event of a default in such covenants, the lender
generally would be able to accelerate repayment of the indebtedness and pursue
other available remedies, which could result in defaults on other indebtedness
of the Company, unless the applicable lender or lenders allowed the Company to
remain in violation of the agreements. Were a default to be declared, the
Company would not be able to continue to operate without the consent of its
lenders. The Company currently is considering various alternatives to enhance
its ability to meet its payment and other obligations under its indebtedness and
the funding requirements discussed above, including the sale of certain assets
and the potential tax and other consequences associated therewith. There can be
no certainty that the Company will have sufficient liquidity to meet these
obligations on a short-term or long-term basis.
YEAR 2000 DATE CONVERSION
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.
OCC, as well as OCN and its other subsidiaries did not experience any
significant malfunctions or errors in its computer systems and applications when
the date changed from 1999 to 2000, nor were business operations disrupted.
Prior to December 31, 1999, OCN completed its project plan to achieve year 2000
readiness of its mission critical and non-mission critical systems, including
hardware infrastructure and software applications. The actual cost of
approximately $2.0 million was 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. During 1999, OCN focused on any remaining validation
tasks, including remediation and validation of its non-mission critical systems
and end-to-end testing with third parties.
OCN believes that any Year 2000 problems that may still occur in its
computer systems and applications are likely to be minor and correctable. In
addition, the Company still could be negatively affected by potential failures
in non-critical vendor computer systems or end-to-end disruptions involving as
yet unidentified, and hence untested, third-party systems and records stored on
these systems. The Company is currently not aware of any significant Year 2000
or related problems that have arisen for its vendors.
19
<PAGE>
ITEM 7A. 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 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.
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
present values of existing assets minus liabilities plus off-balance sheet
instruments. 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 December 31, 1999. Actual results could
differ significantly from those estimated in the table.
20
<PAGE>
Projected Percentage Change In
----------------------------------------------
Change in Interest Rate Net Interest Income (1) Net Portfolio Value
----------------------- ----------------------- -------------------
-400 Basis Points (45.50)% (6.78)%
-300 Basis Points (34.12) (5.28)
-200 Basis Points (22.75) (4.88)
-100 Basis Points (11.37) (2.56)
Base Interest Rate 0.0 0.0
+100 Basis Points 11.37 2.63
+200 Basis Points 22.75 6.84
+300 Basis Points 34.12 11.62
+400 Basis Points 45.50 16.48
(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 December 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.
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.
The following table sets forth the estimated maturity or repricing of
the Company's interest-earning assets and interest-bearing liabilities at
December 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, and (iii) non-performing discount
loans reflect the estimated timing of resolutions which result in repayment to
the Company. 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.
21
<PAGE>
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------------------------------------
More than 1
Within 4 to 12 Year to 3 Years
3 Months Months 3 Years and Over Total
--------- --------- --------- --------- ---------
Rate-Sensitive Assets: (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-earning cash ....................... $ 77,031 $ -- $ -- $ -- $ 77,031
Securities available for sale ............... 2,898 7,507 14,083 78,957 103,445
Loan portfolio, net (1) ..................... 59,270 1,025 366 1,276 61,937
Match funded loans and securities ........... 10,483 61,389 39,919 46,003 157,794
--------- --------- --------- --------- ---------
Total rate-sensitive assets ............... 149,682 69,921 54,368 126,236 400,207
--------- --------- --------- --------- ---------
Rate-Sensitive Liabilities:
Securities sold under agreements
to repurchase ............................. 28,301 -- -- -- 28,301
Bonds-match funded agreements ............... 106,097 10,971 24,447 -- 141,515
Obligations outstanding under lines of credit 159,170 -- -- -- 159,170
Notes, debentures and other interest-
bearing obligations ....................... -- -- -- 140,486 140,486
--------- --------- --------- --------- ---------
Total rate-sensitive liabilities .......... 293,568 10,971 24,447 140,486 469,472
Interest rate sensitivity gap before
Off-balance sheet financial instruments ... (143,886) 58,950 29,921 (14,250) (69,265)
Off-Balance Sheet Financial Instruments:
Interest rate swaps ....................... 200,780 -- (100,780) (100,000) --
Futures contracts ......................... 12,000 -- (12,000) -- --
--------- --------- --------- --------- ---------
Net-off-balance sheets .................... 212,780 -- (112,780) (100,000) --
Interest rate sensitivity gap ................. 68,894 58,950 (82,859) (114,250) $ (69,265)
--------- --------- --------- --------- =========
Cumulative interest rate sensitivity gap ...... $ 68,894 $ 127,844 $ 44,985 $ (69,265)
========= ========= ========= =========
Cumulative interest rate sensitivity gap as a
percentage of total rate-sensitive assets . 17.21% 31.94% 11.24% (17.31)%
</TABLE>
(1) Balances have not been reduced for non-performing loans.
As of December 31, 1999, the cumulative volume of assets maturing or
repricing within one year exceeded liabilities by $59.1 million, or 31.94% of
assets, implying moderate current-year income sensitivity to movements in the
level of interest rates.
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
INDEX
Page
Report of Management ................................................... 24
Report of Independent Certified Public Accountants ..................... 25
Consolidated Statements of Financial Condition at
December 31, 1999 and 1998 ........................................ 27
Consolidated Statements of Operations for the Period October 7, 1999
to December 31, 1999, the Period January 1, 1999 to October 6, 1999,
the Year Ended December 31, 1998, and the period May 14, 1997
to December 31, 1997 .............................................. 28
Consolidated Statements of Comprehensive Income (Loss) for the Period
October 7, 1999 to December 31, 1999, the Period January 1, 1999
to October 6, 1999, the Year Ended December 31, 1998, and the
period May 14, 1997 to December 31, 1997 .......................... 29
Consolidated Statements of Cash Flows for the Period October 7, 1999
to December 31, 1999, the Period January 1, 1999 to October 6, 1999,
the Year Ended December 31, 1998, and the period May 14, 1997
to December 31, 1997 .............................................. 30
Consolidated Statements of Changes in Shareholders' Equity for the
Period October 7, 1999 to December 31, 1999, the Period
January 1, 1999 to October 6, 1999, the Year Ended December 31, 1998,
and the period May 14, 1997 to December 31, 1997 .................. 31
Notes to Consolidated Financial Statements at December 31,
1999, 1998, and 1997 .............................................. 32
23
<PAGE>
REPORT OF MANAGEMENT
The management of Ocwen Asset Investment Corp. ("Ocwen" or the
"Company") is responsible for the preparation and fair presentation of the
financial statements and other financial information contained in this annual
report. The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles applied on a consistent
basis and include amounts based on management's best estimates and judgments.
Nonfinancial information included in this annual report has also been prepared
by management and is consistent with the consolidated financial statements. In
the opinion of management, the consolidated financial statements fairly reflect
the Company's financial position, results of operations and cash flows.
To assure that financial information is reliable and assets are
safeguarded, management has established and maintains an effective system of
internal accounting controls and procedures that provide reasonable assurance as
to the integrity and reliability of the consolidated financial statements, the
protection of assets against loss from unauthorized use or disposition and the
prevention and detection of errors and irregularities on a timely basis.
PricewaterhouseCoopers LLP conducts its audit of the consolidated
financial statements in accordance with generally accepted auditing standards.
Such standards include the evaluation of internal accounting controls to
establish a basis for developing the scope of its examination of the
consolidated financial statements. In addition to the use of independent
certified public accountants, Ocwen maintains a professional staff of internal
auditors who conduct financial, procedural and special audits of the Company. To
ensure their independence, both PricewaterhouseCoopers LLP and the internal
auditors have direct access to the Audit Committee of the Board of Directors.
The Audit Committee, which consists solely of independent directors of
the Company, makes recommendations to the Board of Directors concerning the
appointment of the independent certified public accountants and meets with
PricewaterhouseCoopers LLP and the internal auditors to discuss the results of
their audits, the Company's internal accounting controls and financial reporting
matters.
/s/ WILLIAM C. ERBEY /s/ MARK S. ZEIDMAN
- ----------------------------- -------------------------
William C. Erby Mark S. Zeidman
Chairman and Chief Executive Officer Senior Vice President and
Chief Financial Officer
24
<PAGE>
PRICEWATERHOUSECOOPERS LLP
Suite 1700
200 East Las Olas Blvd.
Fort Lauderdale FL 33301
Telephone (954) 764 7111
Facsimile (954) 525 4453
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Ocwen Asset Investment Corp.
In our opinion, the accompanying consolidated statement of financial
condition and the related consolidated statements of operations, of
comprehensive income (loss), of changes in shareholders' equity and of cash
flows present fairly, in all material respects, the financial position of Ocwen
Asset Investment Corp. (the "Company") and its subsidiaries at December 31,
1998, and the results of their operations and their cash flows for the period
from January 1, 1999 to October 6, 1999, the year ended December 31, 1998, and
the period from May 14, 1997 to December 31, 1997, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As described in Note 1 to the consolidated financial statements, the
Company was acquired by Ocwen Financial Corporation on October 7, 1999.
/s/ PRICEWATERHOUSECOOPERS LLP
- ------------------------------
PricewaterhouseCoopers LLP
Fort Lauderdale, FL
February 9, 2000
25
<PAGE>
PRICEWATERHOUSECOOPERS LLP
Suite 1700
200 East Las Olas Blvd.
Fort Lauderdale FL 33301
Telephone (954) 764 7111
Facsimile (954) 525 4453
Report of Independent Certified Public Accountants
To the Board of Directors and Shareholder
of Ocwen Asset Investment Corp.
In our opinion, the accompanying consolidated statement of financial
condition and the related consolidated statements of operations, of
comprehensive income, of changes in shareholder's equity and of cash flows
present fairly, in all material respects, the financial position of Ocwen Asset
Investment Corp. (the "Company") and its subsidiaries at December 31, 1999, and
the results of their operations and their cash flows for the period from October
7, 1999 to December 31, 1999, in conformity with accounting principles generally
accepted in the United States. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
- ------------------------------
PricewaterhouseCoopers LLP
Fort Lauderdale, FL
February 9, 2000
26
<PAGE>
<TABLE>
<CAPTION>
OCWEN ASSET INVESTMENT CORP.
(A WHOLLY OWNED SUBSIDIARY OF OCWEN FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Predecessor | Successor
------------- | -------------
December 31, | December 31,
1998 | 1999
------------- | -------------
<S> <C> | <C>
ASSETS: |
Cash and amounts due from depository institutions................... $ 3,484,929 | $ 2,085,437
Interest-bearing deposits........................................... 49,880,276 | 77,031,043
Securities available for sale, at fair value........................ 351,153,971 | 103,444,568
Commercial and multi-family loan portfolio, net..................... 65,282,965 | 59,519,840
Residential loan portfolio, net..................................... 8,058,445 | 2,417,647
Match funded residential loans and securities, net.................. 173,609,873 | 157,793,868
Discount loan portfolio, net........................................ 5,618,022 | --
Investment in real estate, net...................................... 208,058,721 | 252,604,156
Principal and interest receivable................................... 7,475,795 | 2,646,732
Other assets........................................................ 15,702,816 | 31,389,621
------------- | -------------
Total assets...................................................... $ 888,325,813 | $ 688,932,912
============= | =============
|
LIABILITIES: |
Securities sold under agreements to repurchase...................... $ 138,611,824 | $ 28,301,141
Obligations outstanding under lines of credit....................... 34,472,404 | 17,997,393
Obligations outstanding under lines of credit - secured by real 142,556,880 | 141,173,063
estate............................................................ |
11.5% Redeemable Notes due 2005..................................... 143,000,000 | 140,486,483
Bonds - match funded agreements..................................... 163,403,966 | 141,515,143
Excess of net assets over purchase price............................ -- | 56,840,751
Accrued expenses, payables and other liabilities.................... 21,190,288 | 23,911,170
------------- | -------------
Total liabilities................................................. 643,235,362 | 550,225,144
------------- | -------------
|
Minority interest in consolidated subsidiary........................... 23,914,058 | --
------------- | -------------
|
Commitments and Contingencies (Note 14) |
|
SHAREHOLDER'S EQUITY: |
Common Stock, $.01 par value; 6,100 and 200,000,000 shares |
authorized at December 31, 1999 and 1998, respectively; |
6,100 and 18,965,000 shares issued and outstanding at December |
31, 1999 and 1998, respectively .................................... 189,650 | 61
Additional paid-in capital.......................................... 294,492,203 | 135,857,923
Cumulative dividends declared....................................... (36,277,546) | --
(Accumulated deficit)/retained earnings............................. (46,394,403) | 3,542,683
Accumulated other comprehensive income, net of taxes: |
Unrealized (loss) gain on securities available for sale........... 11,038,151 | (713,326)
Cumulative translation adjustment................................. (1,871,662) | 20,427
------------- | -------------
Total other accumulated comprehensive income (loss)............. 9,166,489 | (692,899)
------------- | -------------
Total shareholder's equity...................................... 221,176,393 | 138,707,768
------------- | -------------
$ 888,325,813 | $ 688,932,912
============= | =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
OCWEN ASSET INVESTMENT CORP.
(A WHOLLY OWNED SUBSIDIARY OF OCWEN FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
Predecessor | Successor
------------------------------------------------------ | ------------
Period For the Period | Period
May 14, 1997 Year Ended January 1, 1999 | October 7, 1999
To December 31, December 31, To October 6, | To December 31,
1997 1998 1999 | 1999
-------------- ------------- ------------- | ------------
<S> <C> <C> <C> | <C>
INTEREST INCOME: |
Interest bearing deposits ...................... $ 5,538,946 $ 1,212,517 $ 1,028,339 | $ 256,246
Repurchase agreements........................... -- -- 80,648 | 470,248
Securities held for trading..................... -- 106,892 -- | --
Securities available for sale................... 6,362,909 43,446,423 35,908,207 | 5,165,211
Commercial and multi-family loans .............. 245,147 5,736,214 6,250,607 | 3,990,970
Match funded residential loans and securities... -- 1,915,071 8,765,332 | 3,598,473
Residential loans............................... 66,010 8,424,325 391,802 | 126,293
Discount loans ................................. 1,248,703 2,116,564 748,497 | 55,056
-------------- ------------- ------------- | ------------
13,461,715 62,958,006 53,173,432 | 13,662,497
-------------- ------------- ------------- | ------------
INTEREST EXPENSE: |
Securities sold under agreements to repurchase.. -- 11,682,824 6,154,263 | 749,209
Securities sold short........................... -- -- 251,891 | 335,227
Obligations outstanding under lines of credit .. -- 6,515,925 2,097,709 | 686,530
11.5% Redeemable Notes due 2005 ............... -- 7,798,597 12,376,650 | 4,225,501
Bonds-match funded agreements................... -- 1,530,467 6,880,040 | 2,101,146
-------------- ------------- ------------- | ------------
-- 27,527,813 27,760,553 | 8,097,613
-------------- ------------- ------------- | ------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN |
LOSSES ........................................... 13,461,715 35,430,193 25,412,879 | 5,564,884
Provision for loan losses....................... -- 641,677 1,076,841 | (331,134)
-------------- ------------- ------------- | ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN |
LOSSES ......................................... 13,461,715 34,788,516 24,336,038 | 5,896,018
-------------- ------------- ------------- | ------------
|
REAL ESTATE-OPERATING INCOME: |
Rental income................................... 1,320,090 22,701,796 24,394,358 | 7,843,208
Other........................................... 902,665 37,801 52,232 | 31,176
-------------- ------------- ------------- | ------------
2,222,755 22,739,597 24,446,590 | 7,874,384
-------------- ------------- ------------- | ------------
REAL ESTATE-OPERATING EXPENSES: |
Rental operation................................ 549,369 10,803,153 13,157,121 | 4,401,958
Depreciation.................................... 179,088 3,606,490 3,806,345 | 1,619,703
Interest........................................ -- 7,190,002 8,148,717 | 2,816,122
-------------- ------------- ------------- | ------------
728,457 21,599,645 25,112,183 | 8,837,783
-------------- ------------- ------------- | ------------
REAL ESTATE INCOME (EXPENSE), NET................. 1,494,298 1,139,952 (665,593) | (963,399)
-------------- ------------- ------------- | ------------
|
OTHER EXPENSES (INCOME): |
Management fees................................. 1,796,311 5,892,468 4,470,498 | 1,347,472
Servicing fees.................................. 326,025 2,399,778 2,059,175 | 926,541
Due diligence expenses.......................... -- 1,817,924 122,745 | --
Foreign currency (gain) loss.................... 568,565 (116,953) -- | --
Amortization of excess of net assets over |
purchase price ................................ -- -- -- | (3,201,416)
Other........................................... 464,164 3,323,672 5,508,536 | 849,547
-------------- ------------- ------------- | ------------
3,155,065 13,316,889 12,160,954 | (77,856)
-------------- ------------- ------------- | ------------
|
LOSSES ON SECURITIES, DERIVATIVES AND REAL ESTATE. -- (86,267,429) (35,582,326) | (944,257)
-------------- ------------- ------------- | ------------
INCOME (LOSS) BEFORE TAXES AND MINORITY INTEREST.. 11,800,948 (63,655,850) (24,072,835) | 4,066,218
Income tax expense................................ -- -- -- | 539,137
Minority interest in net loss (income) of |
consolidated subsidiary ......................... (9,430) 4,854,884 1,795,925 | --
-------------- ------------- ------------- | ------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS.... 11,791,518 (58,800,966) (22,276,910) | 3,527,081
Extraordinary gain on repurchase of debt........ -- 615,047 -- | --
-------------- ------------- ------------- | ------------
NET INCOME (LOSS)............................... $ 11,791,518 $ (58,185,919) $ (22,276,910) | $ 3,527,081
============== ============= ============= | ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
OCWEN ASSET INVESTMENT CORP.
(A WHOLLY OWNED SUBSIDIARY OF OCWEN FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Predecessor | Successor
------------------------------------------------ | ---------------
Period For the Period | Period
May 14, 1997 Year Ended January 1, 1999 | October 7, 1999
To December 31, December 31, To October 6, | To December 31,
1997 1998 1999 | 1999
-------------- ------------- ------------- | ---------------
<S> <C> <C> <C> | <C>
Net income (loss) $ 11,791,518 $ (58,185,919) $ (22,276,910) | $3,527,081
Other comprehensive income, net of taxes: |
Change in unrealized gain (loss) on securities available |
for sale arising during the year (net of taxes of $373,100 |
for the period October 7, 1999 to December 31, 1999) .... (7,327,890) 8,967,096 (15,341,718) | (713,326)
Unrealized foreign currency translation adjustment |
arising during the year (net of taxes of $10,999 for |
the period October 7, 1999 to December 31, 1999) ........ -- (1,871,662) (280,652) | 20,427
Reclassification adjustment for gains (losses) included in |
net income .............................................. -- 9,398,945 553,806 | --
------------ ------------- ------------- | ----------
Other comprehensive income (loss) ......................... (7,327,890) 16,494,379 (15,068,564) | (692,899)
------------ ------------- ------------- | ----------
Comprehensive income (loss) ................................. $ 4,463,628 $ (41,691,540) $ (37,345,474) | $2,834,182
============ ============= ============= | ==========
|
Disclosure of reclassification adjustment: |
Unrealized holding losses arising during the |
period on securities sold or impaired ............... $ (70,251,978) $ (33,546,148) | $ (944,257)
Add: Adjustment for realized losses and |
impairment charges on securities available for sale |
included in net income (loss) ....................... 79,650,923 34,099,954 | 944,257
------------- ------------- | ----------
Reclassification adjustment for gains included |
in net income ....................................... $ 9,398,945 $ 553,806 | $ --
============= ============= | ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
OCWEN ASSET INVESTMENT CORP.
(A WHOLLY OWNED SUBSIDIARY OF OCWEN FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Predecessor | Successor
------------------------------------------------ | ---------------
Period Period | Period
May 14, 1997 For the January 1, 1999 | October 7, 1999
To December 31, Year Ended To October 6, | To December 31,
1997 1998 1999 | 1999
-------------- ------------- ------------- | ---------------
<S> <C> <C> <C> | <C>
Cash flows from operating activities: |
Net income (loss) ................................... $ 11,791,518 $ (58,185,919) $ (22,276,910) | $ 3,527,081
Adjustments to reconcile net income (loss) to net |
cash provided by operating activities: |
Premium amortization (discount accretion), net .. 6,236,654 15,012,575 25,520,705 | 4,217,984
Depreciation..................................... 179,088 3,606,490 3,806,345 | 1,619,703
Amortization of excess of net assets over |
purchase price ............................... -- -- -- | (3,201,416)
Foreign exchange gain............................ 568,565 (116,953) -- | --
Extraordinary gain on extinguishment of debt -- (615,047) -- | --
Provision for loan losses........................ -- 641,677 1,076,841 | (331,134)
Net losses on securities, derivatives and real |
estate ....................................... -- 86,267,429 35,582,326 | 944,257
Decrease (increase) in principal and interest |
receivable ................................... (2,518,272) (4,957,523) 4,632,499 | 196,564
Increase in other assets......................... (1,540,633) (14,316,713) (5,558,065) | (4,151,553)
Increase in accrued expenses, payables, other |
liabilities .................................. 6,344,783 5,934,062 (1,175,406) | 4,263,292
Minority interest in earnings (losses)........... 9,430 (4,854,884) (1,795,925) | --
------------- ------------- ------------- | -------------
Net cash provided by operating activities .............. 21,071,133 28,415,194 39,812,410 | 7,084,778
------------- ------------- ------------- | -------------
Cash flows from investing activities: |
Purchase of securities available for sale............. (166,334,140) (357,279,884) -- | --
(Increase) decrease in repurchase agreements.......... -- -- (34,382,497) | 34,382,497
Maturities and principal payments received on |
securities available for sale ...................... 6,654,881 42,872,223 16,125,781 | 1,592,979
Principal payments received from discount loans....... 932,366 2,174,388 138,300 | 6,283,525
Principal payments received from loans................ 333,454 36,036,537 57,208,565 | 16,536,709
Proceeds from sale of securities...................... -- 39,408,287 48,516,666 | 19,347,148
Purchase of discount loans............................ (28,465,429) -- -- | --
Payments received from sale of loans.................. -- -- -- | 35,467,239
Purchase/originations of loans........................ (16,091,515) (267,570,853) (22,151,922) | (11,627,535)
Proceeds from sale of investment in real estate....... -- 1,397,201 -- | --
Investment in real estate............................. (45,609,127) (152,252,879) (11,612,818) | (8,547,667)
Deposits on pending asset acquisitions................ (1,000,000) 126,605 -- | --
------------- ------------- ------------- | --
Net cash provided by (used by) investing activities .... (249,579,510) (655,088,375) 53,842,075 | 93,434,895
------------- ------------- ------------- | -------------
Cash flows from financing activities: |
Proceeds from issuance of common stock, net of |
offering costs ..................................... 283,688,000 -- -- | --
Dividend payments on common stock and distributions... (6,502,500) (29,775,046) -- | (17,034,461)
Proceeds from sale of securities to affiliates........ -- 13,957,595 -- | --
Proceeds from issuance of notes....................... -- 150,000,000 -- | --
Proceeds from issuance of bonds....................... -- 173,900,353 -- | 40,094,000
Repurchase of notes................................... -- (6,309,944) -- | --
Proceeds received from sale of operating |
partnership units .................................. -- 27,593,302 -- | --
Principal payments on bonds........................... -- (12,071,246) (50,329,125) | (12,558,685)
Increase in securities sold under agreements |
to repurchase ...................................... -- 114,410,572 (96,017,660) | (14,293,023)
Increase (decrease) in securities sold short.......... -- -- 33,272,188 | (33,437,064)
Increase (decrease) in obligations outstanding |
under lines of credit .............................. -- 201,230,536 6,061,411 | (23,920,239)
------------- ------------- ------------- | -------------
Net cash (used by) provided by financing activities..... 277,185,500 632,936,122 (107,013,186) | (61,149,472)
------------- ------------- ------------- | -------------
Net increase (decrease) in cash and cash equivalents.... 48,677,123 6,262,941 (13,358,701) | 39,370,201
Change in cumulative translation adjustment............. -- (1,574,859) (280,652) | 20,427
Cash and cash equivalents at beginning of period........ -- 48,677,123 53,365,205 | 39,725,852
------------- ------------- ------------- | -------------
Cash and cash equivalents at end of period.............. $ 48,677,123 $ 53,365,205 $ 39,725,852 | $ 79,116,480
============= ============= ============= | =============
|
Reconciliation of cash and cash equivalents at end of period: |
Cash and amounts due from depository institutions..... $ 331,047 $3,484,929 $ 3,331,593 | $ 2,085,437
Interest earning deposits............................. 48,346,076 49,880,276 36,394,259 | 77,031,043
------------- ---------- ------------- | -------------
Total.............................................. $ 48,677,123 $53,365,205 $ 39,725,852 | $ 79,116,480
============= =========== ============= | =============
Supplemental disclosure of cash flow information: |
Interest paid......................................... $ -- $24,960,903 $ 13,663,610 | $ 37,959,951
============= =========== ============= | =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
OCWEN ASSET INVESTMENT CORP.
(A WHOLLY OWNED SUBSIDIARY OF OCWEN FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
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>
Issuance of common stock ...... 19,125,000 $191,250 $283,496,750 $ -- $ -- $ -- $283,688,000
Repurchase of common stock .... (160,000) (1,600) (2,992,912) -- -- -- (2,994,512)
Net income .................... -- -- -- -- 11,791,518 -- 11,791,518
Dividends ..................... -- -- -- (13,898,849) -- -- (13,898,849)
Changes in unrealized gain
(loss) on securities
available for sale .......... -- -- -- -- -- (7,327,890) (7,327,890)
---------- -------- ------------ ------------ ------------ ------------ ------------
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 ................. -- -- -- -- -- (1,871,662) (1,871,662)
---------- -------- ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1998 .. 18,965,000 189,650 294,492,203 (36,277,546) (46,394,403) 9,166,489 221,176,393
Net loss ...................... -- -- -- -- (22,276,910) -- (22,276,910)
Dividends ..................... -- -- -- (15,551,300) -- -- (15,551,300)
Change in unrealized gain
(loss) on securities
available for sale .......... -- -- -- -- -- (14,787,912) (14,787,912)
Change in cumulative
translation ................. -- -- -- -- -- (280,652) (280,652)
---------- -------- ------------ ------------ ------------ ------------- ------------
Balance at October 6, 1999 .... 18,965,000 $189,650 $294,492,203 $(51,828,846) $(68,671,313) $ (5,902,075) $168,279,619
========== ======== ============ ============ ============ ============= ============
==================================================================================================================================
Balance at October 7, 1999 .... 6,100 $ 61 $135,857,923 $ -- $ 15,602 $ -- $135,873,586
Net income .................... -- -- -- -- 3,527,081 -- 3,527,081
Change in unrealized gain
(loss) on securities
available for sale .......... -- -- -- -- -- (713,326) (713,326)
Change in cumulative
translation ................. -- -- -- -- -- 20,427 20,427
---------- -------- ------------ ------------ ------------ ------------- ------------
Balance at December 31, 1999 .. 6,100 $ 61 $135,857,923 $ -- $ 3,542,683 $ (692,899) $138,707,768
========== ======== ============ ============ ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
31
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, 1997
NOTE 1 ACQUISITION OF THE COMPANY
GENERAL
On October 7, 1999, Ocwen Acquisition Company ("Acquisition Sub"), a
Virginia corporation and an indirect wholly-owned subsidiary of Ocwen Financial
Corporation ("OCN"), merged (the "Merger") with and into Ocwen Asset Investment
Corp., a Virginia corporation, (together with its successor by merger (as
discussed below), either "OAC" or the "Company") in accordance with the
Agreement of Merger (the "Merger Agreement") dated as of July 25, 1999 among
OAC, OCN, and Acquisition Sub. In accordance with the Merger Agreement, OAC
shareholders (except for OCN or its subsidiaries) received 0.71 shares of OCN
stock for each outstanding share of OAC common stock. The Merger reflects an
aggregate purchase price of $101.2 million. The following is the Company's
allocation of the purchase price.
(DOLLARS IN THOUSANDS)
Purchase price...................................... $ 101,271
Fair value of net assets ........................... 161,313
------------
Excess of net assets acquired over purchase price... $ 60,042
============
On October 20, 1999, the Company merged (the "Subsequent Merger") into
Small Commercial Properties Corporation I ("SCP"), a Florida corporation and an
indirect wholly-owned subsidiary of OCN. Immediately thereafter, SCP changed its
name to Ocwen Asset Investment Corp. As a result of the Subsequent Merger, on
October 20, 1999, OAC ceased to qualify as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended (the "Code").
BASIS OF PRESENTATION
A vertical line has been used to separate the post-acquisition
consolidated financial statements of the Company from the pre-acquisition
consolidated financial statements of the Company prior to the acquisition (the
"Predecessor"). The effects of the acquisition resulted in a new basis of
accounting reflecting fair values of assets and liabilities at that date. The
consolidated financial statements of the Predecessor are presented at the
Predecessor's historical cost.
NOTE 2 ORGANIZATION
The Company's consolidated financial statements include the accounts of
the Company and its subsidiaries. The Company directly owns two 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
development purposes. The minority interest at December 31, 1998 represents a
8.7% interest (1,808,733 units) in the Operating Partnership held by Investors
Mortgage Insurance Holding Company ("IMIHC"), a wholly-owned subsidiary of OCN.
The Company has 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 phase 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 periods October 7, 1999 to December 31, 1999;
January 1, 1999 to October 6, 1999, and for the years ended 1998 and 1997; OCC
earned from the Company $1.3 million, $4.5 million, $5.9 million and $1.8
million, respectively, in base management fees. No incentive compensation was
paid for 1999, 1998, and 1997.
32
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, 1997
The Company also has 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 periods
October 7, 1999 to December 31, 1999, January 1, 1999 to October 6, 1999, and
for the year ended December 31, 1998, the Bank earned from the Company $0.9
million, $2.1 million, and $2.4, respectively, in servicing fees. No servicing
fees were earned by the Bank in 1997.
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Company and its
subsidiaries follow U.S. 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.
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 loan losses
on loans and discount loans.
REPURCHASE AGREEMENTS AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Company enters into purchases of securities under agreements to
resell (repurchase agreements) and securities sold under agreements to
repurchase. Interest is reported as interest income and interest expense,
respectively. At December 31, 1999 and 1998, there were no repurchase
agreements.
SHORT SALES
In the past, the Company has sold short U.S. Treasury bonds. Short
sales are stated at fair value. Gains and losses are recognized in the
statements of operations. At December 31, 1999 and 1998, there were no short
sales.
SECURITIES AVAILABLE FOR SALE
Securities are classified as available for sale when, in management's
judgment, they may be sold in response to or in anticipation of changes in
interest rates, and the 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 shareholder's 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 December 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.
33
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, 1997
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 is cash.
However, where there is doubt regarding the ultimate collectibility of the loan
principal, cash receipts, whether designated as principal or interest, are
thereafter applied to reduce the carrying value of the loan. Loans are restored
to accrual status only when interest and principal payments are brought current
and future payments are reasonably assured.
DISCOUNT LOAN PORTFOLIO
Certain mortgage loans, for which the borrower is not current as to
principal and interest payments or for which there is a reason to believe the
borrower will be unable to continue to make its scheduled principal and interest
payments, are acquired at a discount. The acquisition cost for a pool of loans
is allocated to each loan within the pool based upon the Company's pricing
methodology. The acquisition cost for a pool of discount loans is allocated on a
relative fair value basis to each loan within the pool.
The Company believes that it is able to reasonably estimate the amounts
and timing of collections on all of its discounted loans. For those commercial
real estate loans which are current and for which the Company believes that
collecting the acquisition amount of the loan and discount is probable, the
discount is accreted into interest income as a yield adjustment using the
interest method over the contractual maturity of the loan. For those commercial
discount loans that become nonperforming, the Company ceases accretion of the
discount. Gains on the repayment or discharge of the discount loans, including
any remaining discount, are reported as interest income.
Discount loans are reported at their outstanding principal balance net
of any charge-offs and premiums or discounts. The Company periodically evaluates
loans in the discount loan portfolio for impairment. Individually identified
impaired loans are measured based on one of the following: the present value of
payments expected to be received (using a discount rate that equates the
Company's estimate of expected future cash flows to the acquisition price),
observable market prices, or the estimated fair value of the collateral (for
loans that are solely dependent on the collateral for repayment). If the
recorded investment in the impaired loan exceeds the measure of estimated fair
value, a valuation allowance is established as a component of the allowance for
loan losses. At December 31, 1999 and 1998, the Company did not have any
impaired loans.
ALLOWANCE FOR LOAN LOSSES
The allowance for 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 loan 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
Land Improvements 20 years
Furniture, fixtures, and equipment 7 years
34
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, 1997
Expenditures for repairs and maintenance are charged to operations as
incurred. Significant improvements are capitalized. The leases are classified as
operating leases in accordances with SFAS No. 13 "Accounting for Leases." 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 income is reported on a straight-line basis over the terms of the
respective leases.
FOREIGN CURRENCY TRANSACTIONS AND TRANSLATION
In accordance with SFAS No. 52, "Foreign Currency Translation," assets
and liabilities of foreign entities where the functional currency is not the
U.S. dollar are translated into U.S. dollars at the current rate of exchange
existing at the statement of financial condition date and revenues and expenses
are translated at average monthly rates. The resulting translation adjustments
are included as a component of accumulated comprehensive income in stockholders'
equity.
INCOME TAXES
The Company will file a consolidated Federal income tax return with its
parent, OCN. The Company accounts for deferred income taxes using the asset and
liability method, which requires the recognition of deferred tax liabilities and
assets for the expected future tax consequences of temporary differences between
the carrying amounts and the basis of assets and liabilities. Prior to October
20, 1999 the Company qualified as a REIT under Sections 856 through 860 of the
Code of 1986, as amended. A REIT generally is not 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. Effective
October 20, 1999, the Company adopted Financial Accounting Standards Board
("FASB") No. 109, "Accounting for Income Taxes" ("SFAS No. 109"), the effect of
which was included in the purchase accounting resulting from the Merger.
EXCESS OF NET ASSETS ACQUIRED OVER PURCHASE PRICE
The effects of the Merger resulted in a new basis of accounting
reflecting fair values of assets and liabilities at the date of acquisition. The
excess of net assets over the purchase price of acquired net assets resulting
from the Merger is stated at cost and is being amortized on a straight-line
basis over the estimated future periods to be benefited of five years.
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.
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 borrower's
inability or unwillingness to make contractually required payments. Market risk
primarily 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.
35
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, 1997
RECENT ACCOUNTING STANDARDS
In June, 1998, the 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, as amended
by SFAS No. 137, is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. 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.
NOTE 4 FAIR VALUE OF FINANCIAL INSTRUMENTS
A majority of the Company's assets, liabilities, and off-balance sheet
instruments and commitments are considered financial instruments. For the
majority of the Company's financial instruments, principally loans and
securities, fair values are not readily available since there are no available
trading markets as characterized by current exchanges between willing parties.
Accordingly, fair values can only be derived or estimated using various
valuation techniques, such as computing the present value of estimated future
cash flows using discount rates commensurate with the risks involved. However,
the determination of estimated future cash flows is inherently subjective and
imprecise. In addition, for those financial instruments with option-related
features, prepayment assumptions are incorporated into the valuation techniques.
It should be noted that minor changes in assumptions or estimation methodologies
could have a material effect on these derived or estimated fair values.
The fair values reflected below are indicative of the interest rate
environments as of December 31, 1999 and 1998, respectively, and do not take
into consideration the effects of interest rate fluctuations. In different
interest rate environments, fair value results can differ significantly,
especially for certain fixed-rate financial instruments and non-accrual assets.
In addition, the fair values presented do not attempt to estimate the value of
the Company's anticipated future business activities. In other words, they do
not represent the Company's value as a going concern. Furthermore, the
differences between the carrying amounts and the fair values presented may not
be realized.
Reasonable comparability of fair values among institutions is difficult
due to the wide range of permitted valuation techniques and numerous estimates
that must be made in the absence of secondary market prices. This lack of
objective pricing standards introduces a degree of subjectivity to these derived
or estimated fair values. Therefore, while disclosure of estimated fair values
of financial instruments is required, readers are cautioned in using this data
for purposes of evaluating the financial condition of the Company.
36
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, 1997
The following table sets forth the carrying amounts and the estimated
fair values of the Company's financial instruments at December 31, 1999 and
1998.
<TABLE>
<CAPTION>
1999 1998
----------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents ................................... $ 79,116 $ 79,116 $ 53,365 $ 53,365
Securities available for sale ............................... 103,445 103,445 351,154 351,154
Loan portfolio, net ......................................... 61,937 61,714 73,341 73,341
Match funded residential loans and securities ............... 157,794 154,623 173,610 173,610
Discount loan portfolio ..................................... -- -- 5,618 5,618
Securities sold under agreements to repurchase .............. 28,301 28,301 138,612 138,612
Obligations outstanding under lines of credit ............... 17,997 17,997 34,472 34,472
Obligations outstanding under lines of credit - real estate . 141,173 141,173 142,557 142,557
11.5% Redeemable Notes due 2005 ............................. 140,486 121,550 143,000 108,680
Bonds-match funded agreements ............................... 141,515 141,557 163,404 163,404
Interest rate swaps ......................................... 1,294 3,702 -- (4,144)
Loan commitments ............................................ -- 22,599 -- 58,666
</TABLE>
The methodologies used and key assumptions made to estimate fair value
follow:
CASH AND CASH EQUIVALENTS
Cash and cash equivalents have been valued at their carrying amounts as
these are reasonable estimates of fair value given the relatively short period
of time between origination of the instruments and their expected maturity.
SECURITIES AVAILABLE FOR SALE
Certain mortgage-related securities are designated as assets available
for sale because the Company does not intend to hold them to maturity.
Securities available for sale are carried at fair value with the net unrealized
gains or losses reported as a separate component of accumulated comprehensive
income in stockholders' equity. At disposition, the realized net gain or loss is
included in earnings on a specific identification basis. The amortization of
premiums and accretion of discounts are computed using the interest method after
considering actual and estimated prepayment rates, if applicable. Actual
prepayment experience is periodically reviewed and effective yields are
recalculated when differences arise between prepayments originally anticipated
and amounts actually received plus anticipated future prepayments.
On a quarterly basis, the Company evaluates each individual security in
its available for sale portfolio to determine whether a decline in value below
amortized cost has occurred which is other than temporary. In making this
assessment, the Company considers several factors, including, but not limited
to, the following:
(1) Determining whether the present value of estimated future cash flows
discounted at a risk-free rate (the rate on monetary assets of a comparable
duration which are essentially risk free, such as the three-month Treasury
bill rate) is less than the amortized cost basis of the instrument;
(2) Examining whether the duration of the decline in market value has exceeded
six consecutive months; and
(3) Identifying the reasons for significant declines in value (i.e., greater
than 20%).
For each security where the Company concludes that all or a portion of
the decrease in value is other than temporary, such amount is charged to
earnings establishing a new cost basis for the security.
37
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, 1997
LOANS, MATCH FUNDED LOANS AND SECURITIES, AND DISCOUNT LOANS
The fair value of the loan portfolio, which includes commercial,
multi-family, residential loans and loan commitments, approximates the carrying
value as these instruments have variable market interest rates. The match funded
securities are marked to fair value at the end of each month in the same manner
as securities available for sale. The fair value of the match funded loans and
the discount loan portfolio are estimated based upon current market yields at
which recent pools of similar mortgages have traded taking into consideration
the timing and amount of expected cash flows.
BORROWINGS
The fair value of securities sold under agreements to repurchase and
obligations outstanding under lines of credit approximates the carrying value as
these instruments have variable market interest rates.
The fair value of the 11.5% Redeemable Notes and bonds-match funded
agreement are based on quotes obtained from securities dealers.
DERIVATIVE FINANCIAL INSTRUMENTS
The fair value of all derivative financial instruments are based on
quoted market prices.
LOAN COMMITMENTS
The fair value of loan commitments is estimated considering the
difference between interest rates on or about the respective financial statement
dates and the committed rates.
NOTE 5 RISK MANAGEMENT INSTRUMENTS
The Company enters into derivatives, particularly interest rate swaps,
to hedge interest rate exposures arising from mismatches between assets and
liabilities. Under interest rate swaps, the Company agrees with other parties to
exchange, at specified intervals, the difference between fixed-rate and
floating-rate interest amounts calculated by reference to an agreed notional
principal amount and the London Interbank Offered Rate ("LIBOR"). The terms of
these interest rate swaps allow the Company to receive a floating rate of
interest equal to LIBOR and to pay fixed interest rates.
The interest rates swaps are used to synthetically alter current LIBOR
rate debt incurred to fund the Company's acquisitions of real estate,
subordinate and residual securities, and securities sold under agreements to
repurchase. None of the Company's interest rate swaps are held for trading
purposes. The fair value of the interest rate swaps is 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 synthetically alters 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 income.
38
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, 1997
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
December 31, 1999 and 1998, 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.
DECEMBER 31, 1999
Notional LIBOR Floating Rate at
Maturity Amount Index Fixed Rate End of Period Fair Value
-------- ------ ----- ---------- ------------- ----------
(DOLLARS IN THOUSANDS)
2003 $ 100,000 1-month 5.75% 6.46 $ 2,983
2001 17,000 1-month 6.00 6.48 108
2001 75,000 1-month 6.00 6.48 482
2002 8,780 1-month 6.04 6.48 129
--------- ---------
$ 200,780 $ 3,702
========= =========
DECEMBER 31, 1998
Notional LIBOR Floating Rate at
Maturity Amount Index Fixed Rate End of Period Fair Value
-------- ------ ----- ---------- ------------- ----------
(DOLLARS IN THOUSANDS)
2003 $ 100,000 1-month 5.75% 5.56 $ (2,086)
2001 17,000 1-month 6.00 5.55 (339)
2001 75,000 1-month 6.00 5.62 (1,479)
2002 8,780 1-month 6.04 5.55 (240)
---------- ---------
$ 200,780 $ (4,144)
========== =========
At December 31, 1999, the Company had sold short U.S. Treasury interest
rate futures contracts with a notional amount of $12.0 million, which expire in
March, 2000. Although these futures contracts are an economic hedge of certain
mortgage backed securities, they do not meet the hedge accounting criteria and
are accounted for at fair value with gains or losses recorded in the
Consolidated Statement of Operations. At December 31, 1999, the futures
contracts had a fair value of $0.06 million. The realized gain/(loss) on
economic hedges included in losses on securities, derivatives and real estate in
the Consolidated Statement of Operations during October 7, 1999 to December 31,
1999, January 1, 1999 to October 6, 1999 and 1998 amounted to ($0.1) million,
$0.1 million and $2.6 million, respectively.
At December 31, 1999 and 1998, 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 foreign 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 December 31, 1999 and 1998,
the fair value of the British Pounds futures contracts was $0.1 million and
$(0.8) million, respectively. 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 foreign subsidiary of the Company. At December 31, 1999 and
1998, the fair value of the Canadian currency contract was $0.3 million and
$0.02 million, respectively. Gains and losses on these foreign currency futures
contracts are recorded in the Consolidated Statement of Financial Condition
offsetting the item being hedged.
39
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, 1997
NOTE 6 SECURITIES AVAILABLE FOR SALE
The following table sets forth the amortized cost, fair value and gross
unrealized gains and losses of the Company's securities available for sale at
the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31, 1999 Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage-related securities:
Single-family residential:
Subprime residuals ................ $ 56,175 -- $ (27) $ 56,148
Subordinates ...................... 5,882 -- (323) 5,559
--------- --------- --------- ---------
62,057 -- (350) 61,707
--------- --------- --------- ---------
Multi-family and commercial:
Subordinates ...................... 41,738 -- -- 41,738
--------- --------- --------- ---------
41,738 -- -- 41,738
--------- --------- --------- ---------
Total securities available for sale .... $ 103,795 $ -- $ (350) $ 103,445
========= ========= ========= =========
DECEMBER 31, 1998 Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Mortgage-related securities:
Single-family residential:
Subprime residuals ................ $ 209,071 $ 9,653 $ -- $ 218,724
Subordinates ...................... 15,390 -- -- 15,390
--------- --------- --------- ---------
224,461 9,653 -- 234,114
--------- --------- --------- ---------
Multi-family and commercial:
AAA-rated interest only ........... 454 -- (13) 441
A-rated interest only ............. 236 -- (14) 222
Non-rated interest only ........... 3,135 -- -- 3,135
Non-rated principal only .......... 276 -- -- 276
Subordinates ...................... 111,554 1,412 -- 112,966
--------- --------- --------- ---------
115,655 1,412 (27) 117,040
--------- --------- --------- ---------
Total securities available for sale .. $ 340,116 $ 11,065 $ (27) $ 351,154
========= ========= ========= =========
</TABLE>
Gross realized gains and losses and proceeds on sales were as follows
during 1999:
Period Period
January 1, 1999 October 7, 1999
To To
October 6, 1999 December 31, 1999
--------------- -----------------
(DOLLARS IN THOUSANDS)
Securities:
Gross realized gains................ $ 4,071 $ --
Gross realized losses............... (28) (729)
----------- -----------
Net realized gains (losses) ........ $ 4,043 $ (729)
=========== ===========
Proceeds on sales................... $ 48,121 19,226
=========== ===========
In 1997, no securities were sold.
40
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, 1997
The following table summarizes the maturities of securities available
for sale at December 31, 1999. Maturities are based on their weighted-average
maturities and reflecting anticipated future prepayments.
Amortized Cost Fair Value
-------------- ----------
(DOLLARS IN THOUSANDS)
Due within one year............... $ 10,581 $ 10,405
Due after 1 through 5 years....... 58,327 58,175
Due after 5 through 10 years...... 25,943 25,927
Due after 10 years................ 8,944 8,938
------------ ----------
$ 103,795 $ 103,445
============ ==========
During the period October 7, 1999 to December 31, 1999, and January 1,
1999 to October 6, 1999, the Company recorded impairment charges of $0.1 million
and $38.2 million, respectively, against its portfolio of securities available
for sale, compared to $79.7 million in 1998. The Company did not record
impairment charges in 1997. The charge results from increases in projected
prepayment speeds during the period and annual losses in excess of assumptions,
which resulted in the shortening of the weighted average lives of certain
individual securities in the portfolio. As a result, a determination was made to
write down the recorded investment in those securities where the reduction in
fair value was considered to be other than temporary.
NOTE 7 LOAN PORTFOLIO
The Company's loan portfolio consisted of the following at December 31,
1999 and 1998:
December 31, December 31,
1999 1998
------------- -------------
(DOLLARS IN THOUSANDS)
Single-family residential...... $ 2,541 $ 8,419
Multi-family residential....... 34,830 20,544
Commercial real estate:
Office....................... -- 24,124
Hotel........................ 24,809 21,305
------------- -------------
Total loans................ 62,180 74,392
Premium/(discount)............. 488 (409)
Allowance for loan losses...... (731) (642)
------------- -------------
Loans, net................... $ 61,937 $ 73,341
============= =============
41
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, 1997
The following table represents a summary of the Company's
non-performing loans (past due 90 days or more) at December 31, 1999 and 1998.
December 31, December 31,
1999 1998
------------- -------------
(DOLLARS IN THOUSANDS)
Single-family residential...... $ 682 $ 4,165
Multi-family................... 3,005 --
------------- -------------
$ 3,687 $ 4,165
============== =============
At and for the year ended December 31, 1999, 1998 and 1997, 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 December 31, 1999:
(DOLLARS IN THOUSANDS)
Single-family Multi-family Commercial
Residential Residential Real Estate Total
------------- ------------ ----------- ---------
New York ...... 494 25,522 6,398 32,414
California .... 383 9,308 -- 9,691
Illinois ...... 543 -- 6,145 6,688
Delaware ...... -- -- 12,266 12,266
Florida ....... 89 -- -- 89
Other ......... 1,032 -- -- 1,032
-------- --------- --------- ---------
Total ......... $ 2,541 $ 34,830 $ 24,809 $ 62,180
======== ========= ========= =========
NOTE 8 MATCH FUNDED RESIDENTIAL LOANS AND SECURITIES, NET
Match funded residential loans and securities is comprised of the
following at December 31:
1999 1998
----------- -----------
(DOLLARS IN THOUSANDS)
Single family residential loans ... $ 104,588 $ 172,013
Premium ........................... 1,008 1,597
Allowance for loan losses ......... (495) --
----------- -----------
Match funded residential
loans, net.................... 105,101 173,610
Match funded securities............ 52,693 --
----------- -----------
Balance at end of period .......... $ 157,794 $ 173,610
=========== ===========
On November 13, 1998, the Company securitized and transferred to OAC
Mortgage Residential Securities, Inc., a real estate mortgage investment conduit
(the "Trust"), $173.6 million (1,808 mortgage loans) of its residential loan
portfolio. On that date, the Trust issued two classes of notes secured by the
related group of mortgage loans. At December 31, 1999, Loan Group I consisted of
approximately 705 mortgage loans with original terms of up to 30 years and which
are secured by first liens on single family residential properties. Loan Group
II consisted of approximately 467 mortgage loans with 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 SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." Accordingly, the amount of proceeds received
from the transfer are reported as a liability in the consolidated statement of
financial condition.
42
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, 1997
The following table sets forth the geographic distribution of
properties securing the Company's match funded residential loans at December 31,
1999:
Single-family
Residential
---------------
(DOLLARS IN THOUSANDS)
Michigan.......... $ 22,809
California........ 11,263
Florida........... 6,792
Texas............. 5,807
Other............. 57,917
---------------
Total............. $ 104,588
===============
The following table represents a summary of the Company's
non-performing loans (past due 90 days or more) at the dates indicated in the
match funded loan portfolio.
December 31, December 31,
1999 1998
------------ ------------
(DOLLARS IN THOUSANDS)
Match funded loans................. $ 1,127 $ --
============ ============
On December 16, 1999, the Company transferred to Ocwen NIM Corp four
unrated residual securities in exchange for $43.0 million in non-recourse notes
(Series 1999-OAC1). Upon the transfer the Company received approximately $40.1
million of proceeds. The transfer did not qualify as a sale under SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." Accordingly, proceeds from the transfer are reported as a
liability in the consolidated statement of financial condition.
The following table sets forth the amortized cost, fair value and gross
unrealized gains and losses of the Company's match funded securities at December
31, 1999.
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
Match funded securities $ 53,561 $ -- $ (868) $ 52,693
========= ========== ========== ========
The following table summarizes the maturities of the match funded
securities at December 31, 1999. Maturities are based on weighted-average unpaid
principal balance and reflect anticipated future prepayments based on a
consensus of dealers in the market.
Amortized Cost Fair Value
-------------- -----------
(DOLLARS IN THOUSANDS)
Due within one year.............. $ 8,669 $ 8,490
Due after 1 through 5 years...... 23,115 22,761
Due after 5 through 10 years..... 9,162 9,025
Due after 10 years............... 12,615 12,417
------------ -----------
$ 53,561 $ 52,693
============ ===========
43
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, 1997
Bonds-match funded agreements were comprised of the following at
December 31:
1999 1998
------------ ------------
(DOLLARS IN THOUSANDS)
OAC Mortgage Residential Securities, Inc........ $ 100,968 $ 163,404
Ocwen NIM Corp.................................. 40,547 --
------------ ------------
$ 141,515 $ 163,404
============ ============
NOTE 9 DISCOUNT LOAN PORTFOLIO
The Company has acquired in the past, through private sales and
auctions, mortgage loans at a discount because either the borrowers are not
current as to principal and interest payments or there is doubt as to the
borrower's ability to pay in full the contractual principal and interest. The
Company estimates the amounts it will realize through foreclosure, collection or
other resolution efforts and the length of time required to complete the
collection process in determining the amounts it will bid to acquire such loans.
The resolution alternatives applied to the discount loan portfolio are:
(i) the borrower brings the loan current in accordance with original or modified
terms; (ii) the borrower repays the loan or a negotiated amount; (iii) the
borrower agrees to a deed-in-lieu of foreclosure, in which case it is classified
as investment in real estate and held for sale by the Company and; (iv) the
Company forecloses on the loan and the property is either acquired at the
foreclosure sale by a third party or by the Company, in which case it is
classified as investment in real estate and held for sale. Upon receipt of title
to the property, the loans are transferred to investment in real estate.
The Company had no discount loans at December 31, 1999, compared to
$5.6 million at December 31, 1998.
NOTE 10 INVESTMENT IN REAL ESTATE
The investment in real estate at December 31, 1999 and 1998 was
comprised of four commercial office properties in San Francisco, California; an
office building in Jacksonville, Florida; and three shopping plazas, one each
located in Bradenton, Florida; Halifax, Nova Scotia; and Havre, Montana. The
following table sets forth the Company's investment in real estate:
December 31, December 31,
1999 1998
-------------- --------------
(DOLLARS IN THOUSANDS)
Office buildings ............................ 202,607 175,319
Retail ...................................... 33,224 31,597
Building improvements ....................... 17,590 1,223
Tenant improvements and lease commissions ... 8,150 3,683
Furniture and fixtures ..................... 44 --
-------------- --------------
261,615 211,822
Accumulated depreciation .................... (9,011) (3,763)
-------------- --------------
Investment in real estate net ............. $ 252,604 $ 208,059
============== ==============
During the period January 1, 1999 to October 6, 1999 and for 1998, the
Company recorded impairment charges of $1.6 million and $3.9 million,
respectively.
44
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, 1997
NOTE 11 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 $28.3 million, with a weighted average interest
rate of 8.36%, at December 31, 1999 compared to $138.6 million with a weighted
average interest rate of 8.42% 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 December 31, 1999 and 1998:
DECEMBER 31, 1999 Commercial Residential
Outstanding Securities Securities
Maturity Date Borrowing Fair Value Fair Value
------------- ------------- ------------- -----------
(Dollars in Millions)
Within 1 month .... $ 23.3 $ 38.2 $ 2.6
More than 1 year .. 5.0 -- 28.1
------------- ------------- -----------
Total ............. $ 28.3 $ 38.2 $ 30.7
============= ============= ===========
DECEMBER 31, 1998 Commercial Residential
Outstanding Securities Securities
Maturity Date Borrowing Fair Value Fair Value
------------- ------------- ------------- -----------
(Dollars in Millions)
Within 1 month .... $ 27.8 $ 34.1 $ 14.4
More than 1 year .. 110.8 57.5 184.2
------------- ------------- -----------
Total ............. $ 138.6 $ 91.6 $ 198.6
============= ============= ===========
Interest expense with respect to these obligations for the period
October 7, 1999 to December 31, 1999; January 1, 1999 to October 6, 1999; and
for 1998 was $0.7 million, $6.2 million and $11.7 million, respectively. During
the period, the underlying securities sold under agreements to repurchase were
delivered into a third-party account that recognizes the Company's rights and
interests in these securities.
Other information concerning securities sold under agreements to
repurchase:
1999 1998
-------- --------
(DOLLARS IN THOUSANDS)
Balance at end of year ........................... $ 28,301 $138,612
Accrued interest payable at end of year .......... 34 428
Weighted average interest rate at end of year .... 8.36% 8.42%
Average balance during the year .................. 78,331 159,001
Weighted average interest rate during the year ... 8.81% 7.97%
Maximum month-end balance ........................ 131,500 223,820
OBLIGATIONS OUTSTANDING UNDER LINES OF CREDIT. Obligations outstanding
under lines of credit amounted to $18.0 million and $34.5 million at December
31, 1999 and for 1998, respectively. The borrowings are pursuant to a three year
agreement, which is collateralized by commercial loans. Interest expense during
the period October 7, 1999 to December 31, 1999; January 1, 1999 to October 6,
1999; and for 1998 was $0.7 million, $2.1 million and $6.5 million,
respectively.
45
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, 1997
OBLIGATIONS OUTSTANDING UNDER LINES OF CREDIT - REAL ESTATE.
Obligations outstanding under lines of credit secured by real estate amounted to
$141.2 million and $142.6 million at December 31, 1999 and 1998, respectively.
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 December 31, 1999:
Property Principal Amount Interest Rate Maturity Date
-------- ---------------- ------------- -------------
(Dollars In Millions)
Bush Street Property..... $ 75.0 LIBOR plus 1.75% April, 2001 (1)
Other.................... $ 66.2 LIBOR plus 1.75% June, 2001 (1)
(1) Represents the portion of the outstanding balance under a $200 million
loan that is secured by real estate. As of December 31, 1999, this line
of credit was collateralized by $117.6 million in investments in real
estate. Also, an additional $18.0 million was borrowed and
collateralized by $34.8 million in commercial mortgage loans under this
line of credit.
Interest expense during the period October 7, 1999 to December 31,
1999; January 1, 1999 to October 6, 1999; and for 1998 was $2.8 million, $8.1
million and $7.2 million, respectively.
NOTE 12 11.5% REDEEMABLE NOTES AND BONDS-MATCH FUNDED AGREEMENTS
In July, 1998, the Company completed the issuance of $150 million of
11.5% Redeemable Notes due 2005 under Rule 144A of the Securities Act of 1933,
as amended. Interest on the Redeemable Notes is payable semi-annually on January
1 and July 1, beginning January 1, 1999, at a rate of 11.5%. The Redeemable
Notes will mature on July 1, 2005 and will be redeemable, at the option of the
Company, in whole or in 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
Redeemable 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
Redeemable 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
Redeemable Notes outstanding must equal at least $112.5 million. At December 31,
1999 and 1998, the outstanding face value of the Redeemable Notes was $143.0
million. Interest expense on the Redeemable Notes during the periods October 7,
1999 to December 31, 1999; January 1, 1999 to October 6, 1999 and for 1998 was
$4.2 million, $12.4 million and $7.8 million, respectively.
The Company is subject to various restrictive covenants under the
indenture governing the Redeemable Notes (the "Redeemable Note Indenture"). The
Redeemable Note 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 Funds From Operations ("FFO") to adjusted fixed charges for the
previous four fiscal quarters exceeds 1.25 to 1.00 Given that adjusted FFO to
adjusted fixed charges for the four quarters ended December 31, 1999 was 0.56,
the Company does not expect this financial test to be satisfied for some time to
come. Permitted Indebtedness, the incurrence of which is not limited under the
Redeemable Note 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 2000 although there can be no assurance that this will be
the case. The Redeemable Note Indenture also prohibits the Company from making
certain restricted payments, including dividends. As of December 31, 1999, the
Company was not permitted to pay dividends under the Redeemable Note Indenture,
and the Company does not expect that it will be able to pay dividends in the
foreseeable future.
46
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, 1997
On November 13, 1998, the Company securitized and transferred to a
trust $173.6 million of its residential loan portfolio. Upon the transfer, the
Company received approximately $173.9 million of proceeds. Also, on December 16,
1999, the Company entered into a Deposit Trust Agreement (the "Trust") with
Ocwen NIM Corp, and transferred four unrated residual securities to the Trust in
exchange for $43.0 million in non-recourse notes (Series 1999-OAC1). Upon the
transfer the Company received approximately $40.1 million of proceeds. The
transfers did not qualify as sales under FAS 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." Accordingly,
the amount of proceeds from the transfers are reported as a liability in the
consolidated statement of financial condition.
At December 31, 1999 and 1998, bonds-match funded agreements amounted
to $141.5 million and $163.4 million, respectively, and with a weighted average
interest rate of 6.86% and 6.65%, respectively. Interest expense for the period
October 7, 1999 to December 31, 1999; January 1, 1999 to October 6, 1999; and
for 1998 was $2.1 million, $6.9 million and $1.5 million, respectively.
NOTE 13 TAXATION
Total income tax expense was allocated as follows for the period
October 7, 1999 to December 31, 1999:
(DOLLARS IN THOUSANDS)
Income from continuing operations......................... $ 539
==========
The components of income tax expense attributable to income from
continuing operations were as follows for the period October 7, 1999 to December
31, 1999:
(DOLLARS IN THOUSANDS)
CURRENT:
Federal................................................... $ 231
DEFERRED:
Federal................................................... 308
----------
Total..................................................... $ 539
==========
Income tax expense for the period October 7, 1999 to December 31, 1999
differs from the amounts computed by applying the U.S. Federal corporate income
tax rate of 35% as follows:
(DOLLARS IN THOUSANDS)
Expected income tax expense at statutory rate............. $ 1,423
Differences between expected and actual tax:
Excess of cost over net assets acquired ............... (1,120)
OAC loss not included in OCN consolidated tax group.... 223
Other.................................................. 13
----------
Actual income tax expense............................ $ 539
==========
47
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, 1997
The net deferred tax asset was comprised of the following as of
December 31, 1999:
(DOLLARS IN THOUSANDS)
DEFERRED TAX ASSETS:
Impairments on securities available for sale......... $ 34,503
State taxes.......................................... 2,631
Application of purchase accounting................... 1,544
Accrued other liabilities............................ 20
Accrued profit sharing............................... 150
Bad debt and allowance and loan losses............... 601
Foreign currency exchange............................ 1,068
Capital loss carryforward............................ 4,160
Unrealized loss on securities available for sale..... (384)
Net operating loss carryforward...................... 4,514
Other................................................ 472
-------------
49,279
-------------
DEFERRED TAX LIABILITIES:
Accrued rental income................................ 499
Other................................................ 9
-------------
508
-------------
48,771
Deferred tax asset valuation allowance................... (38,873)
-------------
Net deferred tax asset................................... $ 9,898
=============
The Company qualified as a REIT under Sections 856 through 860 of the
Code, as amended through October 20, 1999. A REIT is generally not subject to
federal income taxation on the portion of its income that is distributed to its
shareholders if it distributes at least 95 percent of its taxable income for the
year 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 distributed 100 percent of its taxable income for the periods during
which it was a REIT, no provision has been made for federal income taxes for the
Company and its subsidiaries in the accompanying consolidated financial
statements for those periods.
The Company was a REIT for federal tax purposes and will file a REIT
federal income tax return for all prior tax years through October 20, 1999. The
Company will be included in OCN's consolidated federal income tax return
beginning on October 21, 1999. The Company had, at October 6, 1999,
approximately $131.6 million net unrealized built-in losses. Any such loss
recognized within the five-year period beginning on October 7, 1999 (the
"recognition period") is treated as a pre-change loss and, as such, is subject
to an annual limit as to the amount which may offset the taxable income of OCN
and its subsidiaries ("the IRC section 382 limitation"). A net unrealized
built-in loss is an amount by which the tax basis of the corporation's assets,
at the time of the change in ownership, exceeds the aggregate fair market value
of those assets at that time. The annual section 382 limitation is an amount
determined by multiplying the value of the Company's stock by the federal
long-term tax-exempt rate and is approximately $5.3 million. If a deduction is
denied for any recognized built-in loss in any post-change year, the loss is
carried forward to subsequent years under rules similar to the standard loss
carryforward rules. As a result of these limitations, a corresponding deferred
tax asset valuation allowance was established at acquisition date as part of
purchase accounting in the amount of $38.9 million. The valuation allowance will
be adjusted in the future to the extent of a change in management's assessment
of the amount of the net deferred tax asset that is expected to be realized.
48
<PAGE>
OCWEN ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, 1997
NOTE 14 COMMITMENTS AND CONTINGENCIES
At December 31, 1999, the Company had $22.6 million in outstanding
commitments to fund construction loans secured by multi-family and commercial
properties. The following table details the amounts committed at such date.
December 31, 1999
-----------------
(DOLLARS IN THOUSANDS)
Multi-family........................ $ 9,319
Hotels.............................. 13,280
-------
Total committed amount............ $22,599
=======
On April 20, 1999, a complaint was filed on behalf of a putative class
of public shareholders of the Company in the Circuit Court of the Fifteenth
Judicial Circuit, Palm Beach County, Florida against OCN and the Company. On
April 23, 1999, a complaint was filed on behalf of putative classes of public
shareholders of the Company in the Circuit Court of the Fifteenth Judicial
Circuit, Palm Beach County, Florida against the Company and certain directors of
the Company. The plaintiffs in both complaints sought to enjoin consummation of
the acquisition of the Company by OCN. The cases were consolidated, and on
September 13, 1999 a consolidated amended complaint was filed. The injunction
was denied, and on October 14, 1999, OCN was dismissed as a party. Plaintiffs'
remaining claims are for damages for alleged breaches of common law fiduciary
duties. Discovery is ongoing.
On June 3, 1999, Walton Street Capital, L.L.C. ("Walton") filed suit
against the Company and the Operating Partnership in the Circuit Court of Cook
County, Illinois. Walton has alleged that the Company committed an anticipatory
breach of contract with respect to the proposed sale by the Company of all of
its interest in its commercial mortgage-backed securities portfolio to Walton.
Walton has claimed damages in an amount in excess of $20 million. The Company
believes this suit is without merit and continues to vigorously defend against
the same.
The Company is subject to various other pending legal proceedings.
In management's opinion the resolution of these claims will not have a
material effect on the consolidated financial statements.
NOTE 15 STOCKHOLDER'S EQUITY
On May 14, 1997, the Company completed an initial public offering of
19,125,000 shares of the Company's common stock. At that time, the Company's
common stock began trading on the Nasdaq Stock Market's National Market
("NASDAQ") under the symbol "OAIC."
On December 9, 1997, the Company repurchased 160,000 shares of common
stock from IMIHC at the weighted average price of the stock on the day of
repurchase.
On May 1, 1998, the common stock began trading on the New York Stock
Exchange ("NYSE") under the symbol "OAC." Upon effectiveness of the NYSE
listing, the company de-listed its common stock from NASDAQ.
Effective with the merger with OCN on October 7, 1999, the Company
exchanged 0.71 shares of OCN stock for each outstanding share of OAC common
stock. As a result, the Company de-listed from the NYSE.
49
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
50
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Articles of Incorporation (Filed
herewith)
3.2 Amended and Restated Bylaws (Filed herewith)
4.1 Form of Common Stock certificate (Filed herewith)
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 (1)
10.1 First Amended and Restated Management Agreement (2)
10.2 Form of Registration Rights Agreement dated (3)
10.3 Third Amended and Restated Agreement of Limited Partnership of
Ocwen Partnership L.P. (2)
10.4 Form of Stock Option Plan (3)
10.5 Loan Agreement, dated as of April 7, 1998, between OAIC Bush
Street, LLC and Salomon Brothers Realty Corp. (4)
10.6 Loan Agreement, dated as of April 24, 1998, between OAC and
Greenwich Financial Products Inc. (2)
10.7 Amended and Restated Loan Agreement, dated as of June 10,
1998, by and among, inter alia, OAIC California Partnership,
L.P., OAIC California partnership II, L.P., Salomon Brothers
Realty Corp. and LaSalle National Bank (2)
10.8 Second Extension of Term Agreement (filed herewith)
10.9 Compensation and Indemnification Agreement, dated as of May 6,
1999, between the Company and the independent committee of the
Board of Directors (7)
10.10 Agreement of Merger, dated as of July 25, 1999, among OCN
Ocwen Acquisition Company and the Registrant (6)
10.11 First Amendment to Loan Agreement and Guaranty, dated as of
July 9, 1999, made by and among OAIC Bush Street, LLC, Salomon
Brothers Realty Corp, and Ocwen Partnership, L.P., and La
Salle Bank National Association (7)
10.12 Second Amendment to Guarantee of Payment, dated as of July 9,
1999, made by and between Salomon Brothers Realty Corp. and
Ocwen Partnership, L.P. (7)
10.13 Indemnity agreement, dated August 24, 1999, among OCN, and the
Company's directors (7)
27 Financial Data Schedule for the period ended December 31, 1999
(filed herewith)
99.1 Investment Guidelines (2)
99.2 Risk Factors (filed herewith)
================================================================================
(1) 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.
(2) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1998.
(3) Incorporated by reference to the Company's Registration
Statement on Form S-11 (File No. 333-21965), as amended,
declared effective by the Commission on May 14, 1997.
(4) Incorporated by reference to the Current Report on Form 8-K
filed by the Company with the Commission on April 23, 1998.
(5) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1998.
51
<PAGE>
(6) Incorporated by reference to Exhibit 2.1 to OCN's current
Report on Form 8-K filed with the Commission on July 26, 1999.
(7) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 1999.
(b) Financial Statements and Schedules
The following consolidated financial statements of Ocwen Asset
Investment Corp. and report of PricewaterhouseCoopers LLP, independent certified
public accountants, are included in Item 8 hereof.
(1) Report of Independent Certified Public Accountants
(2) Consolidated Statements of Financial condition at December 31,
1999, and December 31, 1998
(3) Consolidated Statement of Operations for the Period October 7,
1999 to December 31, 1999, the Period January 1, 1999 to
October 6, 1999, the Year Ended December 31, 1998, and the
period May 14, 1997 to December 31, 1997
(4) Consolidated statements of Comprehensive Income (Loss) for the
Period October 7, 1999 to December 31, 1999, the Period
January 1, 1999 to October 6, 1999, the Year Ended December
31, 1998, and the period May 14, 1997 to December 31, 1997
(5) Consolidated Statement of Changes in Stockholders' Equity for
the Period October 7, 1999 to December 31, 1999, the Period
January 1, 1999 to October 6, 1999, the Year Ended December
31, 1998, and the period May 14, 1997 to December 31, 1997
(6) Consolidated Statement of Cash Flows for the Period October 7,
1999 to December 31, 1999, the Period January 1, 1999 to
October 6, 1999, the Year Ended December 31, 1998, and the
period May 14, 1997 to December 31, 1997
(7) Notes to Consolidated Financial Statements at December 31,
1999, 1998, and 1997
Financial statement schedules have been omitted because they are not
applicable or the required information is shown in the consolidated financial
statements or notes thereto.
Reports on Form 8-K filed during the quarter ended December 31, 1999:
(1) A Form 8-K filed October 13, 1999 announcing the completion of
the acquisition of the Company by OCN.
52
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
OCWEN ASSET INVESTMENT CORP.
By: /s/ WILLIAM C. ERBEY
---------------------------------------------------
William C. Erbey
Sole director, Chairman and Chief Executive Officer
(principal executive officer)
Date: March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the date indicated.
Date: March 30, 2000
By: /s/ WILLIAM C. ERBEY
------------------------------------
William C. Erbey
Chairman and Chief Executive Officer
(principal executive officer)
By: /s/ MARK S. ZEIDMAN Date: March 30, 2000
-------------------------------------
Mark S. Zeidman
Senior Vice President and Chief Financial Officer
(principal financial and accounting officer)
53
ARTICLES OF INCORPORATION
OF
SMALL COMMERCIAL PROPERTIES CORPORATION I
The undersigned incorporator hereby forms a corporation under Chapter 607 of
laws of the State of Florida.
ARTICLE I. NAME
The name of the Corporation shall be:
SMALL COMMERCIAL PROPERTIES CORPORATION I
ARTICLE II. ADDRESS
The address of the principal office of this Corporation shall be 1675 Palm Beach
Lakes Boulevard, Suite 1002, West Palm Beach, Florida 33401, and the mailing
address of the Corporation shall be the same.
ARTICLE III. NATURE OF BUSINESS
This Corporation may engage or transact in any or all lawful activities or
business permitted under the laws of the United States, the State of Florida or
any other state, country, territory or nation.
ARTICLE IV. CAPITAL STOCK
The maximum number of shares of stock that this Corporation is authorized to
have outstanding at any one time is 1,000 shares of common stock having $.01 par
value per share.
ARTICLE V. REGISTERED AGENT
The street address of the initial registered office of the Corporation in the
State of Florida shall be 1675 Palm Beach Lakes Boulevard, Suite 1002, West Palm
Beach, Florida 33401, and the name of the initial registered agent of the
Corporation at that address is John R. Erbey.
ARTICLE VI. TERM OF EXISTENCE
This Corporation is to exist perpetually.
ARTICLE VII. DIRECTORS
All corporate powers shall be exercised by or under the authority, and the
business and affairs of the Corporation managed under the direction, of its
Board of Directors, subject to any limitation set forth in these Articles of
Incorporation. This Corporation shall have one director, initially. The name and
address of the initial member of the Board of Directors is:
William C. Erbey 1675 Palm Beach Lakes Boulevard
Suite 1002
West Palm Beach, Florida 33401
1
<PAGE>
ARTICLE VIII. INCORPORATOR
The name and street address of the incorporator to these Articles of
Incorporation:
Timothy J. Reynolds, Esquire
1675 Palm Beach Lakes Boulevard
5 A
West Palm Beach, Florida 33401
IN WITNESS WHEREOF, the undersigned incorporator has executed these Articles of
Incorporation this 8th day of September, 1997.
/s/ Timothy J. Reynolds
--------------------------------
Timothy J. Reynolds, Esquire
2
<PAGE>
CERTIFICATE OF DESIGNATION
OF REGISTERED AGENT/REGISTERED OFFICE
Pursuant to the provisions of Section 607.0501 or 617.0501, Florida Statutes,
the undersigned corporation, organized under the laws of the State of Florida,
submits the following statement in designating the registered office/agent, in
the State of Florida.
1. The name of the corporation is: Small Commercial Properties Corporation
I
2. The name and address of the registered agent and office is:
John R. Erbey
1675 Palm Beach Lakes Boulevard
Suite 1002
West Palm Beach, Florida 33401
Having been named as registered agent and to accept service of process for the
above stated corporation at the place designated in this certificate, I hereby
accept the appointment as registered agent and agree to act in this capacity. I
further agree to comply with the provisions of all statutes relating to proper
and complete performance of my duties, and I am familiar with and accept the
obligations of my position as registered agent.
/s/ John R. Erbey 9/8/97
- ----------------- ------
John R. Erbey Date
3
<PAGE>
ARTICLES OF MERGER
for the merger of
OCWEN ASSET INVESTMENT CORP., a Virginia Corporation
into
SMALL COMMERCIAL PROPERTIES CORPORATION I, a Florida corporation
The undersigned, pursuant to Title 13.1, Chapter 9, Article 12 of the
Code of Virginia, hereby execute the following Articles of Merger and set forth:
1. The Agreement and Plan of Merger and Reorganization, attached as
Exhibit A, and made a part of these Articles of Merger, provides for the merger
(the "Merger") of Ocwen Asset Investment Corp., a Virginia corporation, and
Small Commercial Properties Corporation I, a Florida corporation. Small
Commercial Properties I will be the surviving corporation. The Agreement and
Plan of Merger and Reorganization constitutes the "plan of merger" for the
purposes of Article 12 of the Virginia Stock Corporation Act. The Board of
Directors of each corporation which is a party to the Merger adopted the
Agreement and Plan of Merger and Reorganization and recommended its approval to
its shareholders.
2. The Agreement and Plan of Merger and Reorganization was approved by
the written consent of the sole shareholder of Ocwen Asset Investment Corp.
3. The Agreement and Plan of Merger and Reorganization was approved by
the written consent of the sole shareholder of Small Commercial Properties
Corporation I.
4. The laws of the jurisdiction of organization of Small Commercial
Properties Corporation I permit the merger of a business corporation of another
jurisdiction into a corporation organized under the laws of the jurisdiction of
organization of Small Commercial Properties Corporation I; and the merger of
Ocwen Asset Investment Corp. into Small Commercial Properties Corporation I is
in compliance with the laws of the jurisdiction of organization of Small
Commercial Properties Corporation I.
5. The effective time and date of the Merger shall be the later to
occur of (i) the filing in the office of the Virginia State Corporation
Commission (the "Virginia Commission") of these Articles of Merger in accordance
with Section 13.1-720 of the Virginia Stock Corporation Act and the issuance of
a certificate of merger by the Virginia Commission under the Virginia Stock
Corporation Act and (ii) the filing in the office of the Department of State of
the State of Florida of articles of merger in accordance with Section 607.1105
of the Florida Business Corporation Act.
4
<PAGE>
Dated: October 19, 1999
OCWEN ASSET INVESTMENT CORP.
/s/ Christine A. Reich
----------------------------------------
Christine A. Reich
President
SMALL COMMERCIAL PROPERTIES
CORPORATION I
/s/ William C. Erbey
----------------------------------------
William C. Erbey
Chairman and Chief Executive Officer
5
<PAGE>
ARTICLES OF MERGER
For the merger of
OCWEN ASSET INVESTMENT CORP., a Virginia Corporation
into
SMALL COMMERCIAL PROPERTIES CORPORATION I, a Florida corporation
The following Articles of Merger are submitted in accordance with the
Florida Business Corporation Act, pursuant to section 607.1105, F. S.
First: The surviving corporation is Small Commercial Properties Corporation I, a
Florida corporation, which will change its name in the merger pursuant to the
Agreement and Plan of Merger and Reorganization to "Ocwen Asset Investment
Corp."
Second: The merging corporation is Ocwen Asset Investment Corp., a Virginia
corporation.
Third: The Agreement and Plan of Merger and Reorganization, attached as Exhibit
A, and made a part of these Articles of Merger, provides for the merger (the
"Merger") of Ocwen Asset Investment Corp., a Virginia corporation, and Small
Commercial Properties Corporation I, a Florida corporation. The Agreement and
Plan of Merger and Reorganization constitutes the "plan of merger" for the
purposes of the Florida Business Corporation Act. The Board of Directors of each
corporation which is a party to the Merger adopted the Agreement and Plan of
Merger and Reorganization and recommended its approval to its shareholders.
Fourth: The effective time and date of the Merger shall be the later to occur of
(i) the filing in the office of the Virginia State Corporation Commission (the
"Virginia Commission") of articles of merger in accordance with Section 13.1-720
of the Virginia Stock Corporation Act and the issuance of a certificate of
merger by the Virginia Commission under the Virginia Stock Corporation Act and
(ii) the filing in the office of the Department of State of the State of Florida
of these Articles of Merger in accordance with Section 607.1105 of the Florida
Business Corporation Act.
Fifth: The Agreement and Plan of Merger and Reorganization was adopted as of
October 18, 1999 by the written consent of the sole shareholder of Ocwen Asset
Investment Corp.
Sixth: The Agreement and Plan of Merger and Reorganization was adopted as of
October 18, 1999 by the written consent of the sole shareholder of Small
Commercial Properties Corporation I.
6
<PAGE>
Dated: October 19, 1999
OCWEN ASSET INVESTMENT CORP.
/s/ Christine A. Reich
----------------------------------------
Christine A. Reich
SMALL COMMERCIAL PROPERTIES
CORPORATION I
/s/ William C. Erbey
----------------------------------------
William C. Erbey
Chairman and Chief Executive Officer
7
<PAGE>
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
This AGREEMENT AND PLAN OF MERGER AND REORGANIZATION (this "Agreement")
is made and entered into as of October 19, 1999, by and between Small Commercial
Properties Corporation I, a Florida corporation ("Small Commercial" or, after
the Effective Time (as defined in Article IV hereof), the "Surviving
Corporation"), and Ocwen Asset Investment Corp., a Virginia corporation ("OAC").
WHEREAS, Small Commercial is a corporation duly formed and validly existing
under the laws of the State of Florida and a wholly-owned subsidiary of Ocwen
Properties, Inc., a New York corporation ("Ocwen Properties");
WHEREAS, OAC is a corporation duly organized and validly existing under
the laws of the Commonwealth of Virginia and a wholly-owned subsidiary of Ocwen
Properties;
WHEREAS, each of the Florida Business Corporation Act (the "FBCA") and
the Virginia Stock Corporation Act (the "VSCA") permits a corporation organized
and existing under the VSCA to merge with and into a corporation organized and
existing under the FBCA;
WHEREAS, the Board of Directors and the sole stockholder of Small
Commercial and the Board of Directors and sole stockholder of OAC have duly
authorized the merger of OAC with and into Small Commercial pursuant to the
terms of this Agreement; and
WHEREAS, all other conditions precedent to the merger of OAC with and
into Small Commercial have been, or, prior to the Effective Time, will be,
satisfied or validly waived;
NOW, THEREFORE, in consideration of the mutual covenants and agreements herein
contained, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, it is agreed that, in accordance
with the applicable statutes of the Commonwealth of Virginia and the State of
Florida, OAC shall be, and hereby is, at the Effective Time, merged with and
into Small Commercial (the"Merger"), with Small Commercial to be the Surviving
Corporation. The mode of carrying the Merger into effect shall be as follows:
ARTICLE I
MERGER
Prior to the Effective Time, Small Commercial and OAC shall take all
such additional action as shall be necessary or appropriate in order to
effectuate the Merger.
At the Effective Time, OAC shall be merged with and into Small
Commercial, the separate existence of OAC shall cease, Small Commercial shall
continue in existence, and the Merger shall in all respects have the effects
provided for in the VSCA and the FBCA.
If at any time after the Effective Time the Surviving Corporation shall
consider or be advised that any further assignments, conveyances or assurances
in law are necessary or desirable to carry out the provisions hereof, the proper
officers, directors or other agents of OAC shall execute and deliver any and all
8
<PAGE>
proper deeds, assignments and assurances in law, and do all such additional
things, as are necessary or proper to carry out the provisions hereof.
ARTICLE II
TERMS OF THE TRANSACTION
At the Effective Time, (i) each share in the capital of OAC outstanding
immediately prior to the Effective Time, by virtue of the Merger and without any
action on the part of the holder therof, shall be converted into the right to
receive sixty (60) shares of common stock, par value $.01 per share, of the
Surviving Corporation and (ii) each share in the capital of Small Commercial
outstanding immediately prior to the Effective Time shall continue to exist as a
valid share in the capital of the Surviving Corporation with the identical
designations, preferences, limitations and relative rights as in effect prior to
the Effective Time.
ARTICLE III
ARTICLES OF INCORPORATION AND
BYLAWS
From and after the Effective Time, and until thereafter amended as
provided by law, the Articles of Incorporation of Small Commercial as in effect
immediately prior to the Effective Time shall be the Articles of Incorporation
of the Surviving Corporation, except that: (a) Article FIRST shall be amended to
read in its entirety as follows: "The name of this Corporation shall be: OCWEN
ASSET INVESTMENT CORP."; and (b) Article IV shall be amended to read in its
entirety as follows: "The maximum number of shares of stock that this
Corporation is authorized to have outstanding at any one time is 10,000 shares
of common stock having $.01 par value per share." From and after the Effective
Time, and until thereafter amended as provided by law, the Bylaws of Small
Commercial as in effect immediately prior to the Effective Time shall be the
Bylaws of the Surviving Corporation.
ARTICLE IV
EFFECTIVE TIME
The "Effective Time" shall be the later to occur of (i) the filing in
the office of the Virginia State Corporation Commission (the "Virginia
Commission") of articles of merger in accordance with Section 13.1-720 of the
VSCA and the issuance of a certificate of merger by the Virginia Commission
under the VSCA and (ii) the filing in the office of the Department of State of
the State of Florida of articles of merger in accordance with Section 607.1105
of the FBCA.
ARTICLE V
TERMINATION
At any time prior to the Effective Time, either the Board of Directors of Small
Commercial or the Board of Directors of OAC may terminate or abandon this
Agreement.
9
<PAGE>
ARTICLE VI
AMENDMENTS
Subject to the applicable provisions of the VSCA and the FBCA, at any
time prior to the Effective Time, the parties hereto may amend, modify or
supplement this Agreement in such manner as they jointly may determine.
ARTICLE VII
GOVERNING LAW
This Agreement shall be governed by and construed in accordance with
the laws of the states of Florida and Virginia, as applicable.
ARTICLE VIII
COUNTERPARTS
This agreement may be executed in counterparts, each of which when so
executed shall be deemed to be an original, and such counterparts shall together
constitute but one and the same instrument.
IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as of the
day and year first above written,
SMALL COMMERCIAL PROPERTIES CORPORATION I
By: /s/ William C. Erbey
----------------------------------------------------
William C. Erbey
Chairman and Chief Executive Officer
OCWEN ASSET INVESTMENT CORP.
By: /s/ Christine A. Reich
----------------------------------------------------
Christine A. Reich
President
10
BYLAWS
OF
SMALL COMMERCIAL PROPERTIES CORPORATION I
Effective As Of: September 9, 1997
<PAGE>
BYLAWS
OF
SMALL COMMERCIAL PROPERTIES CORPORATION I
ARTICLE I
SHAREHOLDERS
SECTION 1.1 ANNUAL MEETING. Except as otherwise provided in Section 1.9
of these Bylaws, an annual meeting of shareholders of the Corporation for the
election of directors and for the transaction of any proper business shall be
held each year on such date and at such time and place within or without the
State of Florida as may be fixed at any time and from time to time by the Board
of Directors.
SECTION 1.2 SPECIAL MEETINGS. A special meeting of shareholders of the
Corporation entitled to vote on any business to be considered at any such
meeting may be called by the Chairman of the Board or the President and Chief
Executive Officer, and shall be called by the Chairman of the Board, the
President and Chief Executive Officer or the Secretary when directed to do so by
resolution of the Board of Directors or at the written request of shareholders
holding at least 10% of the Corporation's stock entitled to vote at such
meeting. Any such request shall state the purpose or purposes of the proposed
meeting.
SECTION 1.3 NOTICE OF MEETINGS. Notice of the date, time and place of
each annual and special shareholders' meeting, and in the case of a special
meeting, the purpose(s) for which the special meeting is called, shall be
provided to each shareholder entitled to vote thereat by the President and Chief
Executive Officer, the Secretary or a person calling the meeting no fewer than
ten (10) or more than 60 days before the meeting date and may be communicated
orally or in writing and in person or by telegraph, teletype, telecopy or other
form of electronic communication or by mailing the same, first-class mail
postage prepaid to the shareholder's address as it appears on the stock transfer
books of the Corporation, no fewer that ten (10) days before the meeting date;
provided, that notice of a regular or special shareholder's meeting need not be
provided to a shareholder who signs a written waiver of notice either before or
after the meeting and delivers such signed written notice to the Corporation for
inclusion in the minutes or filing with the records of the Corporation; provided
further, that attendance of a shareholder at a meeting shall constitute his or
her waiver of any objection to lack of notice or defective notice of the
meeting, unless the shareholder at the beginning of the meeting objects to
holding the meeting or transacting business at the meeting, or a waiver of
objection to consideration of a particular matter at the meeting that is not
within the purpose(s) described in the meeting notice, unless the shareholder
<PAGE>
objects to considering the matter when it is presented. Neither the business to
be transacted at nor the purpose of any regular or special shareholders' meeting
must be specified in the notice of any regular shareholders' meeting or in the
waiver of notice of any regular or special shareholders' meeting.
When a meeting is adjourned to a different date, time or place, notice
need not be given of the new date, time or place if the new date, time and place
is announced at the meeting before the adjournment is taken, and any business
may be transacted at the adjourned meeting that might have been transacted at
the original meeting. If, however, the adjournment is for more than 120 days or
a new record date is fixed for the adjourned meeting, notice of the adjourned
meeting shall be given to each shareholder who is entitled to notice of the
meeting as of the new record date.
SECTION 1.4 QUORUM. Except as otherwise provided by the Articles of
Incorporation or by law, at any shareholders' meeting a majority of the shares
of stock entitled to vote thereat, either present or represented by proxy, shall
constitute a quorum for the transaction of any business, but the shareholders
present, although less than a quorum, may adjourn the meeting to another time or
place and, except as provided in the last paragraph of Section 1.3 of these
Bylaws, notice need not be given of the adjourned meeting.
SECTION 1.5 VOTING. Whenever directors are to be elected at a meeting,
they shall be elected by a plurality of the votes by the shares entitled to vote
in the election. Whenever any corporate action, other than the election of
directors, is to be taken by vote of shareholders at a meeting, it shall, except
as otherwise required by the Articles of Incorporation or by law, be approved if
the votes cast by the holders of the shares represented at the meeting and
entitled to vote on the subject matter favoring the action exceed the votes cast
opposing the action.
Except as otherwise provided by the Articles of Incorporation or by
law, each outstanding share of stock of the Corporation on the record date is
entitled to one (1) vote on each matter submitted to a vote at any meeting of
shareholders.
Upon the demand of any shareholder entitled to vote, the vote for
directors or the vote on any other matter at a meeting shall be by written
ballot, but otherwise the method of voting and the manner in which votes are
counted shall be at the discretion of the presiding officer at the meeting.
2
<PAGE>
SECTION 1.6 PRESIDING OFFICER AND SECRETARY. At every meeting of
shareholders, the Chairman of the Board, or in his or her absence (or if there
be none), the President and Chief Executive Officer, or in his or her absence, a
Managing Director, or, if none be present, the appointee of the meeting, shall
preside. The Secretary, or in his or her absence, an Assistant Secretary, or if
none be present, the appointee of the presiding officer of the meeting, shall
act as secretary of the meeting.
SECTION 1.7 PROXIES. A shareholder entitled to vote at any
shareholders' meeting or any adjournment thereof may vote in person or by proxy
executed in writing and signed by the shareholder or the shareholder's
attorney-in-fact. The appointment of proxy will be effective when received by
the Secretary or other officer or agent authorized to tabulate votes. No proxy
shall be valid more than eleven (11) months after the date of its execution
unless a longer term is expressly provided therein.
SECTION 1.8 LIST OF SHAREHOLDERS. The officer who has charge of the
stock ledger of the Corporation shall prepare and make, at least ten (10) days
before every meeting of shareholders, a complete list of the shareholders
entitled to notice of the meeting, arranged in alphabetical order, and showing
the address and the number of shares registered in the name of each shareholder.
Such list shall be open to the examination of any shareholder during regular
business hours, and at his or her own expense, for a period of at least ten (10)
days prior to the meeting at the Corporation's principal office, at the office
of the Corporation's transfer agent or registrar or at a place identified in the
meeting notice which is within the city where the meeting is to be held. The
list shall also be made available at the meeting and may be inspected by any
shareholder at any time at the meeting or any adjournment thereof.
The stock ledger shall be the only evidence as to who are the
shareholders entitled to examine the stock ledger, the list required by this
Section 1.8 or the books of the Corporation or to vote in person or by proxy at
any shareholders' meeting.
SECTION 1.9 WRITTEN CONSENT OF SHAREHOLDERS IN LIEU OF MEETING. Except
as otherwise provided by the Articles of Incorporation or by law, any action
required or permitted by statute to be taken at any annual or special meeting of
shareholders of the Corporation may be taken without a meeting, without prior
notice and without a vote if a consent in writing, setting forth the action so
taken, shall be dated and signed by the holders of outstanding shares having not
less than the minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all shares entitled to vote thereon were
present and voted. Any such written consent may be given by one or any number of
3
<PAGE>
substantially concurrent written instruments of substantially similar tenor
dated and signed by such shareholders, in person or by attorney or proxy duly
appointed in writing, and filed with the Secretary or an Assistant Secretary of
the Corporation. Within ten (10) days after obtaining such authorization by
written consent, notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to those shareholders who
have not consented in writing or who are not entitled to vote on such action.
The notice shall fairly summarize the material features of the authorized
action. If the action creates dissenters' rights, the notice shall contain a
clear statement of the right of dissenting shareholders to be paid the fair
value of their shares upon compliance with and as provided for by the Florida
Business Corporation Act.
ARTICLE II
DIRECTORS
SECTION 2.1 NUMBER OF DIRECTORS. The Board of Directors shall consist
of not less than one (1) director and not more than seven (7) directors, with
the exact number to be fixed at any time and from time to time by a resolution
of the Board of Directors or by a majority of shares outstanding and entitled to
vote in the election of directors, except that no decrease in the number of
directors shall shorten the term of any incumbent director unless such incumbent
director is specifically removed pursuant to Section 2.5 of these Bylaws at the
time of such decrease.
SECTION 2.2 ELECTION AND TERM OF DIRECTORS. Directors shall be elected
annually by a vote of the shares outstanding and entitled to vote thereon. If
the annual election of directors is not held on the date designated therefor,
the directors shall cause such election to be held as soon thereafter as
convenient. Each director shall hold office from the time of his election and
qualification until his successor is elected and qualified or until his earlier
resignation or removal.
SECTION 2.3 VACANCIES AND NEWLY CREATED DIRECTORSHIPS. Except as
otherwise provided by the Articles of Incorporation or by law, vacancies and
newly created directorships resulting from any increase in the authorized number
of directors may be filled by the affirmative vote of a majority of the
remaining directors, although less than a quorum, by a sole remaining director
or by the shareholders.
SECTION 2.4 RESIGNATION. Any director may resign at any time upon
written notice to the Board of Directors, the Chairman of the Board or the
Corporation. Any such resignation shall take effect at the date and time
specified therein or, if the date and time is not specified, upon receipt
4
<PAGE>
thereof, and the acceptance of such resignation, unless required by the terms
thereof, shall not be necessary to make such resignation effective.
SECTION. 2.5 REMOVAL. Any or all of the directors may be removed at any
time, with or without cause, by a vote of the shares outstanding and entitled to
vote in the election of directors, taken at a meeting or by written consent, if
the number of votes cast to remove such director or directors exceeds the number
of votes cast not to remove such director or directors.
SECTION 2.6 MEETINGS. Meetings of the Board of Directors, regular or
special, shall be held at the principal place of business of the Corporation or
at another place designated by the person or persons giving notice or otherwise
calling the meeting. Members of the Board of Directors, or of any committee
designated by the Board, may participate in a meeting of such Board or committee
by means of conference telephone or similar communications equipment by which
all directors participating in the meeting may simultaneously hear each other,
and participation in a meeting by such means shall constitute presence in person
at such meeting. The Board of Directors may fix dates, times and places for
regular meetings of the Board of Directors, and no notice of the date, time and
place of such meetings need be given. A special meeting of the Board of
Directors shall be held whenever called by the Chairman of the Board, if any, or
by the President and Chief Executive Officer at such date, time and place as
shall be specified in the notice or waiver thereof, and notice of the date, time
and place of each special meeting shall be provided to each director by the
Secretary or by a person calling the meeting and may be communicated orally or
in writing and in person or by telegraph, teletype, telecopy or other form of
electronic communication not later than the day before the meeting or by mailing
the same, postage prepaid, not later than the second day before the meeting;
provided, that notice of a meeting of the Board of Directors need not be given
to a director who signs a waiver of notice either before or after the meeting;
provided further, that attendance of a director at a meeting shall constitute a
waiver of notice of that meeting and a waiver of all objections to the date,
time and place of the meeting and the manner in which it was called or convened,
except when a director states, at the beginning of the meeting or promptly upon
arrival at the meeting, any objection to the transaction of business because the
meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting of the Board
of Directors must be specified in the notice or waiver of notice of such
meeting.
SECTION 2.7 QUORUM AND VOTING. A majority of the number of directors
prescribed as constituting the Board of Directors pursuant to Section 2.1 of
these Bylaws shall constitute a quorum for the transaction of business but, if
5
<PAGE>
there be less than a quorum at any meeting of the Board of Directors, a majority
of the directors present may adjourn the meeting to another time and place, and
no further notice thereof need be given other than announcement to that effect
at the meeting which shall be so adjourned. Except as otherwise provided by the
Articles of Incorporation or by law, the affirmative vote of a majority of the
directors present at a meeting at which a quorum is present when the vote is
taken shall be the act of the Board of Directors.
SECTION 2.8 WRITTEN CONSENT OF DIRECTORS IN LIEU OF A MEETING. Any
action required or permitted to be taken at any meeting of the Board of
Directors or any committee thereof may be taken without a meeting if all members
of the Board or of such committee, as the case may be, consent thereto in one
(1) or more writings which is (are) filed with the Secretary or an Assistant
Secretary of the Corporation.
SECTION 2.9 COMPENSATION. Directors may receive compensation for
services to the Corporation in their capacities as directors or otherwise in
such manner and in such amounts as may be fixed at any time and from time to
time by the Board of Directors.
SECTION 2.10 COMMITTEES. The Board of Directors may from time to time,
by resolution adopted by the Board, designate from among its members one (1) or
more committees, each consisting of two (2) or more directors of the Corporation
designated by the Board as members of such committee plus one (1) or more
directors designated by the Board as alternate members of such committee who may
act in place and stead and replace any absent or disqualified member at any
meeting of such committee. The resolution of the Board of Directors may, in
addition or alternatively, provide that in the absence or disqualification of a
member of a committee, the member or members thereof present at any meeting and
not disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Except as
otherwise provided by the Articles of Incorporation or by law, any such
committee, to the extent provided in the resolution of the Board of Directors,
shall have and may exercise all the powers and authority of the Board of
Directors in the management of the business and affairs of the Corporation,
including authorizing the seal of the Corporation to be affixed to all papers
which may require it. Except as otherwise provided by the Articles of
Incorporation or by law, any such committee may adopt rules governing the method
of calling and the date, time and place of holding its meetings. Unless
otherwise provided by the Board of Directors, a majority of any such committee
shall constitute a quorum for the transaction of business, and the vote of a
6
<PAGE>
majority of the members of such committee present at a meeting at which a quorum
is present shall be the act of such committee. Each such committee shall keep a
record of its acts and proceedings and shall report thereon to the Board of
Directors whenever requested to do so. Any or all members of any such committee
may be removed, with or without cause, by resolution adopted by a majority of
the Board of Directors.
ARTICLE III
OFFICERS, AGENTS AND EMPLOYEES
SECTION 3.1 APPOINTMENT AND TERM OF OFFICE. The officers of the
Corporation shall include a Chairman of the Board, a President and Chief
Executive Officer, a Treasurer and a Secretary and may include one or more
Managing Directors, Senior Vice Presidents, Vice Presidents, Assistant
Treasurers and Assistant Secretaries. All such officers shall be appointed by
the Board of Directors or by a duly authorized committee thereof. Any number of
such offices may be held by the same person, but no officer shall execute,
acknowledge or verify any instrument in more than one capacity. Except as may be
prescribed otherwise by the Board of Directors or a committee thereof in a
particular case, all such officers shall hold their offices at the pleasure of
the Board of Directors for an unlimited term and need not be reappointed
annually or at any other periodic interval. The Board of Directors may appoint,
and may delegate power to appoint, such other officers (including Assistant
Secretaries and Assistant Treasurers) and agents as it may deem necessary or
proper, and such officers shall hold their offices or positions for such terms,
have such authority and perform such duties as may at any time and from time to
time be determined by or pursuant to authorization of the Board of Directors.
SECTION 3.2 RESIGNATION AND REMOVAL. Any officer may resign at any time
by delivering written notice to the Secretary of the Corporation. Any officer,
agent or employee of the Corporation may be removed by the Board of Directors,
or by a duly authorized committee thereof, with or without cause, at any time.
The Board of Directors or a duly authorized committee thereof may delegate such
power of removal as to officers, agents and employees who were not appointed by
the Board of Directors or such a committee.
SECTION 3.3 COMPENSATION AND BOND. The compensation of the officers of
the Corporation shall be fixed by the Board of Directors, but this power may be
delegated to any officer in respect of other officers under his control. The
Corporation may secure the fidelity of any or all of its officers, agents or
employees by bond or otherwise.
7
<PAGE>
SECTION 3.4 CHAIRMAN OF THE BOARD. The Chairman of the Board shall
preside at all meetings of the Board of Directors and the shareholders. The
Chairman of the Board shall have such other powers and perform such other duties
as are prescribed by these Bylaws and as usually pertain to such office and as
may be assigned to him or her at any time or from time to time by the Board of
Directors.
SECTION 3.5 PRESIDENT AND CHIEF EXECUTIVE OFFICER. The President and
Chief Executive Officer shall be the chief executive officer of the Corporation
and shall have the responsibility for carrying out the policies of the Board of
Directors, subject to the direction of the Board, and shall have general
supervision over the business and affairs of the Corporation. In the absence of
the Chairman of the Board, the President and Chief Executive Officer shall
preside at meetings of the Board of Directors and the shareholders. The
President and Chief Executive Officer may employ and discharge employees and
agents of the Corporation, except as otherwise prescribed by the Board of
Directors, and may delegate those powers. The President and Chief Executive
Officer may vote the stock or other securities of any other domestic or foreign
corporation of any type or kind which may at any time be owned by the
Corporation, may execute any shareholders' or other consents in respect thereof
and may in his or her discretion delegate such powers by executing proxies, or
otherwise, on behalf of the Corporation. The Board of Directors by resolution
from time to time may confer like powers upon any other person or persons. The
President and Chief Executive Officer shall have such other powers and perform
such other duties as are prescribed by these Bylaws and as usually pertain to
such office and as may be assigned to him or her at any time or from time to
time by the Board of Directors.
SECTION 3.6 MANAGING DIRECTORS. Each Managing Director shall have such
powers and perform such duties as the Board of Directors or the President and
Chief Executive Officer may from time to time prescribe. In the absence or
inability to act of the President and Chief Executive Officer, unless the Board
of Directors shall otherwise provide, the Managing Director who has served in
that capacity for the longest time and who shall be present and able to act,
shall perform all the duties and may exercise any of the powers of the President
and Chief Executive Officer. The performance of any duty by a Managing Director
shall, in respect of any other person dealing with the Corporation, be
conclusive evidence of his or her power to act.
SECTION 3.7 SENIOR VICE PRESIDENTS. Each Senior Vice shall have such
powers and perform such duties as the Board of Directors or the President and
Chief Executive Officer may from time to time prescribe. The performance of any
8
<PAGE>
duty by a Senior Vice President shall, in respect of any other person dealing
with the Corporation, be conclusive evidence of his or her power to act.
SECTION 3.8 VICE PRESIDENTS. Each Vice President shall have such powers
and perform such duties as the Board of Directors or the President and Chief
Executive Officer may from time to time prescribe. The performance of any duty
by a Vice President shall, in respect of any other person dealing with the
Corporation, be conclusive evidence of his or her power to act.
SECTION 3.9 TREASURER. The Treasurer shall have charge of all funds and
securities of the Corporation, shall endorse the same for deposit or collection
when necessary and deposit the same to the credit of the Corporation in such
banks or depositories as the Board of Directors may authorize. He may endorse
all commercial documents requiring endorsements for or on behalf of the
Corporation and may sign all receipts and vouchers for payments made to the
Corporation. He shall have all such further powers and duties as generally are
incident to the position of Treasurer or as the Board of Directors or the
President and Chief Executive Officer may from time to time prescribe.
SECTION 3.10 ASSISTANT TREASURERS. In the absence or inability to act
of the Treasurer, any Assistant Treasurer may perform all the duties and
exercise all the powers of the Treasurer. The performance of any such duty
shall, in respect of any other person dealing with the Corporation, be
conclusive evidence of his or her power to act. An Assistant Treasurer shall
also perform such other duties as the Treasurer, the Board of Directors or the
President and Chief Executive Officer may from time to time prescribe.
SECTION 3.11 SECRETARY. The Secretary shall record all the proceedings
of the meetings of the shareholders and directors in a book to be kept for that
purpose and shall also record therein all action taken by written consent of the
shareholders or directors in lieu of a meeting. He or she shall attend to the
giving and serving of all notices of the Corporation and authenticating all
records of the Corporation. The Secretary shall have custody of the seal of the
Corporation and shall attest the same by his or her signature whenever required.
The Secretary shall have charge of the stock ledger and such other books and
papers as the Board of Directors may direct, but he or she may delegate
responsibility for maintaining the stock ledger to any transfer agent appointed
by the Board of Directors. He or she shall have all such further powers and
duties as generally are incident to the position of Secretary or as may be
assigned to him by the Board of Directors or the President and Chief Executive
Officer.
9
<PAGE>
SECTION 3.12 ASSISTANT SECRETARIES. In the absence or inability to act
of the Secretary, any Assistant Secretary may perform all the duties and
exercise all the powers of the Secretary. The performance of any such duty
shall, in respect of any other person dealing with the Corporation, be
conclusive evidence of his or her power to act. An Assistant Secretary shall
also perform such other duties as the Secretary, the Board of Directors or the
President and Chief Executive Officer may from time to time prescribe.
SECTION 3.13 DELEGATION OF DUTIES. In case of the absence of any
officer of the Corporation, or for any other reason that the Board of Directors
may deem sufficient, the Board of Directors may confer for the time being the
powers or duties, or any of them, of such officer upon any other officer or upon
any director.
SECTION 3.14 LOANS TO OFFICERS, DIRECTORS AND EMPLOYEES; GUARANTY OF
OBLIGATIONS OF OFFICERS, DIRECTORS AND EMPLOYEES. The Corporation may lend money
to, guarantee any obligation of, or otherwise assist any officer, director or
employee of the Corporation or any subsidiary, whenever, in the judgment of the
Board of Directors, such loan, guaranty or assistance may reasonably be expected
to benefit the Corporation. The loan, guaranty or other assistance may be with
or without interest and may be unsecured or secured in such manner as the Board
of Directors shall approve, including, without limitation, a pledge of shares of
stock of the Corporation.
ARTICLE IV
INDEMNIFICATION
SECTION 4.1 INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND
AGENTS. Any person who was or is a party, or is threatened to be made a party,
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (including any action or suit
by or in the right of the Corporation to procure a judgment in its favor), by
reason of the fact that he or she is or was a director, officer, employee or
agent of the Corporation or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall be indemnified by the
Corporation, if, as and to the extent authorized by applicable law, against
expenses (including attorneys' fees), judgments, liabilities, fines, costs and
amounts paid in settlement actually and reasonably incurred by him or her in
connection with such proceeding, including the defense, settlement or approval
of such proceeding. The indemnification expressly provided by applicable law and
by these Bylaws in a specific case shall not be deemed exclusive of any other
10
<PAGE>
rights to which any person indemnified may be entitled under any lawful
agreement, vote of shareholders or disinterested directors or otherwise, both as
to action in his official capacity and as to action in another capacity while
holding such office, and shall continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
SECTION 4.2 INSURANCE. The Corporation may purchase and maintain
insurance, at its expense, to protect itself or any of its directors, officers,
employees, agents or other persons described in Section 4.1 of these Bylaws
against expenses (including attorneys' fees), judgments, liabilities, fines,
costs and amounts paid in settlement, whether or not the Corporation would have
the legal power to indemnify them directly against such liability.
SECTION 4.3 SAVINGS CLAUSE. If this Article or any portion of it is
invalidated on any ground by a court of competent jurisdiction, the Corporation
nevertheless shall indemnify each person described in Section 4.1 of these
Bylaws to the fullest extent permitted by all portions of this Article IV that
shall not have been invalidated and to the fullest extent permitted by law.
ARTICLE V
STOCK
SECTION 5.1 CERTIFICATES. The Board of Directors may authorize the
issuance of some or all of the Corporation's shares of stock of any or all
classes or series with or without certificates. Certificates for stock of the
Corporation shall be in such form as shall be approved by the Board of Directors
and shall be signed in the name of the Corporation by the Chairman of the Board,
the President and Chief Executive Officer or a Managing Director and by the
Treasurer, Assistant Treasurer, Secretary or an Assistant Secretary. Such
certificates may be sealed with the seal of the Corporation or a facsimile
thereof. Any or all of the signatures on a certificate may be a facsimile. In
case any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the Corporation with the same effect as if he or she were such
officer, transfer agent or registrar at the date of issue.
SECTION 5.2 REGISTERED SHAREHOLDERS. No certificate shall be issued for
any share until the share is fully paid. The Corporation shall be entitled to
treat the holder of record of shares as the holder in fact and, except as
11
<PAGE>
otherwise provided by law, shall not be bound to recognize any equitable or
other claim to or interest in the shares.
SECTION 5.3 TRANSFERS OF STOCK. Transfers of shares shall be made only
upon the books of the Corporation by the holder, in person or by duly authorized
attorney, and on the surrender of the certificate or certificates for such stock
properly endorsed. The Board of Directors shall have the power to make all such
rules and regulations, not inconsistent with applicable law, the Articles of
Incorporation or these Bylaws, as the Board of Directors may deem appropriate
concerning the issue, transfer and registration of certificates for stock of the
Corporation. The Board may appoint one or more transfer agents or registrars of
transfers, or both, and may require all stock certificates to bear the signature
of either or both.
SECTION 5.4 LOST, STOLEN OR DESTROYED CERTIFICATES. The Corporation may
issue a new stock certificate in the place of any certificate therefore issued
by it which is subsequently alleged to have been lost, stolen or destroyed, and
the Corporation may require the owner of the lost, stolen or destroyed
certificate or his legal representative to give the Corporation a bond
sufficient to indemnify the Corporation against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of any such new certificate. In addition, the Board
of Directors may require such owner to satisfy such other reasonable
requirements as it deems appropriate.
SECTION 5.5 SHAREHOLDER RECORD DATE. In order that the Corporation may
determine the shareholders entitled to notice of or to vote at any meeting of
shareholders or any adjournment thereof, to demand a special meeting, to consent
to corporate action in writing without a meeting, to receive payment of any
dividend or other distribution or allotment of any rights, to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix, in advance,
a record date which shall not precede the date upon which the Board of Directors
adopts the resolution fixing such record date nor be more than 70 days before
the date of such meeting or other action requiring such shareholder
determination. Only such shareholders as shall be shareholders of record on the
date so fixed shall be entitled to notice of and to vote at such meeting or any
adjournment thereof, to demand a special meeting, to give such consent, to
receive payment of such dividend or other distribution or allotment of any such
rights, to exercise such rights in respect of any such change, conversion or
exchange of stock or to participate in such action, as the case may be,
notwithstanding any transfer of any shares on the books of the Corporation after
any record date so fixed.
12
<PAGE>
If no record date is fixed by the Board of Directors, the record date
for determining shareholders (i) entitled to notice of or to vote at a meeting
of shareholders or any adjournment thereof shall be at the close of business on
the day preceding the date on which notice is first given to shareholders or, if
notice is waived by all shareholders entitled to vote at the meeting, at the
close of business on the day preceding the date on which the meeting is held,
(ii) entitled to demand a special meeting is the date the first shareholder
delivers his/her demand to the Corporation, (iii) to express consent to
corporate action in writing without a meeting, when no prior action by the Board
of Directors is necessary, shall be at the close of business on the day on which
the first signed written consent is delivered to the Corporation as provided in
Section 1.9 of these Bylaws, and (iv) the record date for determining
shareholders for any other purpose shall be at the close of business on the day
on which the Board of Directors adopts the resolution relating thereto.
A determination of shareholders of record entitled to notice of or to
vote at a meeting of shareholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting and shall do so if the meeting is adjourned to a date more
than 120 days after the date fixed for the original meeting.
ARTICLE VI
SEAL
The seal of the Corporation shall be circular in form and shall bear,
in addition to any other emblem or device approved by the Board of Directors,
the words "Corporate Seal". The seal may be used by causing it or a facsimile
thereof to be impressed, affixed or in any other manner reproduced.
ARTICLE VII
CHECKS, NOTES, DRAFTS, ETC.
Checks, notes, drafts, acceptances, bills of exchange and other orders
or obligations for the payment of money shall be signed by such officer or
officers or person or persons as the Board of Directors or a duly authorized
committee thereof may from time to time designate.
ARTICLE IX
AMENDMENT
Except as otherwise provided by the Articles of Incorporation or by
law, these Bylaws or any of them may be altered, amended or repealed, and new
Bylaws may be adopted, by either the Board of Directors or the shareholders.
13
CERTIFICATE --------
NO. ____ SHARES
OCWEN ASSET INVESTMENT CORP.
COMMON STOCK
($.01 Par Value)
THIS CERTIFIES that _________________________ is the registered owner
of _______________ shares of the Common Stock, par value $.01 per share, of
Ocwen Asset Investment Corp. transferable only on the books of the Corporation
by the holder hereof in person or by attorney-in-fact upon surrender of this
Certificate properly endorsed.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate to
be signed by its duly authorized officers and to be sealed with the Seal of the
Corporation this ____ day of _________,__________.
____________________________ [SEAL] _____________________________
President Secretary
<PAGE>
The securities represented by this Certificate have not been registered under
the Securities Act of 1933, as amended, or the securities laws of any state
(collectively the "Acts"). As a result, these securities may not be transferred
except pursuant to either registration under the Acts or an exemption therefrom.
For Value Received, ___________ hereby sell, assign and transfer unto
________________________________________________________________________ Shares
of the Capital Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint ___________________________________ to
transfer the said Stock on the books of the within named Corporation with full
power of substitution in the premises.
Dated __________________, 19____
__________________________________________
In presence of
____________________________________________
SECOND EXTENSION OF TERM AGREEMENT
This Second Extension of Term Agreement is made as of November 19, 1999
by and between OCWEN ASSET INVESTMENT CORP., a Florida corporation (the
"Company"), and OCWEN CAPITAL CORPORATION, a Florida corporation (the
"Manager"), with respect to the First Amended and Restated Management Agreement,
dated as of May 19, 1997, and amended and restated as of May 5, 1998, and
extended as of May 19, 1999 (the "Management Agreement"), between the Company
and the Manager.
WITNESSETH:
WHEREAS, the Company and the Manager are parties to the
Management Agreement;
WHEREAS, Section 13 of the Management Agreement provides that
the Management Agreement shall continue in force until November 19, 1999;
WHEREAS, the parties desire to extend the term of the
Management Agreement indefinitely; and
WHEREAS, the Board of Directors of the Company approved the
indefinite extension of the term of the Management Agreement.
NOW THEREFORE, in consideration of the premises, the parties
hereto agree as follows:
SECTION 1. EXTENSION OF TERM. The first two paragraphs of
Section 13 of the Management Agreement are hereby deleted in their entirety and
replaced by the following:
This Agreement shall continue in force until terminated by the
Manager or by the Company as described below or elsewhere in
this Agreement.
Notwithstanding any other provision to the contrary, this
Agreement may be terminated by the Manager, upon 60 days'
written notice, on any anniversary of this Second Extension of
Term Agreement.
SECTION 2. EFFECT OF EXTENSION. Except as expressly set forth
herein, this Second Extension of Term Agreement shall not by implication alter,
modify, amend or in any way affect any of the other terms, conditions,
<PAGE>
obligations, covenants or agreements contained in the Management Agreement, all
of which shall continue in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this
Second Extension of Term Agreement as of the date first written above.
OCWEN ASSET INVESTMENT CORP.
By: /s/ CHRISTINE A. REICH
---------------------------------------------------
Christine A. Reich
President
OCWEN CAPITAL CORPORATION
By: /s/ JOHN R. ERBEY
---------------------------------------------------
John R. Erbey
Senior Managing Director
2
EXHIBIT 99.2
RISK FACTORS
Each of the factors set forth below could, directly or indirectly,
affect the Company's results of operations and financial condition. Capitalized
terms that are not defined herein shall have the meaning ascribed in the Annual
Report on Form 10-K of the Company to which this Exhibit relates.
PREPAYMENT RISK. Subordinate and residual interests are affected by the
rate and timing of payments of principal (including prepayments, repurchases,
defaults and liquidations) on the mortgage loans underlying a series of
mortgage-related securities. The rate of principal payments may vary
significantly over time depending on a variety of factors, such as the level of
prevailing mortgage loan interest rates and economic, demographic, tax, legal
and other factors. Prepayments on the mortgage loans underlying a series of
mortgage-related securities are generally allocated to the more senior classes
of mortgage-related securities. Although in the absence of defaults or interest
shortfalls subordinates receive interest, amounts otherwise allocable to
residuals generally are used to make payments on more senior classes or to fund
a reserve account for the protection of senior classes until
overcollateralization or the balance in the reserve account reaches a specified
level. In periods of declining interest rates, rates of prepayments on mortgage
loans generally increase, and if the rate of prepayments is faster than
anticipated, then the yield on subordinates generally will be positively
affected and the yield on residuals generally will be negatively affected.
LIQUIDITY RISK. As a result of the risks associated with subordinate
and residual interests in mortgage-related securities, and because they
generally are unrated or rated non-investment grade, such securities generally
are traded less frequently than investment-grade securities and may not provide
holders thereof with liquidity of investment.
<PAGE>
VALUE AND REVENUES OF REAL ESTATE DEPENDENT ON CONDITIONS BEYOND THE COMPANY'S
CONTROL
GENERAL. Investment in underperforming real estate is subject to
varying degrees of risk which are generally incident to the ownership of real
property. Revenues may be adversely affected by adverse changes in national or
local economic conditions, competition from other properties offering the same
or similar services, changes in interest rates and in the availability, cost and
terms of mortgage funds, the impact of present or future laws and regulations,
including without limitation those dealing with zoning, the environment, access
by disabled persons and taxation, the ongoing need for capital improvements
(particularly in older structures), changes in real estate tax rates and other
operating expenses, adverse changes in governmental rules and fiscal policies,
civil unrest, acts of nature, including earthquakes, hurricanes and other
natural disasters, acts of war and other factors which are beyond the control of
the Company. Revenues also may be affected by problems experienced by lessees,
which may weaken their financial condition and result in failure to make rental
payments when due. At any time, a lessee of the Company's properties may seek
the protection of bankruptcy laws, which could result in rejection and
termination of the lessee's lease and thereby cause a reduction in cash flow
available for distribution to the Company. As a result of the foregoing factors,
no assurances can be given that the fair market value and/or revenues of the
3
<PAGE>
Company's investments in real estate will not decrease in the future or that the
Company will be able to vary its real estate portfolio in response to changes in
economic or other conditions.
VALUE AND REVENUES OF REAL ESTATE DEPENDENT IN PART ON EXTERNAL
MANAGEMENT. The value and revenues of underperforming real estate acquired by
the Company is dependent in part upon the ability of the Manager to operate the
real estate in a manner which is sufficient to maintain or increase revenues in
excess of operating expenses and debt service requirements, which will be
affected by many of the risks which are inherent in investments in real estate
and over which the Company has no control. The underperforming real estate
acquired by the Company to date generally has had significant amounts of
unleased space or restrictive or below market rents in place. As part of its
initial repositioning of a property after an acquisition, the Company, in
addition to making any necessary capital expenditures, generally pursues a
policy of replacing some existing tenants with tenants which have higher lease
payments and/or a higher probability of expansion and renewal. Although this
strategy may adversely affect tenant retention rates in the early years of
ownership of a property, management believes that the strategy will be
beneficial to the Company in the long term. There can be no assurance, however,
that the Company's tenant retention rate will increase as each property is
repositioned or stabilized or that the net present value of new or renewed
leases will substantially exceed the net present value of leases with existing
tenants.
GEOGRAPHIC CONCENTRATION OF REAL ESTATE SUBJECT TO LOCAL MARKET RISK.
Geographic locations can have a substantial effect on the market value of and
revenues from real estate and on the ability of borrowers to repay loans secured
by properties in such a location. Value and revenues can be affected by national
and local economic conditions and other factors that are beyond the control of
the Company.
INSURANCE MAY NOT COVER ALL REAL ESTATE LOSSES. The Company maintains
comprehensive insurance coverage on its real estate, including coverage against
events of a catastrophic nature, such as earthquakes, hurricanes and other
natural disasters. There can be no assurance that insurance against such events
will continue to be obtainable on terms that are acceptable to the Company or at
all. Moreover, changes in building codes and ordinances, environmental
considerations and other factors also might make it not feasible to use
insurance proceeds to replace a property if it is damaged or destroyed. Under
such circumstances, the insurance proceeds received by the Company might not be
adequate to restore its economic position with respect to the affected
distressed real property.
REAL PROPERTIES WITH ENVIRONMENTAL PROBLEMS WILL INCREASE COSTS AND MAY CREATE
LIABILITY FOR THE COMPANY
Operating costs and the value of real property may be affected by the
obligation to pay for the cost of complying with existing environmental laws,
ordinances and regulations, as well as the cost of future legislation. Under
various federal, state and local environmental laws, ordinances and regulations,
a current or previous owner or operator of real property may be liable for the
costs of removal or remediation of hazardous or toxic substances on, under or in
such property. Such laws often impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances. Therefore, an environmental liability could have a material
adverse effect on the underlying value of a real property, and the revenue
therefrom. Although the Company believes that its pre-acquisition due diligence
identified all material environmental concerns which relate to its current
investments in real estate and accurately assessed the costs and liabilities to
be concurred by it in this regard, there can be no assurance that such
investments will not involve unknown material environmental concerns or material
unanticipated environmental costs in the future.
4
<PAGE>
The Company also evaluates the potential for significant environmental
problems prior to acquiring or originating a loan because there is a risk for
any mortgage loan, particularly a multifamily residential and commercial real
estate loan, that hazardous substances or other environmentally restricted
substances could be discovered on the related real estate. Through foreclosure,
the Company could become the owner of the real estate that secured its loan and
might be required to remove such substances from the affected properties or to
engage in abatement procedures at its sole cost and expense. There can be no
assurance that the cost of such removal or abatement will not substantially
exceed the value of the affected properties or the loans secured by such
properties, that the Company would have adequate remedies against the prior
owners or other responsible parties or that the Company would be able to resell
the affected properties either prior to or following completion of any such
removal or abatement procedures. If such environmental problems are discovered
prior to foreclosure, the Company generally will not foreclose on the related
loan; however, the value of such property as collateral will generally be
substantially reduced, and as a result, the Company may suffer a loss upon
collection of the loan.
GREATER RISKS OF LOSS FROM COMMERCIAL AND MULTIFAMILY CONSTRUCTION AND
RENOVATION LENDING ACTIVITIES
The Company's investments include loans for the construction or
renovation of commercial and multifamily real estate, including a mezzanine loan
which is subordinate to the first lien on the property which secures the loan.
Multifamily and commercial real estate lending, particularly construction and
renovation lending, is generally considered to involve a higher degree of risk
than single-family residential lending because of a variety of factors,
including generally larger loan balances, dependency on successful completion or
operation of the project for repayment, difficulties in estimating construction
and renovation costs and loan terms that often require little or no amortization
of the loan over its term (typically five years) and, instead, provide for a
balloon payment at stated maturity. Furthermore, mezzanine loans, which are
subordinate to a senior loan or loans, and construction loans generally have
higher loan-to-value ratios than conventional loans. Although the Company's
borrowers generally have an equity investment of 10% to 15% of total project
costs, such equity may not be sufficient to protect the Company's investment in
these higher-yielding loans.
GREATER RISKS OF LOSS FROM DISTRESSED MORTGAGE LOANS
Nonperforming and subperforming mortgage loans may presently be in
default or may have a greater than normal risk of future defaults and
delinquencies, as compared to newly-originated, high-quality loans of comparable
type, size and geographic concentration. Returns on an investment of this type
depend on the borrower's ability to make required payments or, in the event of
default, the ability of the loan's servicer to foreclose and liquidate the
mortgage loan. There can be no assurance that the servicer can liquidate a
defaulted mortgage loan successfully or in a timely fashion.
ALLOWANCES FOR LOAN LOSSES MAY NOT BE ADEQUATE TO COVER LOSSES
At December 31, 1999, the Company had established a $1.2 million
allowance for loan losses on its commercial and multifamily loan portfolio its
single-family residential and its match funded loan portfolio. Although the
Company believes that these actions were adequate at such date and in accordance
with generally accepted accounting principles, future additions to allowances
for loan losses may be necessary due to changes in economic conditions,
increases in loans and the performance of the Company's loan portfolios.
Increases in the Company's provisions for losses on loans would adversely affect
the Company's results of operations.
POTENTIAL ADVERSE EFFECTS OF CHANGES IN INTEREST RATES
The Company's operations are significantly affected by current interest
rates, which are highly sensitive to many factors, including governmental
monetary and tax policies, domestic and international economic and political
considerations and other factors beyond the control of the Company. Changes in
the general level of interest rates will affect the Company's net interest
income, which is the difference between the interest income earned on
interest-earning assets and the interest expense incurred in connection with its
interest-bearing liabilities, by affecting the spread between the Company's
5
<PAGE>
interest-earning assets and interest-bearing liabilities. The Company uses
short-term, floating-rate borrowings such as repurchase agreements and lines of
credit to acquire long-term interest-earning assets such as mortgage loans and
subordinate and residual interests in mortgage-related securities, some of which
will have a fixed rate of interest and/or longer effective maturities than the
related borrowings and thus may expose the Company to a maturity mismatch. As a
consequence, in an increasing interest rate environment the Company's borrowing
costs could exceed the income earned on the Company's interest-earning assets
acquired with borrowed funds, thereby reducing the Company's net interest income
and ability to make payments on its indebtedness.
Changes in the level of interest rates also affect the value and
average life of the Company's mortgage-related securities, which are
substantially affected by prepayment rates on the underlying mortgage loans, and
other interest-earning assets and the Company's ability to realize gains from
the sale of such assets. In periods of declining mortgage interest rates,
prepayments on mortgage-related securities generally increase. If general
interest rates also decline, the amounts available for reinvestment by the
Company during such periods are likely to be reinvested at lower interest rates
than the Company was earning on the securities that were prepaid.
Mortgage-related securities, particularly residual interests, may decrease in
value as a result of increases in interest rates and may benefit less than other
fixed-income securities from declining interest rates because of the risk of
prepayment. If general interest rates increase, the credit risk associated with
subordinate and residual interests could be increased if borrowers with
adjustable or floating-rate loans are unable to meet increased debt service
requirements and default on the underlying mortgages. By reducing the likelihood
of loan prepayments, increases in interest rates also could extend the weighted
average maturity of a security, which could adversely affect the Company to the
extent that the cost of the borrowings incurred by the Company to fund the
security are increasing faster than the yield on the security is increasing, if
at all. In general, changes in both prepayment rates and interest rates will
change the total return on mortgage-related securities, which will in turn
affect the Company's ability to make payments on its indebtedness, including the
Notes.
Changes in interest rates also affect the costs of financing the
acquisition of real estate and thus the value of real estate, as well as the
Company's ability to originate and acquire loans, although it is not looking to
do so at this time. Changes in interest rates also may affect the Company's
ability to incur additional indebtedness or raise capital on acceptable terms.
POTENTIAL ADVERSE EFFECTS OF HEDGING STRATEGIES
The Company may utilize a variety of financial instruments, including
interest rate swaps, caps, floors and other interest rate exchange contracts, in
order to limit the effects of interest rates on its operations. Among the risks
inherent with respect to the purchase and/or sale of such derivative instruments
are (i) interest rate risk, which consists of the risks relating to fluctuating
interest rates; (ii) basis risk, which consists of the risk of loss associated
with variations in the spread between the asset yield and the funding and/or
hedge costs; (iii) credit or default risk, which consists of the risk of
insolvency or other inability of the counterparty to a particular transaction to
perform its obligations thereunder; (iv) prepayment risk, which consists of
reinvestment risk to the extent the Company is not able to reinvest repayments,
if any, at a yield which is comparable to the yield being generated on the
particular security; (v) liquidity risk, which consists of the risk that the
Company may not be able to sell a particular security at a particular price;
(vi) legal enforceability risk, which consists of the risks related to Company's
ability to enforce the terms of a particular instrument or to obtain or collect
upon a legal judgment in the United States in the event that the counterparty to
the transaction is a foreign entity or the underlying collateral is located in a
foreign jurisdiction; and (vii) volatility risk, which consists of the risk that
actual volatility (i.e., the degree of uncertainty relating to the price of the
underlying asset) differs from the historical volatility or "implied" volatility
of the instrument.
6
<PAGE>
FOREIGN INVESTMENTS SUBJECT TO CURRENCY CONVERSION RISKS AND UNCERTAINTY OF
FOREIGN LAWS
The Company currently has investments in real estate and
mortgage-related securities backed by real estate located outside the United
States. Foreign investments are subject to most of the same risks faced by the
Company's domestic operations, as well as risks customarily associated with
United States corporations conducting foreign activities. These risks include
fluctuations in foreign exchange rates and controls (which the Company attempts
to mitigate with currency hedging agreements as available and economical),
expropriation, nationalization and other economic, tax and regulatory policies
of foreign governments and policies of the United States affecting foreign
investments.
THE COMPANY IS SUBJECT TO INTENSE COMPETITION
The Company's competition varies by business line and geographic
market. In many cases, the acquisition of mortgage-related securities, real
estate and commercial and multi-family loans is based on competitive bidding,
which involves the risk that the Company may bid too low (which generates no
business) or too high (which could result in an acquisition at an economically
unattractive price). Many of the Company's competitors are larger and have
greater financial resources than the Company, and thus may be better able than
the Company to pursue business opportunities or to survive periods of industry
consolidation.
INVESTMENT POLICIES OF THE COMPANY MAY BE CHANGED
The investment, financing, borrowing and distribution policies of the
Company and its policies with respect to all other activities, including growth,
debt, capitalization and operations, are determined by the Board of Directors.
These policies may be amended or revised at any time and from time to time at
the discretion of the Board of Directors. In addition, the Board of Directors
may change the Company's policies with respect to conflicts of interest,
provided that such changes are consistent with applicable requirements. A change
in these policies could adversely affect the Company's financial condition,
results of operations or the market price of its outstanding securities.
7
<PAGE>
DEPENDENCE OF THE COMPANY UPON EXTERNAL MANAGEMENT
The Company is managed by the Manager, subject to the supervision of
the Board of Directors of the Company. Thus, the Company is dependent on the
services of the Manager and its officers and employees for the success of the
Company. Moreover, the Manager's personnel are employees of the Bank, and
accordingly, the Company's success depends in part on the continuing ability of
OCN to hire and retain knowledgeable personnel. This ability may be affected, in
turn, by OCN's continued financial health. Finally, the Company is subject to
the risk that the Manager will terminate the Management Agreement and that no
suitable replacement can be found to manage the Company.
The Manager is a wholly-owned subsidiary of OCN, a registered savings
and loan holding company that conducts substantial operations through the Bank,
a federally-chartered savings bank. Both OCN and the Bank are subject to
extensive government supervision and regulation, which is intended primarily for
the protection of depositors. In addition, each of OCN and the Bank is subject
to changes in federal and state laws, including changes in tax laws that could
materially affect the real estate industry, as well as changes in regulations,
governmental policies and accounting principles. Such changes may increase OCN's
and the Bank's costs of doing business and assist their competitors. Any such
added burdens may adversely affect the Manager's ability to carry out its
management functions and/or the Bank's ability to provide mortgage loan
servicing for the Company, as well as affect the ability of the Manager and its
affiliates to enter into other arrangements with the Company.
MANAGER ENTITLED TO BROAD INDEMNIFICATION FROM THE COMPANY
Pursuant to the Management Agreement between the Company and the
Manager, the Company is obligated to indemnify the Manager and its directors and
officers from any action or claim that they are accountable or liable for the
debts or obligations of the Company. In addition, the Company is required to
indemnify the Manager and its directors and officers for acts performed pursuant
to the Management Agreement, except for claims arising from acts constituting
bad faith, willful misconduct, gross negligence or reckless disregard of their
duties under the Management Agreement. There can be no assurance that these
requirements will not adversely affect the Company's operations in the future.
POTENTIAL CONFLICTS OF INTEREST BETWEEN THE COMPANY AND ITS AFFILIATES COULD BE
DISADVANTAGEOUS TO THE COMPANY
The Company is subject to the following potential conflicts of interest
arising from its relationship with the Manager and its affiliates:
(i) Pursuant to the Management Agreement, the Manager renders
management services to the Company for a management fee based on
average invested assets, which also benefits the Manager as the asset
size of the Company increases, regardless of the performance of the
Company's assets. In addition, the incentive portion of the management
fee, which is based on the Company's FFO, as adjusted, may create an
incentive for the Manager to recommend investments that have greater
income potential but are generally more speculative than if the
management fee did not include a performance component.
(ii) Although the Manager has granted to the Company the first
option to acquire underperforming real estate and subordinate and
residual interests backed by loans which were not formerly owned by the
Manager and its affiliates, OCN, the Bank and other affiliates of the
Manager invest in other assets that the Company invests in, including a
wide variety of mortgage-related securities and single-family,
multifamily and commercial real estate loans, including subperforming
and nonperforming loans. The Manager and its affiliates have no
obligation to make investment opportunities available to the Company,
and as a result, the Company's ability to invest in certain real estate
related assets may be limited to the extent that such assets are
attractive to OCN or one of its affiliates.
(iii) Because they share certain investment strategies, from
time to time the Company has acquired assets from OCN, the Bank and
other affiliates of the Manager, co-participated in investment
transactions with these entities or persons and sold assets to the
same.
The Board of Directors of the Company established general guidelines
for the Company's investments, borrowings and operations and potential conflicts
of interest (the "Guidelines").
The Management Agreement and the Guidelines do not limit or restrict
the right of the Manager or any of its directors, officers, employees or
affiliates from engaging in any business or rendering services of any kind to
any other person, including the purchase of or rendering advice to others
purchasing real estate assets that meet the Company's policies and criteria.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Financial Condition at December 31, 1999 and the
Consolidated Statement of Operations for the Year Ended December 31, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001033643
<NAME> OCWEN ASSET INVESTMENT CORP.
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 79,116
<SECURITIES> 156,138
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 261,615
<DEPRECIATION> (9,011)
<TOTAL-ASSETS> 688,933
<CURRENT-LIABILITIES> 21,190
<BONDS> 306,404
0
0
<COMMON> 0
<OTHER-SE> 138,708
<TOTAL-LIABILITY-AND-EQUITY> 688,933
<SALES> 0
<TOTAL-REVENUES> 100,953
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 72,134
<LOSS-PROVISION> 746
<INTEREST-EXPENSE> 46,823
<INCOME-PRETAX> (18,750)
<INCOME-TAX> 0
<INCOME-CONTINUING> (18,750)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,750)
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
