UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _________________
Commission file number: 1-13563
LASER MORTGAGE MANAGEMENT, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 22-3535916
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
151 WEST PASSAIC STREET
ROCHELLE PARK, NEW JERSEY 07662
(Address of principal executive offices)
(Zip Code)
(201) 909-3722
(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: 17,803,883 shares of common
stock, $0.001 par value, outstanding as of May 14, 1999.
<PAGE>
LASER MORTGAGE MANAGEMENT, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION................................................1
Item 1. Financial Statements..............................................1
Balance Sheet At March 31, 1999 (Unaudited) and December 31, 1998.......1
Statement of Operations (Unaudited) for the Three Months Ended
March 31, 1999 and March 31, 1998.....................................2
Statement of Stockholders' Equity (Unaudited) for the Three
Months Ended March 31, 1999...........................................3
Statement of Cash Flows (Unaudited) for the Three Months Ended
March 31, 1999 and March 31, 1998.....................................4
Notes to Financial Statements (Unaudited) ..............................5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................16
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................................29
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
LASER MORTGAGE MANAGEMENT, INC.
BALANCE SHEET AT MARCH 31, 1999 DECEMBER 31, 1998
- ----------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents................................... $ 41,892,969 $ 30,392,828
Receivable for securities sold.............................. 269,341,732 --
Investment in securities available for sale
at fair value............................................ 464,483,558 817,689,386
Investment in mortgage loans at amortized cost.............. 6,912,305 8,417,484
Accrued interest receivable................................. 6,243,756 8,148,616
Principal paydown receivable................................ 4,983,936 2,305,060
Margin deposits on repurchase agreements 1,238,875 7,117,098
------------------ ------------------
Total assets.................................... $ 795,097,131 $ 874,070,472
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Repurchase agreements..................................... $ 675,702,796 $ 742,384,912
Dividend payable.......................................... 35,607,766 --
Accrued interest payable.................................. 2,092,220 2,446,237
Other payable............................................. 1,932,774 --
Accounts payable.......................................... 345,982 557,547
Payable to Manager........................................ 416,505 1,125,000
------------------ ------------------
Total liabilities.................................. 716,098,043 746,513,696
------------------ ------------------
STOCKHOLDERS' EQUITY:
Common stock: par value $.001 per share;
100,000,000 shares authorized, 20,118,749 and
20,099,999 shares issued, respectively.................. 20,119 20,100
Additional paid-in capital................................ 283,012,967 282,921,970
Accumulated other comprehensive loss...................... (14,542,557) (14,745,929)
Accumulated distributions and losses...................... (170,074,009) (121,290,971)
Treasury stock at cost (2,314,866 and 2,300,466
shares respectively)............. (19,417,432) (19,348,394)
------------------- ------------------
Total stockholders' equity......................... 78,999,088 127,556,776
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 795,097,131 $ 874,070,472
=================== ==================
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LASER MORTGAGE MANAGEMENT, INC.
STATEMENT OF OPERATIONS (UNAUDITED) FOR
THE THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
- -----------------------------------------------------------------------------------------------------------------------
Interest income:
<S> <C> <C>
Mortgage loans and securities................................ $ 15,553,287 $ 54,506,129
Cash and cash equivalents.................................... 465,173 1,262,864
------------------- -------------------
Total interest income............................... 16,018,460 55,768,993
------------------- -------------------
Interest expense:
Repurchase agreements........................................ 10,174,314 45,143,611
------------------- -------------------
Net interest income............................................ 5,844,146 10,625,382
(Loss) gain on sale of securities, swaps and termination of
repurchase agreement......................................... (17,569,418) 134,098
General and administrative expenses............................ 1,450,000 2,229,827
Net (loss) income.............................................. $ (13,175,272) $ 8,529,653
==================== ===================
Unrealized loss on securities:
Unrealized holding loss arising during period................ $ (17,366,046) $ (13,434,876)
Add: reclassification adjustment for loss (gain)
included in net (loss) income................................ $ 17,569,418 (755,174)
------------------- --------------------
Other comprehensive (loss) income.............................. 203,372 (14,190,050)
------------------- --------------------
Comprehensive loss............................................. $ (12,971,900) $ (5,660,397)
==================== ====================
Net (loss) income per share:
Basic........................................................ $ (0.74) $ 0.43
==================== ===================
Diluted...................................................... $ (0.74) $ 0.42
==================== ===================
Weighted average number of shares outstanding:
Basic........................................................ 17,806,740 20,044,999
=================== ===================
Diluted...................................................... 17,806,740 20,462,139
=================== ===================
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LASER MORTGAGE MANAGEMENT, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Common Additional Comprehensive
Stock Paid-in Income
Par Value Capital (Loss)
BALANCE
<S> <C> <C> <C>
DECEMBER 31, 1998........................ $ 20,100 $282,921,970
=========== ============
Comprehensive Income (loss)
Net loss.................................... $ (13,175,272)
Other comprehensive loss
Unrealized gain on securities,
net of reclassification adjustment.... 203,372
--------------
Comprehensive loss............................ $ (12,971,900)
===============
Common stock issued........................... $ 19 $ 90,997
Repurchase of common stock....................
Dividends/Distributions declared - $2.00 per
share.......................................
BALANCE
MARCH 31, 1999.......................... $ 20,119 $283,012,967
=========== ============
Unrealized holding losses arising during
period........................................ $ (17,366,046)
Add: reclassification adjustment for losses
included in net loss........................ 17,569,418
--------------
Net unrealized gains on securities............ $ 203,372
===============
</TABLE>
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive Accumulated Treasury
Income Distributions Stock
(Loss) and Losses at Cost Total
BALANCE
<S> <C> <C> <C> <C>
DECEMBER 31, 1998........................ $ (14,745,929) $ (121,290,971) $ $19,348,394 $127,556,776
============== =============== ============== =============
Comprehensive Income (loss)
Net loss.................................... $ (13,175,272) $(13,175,272)
Other comprehensive loss
Unrealized gain on securities,
net of reclassification adjustment.... $ 203,372 203,372
Comprehensive loss............................
Common stock issued........................... 91,016
Repurchase of common stock.................... $ (69,038) (69,038)
Dividends/Distributions declared - $2.00 per
share....................................... $ (35,607,766) (35,607,766)
BALANCE
MARCH 31, 1999.......................... $ (14,542,557) $ (170,074,009) $ $19,417,432 $ 78,999,088
=============== =============== ================= ============
Unrealized holding losses arising during
period........................................
Add: reclassification adjustment for losses
included in net loss........................
Net unrealized gains on securities............
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LASER MORTGAGE MANAGEMENT, INC.
STATEMENT OF CASH FLOWS (UNAUDITED) FOR
THE THREE MONTHS ENDED MARCH 31, 1999 MARCH 31, 1998
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net (loss) income.............................................. $ (13,175,272) $ 8,529,653
Adjustments to reconcile net (loss) income to
net cash used in operating activities:
Amortization of mortgage premiums and discounts, net........... 1,007,290 5,342,604
Loss (Gain) on sale of securities.............................. 17,569,418 (134,098)
Increase in accrued interest receivables
and principal paydown........................................ (774,016) (1,057,039)
(Increase) in variation margin on swaps........................ -- (4,171,789)
Decrease in margin deposits on repurchase
agreement................................................... 5,878,223 --
(Decrease) Increase in accrued interest payable................ (354,017) 2,667,303
(Decrease) Increase in accounts payable........................ (211,565) 925,533
Decrease in payable to Manager................................. (708,495) --
------------------ ---------------
Net cash provided by (used in) operating activities. 9,231,566 (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............................... 297,435,189 1,385,889,162
Receivable for securities sold................................. (269,341,732) __
Principal payments on securities............................... 38,902,482 49,258,808
Increase in other payable...................................... 1,932,774 --
----------------- -----------------
Net cash provided by (used in) investing activities. 68,928,713 (799,949,227)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements............................ 1,701,402,100 12,101,558,087
Principal payments on repurchase agreements.................... (1,768,084,216) (11,316,138,953)
Net payments from issuance (repurchase) of common stock........ 21,978 365,625
Distributions paid to stockholders............................. -- (2,602,600)
----------------- -----------------
Net cash (used in) provided by financing
activities...................................... (66,660,138) 783,182,159
------------------ -----------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................................. 11,500,141 (6,515,967)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD.......................................... 30,392,828 82,626,526
----------------- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD....................... $ 41,892,969 $ 76,110,559
================= =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid................................................ $ 10,528,331 $ 42,476,308
================= =================
Noncash financing activities:
Net change in unrealized (loss) gain on
available-for-sale securities............................ $ 203,372 $ (14,190,050)
================= ==================
Dividends declared, not yet paid........................... $ 35,607,766 $ 8,619,350
================= =================
See notes to financial statements.
</TABLE>
<PAGE>
LASER MORTGAGE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (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-month period 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 Form 10-K for the year ended December 31, 1998. 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 1999 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").
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 factors, 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.
<PAGE>
LASER MORTGAGE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
INTEREST RATE SWAPS - The Company entered into interest rate swap
agreements ("swaps") to reduce the mismatch in the maturity and repricing
characteristics of its fixed-rate agency pass-through securities and its
short-term repurchase obligations used for funding. The objective was to change
the interest rate characteristics of the securities from fixed to floating rate.
Swaps were designated as hedges of certain of its fixed rate agency pass-through
securities. The Company monitored the correlation and effectiveness for swap
transactions by ensuring that the notional amount of the swap was less than the
principal amount of the assets being hedged, the maturity of the swaps did not
exceed the maturity of the assets being hedged and the interest rate index on
the asset being hedged correlated with the interest rate index for the paying
leg of the swap.
The Company carried the swaps that meet the above criteria and the
hedged securities at their fair value and reported unrealized gains and losses
in other comprehensive income. Net payments or receipts on swaps that qualified
for hedge accounting were recognized as adjustments to interest income as they
accrued.
The gain or loss on the terminated swaps were deferred and amortized
as a yield adjustment over the remaining original term of the swap. Gains and
losses on swaps associated with sold securities were recognized as part of the
gain or loss on sale.
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 tables set forth the fair value of the Company's
Securities, excluding interest-only securities ("IOs"), as of March 31, 1999 and
December 31, 1998:
<PAGE>
<TABLE>
<CAPTION>
LASER MORTGAGE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
March 31, 1999
Agency Non-Agency
Fixed/ Fixed/
Floating Rate Non- Floating
Mortgage Mortgage Mortgage Rate Mortgage
Securities Subordinates Subordinates Securities Total
<S> <C> <C> <C> <C> <C>
Securities, principal amount $363,654,569 $92,364,367 $14,978,199 $21,521,000 $492,518,135
Unamortized discount (187,878) (26,842,524) (992,079) (60,955) (28,083,436)
Unamortized premium 3,096,996 -- -- 105,764 3,202,760
--------- ---------- -------- ----------- ------------
Amortized cost 366,563,687 65,521,843 13,986,120 21,565,809 467,637,459
Gross unrealized gains 2,740,906 -- -- -- 2,740,906
Gross unrealized losses (2,382) (18,222,124) (1,358,937) (5,184,709) (24,768,152)
--------- ---------- -------- ----------- ------------
Estimated fair value $369,302,211 $47,299,719 $12,627,183 $16,381,100 $445,610,213
============ =========== =========== =========== ============
</TABLE>
<PAGE>
LASER MORTGAGE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
In accordance with Statement of Financial Accounting Standards No.
115, Accounting for Certain Investments in Debt and Equity Securities ("SFAS No.
115"), an entity should recognize an other-than-temporary impairment when it
intends to sell a specifically identified available-for-sale debt security at a
loss shortly after the balance sheet date. The write-down for the impairment
should be recognized in earnings in the period in which the decision is made.
The Company reclassified an amount of approximately $4.2 million from unrealized
loss to realized loss for securities sold in April 1999, as the decision to sell
them was made in March 1999.
<TABLE>
<CAPTION>
December 31, 1998
Agency Non-Agency
Fixed/ Fixed/
Floating Rate Non- Floating
Mortgage Mortgage Mortgage Rate Mortgage
Securities Subordinates Subordinates Securities Total
<S> <C> <C> <C> <C> <C>
Securities, principal amount $667,919,453 $118,998,059 $15,106,000 $31,275,000 $833,298,512
Unamortized discount (1,294,653) (29,974,938) (1,343,889) (67,115) (32,680,595)
Unamortized premium 4,918,479 117,991 5,036,470
--------- ---------- -------- ----------- ------------
Amortized cost 671,543,279 89,023,121 13,762,111 31,325,876 805,654,387
Gross unrealized gains 9,186,945 -- -- -- 9,186,945
Gross unrealized losses -- (16,396,200) (1,284,223) (5,939,633) (23,620,056)
--------- ---------- -------- ----------- ------------
Estimated fair value $680,730,224 $72,626,921 $12,477,888 $25,386,243 $791,221,276
============ =========== =========== =========== ============
</TABLE>
The fair value of the Company's IOs as of March 31, 1999 and December
31, 1998 are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, 1999
Fixed Rate
Commercial Floating Rate Total
<S> <C> <C> <C>
Securities, notional amount $162,794,181 $159,117,319 $321,911,500
Amortized cost, after provision
for impairment 8,838,288 6,755,424 15,593,712
Gross unrealized gains -- 3,888,675 3,888,675
Gross unrealized losses (609,042) -- (609,042)
Estimated fair value $ 8,229,246 $10,644,099 $18,873,345
============ =========== ============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
Fixed Rate
Commercial Floating Rate Total
<S> <C> <C> <C>
Securities, notional amount $276,985,725 $177,704,524 $454,690,249
Amortized cost, after provision 19,447,590 7,333,338 26,780,928
for impairment
Gross unrealized gains -- 2,995,078 2,995,078
Gross unrealized losses (3,307,896) -- (3,307,896)
Estimated fair value $16,139,694 $10,328,416 $26,468,110
=========== =========== ===========
</TABLE>
Financial Accounting Standards Board ("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.
<PAGE>
LASER MORTGAGE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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 continued to reduce its investment portfolio during the
three months ended March 31, 1999 and sold approximately $310 million of
Investments, of which approximately $270 million were agency pass-through
certificates. The Company did not purchase any Investments during the first
quarter of 1999.
During the year ended December 31, 1998, the Company wrote down (took
a permanent impairment charge of $51,473,981) its floating-rate and residential
IOs which had an amortized cost greater than their market value. All of the
Company's floating-rate and residential IOs were written down to their estimated
fair market value, and such writedown is reflected in the Company's statement of
operations.
Most of the IOs were LIBOR floating rate IOs and were purchased in the
fourth quarter of 1997. They were acquired to balance duration in the Company's
portfolio. This investment was made based on the Company's evaluation of the
then-current prepayments and shape of the yield curve, and the relative values
of similar investments.
In evaluating the impairment charge on the IOs, the Company employs
current estimates of future prepayments that are obtained from independent
sources. For IOs collateralized by fixed-rate pass-through mortgage securities
issued by FNMA, GNMA and FHLMC (collectively, "Agency Fixed Rate
Pass-Throughs"), the Company utilized the median lifetime projection prepayment
speeds compiled and reported by Bloomberg L.P. from a survey of leading dealers
in the mortgage market. For "private label" IOs (collateralized by
non-government agency mortgage securities), the Company employs prepayment
estimates from at least one independent dealer. The prepayment estimates
typically take into consideration the current level and shape of the yield
curve.
As a result of the substantial decline in interest rates since the
purchase of the IOs, current estimates of prepayment speeds significantly exceed
the original prepayment speed estimates.
At the end of the first quarter of 1998, the majority of the Company's
IOs were floating rate IOs. Floating rate IOs are unique securities in that the
interest payments on these securities increase as one-month LIBOR increases. Due
to this characteristic of option value, floating rate IOs trade at much lower
yields than fixed rate IOs. At the end of the second and third quarter of 1998,
in light of the continued flat yield curve, low levels of LIBOR and faster than
expected prepayment rates actually occurring for an extended period of time, the
Company decided that the impairment in market value was other than temporary.
3. MORTGAGE LOANS
The following tables pertain to the Company's Mortgage Loans as of
March 31, 1999 and December 31, 1998 which are carried at their amortized cost:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
<S> <C> <C>
Mortgage Loans, principal amount $ 6,674,339 $ 8,150,593
Unamortized discount __ __
Unamortized premium 237,966 266,891
---------------- ---------------
Amortized cost $ 6,912,305 $ 8,417,484
================ ===============
</TABLE>
As of March 31, 1999 and December 31, 1998, the amortized cost of the
Mortgage Loans approximated their fair value.
<PAGE>
LASER MORTGAGE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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 March 31, 1999, the Company had outstanding $675,702,796 of
repurchase agreements with a weighted average borrowing rate of 5.53% and a
weighted average remaining maturity of 12 days. At March 31, 1999, Investments
actually pledged had an estimated fair value of $ 717,918,000.
As of December 31, 1998, the Company had outstanding $742,384,912 of
repurchase agreements with a weighted average borrowing rate of 5.94% and a
weighted average remaining maturity of 2.77 years. At December 31, 1998,
Investments actually pledged had an estimated fair value of $854,791,117.
At March 31, 1999 and December 31, 1998, the repurchase agreements had
the following remaining maturities:
<TABLE>
<CAPTION>
MARCH 31, 1999 December 31, 1998
<S> <C> <C>
Within 30 days $ 675,702,796 $ 242,384,912
30 to 90 days -- __
Greater than 90 days -- 500,000,000
-------------------- --------------------
$ 675,702,796 $ 742,384,912
==================== ====================
</TABLE>
As of December 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 was
three-month LIBOR plus 61.5 basis points and was capped at 6.365%. On March 29,
the Company terminated this repurchase agreement for settlement April 14, 1999
and recognized a loss of approximately $8.5 million.
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, at $15.00
per share, for a total of $15,210,000 from certain officers, directors, proposed
directors, employees and affiliates of the Company and LASER Advisers Inc. (the
"Former 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, at $15.00 per share, 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 Former Manager that a fund
affiliated with the Former 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
Section 4(2) of the Securities Act of 1933. At December 16, 1998, the total rate
of return swap was closed and the Company repurchased the 666,666 shares at a
price of $5.31 per share.
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.
<PAGE>
LASER MORTGAGE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
On each of January 2, 1998, April 1, 1998 and July 1, 1998, 25,000
shares (75,000 shares in the aggregate) of common stock were issued as deferred
stock awards to certain employees of the Company. On each of October 1, 1998 and
January 1, 1999, an additional 5,000 shares were issued as deferred stock awards
to certain employees of the Company, and on February 28, 1999, an additional
13,750 shares were issued as deferred stock awards to an employee of the
Company.
DIVIDENDS/DISTRIBUTIONS - On March 29, 1999, the Company declared a
special first quarter distribution in cash to stockholders of $2.00 per share of
common stock, payable on April 30, 1999. The Company declared and paid dividends
and distributions in cash of $2.19 per share during the year ended December 31,
1998.
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 the repurchase program,
for the three months ended March 31, 1999, the Company has used the proceeds of
sales of, and payments from, its portfolio securities to repurchase 14,400
shares of Common Stock for $69,038 in open market transactions. Such purchases
were made at a weighted average price per share of $ 4.79 (excluding commission
costs). As of December 31, 1998, the Company had repurchased 2,300,466 shares of
Common Stock for $19,348,394 in open market transactions. Such purchases were
made at a weighted average price per share of $8.41 (excluding commission
costs). The repurchased shares have been returned to the Company's authorized
but unissued shares of common stock as treasury shares.
<PAGE>
LASER MORTGAGE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
6. TRANSACTIONS WITH AFFILIATES AND TERMINATION OF MANAGEMENT AGREEMENT
Pursuant to the terms of a Management Agreement (the "Management
Agreement") with the Company, the Former Manager was responsible for the
day-to-day operations of the Company and performed (or caused to be performed)
such services and activities relating to the assets and operations of the
Company as was appropriate, subject to the supervision of the Company's Board of
Directors. For performing these services, the Former Manager received an annual
base management fee of 1.0% of Average Stockholders' Equity. The term "Average
Stockholders' Equity" for any period meant stockholders' equity, calculated in
accordance with GAAP, excluding any mark-to-market adjustments of the investment
portfolio. The Company and the Former Manager have agreed that the provision for
impairment charge on the IOs in the Company's portfolio is not a mark-to-market
adjustment for purposes of these calculations.
The Former Manager also was entitled to receive 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%. The term "Return on Average Stockholders' Equity" is
calculated for any quarter by dividing the Company's Net Income for the quarter
by its Average Stockholders' Equity for the quarter. 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 Former Manager's incentive fees and before
deduction of dividends paid. The incentive fee payments to the Former Manager
were computed before any income distributions were made to stockholders. As used
in calculating the Former Manager's fee, the term "Ten-Year U.S. Treasury Rate"
means the arithmetic average of the weekly yield to maturity for actively traded
current coupon U.S. Treasury fixed interest rate securities (adjusted to
constant maturities of ten years) published by the Federal Reserve Board during
a quarter, or, if such rate is not published by the Federal Reserve Board,
published by any Federal Reserve Bank or agency or department of the federal
government selected by the Company.
For the three months ended March 31, 1998, management fees amounted to
$705,630 and incentive fees were $951,509.
Effective February 28, 1999, the Company and the Former Manager
terminated the Management Agreement, and the Company became advised internally
with Robert J. Gartner, Vice President of the Company and a former Vice
President of the Manager, responsible for day-to-day investment decisions for
the Company. In connection with the termination of the Management Agreement, the
Company agreed to pay to the Former Manager: (a) $416,505, which represented the
base management fee payable under the Management Agreement for the fourth
quarter of 1998; (b) $708,495, which the Company and the Former Manager agreed
to as the quarterly incentive fee for the fourth quarter of 1998; and (c)
$500,000 for services performed under the Management Agreement for the period
January 1, 1999 through February 28, 1999 and for certain transition services
with respect to internalizing the advisory function.
7. EARNINGS PER SHARE (EPS)
In February 1997, the 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. There are no differences between Basic
EPS and Diluted EPS for March 31, 1999.
<PAGE>
LASER MORTGAGE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31, 1999
LOSS Shares Per-Share
(NUMERATOR) (Denominator) Amount
<S> <C> <C> <C>
Basic EPS $(13,183,468) 17,806,740 $ (0.74)
============= ========== =============
Diluted EPS $(13,184,863) 17,806,740 $ (0.74)
============= ========== =============
</TABLE>
For the three months ended March 31, 1999, the Company has no deferred
common stock reserved for issuance.
For the three months ended March 31, 1999, options to purchase 72,000
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 period ($5.04). Therefore, these options were
excluded from Diluted EPS.
The reconciliation for the three months ended March 31, 1998 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>
For the three months ended March 31, 1998, 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 2,066,666 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
("SFAS No. 123") 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
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED For the Three Months Ended
MARCH 31, 1999 March 31, 1998
<S> <C> <C>
Net earnings (loss) - as reported $(13,183,468) $8,529,653
Net earnings (loss) - pro forma $(13,184,863) $8,514,579
(Loss) earnings per share - as reported $(0.74) $0.43
(Loss) earnings per share - pro forma $(0.74) $0.42
</TABLE>
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 for the three months ended March 31, 1999:
dividend yield of 11.47%; expected volatility of 18%; risk-free interest rate of
5.82%; and expected lives of ten years.
<PAGE>
LASER MORTGAGE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
The following table summarizes information about stock options
outstanding as of March 31, 1999 and 1998:
<TABLE>
<CAPTION>
Weighted
Average Weighted
Range of Remaining Average
Exercise Options Contractual Exercise
Prices Outstanding Life (Yrs.) Price
<S> <C> <C> <C> <C>
March 31, 1999 $ 15.00 72,000 8.7 $ 15.00
============== ============
March 31, 1998 $ 15.00 778,000 9.7 $ 15.00
============== ============
</TABLE>
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. During the three months ended March
31, 1999, 148,000 stock options terminated.
The compensation expense for the 400,000 shares of deferred stock
outstanding as of March 31, 1998 will be amortized over a four-year period.
9. INTEREST RATE SWAPS
In December 1997, the Company entered into interest rate swaps with an
aggregate notional amount of $1,035 million. The Company used these interest
rate swaps to hedge its available-for-sale portfolio of fixed-rate agency
pass-through certificates. The primary objective of this hedging strategy was to
change the interest rate characteristics of these securities from fixed to
variable rates, to better correspond to the maturity and repricing
characteristics of the short-term repurchase agreements used by the Company to
fund these investments. This primary objective was the basis for the Company's
hedge accounting treatment. The Company continually monitored the swaps to
ensure that they were effective at changing the interest rate characteristics of
the securities. A secondary objective was to offset fluctuations in the fair
value of the securities caused by fluctuations in market interest rates.
<PAGE>
LASER MORTGAGE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
In September 1998, the Company experienced margin calls and believed
it prudent to increase its liquidity and, therefore, liquidated a large portion
of its agency pass-through certificates. In conjunction with the liquidation of
these securities positions, the Company also discontinued hedge accounting for
the related swaps with an aggregate notional amount of $485 million. The Company
recognized the unrealized loss on these swaps as an element of the overall loss
on the liquidation of the securities of $(26.0) million. In October 1998, the
Company liquidated agency pass-through certificates in response to continued
margin calls and the need for liquidity. The overall October 1998 loss on the
liquidation of agency pass-through certificates, including losses recognized
upon suspension of hedge accounting for the remaining swap with a notional
amount of $550 million, totaled $(35.0) million. On the day of each suspension
of hedge accounting, the affected swaps were closed out without additional gain
or loss.
The Company did not enter into any swaps during the quarter ended
March 31, 1999.
The valuations and other information used by the Company to monitor
the effectiveness of its interest rate swap hedging strategy were obtained
through multiple independent dealer quotes. This same information was used to
record the investments and swaps in the Company's financial statements and to
determine the Company's net asset value. The Company has never purchased or
written options to enter into swaps.
10. TAXABLE INCOME
The recently issued Revenue Procedure 99-17 provides securities and
commodities traders with the ability to elect mark-to-market treatment for 1998
by including a statement with their timely filed 1998 tax return. The election
applies for all future years as well unless revoked with the consent of the
Internal Revenue Service. After consultation with legal counsel, the Company
determined to elect mark-to-market treatment as a securities trader for 1998
and, accordingly, will recognize gains and losses prior to the actual
disposition of its securities. Moreover, some if not all of those gains and
losses, as well as some if not all gains or losses from actual dispositions of
securities, will be treated as ordinary in nature, and not capital, as they
would be in the absence of this election. Accordingly, revised Form 1099s were
sent to the Company's shareholders to reflect the changed characterization of
the Company's distributions. There is no assurance, however, that the Company's
election will not be challenged on the ground that it is not in fact a trader in
securities, or that it is only a trader with respect to some, but not all, of
its securities. As such, there is a risk that the Company will not be able to
mark-to-market its securities, or that it will be limited in its ability to
recognize certain losses.
For the three months ended March 31, 1999, a net operating loss as
calculated for tax purposes ("NOL") is estimated at approximately $(13.0)
million, or $(0.73) per weighted average share. NOLs may be carried forward for
20 years. Taxable income was different from income (loss) as calculated
according to generally accepted accounting principles ("GAAP income (loss)") as
a result of differing treatment of unrealized gains and losses on securities
transactions. For the year ended December 31, 1998, a NOL is estimated at
approximately $(51.3) million, or $(2.65) per weighted average share.
11. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133")
was issued and is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. SFAS No. 133 generally requires that entities recognize all
derivative financial instruments as assets or liabilities, measured at fair
value, and include in earnings the changes in the fair value of such assets and
liabilities. SFAS No. 133 also provides that changes in the fair value of assets
or liabilities being hedged with recognized derivative instruments be recognized
and included in earnings. The Company has not yet completed its evaluation of
SFAS No. 133, and therefore, at this time, cannot predict what, if any, effect
its adoption will have on the Company's financial condition or results of
operations.
<PAGE>
LASER MORTGAGE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONCLUDED)
12. SUBSEQUENT EVENTS
As of April 30, 1999, the Company estimates that its net asset value
per share was between $4.35 and $4.85 per share. As of that date, the Company
estimates that its portfolio was comprised of approximately $213 million of
Agency Certificates, $44 million of Subordinate Interests, $10 million of IOs,
$9 million of CMOs, $7 million of Mortgage Loans and $7 million of other
fixed-income assets.
<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.
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 10-K.
GENERAL
The Company is a specialty finance company, organized in September
1997, that invests primarily in mortgage-backed securities and mortgage loans.
The mortgage-backed securities include mortgage pass-through certificates,
collateralized mortgage obligations, other securities representing interests in,
or obligations backed by, pools of mortgage loans and mortgage derivative
securities (collectively, the "Mortgage Securities"). The mortgage loans are
secured by first or second liens on single-family residential, multi-family
residential, commercial or other real property (the "Mortgage Loans" and,
together with the Mortgage Securities, the "Mortgage Assets").
The Company is authorized to acquire the following types of
investments: (i) fixed and adjustable rate mortgage pass-through certificates
("Pass-Through Certificates"), which are securities collateralized by pools of
Mortgage Loans issued and sold to investors by private, non-governmental issuers
("Privately-Issued Certificates") or by various U.S. government agencies or
instrumentalities, such as the Federal Home Loan Mortgage Corporation ("FHLMC"),
the Federal National Mortgage Association ("FNMA") and the Government National
Mortgage Association ("GNMA") (collectively, "Agency Certificates"); (ii)
collateralized mortgage obligations ("CMOs"), including regular interests in
real estate mortgage investment conduits, which are fixed and adjustable rate
debt obligations collateralized by Mortgage Loans or Pass-Through Certificates;
(iii) Mortgage Loans; (iv) mortgage derivative securities ("Mortgage
Derivatives"), including interest-only securities ("IOs") which receive only
certain interest payments from a pool of Mortgage Securities or Mortgage Loans;
(v) subordinate interests ("Subordinate Interests"), which are classes of
Mortgage Securities junior to other classes of Mortgage Securities in the right
to receive payments from the underlying Mortgage Loans; and (vi) other
fixed-income securities, other than emerging market securities, in an amount not
to exceed 5% of total assets.
The Company has been reducing its portfolio by selling certain
securities and repaying borrowings in an attempt to reduce the portfolio's
susceptibility to basis and interest rate risk and to create additional
liquidity. As of March 31, 1999, the Company estimates that its net asset value
per share was between $ 4.25 and $ 4.50 per share (after giving effect to the
$2.00 per share special distribution described below). During the quarter ended
March 31, 1999, the Company reduced its portfolio by approximately $310 million
of Mortgage Assets, including approximately $270 million of Agency Certificates,
at a loss of approximately $(5.0) million. In addition, in accordance with SFAS
No. 115, an entity should recognize an other-than-temporary impairment when it
intends to sell a specifically identified available-for-sale debt security at a
loss shortly after the balance sheet date. The write-down for the impairment
should be recognized in earnings in the period in which the decision is made.
The Company reclassified an amount of approximately $4.2 million from unrealized
loss to realized loss for securities sold in April 1999, as the decision to sell
them was made in March 1999.
On March 29, 1999, the Company's Board of Directors declared a special
first quarter distribution in cash of $2.00 per share of common stock. The
special distribution was payable on April 30, 1999 to stockholders of record as
of April 1, 1999. Depending upon the Company's reported taxable income for 1999,
this distribution may in whole or in part be characterized as a return of
capital for tax purposes.
On March 2, 1999, the Company announced that the Company and the
Former Manager terminated the Management Agreement under which the Former
Manager served as the external manager of the Company, and that the Company had
become internally advised with Robert J. Gartner, Vice President of the Company,
being responsible for day-to-day investment decisions for the Company. Mr.
Gartner had been actively engaged in the management of the Company's portfolio
by the Former Manager since the Company's inception and had resigned his post at
the Former Manager to become a full-time employee of the Company. The Company
also announced that BlackRock Financial Management, Inc. ("BlackRock") had
agreed to extend its consulting engagement with the Company, that Thomas
Jonovich, Chief Financial Officer and Treasurer of the Company, and Jonathan
Green, General Counsel of the Company, resigned effective March 2, 1999, that
Peter T. Zimmermann, Vice President and Chief Operating Officer of the Company,
resigned effective January 11, 1999 and that the Former Manager agreed to assist
the Company with respect to the transfer of the advisory function to the Company
and with the filing of the Annual Report on Form 10-K.
The Company has elected to be taxed and intends to continue to qualify
as a REIT under the Code commencing with its short taxable year ended December
31, 1997, and such election has not been revoked. The Company has qualified as a
REIT for the taxable years since its inception, and generally will not be
subject to federal income tax provided that it distributes its income to its
stockholders and maintains its qualification as a REIT.
RECENT DEVELOPMENTS
As of April 30, 1999, the Company estimates that its net asset value
per share was between $4.35 and $4.85 per share. As of that date, the Company
estimates that its portfolio was comprised of approximately $213 million of
Agency Certificates, $44 million of Subordinate Interests, $10 million of IOs,
$9 million of CMOs, $7 million of Mortgage Loans and $7 million of other
fixed-income assets.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1999 COMPARED TO THE
QUARTER ENDED MARCH 31, 1998
NET LOSS SUMMARY
For the quarter ended March 31, 1999, the Company had a net loss of
$(13.2) million, or $(0.74) per weighted average share, compared to net income
of $8.5 million, or $0.43 per weighted average share, for the quarter ended
March 31, 1998. The weighted average number of shares of common stock
outstanding for the quarter ended March 31, 1999 and 1998 were 17,806,740 and
20,044,721, respectively. Dividends declared per share were $2.00 and $0.43 per
weighted average share, and $35.6 million and $8.6 million in total, for the
quarter ended March 31, 1999 and 1998, respectively. Return on average equity
was (10.79)% and 2.97% on an unannualized basis for the quarter ended March 31,
1999 and 1998, respectively.
For the quarter ended March 31, 1999, the Company sold securities with
an aggregate historical amortized cost of $310 million for a net loss of $(5.0)
million, compared to sales of $1,389.7 million of securities for an aggregate
gain of $134,098 for the quarter ended March 31, 1998. In addition, in
accordance with SFAS No. 115, an entity should recognize an other-than-temporary
impairment when it intends to sell a specifically identified available-for-sale
debt security at a loss shortly after the balance sheet date. The write-down for
the impairment should be recognized in earnings in the period in which the
decision is made. The Company reclassified an amount of approximately $4.2
million from unrealized loss to realized loss for securities sold in April 1999,
as the decision to sell them was made in March 1999.
The realized losses during the quarter ended March 31, 1999 were
approximately $(17.6) million, or $(0.99) per weighted average share, compared
to a gain of approximately $0.1 million, or $0.01 per weighted average share for
the quarter ended March 31, 1998. Excluding realized gains and losses, the
Company's income for the quarter ended March 31, 1999 was approximately $4.4
million, or $0.25 per weighted average share, compared to approximately $8.4
million, or $0.42 per weighted average share for the quarter ended March 31,
1998. This reduction of income for the first quarter of 1999 compared to the
first quarter of 1998 is consistent with the Company's substantially reduced
investment portfolio.
TAXABLE INCOME (LOSS) AND GAAP INCOME (LOSS)
For the quarter ended March 31, 1999, a NOL is estimated at
approximately $(13.0) million, or $(0.73) per weighted average share. NOLs may
be carried forward for 20 years. Taxable income was different from GAAP income
(loss) as a result of differing treatment of unrealized gains and losses on
securities transactions. For the year ended December 31, 1998, a NOL is
estimated at approximately $(51.3) million, or $(2.65) per weighted average
share.
For the quarter ended March 31, 1998, taxable income did not differ
materially from GAAP income.
Taxable income (loss) and GAAP income (loss) could differ for numerous
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 March 31, 1999 and March 31, 1998, the Company had not
taken credit provisions because 78% and 94%, respectively, of the Company's
investments were Agency Certificates.
The distinction between taxable income (loss) and GAAP income (loss)
is important to the Company's stockholders because dividends or distributions
are declared on the basis of taxable income. While the Company does not pay
taxes so long as it satisfies the requirements for 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 helps to determine 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 $858.1 million for the
quarter ended March 31, 1999 compared to $3,517.7 million for the quarter ended
March 31, 1998. The table below shows, for the quarter ended March 31, 1999 and
1998, the Company's average balance of cash equivalents, loans and securities,
the yields earned on each type of earning asset, 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 March 31, 1999 $ 38,718 $ 819,358 $ 858,076 5.07% 7.58% 7.47% $ 16,018
For the Quarter Ended March 31, 1998 $ 75,312 $ 3,442,368 $ 3,517,680 5.82% 6.80% 6.78% $ 55,769
</TABLE>
INTEREST EXPENSE AND THE COST OF FUNDS
For the quarter ended March 31, 1999 and 1998, the Company had average
borrowed funds of $715.9 million and $3,214.4 million, respectively, and total
interest expense of $10.2 and $45.1 million, respectively, with an average cost
of funds of 5.68% and 5.62%, respectively. The Company believes that its largest
expense is usually the cost of borrowed funds. Interest expense is calculated in
the same manner for tax and GAAP purposes. The Company expects that changes in
the Company's cost of funds closely correlate with changes in one-month LIBOR,
although the Company may choose to extend the maturity of its liabilities at any
time, subject to the lender's consent. The Company's average cost of funds was
0.74% above one-month LIBOR for the quarter ended March 31, 1999 compared to
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, 1999, average one-month LIBOR, which was 4.94%, was
0.11% lower than average six-month LIBOR, which was 5.05%. 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 increase in the Company's
average cost of funds relative to LIBOR in the first quarter of 1999 compared to
the first quarter of 1998 was due primarily to (a) the reduced availability of
funds for the Company and (b) the Company's portfolio during the first quarter
of 1999 compared to the first quarter of 1998 containing a greater percentage of
less liquid securities which finance at higher spreads.
The table below shows, for the quarter ended March 31, 1999 and 1998,
the Company's average borrowed funds and average cost of funds 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 March 31, 1999 $ 715,889 $ 10,174 5.68% 4.94% 5.05% (0.11)% 0.74% 0.63%
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>
During 1998, events in the financial markets (including the continued
flat yield curve, the dislocation in the market for fixed-income securities, the
tightening of credit available for investment in securities and the increased
risk of interest rate sensitive prepayment on mortgages) had an adverse effect
upon the Company's earnings. A relatively flat yield curve caused financing
costs to be relatively high compared to the income earned on the Company's
Mortgage Assets. The dislocation in the fixed-income securities market and the
increased risk of prepayments, which affected the value of the Company's
portfolio, together with the tightening of credit available for investment in
securities, adversely affected the Company's ability to employ leverage
profitably.
INTEREST RATE SWAPS
The Company did not enter into any swaps during the quarter ended
March 31, 1999.
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 received a floating rate and pays a fixed rate. As part
of its asset/liability management process, the Company entered into interest
rate agreements such as interest rate caps, floors and swaps. The agreements
were entered into to reduce interest rate risk and were 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
Income
Average Average (Expense) on
Notional Fixed Floating Contractual
Amount Rate Rate Commitments
<S> <C> <C> <C> <C>
For the Quarter Ended March 31, 1998 $ 1,035,000 7.40% 5.64% $ (3,995)
</TABLE>
In December 1997, the Company entered into interest rate swaps with an
aggregate notional amount of $1,035 million. The Company used these interest
rate swaps to hedge its available-for-sale portfolio of fixed-rate Agency
Certificates. The primary objective of this hedging strategy was to change the
interest rate characteristics of these securities from fixed to variable rates,
to better correspond to the maturity and repricing characteristics of the
short-term repurchase agreements used by the Company to fund these investments.
This primary objective was the basis for the Company's hedge accounting
treatment. The Company continually monitored the swaps to ensure that they were
effective at changing the interest rate characteristics of the securities. A
secondary objective was to offset fluctuations in the fair value of the
securities caused by fluctuations in market interest rates.
In September 1998, the Company experienced margin calls and believed
it prudent to increase its liquidity, and therefore, liquidated a large portion
of its Agency Certificates. In conjunction with liquidating these securities
positions, the Company also discontinued hedge accounting for the related swaps
with an aggregate notional amount of $485 million. The Company recognized the
unrealized loss on these swaps as an element of the overall loss on the
liquidation of the securities of $(26.0) million. In October 1998, the Company
liquidated Agency Certificates in response to continued margin calls and the
need for liquidity. The overall October 1998 loss on the liquidation of Agency
Certificates, including losses recognized upon suspension of hedge accounting
for the remaining swap with a notional amount of $550 million, totaled $(35.0)
million. On the day of each suspension of hedge accounting, the affected swaps
were closed out without additional gain or loss.
The valuations and other information used by the Company to monitor
the effectiveness of its interest rate swap hedging strategy were obtained
through multiple independent dealer quotes. This same information was used to
record the investments and swaps in the Company's financial statements and to
determine the Company's net asset value. The Company has never purchased or
written options to enter into swaps. As part of the Company's investigation of
the potential impact of the pricing irregularities discovered at the Affiliated
Funds, the Company reviewed the pricing of its own securities and swaps and
concluded that the valuations used were accurate.
The Company has been concerned about the potential distortion of GAAP
income relative to taxable income caused by differences in the book and tax
accounting treatment for its hedging activities and about volatility in reported
earnings that would obscure the comparability of the Company with other mortgage
REITs. At the time of the Company's initial public offering, the Company
believed that some of these concerns would best be addressed by electing to
classify the Mortgage Securities as trading securities for financial statement
purposes. Upon further analysis, including analysis of the accounting for the
related borrowings, the Company concluded that this accounting election would
not achieve the results initially anticipated and that classifying the Mortgage
Securities as available-for-sale would likely result in closer conformity to the
tax accounting method upon which distributions are based and greater
comparability with other mortgage REITs. Therefore, as the Company purchased the
individual securities in its portfolio of Mortgage Securities, it did not
classify them as trading securities.
Because the Mortgage Assets were not voluntarily classified as trading
securities, they met the definition of available-for-sale securities of
paragraph 12(b) of SFAS No. 115. Accordingly, the Company classified each
Mortgage Security as available-for-sale at its acquisition date and subsequently
reported each security at its fair value. Pursuant to paragraph 13 of SFAS No.
115, unrealized holding gains of $3.7 million related to available-for- sale
Mortgage Securities were reported in other comprehensive income at December 31,
1997 following the initial acquisition of most of the securities.
NET INTEREST INCOME
Net interest income, which equals interest income less interest
expense, totaled $5.8 million for the quarter ended March 31, 1999 compared to
$10.6 million for the quarter ended March 31, 1998. 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 1.9% for the quarter ended
March 31, 1999 compared to 1.16% for the quarter ended March 31, 1998. The
decrease in net interest income for the quarter ended March 31, 1999 compared to
the quarter ended March 31, 1998 was due to the Company's substantially reduced
investment portfolio. The net interest rate spread increased for the quarter
ended March 31, 1999 compared to the quarter ended March 31, 1998 due to the mix
of Mortgage Assets in the Company's investment portfolio, which contained a
greater percentage of less liquid securities which finance at higher spreads for
the quarter ended March 31, 1999 compared to the quarter ended March 31, 1998.
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, 1999 and 1998.
<PAGE>
<TABLE>
<CAPTION>
NET INTEREST INCOME
(dollars in thousands)
Yield on
Average Interest Net Income Average Average
Amortized Interest Average Income on on Total Interest Balance of Average Net
Cost of Income on Cash Cash Contractual Interest Earning Repurchase Interest Cost of Interest
Investments Investments Equivalents Equivalents Commitments Income Assets Agreements Expense Funds Income
For the Quarter
Ended March 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999 $ 819,358 $ 15,528 $38,718 $ 490 $ - $ 16,018 7.47% $ 715,889 $ 10,174 5.68% $ 5,844
For the Quarter
Ended March 31,
1998 $3,442,368 $ 58,501 $75,312 $ 1,263 $ (3,995) $ 55,769 6.78% $3,214,428 $ 45,144 5.62% $10,625
</TABLE>
CREDIT CONSIDERATIONS
The Company has not experienced credit losses on its investment
portfolio to date, but losses may be experienced in the future. At March 31,
1999 and 1998, the Company had limited its exposure to credit losses on its
portfolio by holding 78% and 94% of its investments in Agency Certificates.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses ("operating expense" or "G&A
expense") were $1.45 million for the quarter ended March 31, 1999, consisting of
fees paid to the Former Manager of $500,000, fees paid to BlackRock of $375,000
and professional and other miscellaneous fees. G&A expenses were $2.2 million
for the quarter ended March 31, 1998, consisting of management fees paid to the
Former Manager of $705,630, incentive fees paid to the Former Manager of
$951,509, deferred stock expense of $366,000 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 Consulting Stock G&A G&A Assets Equity Ratio
Fee Fee Fee Expense Expense Expense (Unannualized) (Unannualized) (Unannualized)
For the Quarter Ended
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March 31, 1999 $500 -- $375 $ 91 $484 $1,450 .17% 1.19% 24.81%
For the Quarter Ended
March 31, 1998 $705 $951 -- $366 $208 $2,230 .05% .80% 20.99%
</TABLE>
NET (LOSS) INCOME AND RETURN ON AVERAGE EQUITY
Net losses were $(13.2) million for the quarter ended March 31, 1999
compared to net income of $8.5 million for the quarter ended March 31, 1998.
Return on average equity, on an unannualized basis, for the quarter ended March
31, 1999 was (10.79)% compared to 2.97% for the quarter ended March 31, 1998.
The table below shows, on an unannualized basis, for the quarter ended
March 31, 1999 and 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.
<TABLE>
<CAPTION>
COMPONENTS OF RETURN ON AVERAGE EQUITY
Net Interest Gain (Loss) on Sale Impairment Loss
Income/Average of Securities/ on Interest-Only G&A Expense/ Return on
Equity Average Equity Securities Average Equity Average Equity
<S> <C> <C> <C> <C>
For the Quarter Ended March 31, 1999 4.78% (14.38)% -- 1.19% (10.79)%
For the Quarter Ended March 31, 1998 3.82% .05% -- .80% 2.97%
</TABLE>
DISTRIBUTIONS AND TAXABLE INCOME
The Company has elected to be taxed as a REIT under the Code.
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, 1999, the Company
determined that it had no taxable income and did not make any capital
distributions. 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.
FINANCIAL CONDITION
INVESTMENTS
As of March 31, 1999 and December 31, 1998, the Company's portfolio
consisted of:
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999 AS OF DECEMBER 31, 1998
Dollar Amount Dollar Amount
SECURITIES (IN MILLIONS) PERCENTAGE (IN MILLIONS) PERCENTAGE
---------- ------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Agency Certificates $370 78% $ 681 82%
Subordinate Interests 47 10% 73 9%
IOs 18 4% 26 3%
CMOs 16 4% 25 3%
Mortgage Loans 7 1% 8 1%
Other fixed-income assets 13(1) 3% 13(1) 2%
-----------------------------------------------------------------------------------------
Total $471 100% $ 826 100%
=========================================================================================
- -----------------------------------
(1) Included no emerging market securities.
</TABLE>
The Company reduced its portfolio of Mortgage Assets during the
quarter ended March 31, 1999 in an attempt to reduce the portfolio's
susceptibility to basis and interest rate risk and to create additional
liquidity.
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,
1999 and December 31, 1998, the Company had on its balance sheet (excluding IOs)
$28.1 million and $32.7 million, respectively, 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 $3.2 million and $5.0 million, respectively, 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 $15.6 million unamortized premium on IOs at March
31, 1999 compared to $26.8 million at December 31, 1998.
Mortgage principal repayments received were $38.9 million for the
quarter ended March 31, 1999. 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 tables below summarize the Company's investments at March 31, 1999
and December 31, 1998.
SECURITIES (EXCLUDING IOs)
(dollars in thousands)
<TABLE>
<CAPTION>
Amortized Estimated Weighted
Cost to Fair Value Average
Principal Net Amortized Principal Estimated to Principal Life
Amount Discount Cost Amount Fair Value Amount (Years)
<S> <C> <C> <C> <C> <C> <C> <C>
March 31, 1999 $ 492,518 $ (24,881) $ 467,637 94.95% $ 445,610 90.48% 7.0
December 31, 1998 $ 833,299 $ (27,644) $ 805,654 96.68% $ 791,221 94.95% 7.1
</TABLE>
MORTGAGE LOANS
(dollars in thousands)
<TABLE>
<CAPTION>
Amortized Estimated Weighted
Cost to Fair Value Average
Principal Net Amortized Principal Estimated to Principal Life
Amount Premium Cost Amount Fair Value Amount (Years)
<S> <C> <C> <C> <C> <C> <C> <C>
March 31, 1999 $ 6,674 $ 238 $ 6,912 103.57% $ 6,912 103.57% 3.0
December 31, 1998 $ 8,151 $ 267 $ 8,417 103.27% $ 8,417 103.27% 2.6
</TABLE>
At March 31, 1999, the Company had borrowing outstanding from eight
lenders compared to eight lenders at December 31, 1998. Such borrowings are
generally short-term (7-day or 30-day terms) and may not be renewed by the
lender at its discretion.
IO SECURITIES
(dollars in thousands)
<TABLE>
<CAPTION>
Amortized Estimated Weighted
Cost to Fair Value Average
Notional Net Amortized Notional Estimated to Notional Life
Amount Premium Cost (1) Amount Fair Value Amount (Years)
<S> <C> <C> <C> <C> <C> <C> <C>
March 31, 1999 $ 321,912 $ 15,594 $ 15,594 4.84% $ 18,873 5.86% 6.0
December 31, 1998 $ 454,690 $ 26,781 $ 26,781 5.89% $ 26,468 5.82% 7.1
- ---------------------
(1) After provision for impairment.
</TABLE>
The table below shows unrealized gains and losses on the securities in
the Company's portfolio at March 31, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
UNREALIZED GAINS AND LOSSES
(dollars in thousands)
At March 31, 1999 At December 31, 1998
<S> <C> <C>
Unrealized Gain $ 6,630 $ 12,182
Unrealized Loss (25,377) (26,928)
Net Unrealized Loss (18,747) (14,746)
Net Unrealized Loss as % of Investments
Principal/Notional Amount (2.28)% (1.14)%
Net Unrealized Loss as % of Investments Amortized
Cost (3.82)% (1.75)%
</TABLE>
The following table sets forth a schedule of Pass-Through Certificates
and Mortgage Loans owned by the Company at March 31, 1999 and December 31, 1998
classified by issuer and by ratings categories.
<TABLE>
<CAPTION>
PASS-THROUGH CERTIFICATES AND MORTGAGE LOANS BY ISSUER AND CREDIT RATING
(dollars in thousands)
AT MARCH 31, 1999 AT DECEMBER 31, 1998
----------------- --------------------
CARRYING VALUE PORTFOLIO MIX CARRYING VALUE PORTFOLIO MIX
<S> <C> <C> <C> <C>
Agency Certificates $ 369,302 78% $ 680,730 83%
Privately Issued Certificates:
AAA/Aaa Rating.................. -- -- -- --
AA/Aa Rating.................... -- -- -- --
A Rating........................ 7,219 2% 7,596 1%
BBB/Baa Rating.................. 9,162 2% 17,791 2%
BB/Ba Rating and Other 59,928 13% 85,105 10%
IOs.............................. 18,873 4% 26,468 3%
Mortgage Loans................... 6,912 1% 8,417 1%
----------- -----------
Total.................... $ 471,396 $ 826,107
=========== ===========
</TABLE>
The following tables set forth information about the Company's
portfolio of Subordinate Interests, IOs, CMOs, and other fixed-income assets as
of March 31, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
SUBORDINATE INTERESTS
(dollars in thousands)
MARKET VALUE AT
Description MARCH 31, 1999 DECEMBER 31, 1998
<S> <C> <C>
Commercial $ 38,210 $ 45,292
Residential 9,090 27,337
</TABLE>
<TABLE>
<CAPTION>
IO SECURITIES
(dollars in thousands)
Market Value at
DESCRIPTION COUPON MARCH 31, 1999 DECEMBER 31, 1998
<S> <C> <C> <C>
Commercial Fixed $ 8,229 $ 16,140
Residential Floating 10,644 10,328
</TABLE>
<TABLE>
<CAPTION>
CMOs
(dollars in thousands)
Market Value at
DESCRIPTION RATING MARCH 31, 1999 DECEMBER 31, 1998
<S> <C> <C> <C>
Residential BBB $ 9,162 $ 17,792
Residential A 7,219 7,596
</TABLE>
OTHER FIXED-INCOME ASSETS
(dollars in thousands)
Market Value at
DESCRIPTION MARCH 31, 1999 DECEMBER 31, 1998
CBO/CLO $ 12,627 $ 12,478
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. 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. At March 31, 1999, the
Company had borrowings outstanding from eight lenders, the same number of
lenders it had at December 31, 1998. Such borrowings are generally short-term
(7-day or 30- day terms) and may not be renewed by the lender at its discretion.
Certain lenders have reduced the funds made available to the Company for pledges
of certain less liquid securities.
For the quarter ended March 31, 1999, the term to maturity of the
Company's borrowings has ranged from one day to 4.2 years, with a weighted
average remaining maturity of 12 days at March 31, 1999. At March 31, 1999, the
Company had outstanding $675.7 million of repurchase agreements. Approximately
$175.7 million of the Company's borrowings have a cost of funds which adjusts
based on a fixed spread over or under one-month LIBOR. At March 31, 1999, the
weighted average cost of funds for all of the Company's borrowings was 5.53%. At
March 31, 1999, investments actually pledged had an estimated fair value of
$717.9 million.
For the year ended December 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 2.77 years at December 31, 1998. At December 31,
1998, the Company had outstanding $742.4 million of repurchase agreements.
Approximately $242.4 million 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
December 31, 1998, the weighted average cost of funds for all of the Company's
borrowings was 5.94%. At December 31, 1998, investments actually pledged had an
estimated fair value of $854.8 million.
On March 29, 1999, to improve its liquidity, the Company terminated a
repurchase agreement with a broker-dealer with respect to $500 million of the
Company's Agency Certificates and recognized a loss of approximately $8.5
million.
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 varies
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.
During 1998, events in the financial markets (including the
dislocation in the market for fixed-income securities, the tightening of credit
available for investment in securities and the decrease in value of mortgage
securities due to prepayment risk) had an adverse effect on the Company's
ability to borrow funds and may continue to have such an effect. To address
concerns with respect to possible decreased liquidity, the Company has reduced
its portfolio and sold securities. From January 1, 1999 through March 31, 1999,
the Company sold approximately $310 million of Mortgage Assets, including
approximately $270 million of Agency Certificates.
The availability of financing for the Company's portfolio has been
stable during the first quarter of 1999. This is in sharp contrast to the third
and fourth quarters of 1998, which saw a significant decline in the availability
of financing. While financing is not as easily available as it was in early
1998, the Company believes it can adequately finance its portfolio given current
market conditions.
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, during the first quarter of
1999, the Company has used the proceeds of sales of, and payments from, its
portfolio securities to repurchase 14,400 shares of Common Stock for $69,038 in
open market transactions. Such purchases were made at a weighted average price
per share of $4.79 (excluding commission costs). As of December 31, 1998, the
Company had repurchased 2,300,466 shares of Common Stock for $19.3 million in
open market transactions. Such purchases were made at a weighted average price
per share of $8.41 (excluding commission costs). The repurchased shares have
been returned to the Company's authorized but unissued shares of Common Stock as
treasury shares.
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, 1999 was $79.0 million, or $4.44 per
share, compared to $127.6 million, or $7.17 per share, at December 31, 1998. If
the Company had used historical amortized cost accounting, the Company's equity
base at March 31, 1999 would have been $93.5 million, or $5.25 per share
compared to $142.3 million, or $7.99 per share, at December 31, 1998.
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 (Loss)" and in the statement of
operations under "Other Comprehensive 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 mark-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 $(14.5) million, or (3.82)% of the amortized cost of securities at March 31,
1999 and $(14.7) million, or (1.75)% of the amortized cost of securities at
December 31, 1998.
In accordance with SFAS No. 115, an entity should recognize an
other-than-temporary impairment when it intends to sell a specifically
identified available-for-sale debt security at a loss shortly after the balance
sheet date. The write-down for the impairment should be recognized in earnings
in the period in which the decision is made. The Company reclassified an amount
of approximately $4.2 million from unrealized loss to realized loss for
securities sold in April 1999, as the decision to sell them was made in March
1999.
The table below shows the Company's equity capital base as reported
and on a historical amortized cost basis at March 31, 1999 and at December 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 "Accumulated Other Comprehensive Income (Loss)" 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>
At March 31, 1999 $ 93,542 $(14,543) $ 78,999 $5.25 $4.44
At December 31, 1998 $142,303 $(14,746) $127,557 $7.99 $7.17
</TABLE>
CAPITAL AND LEVERAGE STRATEGIES
The Company's operations are leveraged approximately 10 to 1 at March
31, 1999 compared to 6.9 to 1 at December 31, 1998. At March 31, 1999, the
Company's equity-to-assets ratio was 9.9%, and has ranged from a high of
approximately 16.6% to a low of approximately 4.1% during the past 12 months.
Initially, the Company financed its acquisition of Mortgage Assets through
proceeds of its initial public offering and several concurrent private
placements, and currently finances any acquisitions primarily by borrowing
against or "leveraging" its existing portfolio and using the proceeds to acquire
additional Mortgage Assets. The Company's target for its equity-to-assets ratio
depends on market conditions and other relevant factors.
The equity-to-assets ratio is total stockholders' equity as a
percentage of total assets. The Company's total stockholders' equity, for
purposes of this calculation, equals the Company's stockholders' equity
determined in accordance with GAAP. 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
Mortgage Assets, the Company obtains market quotes for its Mortgage Assets from
independent broker-dealers that make markets in securities similar to those in
the Company's portfolio. The Board of Directors has discretion to deviate from
or change the Company's indebtedness policy at any time. However, the Company
endeavors 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 Mortgage Assets. These conditions could occur, for
example, when, due to interest rate fluctuations, interest income on the
Company's Mortgage Assets (which occur during periods, such as the first three
quarters of 1998, 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.
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
The Company uses computer software programs and operating systems in
its internal operations relating to the management of the Company and its
portfolio. The year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year and impacts both
information technology ("IT") and non-IT systems. Any of the Company's computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could cause the Company to incur
expenses and the risk and potential expense of any disruptions that may be
caused by the software's impaired functioning as the year 2000 approaches and by
the modification or replacement of such software.
The Company does not own or license any proprietary IT systems in its
operations and relies on the IT systems of third parties, for its operations.
The ability of these third parties with whom the Company transacts business to
address adequately their year 2000 compliance is beyond the Company's control.
The Company has started the process of contacting these parties and others with
whom the Company does significant business to determine their year 2000
compliance status and the extent to which the Company could be affected by any
third party year 2000 compliance issues. There can be no assurance that the
systems of other companies with whom the Company does business or upon which the
Company's systems rely will be timely converted, or that a failure to convert by
another company, or a conversion that is incompatible with the Company's
systems, would not have a material adverse effect on the Company. The Company is
currently in the process of assessing its non-IT systems for year 2000
compliance.
The costs incurred by the Company to address year 2000 compliance have
not had, and are not anticipated to have, a material adverse effect on the
Company's business, financial condition, results of operations or ability to
sustain growth. The costs are based on management's best estimates, which were
derived using numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ from those plans.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133")
was issued and is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. SFAS No. 133 generally requires that entities recognize all
derivative financial instruments as assets or liabilities, measured at fair
value, and include in earnings the changes in the fair value of such assets and
liabilities. SFAS No. 133 also provides that changes in the fair value of assets
or liabilities being hedged with recognized derivative instruments be recognized
and included in earnings. The Company has not yet completed its evaluation of
SFAS No. 133, and therefore, at this time, cannot predict what, if any, effect
its adoption will have on the Company's financial condition or results of
operations.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
At March 31, 1999, there were no legal proceedings to which the
Company was a party or of which any of its properties were 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
None.
Item 5. Other Information
As of April 30, 1999, the Company estimates that its net asset value
per share was between $4.35 and $4.85 per share. As of that date, the Company
estimates that its portfolio was comprised of approximately $213 million of
Agency Certificates, $44 million of Subordinate Interests, $10 million of IOs,
$9 million of CMOs, $7 million of Mortgage Loans and $7 million of other
fixed-income assets, none of which were emerging market securities.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27.1 - Financial Data Schedule
(b) Reports
On March 5, 1999, the Company filed a Current Report on Form 8-K
regarding a press release issued by the Company announcing that the Company and
the Former Manager terminated the agreement under which the Former Manager
served as the external manager of the Company; that the Company had become
internally advised with Robert J. Gartner, Vice President of the Company, being
responsible for day-to-day investment decisions for the Company; that BlackRock
Financial Management, Inc. had agreed to extend its consulting engagement with
the Company; that Thomas Jonovich, Chief Financial Officer and Treasurer of the
Company, and Jonathan Green, General Counsel of the Company, resigned effective
March 2, 1999; and that Peter T. Zimmermann, Vice President and Chief Operating
Officer of the Company, resigned effective January 11, 1999.
On April 6, 1999, the Company filed a Current Report on Form 8-K
regarding a press release issued by the Company announcing that the Board of
Directors declared on March 30, 1999 a special first quarter distribution in
cash of $2.00 per share of Common Stock, payable on April 30, 1999.
<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 14, 1999 By: /S/ ROBERT J. GARTNER
---------------------
Robert J. Gartner
Vice President
(principal accounting officer)
(authorized officer of registrant)
<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.
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARCH
31, 1999 QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH
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