UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1998
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 number: 1-13447
LASER MORTGAGE MANAGEMENT, INC.
(Exact name of registrant as specified in its charter)
MARYLAND
(State or other jurisdiction of incorporation
or organization)
22-3535916
(I.R.S. Employer
Identification No.)
51 JOHN F. KENNEDY PARKWAY
SHORT HILLS, NEW JERSEY 07078
(Address of principal executive offices)
(Zip Code)
(973) 912-8770
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
documents and reports required to be filed by Section 13 or 15(d) of The
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days:
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of stock, as of the last practicable date: 20,069,999 shares of Common
Stock, $0.001 par value, outstanding as of May 13, 1998.
<PAGE>
LASER MORTGAGE MANAGEMENT, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION................................................3
Item 1. Financial Statements.............................................3
Balance Sheet at March 31, 1998 and December 31, 1997............3
Statement of Operations for the Three Months Ended
March 31, 1998...............................4
Statement of Stockholders' Equity for the Three Months Ended
March 31, 1998 (Unaudited)....................................5
Statement of Cash Flows for the Three Months Ended
March 31, 1998 (Unaudited)....................................6
Notes to Financial Statements for the Three Months Ended
March 31, 1998................................................7
Item 2. Management's Discussion And Analysis of Financial Condition
and Results of Operations........................................15
PART II. OTHER INFORMATION...................................................25
Item 1. Legal Proceedings.................................................25
Item 2. Changes in Securities and Use of Proceeds.........................25
Item 3. Defaults Upon Senior Securities...................................25
Item 4. Submission of Matters to a Vote of Security Holders...............25
Item 5. Other Information.................................................25
Item 6. Exhibits and Reports on Form 8-K..................................25
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LASER MORTGAGE MANAGEMENT, INC.
BALANCE SHEET AT
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 76,110,559 $ 82,626,526
RECEIVABLE FOR SECURITIES SOLD 21,859,433 67,208,943
INVESTMENT IN SECURITIES AT FAIR VALUE 3,743,501,961 3,616,733,170
INVESTMENT IN MORTGAGE LOANS AT AMORTIZED 11,902,263 --
COST
ACCRUED INTEREST RECEIVABLE 22,227,408 21,170,369
VARIATION MARGIN ON INTEREST RATE SWAPS 9,671,789 5,500,000
----------------------- ---------------------
TOTAL ASSETS $ 3,885,273,413 $ 3,793,239,008
=================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Repurchase agreements $ 3,532,479,722 $ 2,747,060,588
Payable for securities purchased 53,683,505 747,594,232
Accrued interest payable 11,016,134 8,348,831
Contractual commitments at fair value 9,796,500 3,114,900
Dividends payable 8,619,350 2,602,600
Accounts payable 1,158,504 2,084,037
----------------------- ---------------------
Total liabilities 3,616,753,715 3,510,805,188
==================== ==================
STOCKHOLDERS' EQUITY:
Common stock: par value $.001 per share;
100,000,000 authorized, 20,044,999 and
20,019,999 shares issued and outstanding, respectively 20,045 20,020
Additional paid-in capital 282,205,775 281,840,175
Net unrealized (loss) gain on investment in securities (13,586,229) 603,821
Distributions in excess of net income (119,893) (30,196)
------------------------ ------------------------
Total stockholders' equity 268,519,698 282,433,820
===================== ===================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,885,273,413 $ 3,793,239,008
=================== =================
See notes to financial statements.
</TABLE>
<PAGE>
LASER MORTGAGE MANAGEMENT, INC.
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS
ENDED MARCH 31, 1998 (UNAUDITED)
- ------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTEREST INCOME:
<S> <C>
Mortgage loans and securities $ 54,506,129
Cash and cash equivalents 1,262,864
-----------------
Total interest income 55,768,993
INTEREST EXPENSE:
Repurchase agreements 45,143,611
NET INTEREST INCOME 10,625,382
GAIN ON SALE OF SECURITIES 134,098
GENERAL AND ADMINISTRATIVE EXPENSES 2,229,827
NET INCOME $ 8,529,653
================
NET INCOME PER SHARE:
Basic $ 0.43
====================
Diluted $ 0.42
====================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 20,044,721
================
See notes to financial statements.
</TABLE>
<PAGE>
LASER MORTGAGE MANAGEMENT, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Additional Net Dividends
Stock Paid-in Unrealized in Excess of
Par Value Capital Gain (Loss) Net Income Total
BALANCE,
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1997 $ 20,020 $ 281,840,175 $ 603,821 $ (30,196) $ 282,433,820
Issuance of common stock 25 365,600 - - 365,625
Available for sale securities -
fair value adjustment - - (14,190,050) - (14,190,050)
Net income - - - 8,529,653 8,529,653
Dividends declared -
$0.43 per share - - - (8,619,350) (8,619,350)
----------- -------------- --------------- ------------ --------------
BALANCE,
MARCH 31, 1998 $ 20,045 $ 282,205,775 $ (13,586,229) $ (119,893) $ 268,519,698
========== =============== ================ ============== =============
See notes to financial statements.
</TABLE>
<PAGE>
LASER MORTGAGE MANAGEMENT, INC.
STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS
ENDED MARCH 31, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C>
Net income $ 8,529,653
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of mortgage premiums and discounts, net 5,342,604
Gain on sale of securities (134,098)
Increase in accrued interest receivable (1,057,039)
Increase in variation margin on interest rate swaps (4,171,789)
Increase in accrued interest payable 2,667,303
Decrease in accrued expenses and other liabilities (925,533)
--------------------------
Net cash provided by operating activities 10,251,101
------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities (2,223,185,122)
Purchase of mortgage loans (11,912,075)
Proceeds from sale of securities 1,385,889,162
Principal payments on securities 49,258,808
------------------------
Net cash used in investing activities (799,949,227)
-----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements 12,101,558,087
Principal payments on repurchase agreements (11,316,138,953)
Net proceeds from issuance of common stock 365,625
Dividends paid (2,602,600)
Net cash provided by financing activities 783,182,159
-----------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (6,515,967)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 82,626,526
------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 76,110,559
=======================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 42,476,308
=======================
Noncash financing activities:
Net change in unrealized loss on available-for-sale securities $ (14,190,050)
=======================
Dividends declared, not yet paid $ 8,619,350
========================
See notes to financial statements.
</TABLE>
<PAGE>
LASER MORTGAGE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
LASER Mortgage Management, Inc. (the "Company") was incorporated in
Maryland on September 3, 1997. The Company commenced its operations on November
26, 1997 (see Note 5).
A summary of the Company's significant accounting policies follows:
CASH AND CASH EQUIVALENTS - Cash and cash equivalents includes cash on hand
and overnight repurchase agreements. The carrying amounts of cash equivalents
approximates their value.
INVESTMENTS - The Company invests primarily in mortgage-backed securities
and mortgage loans. The mortgage-backed securities include mortgage pass-through
certificates, collateralized mortgage obligations and other securities
representing interests in, or obligations backed by, pools of mortgage loans
(collectively, "Mortgage Securities"). The Company also may invest in other debt
and equity securities ("Other Securities" and, together with Mortgage
Securities, "Securities"). The mortgage loans are secured by first or second
liens on single-family residential, multi-family residential, commercial or
other real property ("Mortgage Loans" and, together with Securities,
"Investments").
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities (SFAS 115), requires the Company to
classify its securities as either trading investments, available-for-sale
investments or held-to-maturity investments. Although the Company generally
intends to hold most of its Securities until maturity, it may, from time to
time, sell any of its Securities as part of its overall management of its
balance sheet. Accordingly, this flexibility requires the Company to classify
all of its Securities as available-for-sale. All Investments classified as
available- for-sale are reported at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate component of stockholders'
equity.
Unrealized losses on Securities that are considered other than temporary,
as measured by the amount of decline in fair value attributable to factors other
than temporary, are recognized in income and the cost basis of the Securities is
adjusted. At March 31, 1998, no such adjustments were recognized.
Statement of Financial Accounting Standards No. 65, Accounting for Certain
Mortgage Banking Activities (SFAS 65), requires the Company to classify its
Mortgage Loans as either long-term investments or held-for-sale investments. The
Company's Mortgage Loans are held as long-term investments and are carried at
their unpaid principal balance, net of unamortized discount or premium.
Interest income is accrued based on the outstanding principal amount of the
Investments and their contractual terms. Premiums and discounts associated with
the purchase of the Investments are amortized into interest income over the
lives of the Investments using the effective yield method.
Investment transactions are recorded on the date the Investments are
purchased or sold. Purchases of newly-issued securities are recorded when all
significant uncertainties regarding the characteristics of the securities are
removed, generally shortly before settlement date. Realized gains and losses on
Investment transactions are determined on the specific identification basis.
INTEREST RATE SWAPS - In a simple interest rate swap, one investor pays a
floating rate of interest on a notional principal amount and receives a fixed
rate of interest on the same notional principal amount for a specified period of
time. Alternatively, an investor may pay a fixed rate and receive a floating
rate. Interest rate swaps were conceived as asset/liability management tools and
are used for various hedging activities. In more complex interest rate swaps,
the notional principal amount may decline (or amortize) over time.
During the term of the interest rate swap, changes in value are recognized
on the balance sheet as contractual commitments at fair value and included among
assets (if there is a net unrealized gain) or among liabilities (if there is a
net unrealized loss). A corresponding amount is included as an unrealized
gain/loss on investments in securities included in stockholders' equity. When
the interest rate swap is terminated, the Company will record a realized gain or
loss equal to the difference between the proceeds from (or cost of) the closing
transaction and the Company's basis in the contract, if any.
The Company is exposed to credit loss in the event of nonperformance by the
other party to the interest rate swap. However, the Company does not anticipate
nonperformance by any counterparty.
CREDIT RISK - The Company intends to invest primarily in Mortgage Loans and
Securities (together, "Mortgage Assets") which would be classified in the 70%
Asset Group. The "70% Asset Group" is comprised of (i) securities which are
rated within one of the two highest rating categories by one of the
nationally-recognized rating agencies, (ii) securities which are unrated but are
guaranteed by the U.S. government or any agency or instrumentality thereof
("Agency Certificates") and (iii) Mortgage Loans to borrowers who would
otherwise meet Federal Home Loan Mortgage Corporation (FHLMC), Federal National
Mortgage Association (FNMA) or Government National Mortgage Association (GNMA)
guidelines, except with respect to the size of the loans. The "30% Asset Group"
is comprised of the remainder of the Company's total assets, which are expected
to consist of Mortgage Loans not included in the 70% Asset Group, retained
subordinate interests and fixed-income securities that are primarily qualified
real estate assets but also include non-investment grade high yield corporate
debt, as well as Mortgage Loans and Mortgage Securities that constitute the 30%
Asset Group.
INCOME TAXES - The Company has elected to be taxed as a Real Estate
Investment Trust ("REIT") and intends to comply with the provisions of the
Internal Revenue Code of 1986, as amended (the "Code") with respect thereto.
Accordingly, the Company should not be subjected to Federal income tax to the
extent of its distributions to stockholders and as long as certain asset, income
and stock ownership tests are met.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires the Company 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.
2. AVAILABLE-FOR-SALE INVESTMENTS
The following table sets forth the fair value of the Company's Securities,
excluding interest only securities ("IOs"), as of March 31, 1998 and December
31, 1997:
MARCH 31, 1998
<TABLE>
<CAPTION>
Emerging Privately-
Markets Agency Issued
Bonds Certificates Certificates Total
<S> <C> <C> <C> <C>
Securities, gross $ 58,028,250 $ 3,437,821936 $ 145,241,531 $ 3,641,092,017
Unamortized discount (4,102,294) (35,049,145) (12,592,213) (51,743,652)
Unamortized premium 604,132 28,129,365 683,616 29,417,113
------- ---------- ------- ----------
Amortized cost 54,530,388 3,430,902,156 133,332,934 3,618,765,478
---------- ------------- ----------- -------------
Gross unrealized gains 684,984 18,855,350 369,459 19,909,793
Gross unrealized losses (126,176) (3,205,239) (780,700) (4,112,115)
-------- ---------- -------- ----------
Estimated fair value $ 55,089196 $ 3,446,552,267 $ 132,921,693 3,634,563,156
=============== =============== ============= =============
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Emerging Privately-
Markets Agency Issued
Bonds Certificates Certificates Total
<S> <C> <C> <C> <C>
Securities, gross $ 52,221,550 $ 3,344,684,756 $ 78,153,965 $ 3,475,060,271
Unamortized discount (3,915,578) (37,822,694) (10,467,277) (52,205,549)
Unamortized premium 415,210 28,075,718 297,872 28,788,800
------- ---------- ------- ----------
Amortized cost 48,721,182 3,334,937,780 67,984,560 3,451,643,522
---------- ------------- ---------- -------------
Gross unrealized gains 54,033 14,425,450 252,415 14,731,898
Gross unrealized losses (274,504) (298,163) (541,223) (1,113,890)
-------- -------- -------- ----------
Estimated fair value $ 48,500,711 $349,065,$67 $67,695,$52 $3,465,261,530
=============== ============ =========== ==============
</TABLE>
<PAGE>
The fair value of the Company's IOs as of March 31, 1998 and December
31, 1997 are summarized as follows:
MARCH 31, 1998
<TABLE>
<CAPTION>
Privately-
Agency Issued
Certificates Certificates Total
<S> <C> <C> <C>
Securities, gross $ 605,394,637 $ 337,768,448 $943,163,085
Amortized cost 94,432,222 34,093,990 128,526,212
Gross unrealized gains 11,384 45,146 56,530
Gross unrealized losses (18,004,886) (1,639,051) (19,643,937)
----------- ---------- -----------
Estimated fair value $ 76,438,720 $ 32,500,085 $ 108,938,805
============= ============ =============
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Privately-
Agency Issued
Certificates Certificates Total
<S> <C> <C> <C>
Securities, gross $ 650,484,134 $ 324,111,561 $ 974,595,695
Amortized cost 128,906,552 32,464,375 161,370,927
Gross unrealized gains 28,8830 0 28,883
Gross unrealized losses (8,116,124) (1,812,046) (9,928,170)
---------- ---------- ----------
Estimated fair value $ 120,819,311 30,652,329 151,471,640
=============== ========== ===========
</TABLE>
FASB Statement No. 107, Disclosures About Fair Value of Financial
Instruments, defines the fair value of a financial instrument as the amount at
which the instrument could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale.
The fair values of the Company's Investments are based on market prices
provided by dealers who make markets in these financial instruments. The fair
values reported reflect estimates and may not necessarily be indicative of the
amounts the Company could realize in a current market exchange. Cash and cash
equivalents, interest receivable, repurchase agreements and other liabilities
are reflected in the financial statements at their fair value because of the
short-term nature of these instruments.
<PAGE>
3. MORTGAGE LOANS
The following table pertains to the Company's Mortgage Loans as of March
31, 1998 which are carried at their amortized cost:
Total
Mortgage Loans, gross $ 11,412,767
Unamortized discount -
Unamortized premium 489,496
Amortized cost $ 11,902,263
---------------
As of March 31, 1998, the amortized cost of the Mortgage Loans approximated
their fair value.
4. REPURCHASE AGREEMENTS
The Company has entered into repurchase agreements to finance most of its
Investments. The repurchase agreements are collateralized by the market value of
the Company's Investments and bear interest rates that generally move in close
relationship to LIBOR.
As of March 31, 1998, the Company had outstanding $3,532,479,722 of
repurchase agreements with a weighted average borrowing rate of 5.72% and a
weighted average remaining maturity of 269 days. At March 31, 1998, Investments
actually pledged had an estimated fair value of $3,673,153,040.
At March 31, 1998, the repurchase agreements had the following remaining
maturities:
Within 30 days $ 2,986,671,334
30 to 90 days 45,808,388
Greater than 90 days 500,000,000
-------------------
$ 3,532,479,722
5. COMMON STOCK
The Company's common stock was sold through several transactions as
follows.
The Company was initially capitalized with the sale of 6,000 shares of
common stock on September 2, 1997, for a total of $15,005.
The Company received commitments on September 15, 1997 for the purchase, in
a private placement, of 1,014,000 shares of common stock for a total of
$15,210,000, at $15.00 per share from certain officers, directors, proposed
directors, employees and affiliates of the Company and the Manager. The sale of
these shares was consummated at the time of the closing of the public offering.
The Company received commitments on November 7, 1997 from several mutual
funds under common management (the "Funds") for the purchase, in a private
placement, of 3,333,333 shares of common stock for a total of $49,999,995. The
sale of these shares was consummated at the time of the closing of the public
offering.
The Company has been informed by LASER Advisers Inc. (the "Manager") that a
fund affiliated with the Manager entered into a total rate of return swap with a
broker-dealer which provides that the affiliated fund bear the economic benefit
and risk of directly holding 666,666 shares of the Company's common stock for a
total of $9,999,990. Such shares of common stock were sold by the Company to
such broker-dealer in a private placement without registration under the
Securities Act of 1933.
15,000,000 shares were sold through a public offering for $225,000,000.
Syndication costs of $18,364,795 were deducted from the gross proceeds of the
offerings.
The remaining 25,000 shares were issued on January 2, 1998 as deferred
stock awards to certain employees of the Company.
During the three months ended March 31, 1998, the Company declared
dividends to stockholders totaling $0.43 per share, which will be paid on April
30, 1998. For Federal income tax purposes, all dividends paid for the period are
ordinary income to the Company's stockholders.
6. TRANSACTIONS WITH AFFILIATES
The Company has a management agreement (the "Management Agreement") with
the Manager pursuant to which the Manager, subject to the supervision of the
Company's Board of Directors, formulates operating strategies for the Company,
oversees the acquisition of Investments by the Company, arranges for various
types of financing for the Company, monitors the performance of the Company's
Investments and provides certain administrative and managerial services in
connection with the Company's operations. For its performance of these services,
the Manager receives an annual base management fee, payable monthly as set forth
below:
AVERAGE STOCKHOLDERS' EQUITY ANNUAL BASE MANAGEMENT FEE AS A
PERCENTAGE OF AVERAGE STOCKHOLDERS' EQUITY
$0 to $500 million 1.0%
$500 million to $1 billion $5 million plus 0.8% of amounts
in excess of $500 million
$1 billion or more $9 million plus 0.6% of amounts in
excess of $1 billion
The Manager also receives a quarterly incentive fee in an amount equal to
20% of the Net Income of the Company for the preceding fiscal quarter in excess
of the amount that would produce an annualized Return on Average Stockholders'
Equity for such fiscal quarter equal to the Ten-Year U.S. Treasury Rate plus 1%.
Average Stockholders' Equity means, for any period, stockholders' equity,
calculated in accordance with GAAP, excluding any mark-to-market adjustments of
the investment portfolio. For the three months ended March 31, 1998 management
fees amounted to $705,630 and incentive fees were $951,509 and are included in
General and Administrative Expenses. The Board of Directors of the Company with
the approval of a majority of the Company's Board of Directors who are
unaffiliated with the Manager is authorized to change the fees from time to time
as agreed with the Manager. The Manager will be reimbursed for certain
out-of-pocket expenses incurred on behalf of the Company.
7. EARNINGS PER SHARE (EPS)
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting No. 128, Earnings Per Share (SFAS No. 128)
which requires dual presentation of Basic EPS and Diluted EPS on the face of the
income statement for all entities with complex capital structures. SFAS No. 128
also will require a reconciliation of the numerator and denominator of the Basic
EPS to the numerator and denominator of Basic EPS and Diluted EPS computation.
The reconciliation is as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31, 1998
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
Basic EPS $ 8,529,653 20,044,999 $ 0.43
Effect of Dilutive Securities:
Deferred Common Stock - 375,000
Options - 42,140
-------------- -----------
Diluted EPS $ 8,529,653 20,462,139 $ 0.42
-------------- ------------ ----------
</TABLE>
Deferred common stock totaling 375,000 shares was included in Diluted EPS.
The receipt of the stock is contingent upon the holder's continued employment or
service. The deferred common stock has been awarded and does not have an
exercise or strike price.
42,140 incremental shares were included in Diluted EPS, representing
778,000 options exercised at a strike price of $15.00 per share and an average
market price of $15.859.
8. LONG-TERM STOCK INCENTIVE PLAN
The Company has adopted a Long-Term Stock Incentive Plan for directors,
executive officers, and key employees (the "Incentive Plan"). The Incentive Plan
authorizes the Compensation Committee of the Board of Directors to grant awards,
including deferred stock, incentive stock options as defined under Section 422
of the Code ("ISOs") and options not so qualified ("NQSOs"). The Incentive Plan
authorizes the granting of options or other awards for an aggregate of 778,000
shares and 400,000 deferred shares of the Company's common stock.
The Company adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" for the options. Accordingly, no compensation cost for the
Incentive Plan has been determined based on the fair value at the grant date for
awards consistent with the provisions of SFAS No. 123. For the Company's pro
forma net earnings, the compensation cost will be amortized over the four-year
vesting period of the options. The Company's net earnings per share would have
been reduced to the pro forma amounts indicated below:
FOR THE PERIOD ENDING
MARCH 31, 1998
Net earnings - as reported $8,529,653
Net earnings - pro forma $8,514,579
Earnings per share - as reported $0.43
Earnings per share - pro forma $0.42
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in the three months ended March 31, 1998: dividend
yield of 11.47%; expected volatility of 18%; risk-free interest rate of 5.82%;
and expected lives of ten years.
<PAGE>
The following table summarizes information about stock options
outstanding:
Weighted
Average Weighted
Range of Remaining Average
Exercise Options Contractual Exercise
Prices Outstanding Life (Yrs.) Price
$ 15.00 778,000 9.7 $ 15.00
------- ------- --- -------
The options become exercisable at the rate of 25% on each of January 2,
1998, January 2, 1999, January 2, 2000 and January 2, 2001, subject to the
holder's continued employment or service.
The compensation expense for the 400,000 shares of deferred stock will be
amortized over a four-year period.
9. CONTRACTUAL COMMITMENTS
During the three months ended March 31, 1998, the Company entered into
contractual commitments with original notional amounts as stated below. Under
these agreements, the Company receives a floating rate and pays a fixed rate.
<TABLE>
<CAPTION>
CURRENT
NOTIONAL UNREALIZED
AMOUNT FIXED TERMINATION APPRECIATION/
(IN THOUSANDS) TYPE RATE FLOATING RATE DATE DEPRECIATION
<S> <C> <C> <C> <C> <C> <C>
$ 350,000 Interest Rate Swap 7.4075% LIBOR 1/10/13 $ (3,710,000)
550,000 Interest Rate Swap 7.4100% LIBOR 1/10/13 (5,830,000)
135,000 Interest Rate Swap 7.3025% LIBOR 1/10/13 (256,500)
----------
$ (9,796,500)
</TABLE>
******
<PAGE>
Item 2. Management's Discussion And Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the Company's
financial statements and notes thereto.
GENERAL
The Company was organized in September 1997 and commenced operations on
November 26, 1997. The Company's day-to-day operations are managed by the
Manager, subject to the supervision of the Board of Directors. The Manager and
its investment professionals have no prior experience in managing a REIT, and
specialize in managing investments in Mortgage Securities for institutions and
other sophisticated investors.
The Company seeks to generate net income for distribution to stockholders
from the spread between the interest income earned on its investment portfolio
and the costs of borrowing to finance the portfolio. The Company's results of
operations are affected by various factors, many of which are beyond the control
of the Company, including the availability of opportunities for the acquisition
of Investments, the level and volatility of interest rates, conditions in the
financial markets and other economic conditions.
The Company has elected to qualify as a REIT under the Code and, as such,
is required to distribute at least 95% of its taxable income annually, subject
to certain adjustments. Cash for such distributions is expected to be generated
from the Company's operations, although the Company also may borrow funds to
make distributions.
The Company may experience high volatility in net interest income from
quarter to quarter and year to year, primarily as a result of fluctuations in
interest rates, borrowing costs, reinvestment opportunities and prepayment
rates. Because changes in interest rates may significantly affect the Company's
activities, the operating results of the Company will depend, in large part,
upon the ability of the Company to manage its interest rate, prepayment and
credit risks, while effectively maintaining its status as a REIT.
Since its commencement of operations, the Company has been in the process
of acquiring Mortgage Assets and Other Securities. Therefore, the operating
results of the Company reflected in the financial statements included in this
Form 10-Q should be interpreted in light of this acquisition process and are not
necessarily representative of what they may be in the future.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1998
NET INCOME SUMMARY
For the quarter ended March 31, 1998, net income was $8,529,653, or $0.43
per weighted average share. Net income per share is computed by dividing net
income by the weighted average number of shares of Common Stock outstanding,
which was 20,044,721 for the quarter. Dividends per share were $0.43 per
weighted average share, $8,619,350 in total. Taxable income did not differ from
GAAP income for the period. Return on average equity was 3.07% on an
unannualized basis, for the quarter ended March 31, 1998.
Management's policy is to focus on income and expense measures as a
percentage of equity rather than as a percentage of assets. Improvements in
asset-based measures such as net interest margin or operating expenses as a
percentage of assets do not necessarily translate into improved stockholder
returns. Improvements in net interest income or operating expenses as a
percentage of equity, however, indicate that the Company is effectively
utilizing its equity capital base.
TAXABLE INCOME AND GAAP INCOME
For the quarter ended March 31, 1998, income as calculated for tax purposes
(taxable income) did not differ from income as calculated according to generally
accepted accounting principles (GAAP income). However, such amounts could differ
in the future for various reasons. For example, the Company may take credit
provisions which would affect GAAP income whereas only actual credit losses are
deducted in calculating taxable income. In addition, general and administrative
expenses may differ due to differing treatment of leasehold amortization,
certain stock option expenses and other items. Also, differences could arise in
the treatment of premium and discount amortization. As of March 31, 1998, the
Company had not taken credit provisions because 94% of Investments acquired by
the Company through March 31, 1998 had been Agency Certificates which, although
not rated, carry an implied "AAA" rating.
The distinction between taxable income and GAAP income is important to the
Company's stockholders because dividends are declared on the basis of taxable
income. While the Company does not pay taxes so long as it satisfies the
requirements from exemption from taxation pursuant to the REIT Provisions of the
Code, each year the Company completes a corporate tax form wherein taxable
income is calculated as if the Company were to be taxed. This taxable income
level determines the amount of dividends the Company can pay out over time.
INTEREST INCOME AND AVERAGE EARNING ASSET YIELD
The Company had average earning assets of $3,517.7 million for the quarter
ended March 31, 1998. The Company's primary source of income for the quarter
ended March 31, 1998 was interest income. A portion of income was generated by
gains on sales of securities. Interest income was $55.8 million for the quarter
ended March 31, 1998. The yield on average earning assets was 6.78% for the
quarter ended March 31, 1998. The table below shows, for the quarter ended March
31, 1998, the Company's average balance of cash equivalents, loans and
securities, the yields earned on each type of earning assets, the yield on
average earning assets and interest income.
<PAGE>
AVERAGE EARNING ASSET YIELD
(dollars in thousands)
<TABLE>
<CAPTION>
Yield on
Average Average
Amortized Amortized Yield on
Cost of Yield on Cost of Average
Average Mortgage Average Average Mortgage Interest
Cash Loans and Earning Cash Loans and Earning Interest
Equivalents Securities Assets Equivalents Securities Assets Income
<S> <C> <C> <C> <C> <C> <C> <C>
For the Quarter Ended March 31, 1998 $ 75,312 $3,442,368 $ 3,517,680 5.82% 6.80% 6.78% $ 55,769
</TABLE>
The Constant Prepayment Rate (or "CPR") on the Company's portfolio of
Mortgage Securities for the period ended March 31, 1998 was approximately 9%.
"CPR" means an assumed rate of prepayment for the Company's Mortgage Securities,
expressed as an annual rate of prepayment relative to the outstanding principal
balance of the Company's Mortgage Securities. This CPR does not purport to be
either a historical description of the prepayment experience of the Company's
Mortgage Securities or a prediction of the anticipated rate of prepayment of the
Company's Mortgage Securities.
INTEREST EXPENSE AND THE COST OF FUNDS
The Company had average borrowed funds of $3,214.4 million and total
interest expense of $45.1 million for the quarter ended March 31, 1998. The
average cost of funds was 5.62% for the same period. The Company anticipates
that its largest expense will usually be the cost of borrowed funds. Interest
expense is calculated in the same manner for GAAP and tax purposes.
With the Company's current asset/liability management strategy, changes in
the Company's cost of funds are expected to be closely correlated with changes
in short-term LIBOR, although the Company may choose to extend the maturity of
its liabilities at any time. The Company's average cost of funds was 0.03% below
one-month LIBOR for the quarter ended March 31, 1998. The Company generally has
structured its borrowings to adjust with one-month LIBOR. During the quarter
ended March 31, 1998, average one-month LIBOR, which was 5.65%, was 0.35% lower
than average six month LIBOR, which was 6.00%.
The table below shows, for the quarter ended March 31, 1998, the Company's
average borrowed funds and average cost of funds as compared to average one and
six-month LIBOR.
AVERAGE COST OF FUNDS
(dollars in thousands)
<TABLE>
<CAPTION>
Average Average Average
One-Month Cost of Cost of
LIBOR Funds Funds
Relative to Relative to Relative to
Average Average Average Average Average Average Average
Borrowed Interest Cost of One-Month Six-Month Six-Month One-Month Six-Month
Funds Expense Funds LIBOR LIBOR LIBOR LIBOR LIBOR
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Quarter Ended March 31, 1998 $ 3,214,428 $ 45,144 5.62% 5.65% 6.00% -0.35% -0.03% -0.38%
</TABLE>
NET CONTRACTUAL COMMITMENTS
For the quarter ended March 31, 1998, the Company entered into the
contractual commitments with original notional amounts stated below. Under these
agreements, the Company receives a floating rate and pays a fixed rate. As part
of its asset/liability management process, the Company may enter into interest
rate agreements such as interest rate caps, floors and swaps. The agreements
would be entered into to reduce interest rate risk and would be designed to
provide income and capital appreciation to the Company in the event of certain
changes in interest rates.
CONTRACTUAL COMMITMENT INCOME (EXPENSE)
(dollars in thousands)
<TABLE>
<CAPTION>
Net Interest
Average Average Income
Notional Fixed Floating (Expense) on
Amount Rate Rate Contractual
Commitments
<S> <C> <C> <C> <C>
For the Quarter Ended March 31, 1998 $ 1,035,000 7.40% 5.64% $ (3,995)
</TABLE>
NET INTEREST INCOME
Interest income, which equals interest income less interest expense,
totaled $55,768,993 for the quarter ended March 31, 1998. Net interest rate
spread, which equals the yield on the Company's average assets for the period
less the average cost of funds for the period, was 1.16% for the quarter ended
March 31, 1998. This net interest spread is exclusive of hedging costs and,
adjusting for the negative carry and cost of hedges, results in a hedged net
interest spread of 0.69%. Net interest margin, which equals net interest income
divided by average total assets, was 0.26% on an unannualized basis, for the
quarter ended March 31, 1998. The principal reason that annualized net interest
margin exceeded hedged net interest rate spread is that average assets exceeded
average liabilities.
The table below shows interest income by earning asset type, average
earning assets by type, total interest income, interest expense, average
repurchase agreements, average cost of funds, and net interest income for the
quarter ended March 31, 1998.
NET INTEREST INCOME
(dollars in thousands)
<TABLE>
<CAPTION>
Net
Average Interest
Amortized Interest Income Yield on
Cost of Interest Average Income (Expense) Average Average
Invest- Income on Cash on Cash on Contrac- Total Interest Balance of Average Net
ments Invest- Equiva- Equiva- tual Interest Earning Repurchase Interest Cost of Interest
Held ments lents lents Commitment Income Assets Agreements Expense Funds Income
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
For the Quarter $3,442,368 $ 58,501 75,312 1,263 $ (3,995) 55,769 6.78% $ 3,214,428 $45,144 5.62% $10,625
Ended March 31,
1998
</TABLE>
<PAGE>
GAINS AND LOSSES ON SALES OF SECURITIES
For the quarter ended March 31, 1998, the Company sold Securities with an
aggregate historical amortized cost of $1,389.7 million for an aggregate gain of
$134,098. The difference between the sale price and the historical amortized
cost of the securities is a realized gain and increased income accordingly. The
Company does not expect to sell assets on a frequent basis, but may from time to
time sell existing assets to move into new assets which management believes
might have higher risk-adjusted returns or to manage its balance sheet as part
of management's asset/liability management strategy.
CREDIT EXPENSES
The Company has not experienced credit losses on its investment portfolio
to date, but losses may be experienced in the future. At March 31, 1998, the
Company had limited its exposure to credit losses on its portfolio by holding
94% of its Investments in Agency Certificates which, although not rated, carry
an implied "AAA" rating.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses ("operating expense" or "G&A expense")
were $2,229,827 for the quarter ended March 31, 1998 consisting of management
fees paid to the Manager of $705,630, incentive fees paid to the Manager of
$951,509 and professional and other miscellaneous fees. There were no
differences in the calculation of G&A expense for taxable and GAAP income
purposes. The "Efficiency Ratio" is the G&A expense divided by the net interest
income.
G&A EXPENSE RATIOS
(dollars in thousands)
<TABLE>
<CAPTION>
Total G&A Total G&A
Expense/ Expense/
Deferred Other Total Average Average Efficiency
Management Incentive Stock G&A G&A Assets Equity Ratio
Fee Fee Expense Expense Expense (Unannualized) (Unannualized) (Unannualized)
For the Quarter Ended
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March 31, 1998 $ 705 $951 3$6 $ 208 $ 2,230 0.05% .80% 20.99%
</TABLE>
<PAGE>
NET INCOME AND RETURN ON AVERAGE EQUITY
Net income was $8.5 million for the quarter ended March 31, 1998. Return on
average equity for the quarter ended March 31, 1998, was 3.07% on an
unannualized basis. The table below shows, on an unannualized basis, for the
quarter ended March 31, 1998, the Company's net interest income, gain on sale of
securities and G&A expense each as a percentage of average equity, and the
return on average equity.
COMPONENTS OF RETURN ON AVERAGE EQUITY
<TABLE>
<CAPTION>
Net Interest Gain on Sale
Income/ of Securities G&A Expense/
Average Average Average Return on
Equity Equity Equity Average Equity
<S> <C> <C> <C> <C>
For the Quarter Ended March 31, 1998 3.82% 0.05% 0.80% 3.07%
</TABLE>
DIVIDENDS AND TAXABLE INCOME
The Company will elect to be taxed as a REIT under the Internal Revenue
Code of 1986, as amended. Accordingly, the Company intends to distribute
substantially all of its taxable income for each year to stockholders, including
income resulting from gains on sales of securities. For the quarter ended March
31, 1998, dividend declarations exceeded earned taxable income by $89,697, or
less than $0.01 per share, based on the number of shares of common stock
outstanding at period end.
DIVIDEND SUMMARY
(dollars in thousands)
<TABLE>
<CAPTION>
Weighted Taxable Dividend Per Cumulative
Taxable Average Net Weighted Dividend Undistributed
Net Common Income Average Total Pay-Out Taxable
Income Shares Per Share Share Dividends Ratio Income
<S> <C> <C> <C> <C> <C> <C> <C>
For the Quarter Ended March 31, 1998 $8,530 20,044,721 $0.43 $0.43 8,619 101.0% $ (89)
</TABLE>
FINANCIAL CONDITION
Investments
Of the Company's Investments at March 31, 1998, $3,700,315,028 were
Mortgage Assets and $55,089,196 were emerging market bonds. Agency Certificates
comprised approximately 94% of the Company's Investments ($3,522,990,987), while
Privately-Issued Certificates totaled $165,421,778. All of the Company's
Securities are marked to-market at liquidation value, while
<PAGE>
Mortgage Loans are carried at amortized cost.
Discount balances are accreted as an increase in interest income over the
life of discount investments and premium balances are amortized as a decrease in
interest income over the life of premium investments. At March 31, 1998, the
Company had on its balance sheet (excluding IOs) $51,743,652 total unamortized
discount (which is the difference between the remaining principal value and the
current historical amortized cost of investments acquired at a price below
principal value) and $29,906,609 unamortized premium (which is the difference
between the remaining principal value and the current historical amortized cost
of investments acquired at a price above principal value). The Company also had
$943,163,085 unamortized premium on IO securities (which is the remaining
principal value).
Mortgage principal repayments received were $49.3 million for the period
ended March 31, 1998, which equals a CPR of approximately 9%. Given the
Company's current portfolio composition, if mortgage principal repayment rates
increase over the life of the Mortgage Securities comprising the current
portfolio, all other factors being equal, the Company's net interest income
should decrease during the life of such Mortgage Securities as the Company will
be required to amortize its net premium balance into income over a shorter time
period. Similarly, if mortgage principal prepayment rates decrease over the life
of such Mortgage Securities, all other factors being equal, the Company's net
interest income should increase during the life of such Mortgage Securities as
the Company will amortize its net premium balance over a longer time.
The table below summarizes the Company's Investments at March 31, 1998.
SECURITIES AND MORTGAGE LOANS (EXCLUDING IOs)
(dollars in thousands)
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
Principal Net Amortized Principal Estimated Principal
Value Discount Cost Value Fair Value Value
<S> <C> <C> <C> <C> <C> <C>
For the Quarter Ended March 31, 1998 $ 3,652,505 $ (21,837) $ 3,630,668 99.40% $ 3,646,465 99.83%
</TABLE>
IO SECURITIES
(dollars in thousands)
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
Principal Net Amortized Principal Estimated Principal
Value Premium Cost Value Fair Value Value
<S> <C> <C> <C> <C> <C> <C>
For the Quarter Ended March 31, 1998 $ 943,163 $ 943,163 $ 128,526 13.63% $ 108,939 11.55%
</TABLE>
<PAGE>
ASSET CHARACTERISTICS
(dollars in thousands)
<TABLE>
<CAPTION>
Weighted Weighted
Principal Average Average
Value Coupon Rate Asset Yield
<S> <C> <C> <C>
For the Quarter Ended March 31, 1998 $ 4,595,668 5.96% 6.89%
</TABLE>
The table below shows unrealized gains and losses on the Securities in the
Company's portfolio at March 31, 1998.
UNREALIZED GAINS AND LOSSES
At March 31, 1998
(dollars in thousands)
Unrealized Gain $ 19,966
Unrealized Loss (33,552)
Net Unrealized Loss (13,586)
Net Unrealized Loss as % of Securities Principal Value -0.30%
Net Unrealized Loss as % of Securities Amortized Cost -0.36%
CONTRACTUAL COMMITMENTS
Contractual Commitments are carried on a balance sheet at estimated
liquidation value. At March 31, 1998, there were $9,796,500 in unrealized losses
on contractual commitments.
BORROWINGS
To date, the Company's debt has consisted entirely of borrowings
collateralized by a pledge of the Company's Investments. These borrowings appear
on the balance sheet as repurchase agreements. At March 31, 1998, the Company
had established uncommitted borrowing facilities in this market with twenty
lenders in amounts which the Company believes are in excess of its needs.
Substantially all of the Company's Investments are currently accepted as
collateral for such borrowings. The Company has not established, and currently
does not intend to establish permanent lines of credit. The Company has
obtained, and believes it will be able to continue to obtain, short-term
financing in amounts and at interest rates consistent with the Company's
financing objectives.
For the quarter ended March 31, 1998, the term to maturity of the Company's
borrowings has ranged from one day to five years, with a weighted average
remaining maturity of 269 days at March 31, 1998. At March 31, 1998, the Company
had outstanding $3,532,479,722 of repurchase agreements. Many of the Company's
borrowings have a cost of funds which adjusts monthly based on a fixed spread
over or under one-month LIBOR. At March 31, 1998, the weighted average cost of
funds for all of the Company's borrowings was 5.72%. At March 31, 1998,
Investments actually pledged had an estimated fair value of $3,673,153,040.
At March 31, 1998, $500,000,000 of the Company's Securities were subject to
a repurchase agreement with a broker-dealer with a term of five years ending
March 10, 2003. The borrowing rate of this repurchase agreement is three-month
LIBOR plus 61.5 basis points and is capped at 6.365%.
LIQUIDITY
Liquidity, which is the Company's ability to turn non-cash assets into
cash, allows the Company to purchase additional securities and to pledge
additional assets to secure existing borrowings should the value of pledged
assets decline. Potential immediate sources of liquidity for the Company include
cash balances and unused borrowing capacity. Unused borrowing capacity will vary
over time as the market value of the Company's securities varies. The Company's
balance sheet also generates liquidity on an on-going basis through mortgage
principal repayments and net earnings held prior to payment as dividends. Should
the Company's needs ever exceed these on-going sources of liquidity plus the
immediate sources of liquidity discussed above, management believes that the
Company's securities could in most circumstances be sold to raise cash; however,
if the Company is forced to liquidate Mortgage Assets that qualify as qualified
real estate assets to repay borrowings, there can be no assurance that it will
be able to maintain its REIT status.
STOCKHOLDERS' EQUITY
The Company uses "available-for-sale" treatment for its Securities; these
assets are carried on the balance sheet at estimated market value rather than
historical amortized cost. Based upon such "available-for- sale" treatment, the
Company's equity base at March 31, 1998 was $268.5 million, or $13.40 per share.
If the Company had used historical amortized cost accounting, the Company's
equity base at March 31, 1998 would have been $282.1 million, or $14.07 per
share.
With the Company's "available-for-sale" accounting treatment, unrealized
fluctuations in market values of assets do not impact GAAP or taxable income but
rather are reflected on the balance sheet by changing the carrying value of the
assets and reflecting the change in stockholders' equity under "Net Unrealized
(Loss) Gain on Investment in Securities." By accounting for its assets in this
manner, the Company hopes to provide useful information to stockholders and
creditors and to preserve flexibility to sell assets in the future without
having to change accounting methods.
As a result of this mark-to-market accounting treatment, the book value
and book value per share of the Company are likely to fluctuate far more than if
the Company used historical amortized cost accounting. As a result, comparison
with companies that use historical cost accounting for some or all of their
balance sheet may be misleading.
Unrealized changes in the estimated net market value of Securities have one
direct effect on the Company's potential earnings and dividends: positive
market-to-market changes will increase the Company's equity base and allow the
Company to increase its borrowing capacity while negative changes in the net
market value of the Company's Securities might impair the Company's liquidity
position, requiring the Company to sell assets with the likely result of
realized losses upon sale. "Net Unrealized (Loss) Gain on Investment in
Securities" was $13.6 million, or 0.36% of the amortized cost of Securities at
March 31, 1998.
The table below shows the Company's equity capital base as reported and on
a historical amortized cost basis at March 31, 1998. The historical cost equity
basis is influenced by issuances of Common Stock, the level of GAAP earnings as
compared to dividends declared, and other factors. The GAAP reported equity base
is influenced by these factors plus changes in the "Net Unrealized (Loss) Gain
on Investment in Securities" account.
STOCKHOLDERS' EQUITY
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Net Unrealized GAAP Historical GAAP
Historical Losses on Reported Amortized Reported
Amortized Investments Equity Cost Equity
Cost Equity in Base Equity (Book Value
Base Securities (Book Value) Per Share Per Share)
<S> <C> <C> <C> <C> <C>
For the Quarter Ended March 31, 1998 $ 282,106 (13,586) 268,520 $ 14.07 $ 13.40
</TABLE>
CAPITAL AND LEVERAGE POLICIES
The Company's operations are highly leveraged. Initially, the Company
financed its acquisition of Investments through proceeds of its initial public
offering and several private placements, and currently finances acquisitions
primarily by borrowing against or "leveraging" its existing portfolio and using
the proceeds to acquire additional Investments. The Company incurs, and expects
to continue to incur, debt such that it maintains an equity-to-assets ratio of
between 6% to 10%, although the actual ratio may be higher or lower from time to
time depending on market conditions and other factors deemed relevant by the
Manager, subject to the review of the Company's Board of Directors. At March 31,
1998, the Company's equity-to-assets ratio was 6.91%. The equity-to-assets ratio
is total stockholders' equity as a percentage of total assets. For purposes of
calculating the equity-to-assets ratio, the Company's total assets include the
value of the Company's investment portfolio on a marked-to-market-basis. For
purchased Investments, the Company obtains market quotes for its Investments
from independent broker-dealers that make markets in securities similar to those
in the Company's portfolio. The Company's total stockholders' equity, for
purposes of this calculation, equals the Company's stockholders' equity
determined in accordance with GAAP. The Board of Directors has discretion to
deviate from or change the Company's indebtedness policy at any time. However,
the Company intends to maintain an adequate capital base to protect against
interest rate environments in which the Company's financing and hedging costs
might exceed interest income from its Investments. These conditions could occur,
for example, when, due to interest rate fluctuations, interest income on the
Company's Investments (which occur during periods of rapidly rising interest
rates or during periods when the Mortgage Loans in the portfolio are prepaying
rapidly) lags behind interest rate increases in the Company's variable rate
borrowings. The Company enters into hedging transactions in an effort to protect
its portfolio of Investments, such hedging transactions include interest rate
swaps, IOs, the purchase or sale of interest rate collars, caps or floors and
options.
INFLATION
Virtually all of the Company's assets and liabilities are financial in
nature. As a result, interest rates are expected to influence the Company's
performance more directly than inflation. While changes in interest rates do not
necessarily correlate with inflation rates or changes in inflation rates,
interest rates ordinarily increase during periods of high or increasing
inflation and decrease during periods of low or declining inflation.
Accordingly, management believes that the Company's financial condition or
results of operations will be influenced by inflation to the extent interest
rates are affected by inflation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
At March 31, 1998, there were no legal proceedings to which the Company was
a party or of which any of its property was subject.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27.1 - Financial Data Schedule.
(b) Reports
On March 20, 1998, the Registrant filed a Current Report on Form 8-K
regarding the Board of Directors' declaration of a quarterly cash dividend to
the Company's stockholders equal to $0.43 per share of common stock to
stockholders of record March 31, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
LASER MORTGAGE MANAGEMENT, INC.
Dated: May 13, 1998 By:/S/ MICHAEL L. SMIRLOCK
-----------------------
Michael L. Smirlock
Chairman of the Board and Chief
Executive Officer (authorized officer of
registrant)
Dated: May 13, 1998 By:/S/ THOMAS G. JONOVICH
----------------------
Thomas G. Jonovich
Chief Financial Officer (principal
accounting officer)
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT
3.1 Articles of Incorporation of the Registrant (Incorporated by reference
to Exhibit 3.1 to the Registration Statement on Form S-11 (File No.
333- 35673))
3.2 Bylaws of the Registrant (Incorporated by reference to Exhibit 3.2 to
the Registration Statement on Form S-11 (File No. 333-35673))
27.1* Summary Financial Data
- ----------
* Filed herewith.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
MARCH 31, 1997 QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> MAR-31-1998
<CASH> 85,782
<SECURITIES> 375,404
<RECEIVABLES> 44,087
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,885,273
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,885,273
<CURRENT-LIABILITIES> 3,616,753
<BONDS> 0
0
0
<COMMON> 282,226
<OTHER-SE> (13,706)
<TOTAL-LIABILITY-AND-EQUITY> 3,885,273
<SALES> 0
<TOTAL-REVENUES> 55,903
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,230
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 45,143
<INCOME-PRETAX> 8,530
<INCOME-TAX> 0
<INCOME-CONTINUING> 8,530
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,530
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.42
</TABLE>
