UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 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 22-3535916
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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: 18,548,199 shares of common stock,
$0.001 par value, outstanding as of August 12, 1998.
<PAGE>
LASER Mortgage Management, Inc.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION...............................................3
Independent Accountants' Review Report...................................3
Item 1. Financial Statements...........................................4
Balance Sheet at June 30, 1998 (Unaudited) and
December 31, 1997..........................................4
Statement of Operations for the Three Months Ended
June 30, 1998 (Unaudited) and the Six Months Ended
June 30, 1998 (Unaudited)..................................5
Statement of Stockholders' Equity for the Six Months Ended
June 30, 1998 (Unaudited)...................................6
Statement of Cash Flows for the Six Months Ended
June 30, 1998 (Unaudited)...................................8
Notes to Financial Statements for the Six Months Ended
June 30, 1998 (Unaudited)...................................9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................18
PART II. OTHER INFORMATION..................................................29
Item 1. Legal Proceedings..............................................29
Item 2. Changes in Securities and Use of Proceeds......................29
Item 3. Defaults Upon Senior Securities................................29
Item 4. Submission of Matters to a Vote of Security Holders............29
Item 5. Other Information..............................................29
Item 6. Exhibits and Reports on Form 8-K...............................30
<PAGE>
PART I. FINANCIAL INFORMATION
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors of
LASER Mortgage Management, Inc.
We have reviewed the accompanying balance sheet of LASER Mortgage Management,
Inc. (the "Company") as of June 30, 1998, and the related statements of
operations for the three-month and six-month periods ended June 30, 1998, and
the statements of stockholders' equity and cash flows for the six-month period
then ended. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in accordance with
generally accepted auditing standards, the objective of which is the expression
of an opinion regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
August 13, 1998
<PAGE>
Item 1. Financial Statements
LASER Mortgage Management, Inc.
<TABLE>
<CAPTION>
BALANCE SHEET AT JUNE 30, 1998
(UNAUDITED) DECEMBER 31, 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS 49,516,606 $ 82,626,526
RECEIVABLE FOR SECURITIES SOLD 422,240,421 67,208,943
INVESTMENT IN SECURITIES AT FAIR VALUE 3,422,209,398 3,616,733,170
INVESTMENT IN MORTGAGE LOANS AT AMORTIZED COST 10,152,847 --
ACCRUED INTEREST RECEIVABLE 23,024,093 21,170,369
MARGIN DEPOSITS ON INTEREST RATE SWAPS 35,912,872 5,500,000
--------------- ---------------
TOTAL ASSETS $ 3,963,056,237 $ 3,793,239,008
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Repurchase agreements $ 3,538,985,238 $ 2,747,060,588
Payable for securities purchased 136,880,809 747,594,232
Payable for common stock repurchased 4,310,234 --
Accrued interest payable 10,701,873 8,348,831
Interest rate swaps at fair value 28,720,000 3,114,900
Dividends payable 7,626,600 2,602,600
Accounts payable 633,895 2,084,037
--------------- ---------------
Total liabilities 3,727,858,649 3,510,805,188
--------------- ---------------
STOCKHOLDERS' EQUITY:
Common stock: par value $.001 per share;
100,000,000 shares authorized, 20,069,999 and 20,019,999
shares issued, respectively 20,070 20,020
Additional paid-in capital 282,612,000 281,840,175
Accumulated other comprehensive income (loss) (11,622,561) 603,821
Dividends in excess of net income (29,416,787) (30,196)
Treasury stock at cost (636,700 shares) (6,395,134) --
--------------- ---------------
Total stockholders' equity 235,197,588 282,433,820
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,963,056,237 $ 3,793,239,008
=============== ===============
</TABLE>
See notes to financial statements.
<PAGE>
LASER Mortgage Management, Inc.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS THREE MONTHS SIX MONTHS
FOR THE ENDED JUNE 30, ENDED JUNE 30,
1998 (UNAUDITED) 1998 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
<S> <C> <C>
Mortgage loans and securities $ 58,515,279 $ 112,400,332
Cash and cash equivalents 1,159,663 2,422,527
----------------- ------------------
Total interest income 59,674,942 114,822,859
----------------- ------------------
INTEREST EXPENSE:
Repurchase agreements 51,135,634 96,279,245
----------------- ------------------
NET INTEREST INCOME 8,539,308 18,543,614
GAIN ON SALE OF SECURITIES 510,627 1,265,801
IMPAIRMENT LOSS ON INTEREST-ONLY SECURITIES (28,617,746) (28,617,746)
GENERAL AND ADMINISTRATIVE EXPENSES 2,102,483 4,332,310
----------------- ------------------
NET LOSS $(21,670,294) $ (13,140,641)
================= ==================
Unrealized gain (loss) on securities:
Unrealized holding gain (loss) arising during period 2,474,295 (10,960,581)
Less: reclassification adjustment for gains included in
net income (510,627) (1,265,801)
----------------- ------------------
Other comprehensive income (loss) 1,963,668 (12,226,382)
----------------- ------------------
Comprehensive loss $ (19,706,626) $ (25,367,023)
================= ==================
NET LOSS PER SHARE:
Basic $ ( 1.08) $ ( 0.66)
================= ==================
Diluted $ ( 1.08) $ ( 0.66)
================= ==================
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING:
Basic 20,050,473 20,047,613
================= ==================
Diluted 20,050,473 20,047,613
================= ==================
</TABLE>
See notes to financial statements.
<PAGE>
LASER Mortgage Management, Inc.
<TABLE>
<CAPTION>
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other Dividends
Common Additional Comprehensive Comprehensive In Excess Treasury
Stock Paid-in Income Income of Net Stock
Par Value Capital (Loss) (Loss) Income at cost Total
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
DECEMBER 31, 1997 $ 20,020 $ 281,840,175 $ 603,821 $ (30,196) - $282,433,820
Comprehensive income (loss) - - -
Net income - - 8,529,653 - 8,529,653 - 8,529,653
Other comprehensive income
Unrealized loss on securities,
net of reclassification adjustment - - (14,190,050) (14,190,050) - - (14,190,050)
------------
Comprehensive loss - - $ (5,660,397) - - -
=============
Common stock issued 25 365,600 - - - 365,625
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
======== ============= ============= ============ ==== ==============
BALANCE,
MARCH 31, 1998 $ 20,045 $ 282,205,775 $ - $(13,586,229) $ (119,893) $ - $ 268,519,698
Comprehensive income (loss) - - -
Net loss - - (21,670,294) - (21,670,294) - (21,670,294)
Other comprehensive income
Unrealized gains on securities,
net of reclassification adjustment - - 1,963,668 1,963,668 - - 1,963,668
-------------
Comprehensive loss - - $(19,706,626) - - - -
=============
Repurchase of common stock - - - - (6,395,134)(6,395,134)
Common stock issued 25 406,225 - - - - 406,250
Dividends declared -
$0.38 per share - - - - (7,626,600) - (7,626,600)
-------- ------------- ------------- ------------- ---------- ------------
BALANCE,
JUNE 30, 1998 $ 20,070 $ 282,612,000 $(11,622,561) $(29,416,787)$(6,395,134)$235,197,588
======== ============= ============= ============ =========== ============
Disclosure of Reclassification Amount:
Unrealized holding losses arising during period $(10,960,581)
Less: reclassification adjustment for gains
included in net income (1,265,801)
-------------
Net unrealized losses on securities $(12,226,382)
=============
See notes to financial statements.
</TABLE>
<PAGE>
LASER Mortgage Management, Inc.
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS
ENDED JUNE 30, 1998 (UNAUDITED)
- -------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C>
Net loss $ (13,140,641)
Adjustments to reconcile net loss to
net cash used in operating activities:
Amortization of mortgage premiums and discounts, net 10,553,436
Impairment loss on interest-only securities 28,617,746
Gain on sale of securities (1,265,801)
Increase in accrued interest receivable (1,853,724)
Increase in variation margin on interest rate swaps (30,412,872)
Increase in accrued interest payable 2,353,042
Decrease in accrued expenses and other liabilities (1,450,142)
----------------
Net cash used in operating activities (6,598,956)
----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities (2,809,914,169)
Purchase of mortgage loans (11,912,075)
Proceeds from sale of securities 1,868,055,604
Principal payments on securities 147,869,415
----------------
Net cash used in investing activities (805,901,225)
----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements 22,372,554,347
Principal payments on repurchase agreements (21,580,629,698)
Net proceeds from issuance of common stock (1,312,438)
Dividends paid (11,221,950)
----------------
Net cash provided by financing activities 779,390,261
----------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (33,109,920)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 82,626,526
----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 49,516,606
================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 93,926,203
================
Noncash financing activities:
Net change in unrealized loss on available-for-sale
securities $ (12,226,382)
================
Dividends declared, not yet paid $ 7,626,600
================
</TABLE>
See notes to financial statements.
<PAGE>
LASER Mortgage Management, Inc.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 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).
Basis of Presentation - The accompanying unaudited financial statements
have been prepared in conformity with the instructions to Form 10-Q and Article
10, Rule 10-01 of Regulation S-X for interim financial statements. The interim
financial statements for the three- and six-month periods are unaudited;
however, in the opinion of the Company's management, all adjustments, consisting
only of normal recurring accruals, necessary for a fair statement of the results
of operations have been included. These unaudited financial statements should be
read in conjunction with the audited financial statements included in the
Company's Annual Report on Form10-K for the period ended December 31, 1997. The
nature of the Company's business is such that the results of any interim period
are not necessarily indicative of results for a full year. Prior period
financial statements have been reclassified, where appropriate, to conform to
the 1998 presentation.
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 invests 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 Securities classified as
available-for-sale are reported at fair value, with unrealized gains and losses
reported as a separate component of stockholders' equity within accumulated
other comprehensive income (loss).
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. Other-than-temporary unrealized losses are based on management's
assessment of various factors affecting the expected cash flow from the
Securities, including the level of interest rates, an other-than-temporary
deterioration of the credit quality of the underlying mortgages and/or the
credit protection available to the related mortgage pool and a significant
change in the prepayment characteristics of the underlying collateral.
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 or notional
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 interest rate swaps 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 in accumulated other
comprehensive income as a component of stockholders' equity. When the interest
rate swap is terminated, the Company will record a 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. Such gain or loss may be deferred
and amortized if the hedged item still exists. During the term of an interest
rate swap, the Company is generally required to provide collateral to the
counterparty in an amount equal to the sum of an agreed-upon percentage of the
notional principal amount and the Company's unrealized loss in value (if any) of
the interest rate swap. The amount of such collateral appears on the balance
sheet as margin deposits on interest rate swaps.
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.
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.
Comprehensive Income - The Company has adopted SFAS No. 130, Reporting
Comprehensive Income. This statement requires the reporting of comprehensive
income in addition to net income from operations. Comprehensive income is a more
inclusive financial reporting methodology that includes disclosure of certain
financial information (such as unrealized gains or losses on securities) that
historically has not been recognized in the calculation of net income.
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 June 30, 1998 and December 31,
1997:
<TABLE>
<CAPTION>
June 30, 1998
Agency Non-Agency
Fixed/ Fixed/
Floating Agency Floating
Rate Fixed Emerging Non- Principal Rate
Mortgage Rate Market Mortgage Mortgage Only Mortgage
Securities Pass-Throughs Bonds Subordinates Subordinates Securities Securities Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities, $108,129,039 $2,894,987,245 $67,367,121 $143,250,543 $37,062,850 $62,162,575 $36,700,803 $3,349,660,176
principal
amount
Unamortized
discount (297,189) (15,665,790) (4,235,893) (27,618,611) (696,503) (11,789,218) (545,009) (60,848,213)
Unamortized
premium 837,409 23,154,935 717,993 262,902 334,181 - 138,692 25,446,112
Amortized cost 108,669,259 2,902,476,390 63,849,221 115,894,834 36,700,528 50,373,357 36,294,486 3,314,258,075
Gross unrealized
gains 1,165,937 22,001,394 - 123,358 11 2,034,592 235,296 25,560,588
Gross unrealized
losses - (676,064) (3,041,389) (1,689,842) (585,410) - (100,731) (6,093,436)
------------ -------------- ----------- ------------- ----------- ----------- ----------- ---------------
Estimated fair
value $109,835,196 $2,923,801,720 $60,807,832 $114,328,350 $36,115,129 $52,407,949 $36,429,051 $3,333,725,227
============ ============== =========== ============ =========== =========== =========== ==============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
Non-Agency
Fixed/
Agency Floating
Fixed Emerging Non- Principal Rate
Rate Market Mortgage Mortgage Only Mortgage
Pass-Throughs Bonds Subordinates Subordinates Securities Securities Total
<S> <C> <C> <C> <C> <C> <C> <C>
Securities, $ 3,286,896,621 $ 52,221,550 $58,399,966 $ 10,000,000 $ 57,788,134 $ 9,754,000 $3,475,060,271
principal amount
Unamortized discount (14,104,395) (3,915,578) (10,416,934) (44,194) (23,718,298) (6,150) (52,205,549)
Unamortized premium 28,075,718 415,210 297,872 - - - 28,788,800
---------------- ------------- ------------ -------------- ------------- ----------- ---------------
Amortized cost 3,300,867,944 48,721,182 48,280,904 9,955,806 34,069,836 9,747,850 3,451,643,522
Gross unrealized gains 12,208,264 54,033 240,088 3,569 2,217,185 56 14,723,195
Gross unrealized losses (182,202) (274,504) (532,520) - (115,961) - (1,105,187)
---------------- ------------- ----------- -------------- ------------ ------------ --------------
Estimated fair value $ 3,312,894,006 $ 48,500,711 $47,988,472 $ 9,959,375 $ 36,171,060 $ 9,747,906 $3,465,261,530
================ ============= =========== ============== ============== ============ ==============
</TABLE>
The fair value of the Company's IOs as of June 30, 1998 and December 31,
1997 are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1998
Residential Commercial Floating Rate Total
<S> <C> <C> <C> <C>
Securities, notional amount $250,000,000 $581,888,145 $353,525,591 $1,185,413,736
Amortized cost, after provision 8,920,741 37,684,006 44,249,137 90,853,884
for impairment
Gross unrealized gains - 93,726 - 93,726
Gross unrealized losses (1,108,241) (1,355,198) - (2,463,439)
------------- ------------ ----------- ---------------
Estimated fair value $ 7,812,500 $ 36,422,534 $44,249,137 $ 88,484,171
============ ============ =========== ===============
December 31, 1997
Residential Commercial Floating Rate Total
Securities, notional amount $201,685,139 $373,650,000 $399,260,556 $ 974,595,695
Amortized cost 57,545,769 22,965,348 80,859,810 161,370,927
Gross unrealized gains - 32,494 5,093 37,587
Gross unrealized losses (3,153,808) (51,639) (6,731,427) (9,936,874)
------------- ------------ ----------- ---------------
Estimated fair value $54,391,961 $22,946,203 $74,133,476 $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 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.
The Company wrote down (took a permanent impairment charge of $28,617,746
on) its floating-rate Interest-Only Securities which had amortized cost greater
than their market value. As of June 30, 1998, all of the Company's floating-rate
Interest-Only Securities were written down to their estimated fair market value,
and such writedown is reflected in the Company's statement of operations.
3. MORTGAGE LOANS
The following table pertains to the Company's Mortgage Loans as of June 30,
1998 which are carried at their amortized cost:
Total
Mortgage Loans, principal amount $ 9,793,533
Unamortized discount -
Unamortized premium 359,314
------------
Amortized cost $ 10,152,847
------------
As of June 30, 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
relation to one-month LIBOR.
As of June 30, 1998, the Company had outstanding $3,538,985,238 of
repurchase agreements with a weighted average borrowing rate of 5.74% and a
weighted average remaining maturity of 254 days. At June 30, 1998, Investments
actually pledged had an estimated fair value of $3,688,992,580.
At June 30, 1998, the repurchase agreements had the following remaining
maturities:
Within 30 days $ 2,982,671,915
30 to 90 days 56,313,323
Greater than 90 days 500,000,000
----------------
$ 3,538,985,238
================
At June 30, 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%.
5. COMMON STOCK
Sales of 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 LASER Advisers Inc. (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 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 of common stock 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.
On January 2, 1998 and April 1, 1998, 25,000 shares (50,000 shares in the
aggregate) of common stock were issued as deferred stock awards to certain
employees of the Company.
Dividends - During the three months ended June 30, 1998, the Company
declared dividends to stockholders totaling $0.38 per share, which were paid on
July 31, 1998. During the three months ended March 31, 1998, the Company
declared dividends to stockholders totaling $0.43 per share, which were paid on
April 30, 1998. For Federal income tax purposes, all dividends paid for the
period are ordinary income to the Company's stockholders.
Stock Repurchases - In March 1998, the Board of Directors of the Company
approved the repurchase of up to $20 million of the Company's common stock. In
June 1998, the Board of Directors increased the amount of common stock
authorized to be repurchased to $30 million. Pursuant to this repurchase
program, the Company repurchased 636,700 shares of its common stock for $6.4
million in open market transactions during the three months ended June 30, 1998.
Such purchases were made at a weighted average price per share of $10.004
(excluding commissions). The total number of shares repurchased by the Company
as of June 30, 1998 was 636,700. The repurchased shares have been returned to
the Company's authorized but unissued shares of common stock.
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' Equit 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%.
For such calculations, the "Net Income" of the Company means the taxable income
of the Company, within the meaning of the Code, less capital gains and capital
appreciation included in taxable income, but before the Manager's incentive fee
and before deduction of dividends paid.
For purposes of both the management and incentive fee calculations, Average
Stockholders' Equity means, for any period, stockholders' equity, calculated in
accordance with GAAP, excluding any mark-to-market adjustments of the investment
portfolio. The Company and the Manager have agreed that the provision for
impairment charge on the Interest-Only securities in the Company's portfolio is
not a mark-to-market adjustment for purposes of these calculations. For the
three months ended June 30, 1998 management fees amounted to $694,113 and
incentive fees were $497,493 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 requires 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 For the Six Months Ended
June 30, 1988 June 30, 1988
Loss Shares Per-Share Loss Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $ (21,670,294) 20,050,473 $ (1.08) $ (13,140,641) 20,047,613 $ (0.66)
============== ========== ========== ============== ========== ===========
Diluted EPS $ (21,670,294) 20,050,473 $ (1.08) $ (13,140,641) 20,047,613 $ (0.66)
============== ========== ========== ============== ========== ===========
</TABLE>
The Company has deferred common stock totaling 350,000 shares outstanding.
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. Such shares were not included in Diluted EPS as the
Company has a loss from operations and including such amounts would be
anti-dilutive.
For the three months ended June 30, 1998, options to purchase 778,000
shares were outstanding during the period and were anti-dilutive because the
strike price ($15.00) was greater than the average daily market price of the
Company's common stock for the quarter ($14.587). Therefore, these options were
excluded from Diluted EPS.
For the six months ended June 30, 1998, 10,893 incremental shares would
have been included in Diluted EPS representing 778,000 options exercisable at a
strike price of $15.00 per share and an average market price of the Company's
common stock for the quarter of $15.213. However, since the Company had a loss
the inclusion of such shares would be anti-dilutive.
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 loss per share would have been
reduced to the pro forma amounts indicated below:
For the Three Monts Ended For the Six Months Ended
June 30, 1998 June 30, 1998
------------------------- ------------------------
Net loss - as reported $(21,670,294) $(13,140,641)
Net loss - pro forma $(21,685,368) $(13,170,789)
Loss per share - as reported $ (1.08) $ (0.66)
Loss per share - pro forma $ (1.08) $ (0.66)
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 and six months ended June 30,
1998: dividend yield of 11.47%; expected volatility of 18%; risk-free interest
rate of 5.82%; and expected lives of ten years.
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 9.3 $ 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. INTEREST RATE SWAPS
As of June 30, 1998, the Company is a party to interest rate swaps with
original notional amounts as stated below. Under these agreements, the Company
receives a floating rate and pays a fixed rate. These swaps are cancellable at
the option of the Company on the fifth anniversary of their respective effective
dates.
<TABLE>
<CAPTION>
Non-Amortizing
Notional
Amount Fixed Termination Unrealized
(in thousands) Rate Floating Rate Date Loss in Value
<S> <C> <C> <C> <C>
$ 350,000 7.4075% 1 month LIBOR 1/10/13 $ (10,045,000)
550,000 7.4100% 1 month LIBOR 1/10/13 (15,840,000)
135,000 7.3025% 1 month LIBOR 1/10/13 (2,835,000)
--------------
$ (28,720,000)
==============
</TABLE>
During the three-months ended June 30, 1998, the Company entered into and
terminated interest rate swaps with notional amounts totaling $140 million and
incurred a realized loss of $1,897,968, which is included as a reduction of the
gain on sale of securities in the statement of operations.
10. TAXABLE INCOME
For the quarter ended June 30, 1998, income as calculated for tax purposes
(taxable income) is estimated at approximately $6,100,000 or $0.30 per weighted
average share. For the six-month period ended June 30,1998, taxable income is
estimated at approximately $14,400,000 or $0.72 per weighted average share.
Taxable income was different from income as calculated according to generally
accepted accounting principles (GAAP income) as a result of differing treatments
of premium and discount amortization and permanent impairment writedowns on
Interest-Only Securities.
11. SUBSEQUENT EVENTS
On July 30, 1998, the Company's Board of Directors terminated the
employment of Michael L. Smirlock as Chief Executive Officer and President and
removed Mr. Smirlock from his post as Chairman of the Board. The Board's
decision followed a report by special counsel to the Manager concerning pricing
irregularities detected in the hedge funds managed by the Manager. The Company
has been advised that day- to-day portfolio management decisions for the Manager
on behalf the Company will be made by Peter T. Zimmermann and Robert J. Gartner.
Messrs. Zimmermann and Gartner are Senior Vice President and Vice President -
Operations of the Manager, respectively. The Board of Directors has retained
Lehman Brothers Inc. to advise the Company on its strategic alternatives
intended to maximize stockholder value.
The Company also accepted the resignation of two of its directors, David A.
Tepper and William Marshall, effective July 30, 1998. In addition, the Board
elected Jonathan Ilany as a member of the Company's Board of Directors.
*****
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.
Forward-Looking Statements
"Safe Harbor" statement under the Private Securities Litigation Reform Act
of 1995: Statements in this discussion regarding the Company and its business,
which are not historical facts, are "forward-looking statements" that involve
risks and uncertainties. Risks and uncertainties, which could cause results to
differ from those discussed in the forward-looking statements herein, are listed
in the Company's Annual Report filed on form 10K.
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.
Recent Developments
On July 30, 1998, the Company's Board of Directors terminated the
employment of Michael L. Smirlock as Chief Executive Officer and President and
removed Mr. Smirlock from his post as Chairman of the Board. The Board's
decision followed a report by special counsel to the Manager concerning pricing
irregularities detected in the hedge funds managed by the Manager. The Company
has been advised that day-to-day portfolio management decisions for the Manager
on behalf the Company will be made by Peter T. Zimmermann and Robert J. Gartner.
Messrs. Zimmermann and Gartner are Senior Vice President and Vice President -
Operations of the Manager, respectively. The Board of Directors has retained
Lehman Brothers Inc. to advise the Company on its strategic alternatives
intended to maximize stockholder value.
The Company also accepted the resignation of two of its directors, David A.
Tepper and William Marshall, effective July 30, 1998. In addition, the Board
elected Jonathan Ilany as a member of the Company's Board of Directors. Mr.
Ilany is the Chief Executive Officer and a Director of Angiosonics, Inc., a
private medical device company with operations in the United States and Israel.
Prior to joining Angiosonics, Inc. in 1996, Mr. Ilany was, since 1987, a Senior
Managing Director of Bear, Stearns & Co. Inc., and served on the Board of
Directors of The Bear Stearns Companies Inc. until 1995. Mr. Ilany holds a B.A.
and an M.B.A. from the University of San Francisco. On August 3, 1998, the
Company filed a Current Report on Form 8-K in connection with these
developments.
In June 1998, the Board of Directors increased the amount of common stock
authorized to be repurchased under the Company's stock repurchase program to $30
million. Pursuant to the repurchase program, to date the Company has repurchased
1,546,800 shares of its common stock for $15.2 million in open market
transactions. Such purchases were made at a weighted average price per share of
$9.80 (excluding commission costs). The repurchased shares have been returned to
the Company's authorized but unissued shares of common stock.
Results of Operations for the Quarter Ended June 30, 1998
and for the Six Months Ended June 30, 1998
Net Loss Summary
For the quarter ended June 30, 1998, income before giving effect to charges
relating to the permanent impairment of certain Interest-Only Securities ("IOs")
was $6,947,452, or $0.35 per weighted average share. After giving effect to the
impairment charges of $(28,617,746), or $(1.43) per weighted average share, the
Company had a net loss of $(21,670,294), or $(1.08) per weighted average share
for the quarter ended June 30, 1998. Net income (loss) per share is computed by
dividing net income (loss) by the weighted average number of shares of common
stock outstanding, which was 20,050,473 for the quarter. Dividends were $0.38
per weighted average share, $7,626,600 in total. Return on average equity was
(8.00)% on an unannualized basis (after giving effect to the impairment
charges), for the quarter ended June 30, 1998.
For the six months ended June 30, 1998, net income before giving effect to
the impairment charges was $15,477,105, or $0.77 per weighted average share.
After giving effect to the impairment charges, for the six-month period ended
June 30, 1998, the Company had a net loss of $(13,140,641), or $(0.66) per
weighted average share. The weighted average number of shares of common stock
outstanding for the six-month period was 20,047,613. Dividends were $0.81 per
weighted average share, $16,245,949 in total. Return on average equity was
(4.79)% on an unannualized basis (after giving effect to the impairment
charges), for the six-month period ended June 30, 1998.
During the second quarter of 1998, the Company's net income (before giving
effect to the impairment charges) declined as a result of a reduction in the
income from its Mortgage Securities due to the effect of increasing prepayments.
The Company, based on its current estimates of future prepayments and the shape
of the yield curve, wrote down (took an impairment charge of $28,617,746 on) its
floating-rate Interest-Only Securities which had amortized cost greater than
their market value. As of June 30, 1998, all of the Company's floating-rate IOs
were written down to their estimated fair market value, and such writedown is
reflected in the Company's statement of operations. This writedown reduced GAAP
income by $(28,617,746), or $(1.43) per weighted average share. This writedown
did not affect the Company's taxable income or total stockholders' equity.
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 June 30, 1998, income as calculated for tax purposes
(taxable income) is estimated at approximately $6,100,000 or $0.30 per weighted
average share. For the six-month period ended June 30,1998, taxable income is
estimated at approximately $14,400,000 or $0.72 per weighted average share.
Taxable income was different from income as calculated according to generally
accepted accounting principles (GAAP income) as a result of differing treatments
of premium and discount amortization and permanent impairment writedowns on
Interest-Only Securities.
GAAP income and taxable income could also differ for other 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. As of June 30, 1998, the Company had not taken credit provisions because
91% of Investments acquired by the Company through June 30, 1998 had been
Mortgage Securities issued by government agencies 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 intends to pay out over
time.
Interest Income and Average Earning Asset Yield
The Company had average earning assets of $3,765.6 million and $3,642.3
million for the quarter and six-month period ended June 30, 1998, respectively.
The table below shows, for the quarter and six-month period ended June 30, 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.
<TABLE>
<CAPTION>
AVERAGE EARNING ASSET YIELD
(dollars in thousands)
Yield on Yield on
Average Yield on Average Average
Average Amortized Average Average Amortized Interest
Cash Cost of Earning Cash Cost of Earning Interest
Equivalents Securities Assets Equivalents Securities Assets Income
<S> <C> <C> <C> <C> <C> <C> <C>
For the Quarter Ended June 30, 1998 $57,059 $3,708,502 $ 3,765,561 5.82% 6.72% 6.71% $ 59,675
For the Six Months Ended June 30, 1998 $66,135 $3,576,170 $ 3,642,305 5.82% 6.72% 6.70% $114,823
</TABLE>
Interest Expense and the Cost of Funds
The Company had average borrowed funds of $3,539.1 million and total
interest expense of $51.1 million for the quarter ended June 30, 1998. The
average cost of funds was 5.72% for the same period. For the six-month period
ended June 30, 1998, the Company had average borrowed funds of $3,377.7 million
and total interest expense of $96.3 million with an average cost of funds of
5.67%. 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 one-month LIBOR, although the Company may choose to extend the maturity of
its liabilities at any time. The Company's average cost of funds was 0.02% above
one-month LIBOR for the six months ended June 30, 1998 and 0.06% above one-month
LIBOR for the three months ended June 30,1998. The Company generally has
structured its borrowings to adjust with one-month LIBOR. During the quarter
ended June 30, 1998, average one-month LIBOR, which was 5.66%, was 0.09% lower
than average six-month LIBOR, which was 5.75%.
The table below shows, for the quarter and six-month period ended June 30,
1998, the Company's average borrowed funds and average cost of funds as compared
to average one and six-month LIBOR.
<TABLE>
<CAPTION>
AVERAGE COST OF FUNDS
(dollars in thousands)
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
June 30, 1998 $ 3,539,147 $ 51,136 5.72% 5.66% 5.75% -0.09% 0.06% -0.03%
For the Six-Months Ended
June 30, 1998 $ 3,377,684 $ 96,279 5.67% 5.65% 5.71% -0.06% 0.02% -0.04%
</TABLE>
Interest Rate Swaps
During the quarter and six-month period ended June 30, 1998, the Company
has outstanding the interest rate swaps 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 are 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.
<TABLE>
<CAPTION>
INTEREST RATE SWAP TERMS
(dollars in thousands)
Average
Notional Fixed Floating Net
Amount Rate Rate Loss
<S> <C> <C> <C> <C>
For the Quarter Ended June 30, 1998 $ 1,035,000 7.40% 5.66% $ (4,460)
For the Six Months Ended June 30, 1998 $ 1,035,000 7.40% 5.65% $ (8,455)
</TABLE>
During the three-months ended June 30, 1998, the Company entered into and
terminated interest rate swaps with notional amounts totaling $140 million and
incurred a realized loss of $1,897,968, which is included as a reduction of the
gain on sale of securities in the statement of operations.
Net Interest Income
Net interest income, which equals interest income less interest expense,
totaled $8,539,308 and $18,543,614 for the quarter and six-month period ended
June 30, 1998, respectively. Net interest rate spread, which equals the yield on
the Company's interest earning assets (excluding cash) less the average cost of
funds for the period was 1.00% and 1.05% for the quarter and the six-month
period ended June 30,1998, respectively.
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 and six-month period ended June 30, 1998.
<TABLE>
<CAPTION>
NET INTEREST INCOME
(dollars in thousands)
Net Yield
Average Interest Interest on Average
Amortized Interest Income Income Average Balance Average
Cost Income Average on on Total Interest of Cost Net
of on Cash Cash Contractual Interest Earning Repurchase Interest of Interest
Securities Investments Equivalents Equivalents Equivalents Income Assets Agreements Expense Funds Income
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
For the
Quarter Ended
June 30,
1998 $ 3,708,502 $ 62,975 $57,059 $1,160 $(4,460) $ 59,675 6.71% $3,539,147 $51,136 5.72% $ 8,539
For the
Six Months
Ended
June 30,
1998 $ 3,576,170 $120,855 $66,135 $2,423 $(8,455) $ 114,823 6.70% $3,377,684 $96,279 5.67% $18,544
</TABLE>
Gains and Losses on Sales of Securities
For the quarter ended June 30, 1998, the Company sold Securities with an
aggregate historical amortized cost of $880.9 million for an aggregate gain of
$510,627. For the six-month period ended June 30, 1998, the Company sold
Securities with an aggregate historical amortized cost of $2.2 billion for a net
gain of $1,265,801. The difference between the sale price and the historical
amortized cost of the securities is a realized gain and increased income
accordingly.
Credit Considerations
The Company has not experienced credit losses on its investment portfolio
to date, but losses may be experienced in the future. At June 30, 1998, the
Company had limited its exposure to credit losses on its portfolio by holding
91% of its Investments in Mortgage Securities issued by governmental agencies
which, although not rated, carry an implied "AAA" rating.
General and Administrative Expenses
General and administrative expenses ("operating expense" or "G&A expense")
were $2,102,483 and $4,332,310 for the quarter and the six-month period ended
June 30, 1998, respectively, consisting of management fees paid to the Manager
of $694,113 and $1,399,743, incentive fees payable to the Manager of $497,493
and $1,449,002 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.
<TABLE>
<CAPTION>
G&A EXPENSE RATIOS
(dollars in thousands)
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 (Annualized) (Annualized) (Annualized)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Quarter Ended June 30, 1998 $ 694 $ 497 $406 $505 $2,102 0.22% 3.11% 26.55%
For the Six Months Ended June 30, 1998 $1,400 $1,449 $772 $711 $4,332 0.22% 3.19% 24.17%
</TABLE>
Net Loss and Return on Average Equity
Net loss was $(21.7) million and $(13.1) million for the quarter and
six-month period ended June 30, 1998, respectively. Return on average equity for
the quarter and six-month period ended June 30, 1998, was (8.00)% and (4.79)% on
an unannualized basis, respectively. The table below shows, on an unannualized
basis, for the quarter and six-month period ended June 30, 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.
<TABLE>
<CAPTION>
COMPONENTS OF RETURN ON AVERAGE EQUITY
Net Interest Gain on Sale Impairment
Income/ of Securities Loss on G&A Expense/
Average Average Interest-Only Average Return on
Equity Equity Securities Equity Average Equity
<S> <C> <C> <C> <C> <C>
For the Quarter Ended June 30, 1998 3.15% 0.19% (10.57)% 0.77% (8.00)%
For the Six Months Ended June 30, 1998 6.76% 0.46% (10.44)% 1.57% (4.79)%
</TABLE>
Dividends and Taxable Income
The Company has elected 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 six months ended
June 30, 1998, earned dividend declarations exceeded estimated taxable income by
approximately $1,846,000, or $0.09 per share, based on the weighted average
number of shares of common stock outstanding during the period.
<TABLE>
<CAPTION>
DIVIDEND SUMMARY
(dollars in thousands)
Estimated Dividends
Estimated Weighted Taxable Dividend Per in Excess of
Taxable Average Net Weighted Dividend Estimated
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 Six Months Ended
June 30, 1998 $14,400 20,047,613 $0.72 0.81 $16,246 112.8% $(1,846)
</TABLE>
Financial Condition
Investments
At June 30, 1998, the Company's Investments consisted of: $109,835,196
fixed/floating rate mortgage securities issued by government agencies ("Agency
Fixed/Floating Rate Mortgage Securities"); $2,923,801,720 fixed rate
pass-through mortgage securities issued by government agencies ("Agency Fixed
Rate Pass-Throughs"); $60,807,832 emerging market sovereign debt securities
("Emerging Market Bonds"); $114,328,350 subordinate mortgage securities
("Mortgage Subordinates"); $36,115,129 other debt securities ("Non-Mortgage
Subordinates"); $52,407,949 principal only mortgage securities ("Principal Only
Securities"); $36,429,051 fixed/floating rate mortgage securities issued by
non-governmental entities ("Non-Agency Fixed/Floating Rate Mortgage
Securities"); and $10,152,847 Mortgage Loans.
At December 31, 1997, the Company's Investments consisted of:
$3,312,894,006 Fixed Rate Agency Pass-Throughs; $48,500,711 Emerging Market
Bonds; $47,988,472 Mortgage Subordinates; $9,959,375 Non-Mortgage Subordinates;
$36,171,060 Principal Only Securities; and $9,747,906 Non-Agency Fixed/Floating
Rate Mortgage Securities.
The Company's Agency Fixed Rate Pass-Through portfolio has been reduced
since December 31, 1997 through amortization, prepayments and selected sales.
The Company's investments in Other Securities increased significantly as the
Company continues to emphasize investment in these higher yielding securities.
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 June 30, 1998, the
Company had on its balance sheet (excluding IOs) $60,848,213 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 $25,805,426 unamortized premium (which is the difference
between the remaining principal amount and the current historical amortized cost
of investments acquired at a price above principal value). The Company also had
$90,853,884 unamortized premium on IO securities.
Mortgage principal repayments received were $147.9 million for the period
ended June 30, 1998. 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 June 30, 1998.
<TABLE>
<CAPTION>
SECURITIES (EXCLUDING IOs)
(dollars in thousands)
Amortized Estimated
Cost to Fair Value
Principal Net Amortized Principal Estimated to Principal
Amount Discount Cost Amount Fair Value Amount
<S> <C> <C> <C> <C> <C> <C>
June 30, 1998 $ 3,349,660 $ (35,402) $ 3,314,258 98.94% $ 3,333,725 99.52%
</TABLE>
<TABLE>
<CAPTION>
MORTGAGE LOANS
(dollars in thousands)
Amortized Estimated
Cost to Fair Value
Principal Net Amortized Principal Estimated to Principal
Amount Premium Cost Amount Fair Value Amount
<S> <C> <C> <C> <C> <C> <C>
June 30, 1998 $ 9,794 $ 359 $ 10,153 103.67% $ 10,153 103.67%
</TABLE>
<TABLE>
<CAPTION>
IO SECURITIES
(dollars in thousands)
Amortized Estimated
Cost to Fair Value
Notional Net Amortized Notional Estimated to Notional
Amount Premium Cost (1) Amount Fair Value Amount
<S> <C> <C> <C> <C> <C> <C>
June 30, 1998 $ 1,185,414 $ 90,854 $ 90,854 7.66% $ 88,484 7.46%
- --------------------
(1) After provision for impairment.
</TABLE>
<PAGE>
INVESTMENT CHARACTERISTICS
(dollars in thousands)
Principal/ Weighted
Notional Average
Amount Coupon Rate
June 30, 1998 $4,544,867 5.54%
The table below shows unrealized gains and losses on the Securities in the
Company's portfolio at June 30, 1998.
UNREALIZED GAINS AND LOSSES
At June 30, 1998
(dollars in thousands)
Unrealized Gain $25,654
Unrealized Loss (37,277)
Net Unrealized Loss (11,623)
Net Unrealized Loss as % of Securities Principal/
Notional Amount -0.26%
Net Unrealized Loss as % of Securities Amortized Cost -0.34%
Interest Rate Swaps
Interest rate swaps are carried on the balance sheet at fair value. At June
30, 1998, there were $28,720,000 in unrealized losses on interest rate swaps.
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 June 30, 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 June 30, 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 254 days at June 30, 1998. At June 30, 1998, the Company
had outstanding $3,538,985,238 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 June 30, 1998, the weighted average cost of
funds for all of the Company's borrowings was 5.74%. At June 30, 1998,
Investments actually pledged had an estimated fair value of $3,688,992,580.
At June 30, 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 June 30, 1998 was $235.2 million, or $12.10 per share.
If the Company had used historical amortized cost accounting, the Company's
equity base at June 30, 1998 would have been $246.8 million, or $12.70 per
share.
With the Company's "available-for-sale" accounting treatment, unrealized
fluctuations in market values of assets do not impact GAAP net income 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
"Accumulated Other Comprehensive Income" and in the statement of operations
under "Other Comprehensive Income (Loss)." 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. "Accumulated Other Comprehensive Income (Loss)" was
$(11.6) million, or (0.34)% of the amortized cost of Securities at June 30,
1998.
The table below shows the Company's equity capital base as reported and on
a historical amortized cost basis at June 30, 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 "Accumulated Other
Comprehensive Income" account.
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
(dollars in thousands, except per share data)
Net Unrealized GAAP Historical GAAP
Historical Losses on Reported Amortized Reported
Amortized Assets Equity Cost Equity
Cost Equity Available Base Equity (Book Value
Base for Sale (Book Value) Per Share Per Share)
<S> <C> <C> <C> <C> <C>
For the Quarter Ended June 30, 1998 $246,821 $(11,623) $235,198 $12.70 $12.10
</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 June 30,
1998, the Company's equity-to-assets ratio was 5.94%. 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 assets and liabilities, 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.
Year 2000 Compliance
As the year 2000 approaches, an issue has emerged regarding how existing
application software programs and operating systems can accommodate this date
value. Failure to adequately address this issue could have potentially serious
repercussions. The Manager is in the process of working with its own and with
the Company's service providers to prepare for the year 2000. Based on
information currently available, the Company and the Manager do not expect that
the Company will incur significant operating expenses or be required to incur
material costs to be year 2000 compliant.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
At June 30, 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
The Annual Meeting of Stockholders of the Company was held on May 12, 1998.
The following matters were voted on at the Annual Meeting:
(1) Election of Director. The following person was elected as a director:
Number of Shares
Voted against
Name Voted for or withheld
Stuart H. Coleman 15,981,638 15,030
(2) Appointment of Independent Auditors. The stockholders approved the
appointment of Deloitte & Touche LLP as independent auditors for the
Company for the year 1998. There were 15,979,198 shares voted for approval;
6,100 shares voted against; 11,370 abstentions, and 4,048,331 shares not
voting.
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 May 1, 1998, the Company filed a Current Report on Form 8-K regarding a
press release issued by the Company announcing its earnings for the quarter
ended March 31, 1998. On June 25, 1998, the Company 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 $0.38 per share of common stock
to stockholders of record June 30, 1998 and authorization of an increase in its
stock repurchase program.
<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: August 13, 1998
By:/s/ Peter T. Zimmermann
--------------------------------
Peter T. Zimmermann
Chief Operating Officer
(authorized officer of registrant)
Dated: August 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.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUNE 30,
1997 QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> JUN-30-1998
<CASH> 85,429
<SECURITIES> 3,432,362
<RECEIVABLES> 445,265
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,963,056
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,963,056
<CURRENT-LIABILITIES> 3,727,858
<BONDS> 0
0
0
<COMMON> 276,237
<OTHER-SE> 41,039
<TOTAL-LIABILITY-AND-EQUITY> 3,963,056
<SALES> 0
<TOTAL-REVENUES> 31,568
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,102
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 51,136
<INCOME-PRETAX> 21,670
<INCOME-TAX> 0
<INCOME-CONTINUING> 21,670
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,670
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.08
</TABLE>
