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Previous: CLAIMSNET COM INC, 8-K, EX-99.1, 2000-11-14 |
Next: LASER MORTGAGE MANAGEMENT INC, 10-Q, EX-27, 2000-11-14 |
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: September 30, 2000
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 (State or other jurisdiction of incorporation or organization) |
22-3535916 (I.R.S. Employer Identification No.) |
c/o Mariner Mortgage Management LLC
65 East 55th Street
New York, New York 10022
(Address of principal executive offices)
(Zip Code)
(212) 758-6200
(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: 14,038,983 shares of common stock, $0.001 par value, outstanding as of November 8, 2000
LASER MORTGAGE MANAGEMENT, INC.
FORM 10-Q
INDEX
| PART I. | FINANCIAL INFORMATION | 3 |
| Item 1. | Financial Statements Balance Sheet at September 30, 2000 (Unaudited) and December 31, 1999 |
3 3 |
| Statement of Operations (Unaudited) for the Three
Months and Nine Months Ended September 30, 2000 and September 30, 1999 |
4 |
| Statement of Stockholders' Equity (Unaudited) for the Nine Months Ended September 30, 2000 | 5 |
| Statement of Cash Flows (Unaudited) for the Three Months and Nine Months Ended September 30, 2000 and September 30, 1999 |
6 |
| Notes to Financial Statements | 7 |
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 16 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 28 |
| PART II. | OTHER INFORMATION | 30 |
| Item 1. | Legal Proceedings | 30 |
| Item 2. | Changes in Securities and Use of Proceeds | 30 |
| Item 3. | Defaults Upon Senior Securities | 30 |
| Item 4. | Submission of Matters to a Vote of Security Holders | 30 |
| Item 5. | Other Information | 30 |
| Item 6. | Exhibits and Reports on Form 8-K | 30 |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LASER MORTGAGE MANAGEMENT, INC.
BALANCE SHEET AT SEPTEMBER 30, 2000 DECEMBER 31, 1999
(Unaudited)
ASSETS
Cash and cash equivalents................................ $ 11,299,110 $ 16,065,024
Investment in securities at fair value................... 318,110,715 97,147,637
Investment in mortgage loans at amortized cost........... 3,059,052 3,804,632
Receivable for securities sold........................... 9,890,209 --
Accrued interest and principal paydown receivable........ 2,144,164 840,459
Margin deposits on repurchase agreements................. -- 425,000
Prepaid assets........................................... 1,836,705 --
---------------- --------------
Total assets................................. $ 346,339,955 $ 118,282,752
================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Repurchase agreements.................................. 280,783,000 44,018,000
Accrued interest payable............................... 450,166 149,260
Accounts payable and accrued expenses.................. 690,918 1,081,061
Payable to manager..................................... 112,005 42,754
---------------- --------------
Total liabilities............................... 282,036,089 45,291,075
---------------- --------------
STOCKHOLDERS' EQUITY:
Common stock: par value $.001 per share;
100,000,000 shares authorized, 20,118,749 and
20,118,749 shares issued, respectively............... 20,119 20,119
Additional paid-in capital............................. 283,012,967 283,012,967
Accumulated other comprehensive loss................... (21,371,733) (12,422,818)
Accumulated distributions and losses................... (164,509,056) (167,921,096)
Treasury stock at cost (6,079,766 and 5,254,166
shares respectively)............... (32,848,431) (29,697,495)
---------------- --------------
Total stockholders' equity...................... 64,303,866 72,991,677
---------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............... $ 346,339,955 $ 118,282,752
================== ===============
See notes to financial statements.
LASER MORTGAGE MANAGEMENT, INC.
STATEMENT OF OPERATIONS (UNAUDITED) FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
Interest income:
Mortgage loans and securities........ $ 6,004,785 $ 3,854,058 $ 11,251,204 $ 26,074,650
Cash and cash equivalents............ 120,743 595,217 1,176,664 1,559,424
------------ ------------ ------------ ------------
Total interest income....... 6,125,528 4,449,275 12,427,868 27,634,074
------------ ------------ ------------ ------------
Interest expense:
Securities sold short................ -- -- 242,101 --
Repurchase agreements................ 3,874,009 1,996,483 6,207,614 15,972,392
------------ ------------ ------------ ------------
Total interest expense...... 3,874,009 1,996,483 6,449,715 15,972,392
------------ ------------ ------------ ------------
Net interest income.................... 2,251,519 2,452,792 5,978,153 11,661,682
Gain (loss) on sale of securities,
swaps and termination of
repurchase agreement................. 371,115 (2,191,446) (1,641,134) (23,415,673)
General and administrative expenses.... 318,587 945,328 924,979 3,191,367
------------ ------------ ------------ ------------
Net income (loss)...................... $ 2,304,047 $ (683,982) $ 3,412,040 $(14,945,358)
============= ============= ============= ============
Unrealized gain (loss) on securities:
Unrealized holding gain (loss)
arising during period................ $ 138,877 $ (210,679) $(10,590,049) $(16,523,241)
Add: reclassification adjustment
for (gain) loss included in net
income (loss)........................ (371,115) 2,191,446 1,641,134 23,415,673
------------ ------------ ------------ ------------
Other comprehensive (loss) income...... (232,238) 1,980,767 (8,948,915) 6,892,432
------------ ------------ ------------ ------------
Comprehensive income (loss)............ $ 2,071,809 $ 1,296,785 $ (5,536,875) $ (8,052,926)
============= ============= ============ ============
Net income (loss) per share:
Basic................................ $ 0.16 $ (0.04) $ 0.24 $ (0.85)
============= ============= ============ ============
Diluted.............................. $ 0.16 $ (0.04) $ 0.24 $ (0.85)
============= ============= ============ ============
Weighted average number of shares
outstanding:
Basic................................ 14,038,983 17,223,109 14,481,532 17,601,921
============= ============= ============ ============
Diluted.............................. 14,038,983 17,223,109 14,481,532 17,601,921
============= ============= ============ ============
See notes to financial statements.
STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
Common Additional Comprehensive
Stock Paid-in Income
Par Value Capital (Loss)
BALANCE
DECEMBER 31, 1999....................... $ 20,119 $283,012,967
Comprehensive income
Net income................................. $ 3,412,040
Other comprehensive loss
Unrealized loss on securities,
Net of reclassification adjustment... (8,948,915)
-------------
Comprehensive loss........................... $ (5,535,875)
==============
Repurchase of common stock...................
----------- ------------
BALANCE SEPTEMBER 30, 2000................... $ 20,119 $283,012,967
========== ============
Unrealized holding losses arising during
period....................................... (10,590,049)
Add: reclassification adjustment for losses
included in net loss.................... 1,641,134
-------------
Net unrealized losses on securities.......... $ (8,948,915)
=============
Accumulated
Other
Comprehensive Accumulated Treasury
Income Distributions Stock
(Loss) and Losses at Cost Total
BALANCE
DECEMBER 31, 1999................... $ (12,422,818) $(167,921,096) $(29,697,495) $72,991,677
Comprehensive income
Net income............................. 3,412,040 3,412,040
Other comprehensive loss
Unrealized loss on securities,
Net of reclassification
adjustment...................... (8,948,915) (8,948,915)
Comprehensive loss.......................
Repurchase of common stock............... (3,150,936) (3,150,936)
-------------- ------------- ------------- -----------
BALANCE SEPTEMBER 30, 2000............... $ (21,371,733) $(164,509,056) $(32,848,431) $ 64,303,866
================ ============== ============== ===========
Unrealized holding losses arising
during period............................
Add: reclassification adjustment
for losses included in net..........
Net unrealized losses on securities......
See notes to financial statements.
STATEMENT OF CASH FLOWS (UNAUDITED) FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................. $2,304,047 $(683,982) $3,412,040 $(14,945,358)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Amortization of mortgage premiums and
discounts, net............................... (66,142) 485,020 (434,889) 2,215,858
(Gain) loss on sale of securities............ (371,115) 2,191,446 1,641,134 23,415,673
(Increase) decrease in accrued interest
receivable................................. 134,512 2,685,154 (1,303,705) 8,062,783
Decrease in variation margin on interest
rate swaps................................. -- -- 425,000 --
Decrease in margin deposits on repurchase
agreements ................................ -- -- -- 7,117,098
Decrease (increase) in other assets.......... 18,030 66,244 (1,836,705) (45,451)
(Decrease) increase in accrued interest
payable.................................... (17,568) (114,931) 300,907 (2,138,936)
Increase (decrease) in accounts payable and
accrued expenses........................... 168,930 504,909 (390,143) (1,197,363)
Increase (decrease) in payable to Manager.... 50,210 -- 69,251 (1,125,000)
---------- ---------- ----------- ------------
Net cash provided by operating activities.. 2,220,904 5,133,860 1,882,890 21,359,304
========== =========== =========== ============
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities......................... (53,274,121) -- (424,419,633) --
Proceeds from sale of securities............... 21,647,051 6,245,873 182,955,851 577,131,882
(Increase) decrease in receivables for
securities sold.............................. (9,890,209) 75,368,727 (9,890,209) (3,512)
Decrease in payables for securities purchased (81,110,628) -- -- --
Principal payments on securities............... 6,743,043 6,491,188 11,091,124 62,911,590
Other payables................................. -- -- -- 1,932,774
---------- ---------- ----------- ------------
Net cash (used in) provided by investing
activities................................ (115,884,864) 88,105,788 (240,262,867) 641,972,734
============= ============ ============ ============
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements............ 631,106,000 425,974,000 1,042,248,625 3,240,819,246
Principal payments on repurchase agreements.... (509,992,000)(509,420,610) (805,483,625) (3,849,811,157)
Payments for repurchase of common stock........ -- (9,958,238) (3,150,937) (10,173,282)
Distributions paid to stockholders............. -- -- -- (35,607,766)
---------- ---------- ----------- ------------
Net cash provided by (used in) financing
activities................................ 121,114,000 (93,404,848) 233,614,063 (654,772,959)
=========== =========== =========== ============
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................. 7,450,040 (165,200) (4,765,914) 8,559,079
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD... 3,849,070 39,117,107 16,065,024 30,392,828
---------- ---------- ----------- ------------
CASH AND CASH EQUIVALENTS, END OF
PERIOD........................................... $ 11,299,110 $ 38,951,907 $ 11,299,110 $ 38,951,907
============ ============= ============ ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid.................................. $ 3,891,577 $ 2,111,414 $ 6,148,809 $ 18,111,328
============ ============= ============ ==============
Noncash financing activities:
Net change in unrealized gain (loss) on
available-for-sale securities.............. $ (232,238) $ 1,980,767 $ (8,948,915) $ 6,892,432
============ ============= ============ ==============
See notes to financial statements.
LASER MORTGAGE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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 and nine-month periods are unaudited; however, in the opinion of the Company’s management, all adjustments, consisting only of normal recurring accruals, necessary for a fair statement of the results of operations have been included. These unaudited financial statements should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 1999. 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 2000 presentation.
A summary of the Company's significant accounting policies follows:
Cash and Cash Equivalents - Cash and cash equivalents include cash on hand and overnight repurchase agreements. The carrying amounts of cash equivalents approximate their value.
Investments - The Company invests primarily in mortgage-backed securities and mortgage loans. The mortgage-backed securities include mortgage pass-through certificates, collateralized mortgage obligations and other securities representing interests in, or obligations backed by, pools of mortgage loans (collectively, "Mortgage Securities"). The Company also invests in other debt and equity securities ("Other Securities" and, together with Mortgage Securities, "Securities"). The mortgage loans are secured by first or second liens on single-family residential, multi-family residential, commercial or other real property ("Mortgage Loans" and, together with Securities, "Investments").
Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities ("SFAS No. 115"), requires the Company to classify its Securities as either trading investments, available-for-sale investments or held-to-maturity investments. Although the Company generally intends to hold most of its Securities until maturity, it may, from time to time, sell any of its Securities as part of its overall management of its balance sheet. Accordingly, this flexibility requires the Company to classify all of its Securities as available-for-sale. All Securities classified as available-for-sale are reported at fair value, with unrealized gains and losses reported as a separate component of stockholders’ equity within accumulated other comprehensive income (loss).
Unrealized losses on Securities that are considered other-than-temporary, as measured by the amount of decline in fair value attributable to factors other than temporary 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.
Interest Rate Swaps - In 1998, 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 met 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. Swaps that did not meet these criteria were carried at fair value with changes reflected in income currently.
The gain or loss on the terminated swaps were deferred and amortized as a yield adjustment over the shorter of the remaining original term of the swap or the remaining holding period of the investment securities. 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 ("GAAP") 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") and interest rate caps, as of September 30, 2000 and December 31, 1999:
September 30, 2000
Agency Fixed/
Floating Rate Non-
Mortgage Mortgage Mortgage
Securities Subordinates Subordinates Total
Securities, principal amount $292,520,905 $33,570,410 $6,379,668 $332,470,983
Unamortized discount (4,629,456) (8,668,076) (661,965) (13,959,497)
Unamortized premium 3,098,656 4,735 -- 3,103,391
------------ ------------ ---------- ------------
Amortized cost 290,990,105 24,907,069 5,717,703 321,614,877
Gross unrealized gains 2,386,228 41,143 -- 2,427,371
Gross unrealized losses (14,358) (17,561,891) (2,624,479) (20,200,728)
------------ ----------- ------------ -------------
Estimated fair value $293,361,975 $ 7,386,321 $3,093,224 $303,841,520
============ =========== ============ ===========
The Company was notified in June 2000 of a default in a $50.0 million mortgage loan in a trust fund of which the Company owns subordinated interests. The assets that are affected by this reduction are subordinated classes of Commercial Mortgage Pass-Through Certificates, Series 1997-D5 that represent beneficial ownership interests in a trust fund created by Asset Securitization Corporation ("ASC"), an affiliate of Nomura Securities International, Inc. at the time of the offering. Thereafter, a representative of Nomura Securities notified a representative of the Company that the recovery on this loan may be negligible. As a result, the Company's management is of the opinion that the ASC securities owned by the Company may have little or no value. Accordingly, management has decided to reduce the carrying value of these assets to $1.00, pending further developments. The amount of the write-down, approximately $9.0 million, is included in "Unrealized holding gain (loss) arising during period" in the accompanying statement of operations. A recovery on this investment may be possible, but management is unable to predict the likelihood of this occurrence.
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 $2.1 million from unrealized loss to realized loss for securities sold in October 1999, as the decision to sell them was made in September 1999.
December 31, 1999
Agency
Fixed/
Floating
Rate Non-
Mortgage Mortgage Mortgage
Securities Subordinates Subordinates Total
Securities, principal amount $67,029,843 $59,760,702 $6,436,914 $133,227,459
Unamortized discount (1,131,485) (24,333,991) (661,965) (26,127,441)
Unamortized premium 314,971 -- -- 314,971
----------- ------------ ----------- -------------
Amortized cost 66,213,329 35,426,711 5,774,949 107,414,989
Gross unrealized losses (1,411,395) (16,866,092) (559,880) (18,837,367)
----------- ------------ ----------- -------------
Estimated fair value $64,801,934 $18,560,619 $5,215,069 $88,577,622
=========== =========== =========== =============
The fair value of the Company's IOs, all of which are floating rate, as of September 30, 2000 and December 31, 1999 are summarized as follows:
September 30, 2000 December 31, 1999
Total Total
Securities, notional amount $43,188,719 $56,322,389
============ ============
Amortized cost, after provision
for impairment 14,872,545 2,155,466
Gross unrealized gains -- 6,414,549
Gross unrealized losses (1,648,188) --
------------ ------------
Estimated fair value $ 13,224,357 $ 8,570,015
============ ============
During the nine months ended September 30, 2000, the Company purchased an interest rate cap with a notional amount of $100 million. At September 30, 2000, the Company’s interest rate cap was classified as trading and, therefore, reported at fair value in accordance with SFAS 115. For the three and nine months ended September 30, 2000, the Company recognized market losses of approximately $0.7 million and $1.9 million, respectively, on the interest rate cap.
The fair value of the Company's interest rate cap as of September 30, 2000 is summarized as follows:
September 30, 2000
Amortized cost $ 2,960,000
Unrealized losses (1,915,162)
------------------
Estimated fair value $ 1,044,838
==================
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.
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.
3. MORTGAGE LOANS
The following tables pertain to the Company’s Mortgage Loans as of September 30, 2000 and December 31, 1999 which are carried at their amortized cost:
September 30, 2000 December 31, 1999
Mortgage Loans, principal amount $2,977,880 $3,653,788
Unamortized discount -- --
Unamortized premium 81,172 150,844
----------- ----------
Amortized cost $3,059,052 $3,804,632
========== ==========
As of September 30, 2000 and December 31, 1999, the amortized cost of the Mortgage Loans approximated their fair value.
4. REPURCHASE AGREEMENTS
The Company has entered into repurchase agreements to finance most of its Investments. The repurchase agreements are collateralized by the market value of the Company's Investments and bear interest rates that generally move in close relation to one-month LIBOR.
As of September 30, 2000, the Company had outstanding $280.8 million of repurchase agreements with a weighted average borrowing rate of 6.60% and a weighted average remaining maturity of 19 days. At September 30, 2000, Investments actually pledged had an estimated fair value of $292.7 million.
As of December 31, 1999, the Company had outstanding $44.0 million of repurchase agreements with a weighted average borrowing rate of 5.90% and a weighted average remaining maturity of 12 days. At December 31, 1999, Investments actually pledged had an estimated fair value of $45.4 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 Company's former investment adviser (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 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 sold 15,000,000 shares of common stock through a public offering for $225,000,000. Syndication costs of $18,364,795 were deducted from the gross proceeds of the offering.
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 - The Company did not declare or pay any dividends or distributions during the nine months ended September 30, 2000. The Company declared distributions in cash of $2.00 per share during the year ended December 31, 1999.
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 and November 1998, the Board of Directors increased the amount of common stock authorized to be repurchased to $30 million and $40 million, respectively. Pursuant to the repurchase program, during the nine months ended September 30, 2000, the Company repurchased 825,600 shares of common stock for approximately $3.1 million or a weighted average share price of $3.82 per share (excluding commission) and during the year ended December 31, 1999, the Company repurchased 2,953,700 shares of common stock for approximately $10.0 million or a weighted average share price of $3.50 per share (excluding commission). The Company did not make any stock repurchases during the three months ended September 30, 2000. The repurchased shares have been returned to the Company’s authorized but unissued shares of common stock as treasury shares.
6.
TRANSACTIONS WITH AFFILIATES AND TERMINATION
OF MANAGEMENT AGREEMENT
Pursuant to the terms of a Management Agreement (the "LASER Advisers 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 1.00% 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 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.
The Company and the Former Manager terminated the LASER Advisers Management Agreement effective as of February 28, 1999. In connection therewith, the Company agreed to pay to the Former Manager: (a) $416,505, which represented the base management fee payable under the LASER Advisers 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 LASER Advisers Management Agreement for the period January 1, 1999 through February 28, 1999 and for certain transition services with respect to internalizing the advisory function.
On November 1, 1999, the Company announced that Mariner Mortgage Management, L.L.C. ("Mariner") agreed to serve as the external manager of the Company and be responsible for day-to-day management of the Company"s investments. William J. Michaelcheck, the Chairman of Mariner, was appointed President and Chief Executive Officer of the Company and Charles R. Howe, Chief Financial Officer of Mariner, serves as the Company's Chief Financial Officer. The Company terminated its consulting arrangement with BlackRock Financial Management, Inc. ("BlackRock").
Under the Company"s management agreement with Mariner (the "Mariner Management Agreement"), Mariner was entitled to receive an (1) annual base management fee payable monthly in cash equal to 0.45% of the aggregate value of the Company’s outstanding equity as of the end of such month and (2) incentive fee payable annually in newly issued stock of the Company. The incentive fee was payable based on the number of shares outstanding on November 1, 2000, multipled by:
| • | 10% of the difference between the market price of the Company’s common stock (plus any distributions) on November 1, 2000 (or such earlier date when the agreement is terminated) and $3.63 per share (which approximates the average closing price of the Company’s common stock for the fifteen days ended October 29, 1999) up to the equivalent of $4.00 per share; |
| • | 15% of the difference over $4.00 per share up to $4.50 per share; and |
| • | 20% of the difference over $4.50 per share. |
The Mariner Management Agreement had a one-year term, but was terminable by the Company without cause or penalty on 30 days’ notice. Mariner could terminate the agreement in limited circumstances. In addition, Mariner was entitled to receive a minimum fee if the Company adopted a plan of liquidation prior to the expiration of the Mariner Management Agreement.
Pursuant to the Mariner Management Agreement, the Company incurred base management fees of $50,210 and $176,973 for the three and nine months ended September 30, 2000. At September 30, 2000, base management fees of $112,005 were payable to Mariner. No incentive fee was earned for the three and nine months ended September 30, 2000. At December 31, 1999, base management fees of $42,754 were payable to Mariner under this agreement.
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 the three and nine months ended September 30, 2000, as shown in the table below.
For the Three Months Ended For the Nine Months Ended
September 30, 2000 September 30, 2000
Loss Shares Per-Share Loss Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Basic EPS $2,304,047 $14,038,983 $0.16 $3,412,040 $14,481,532 $0.24
Diluted EPS $2,304,047 $14,038,983 $0.16 $3,412,040 $14,481,532 $0.24
For the three and nine months ended September 30, 2000, the Company had no deferred common stock reserved for issuance.
For the three and nine months ended September 30, 2000, options to purchase 7,500 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. Therefore, these options were excluded from Diluted EPS.
There are no differences between Basic EPS and Diluted EPS for the three months and nine months ended September 30, 1999, as shown in the table below.
For the Three Months Ended For the Nine Months Ended
September 30, 1999 September 30, 1999
Loss Shares Per-Share Loss Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Basic EPS $ (683,982) 17,223,109 $ (0.04) $(14,945,358) 17,601,921 $ (0.85)
Diluted EPS $(683,982) 17,223,109 $ (0.04) $(14,945,358) 17,601,921 $ (0.85)
For the three and nine months ended September 30, 1999, the Company had no deferred common stock reserved for issuance.
For the three and nine months ended September 30, 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. Therefore, these options were excluded from Diluted EPS.
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:
For the Three Months Ended For the Nine Months Ended
September 30, 2000 September 30, 2000
Net earnings (loss) - as reported $ 2,304,047 $ 3,412,040
Net earnings (loss) - pro forma $ 2,298,456 $ 3,406,449
(Loss) earnings per share - as reported $ 0.16 $ 0.24
(Loss) earnings per share - pro forma $ 0.16 $ 0.24
For the Three Months Ended For the Nine Months Ended
September 30, 1999 September 30, 1999
Net loss - as reported $ (683,982) $ (14,945,358)
Net loss - pro forma $ (684,049) $ (14,945,425)
Loss per share - as reported $ (0.04) $ (0.85)
Loss per share - pro forma $ (0.04) $ (0.85)
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 and nine months ended September 30, 2000 and 1999: dividend yield of 0%; expected volatility of 22%; risk-free interest rate of 5.82%; and expected lives of ten years.
The following table summarizes information about stock options outstanding as of September 30, 2000 and 1999:
Weighted
Average Weighted
Range of Remaining Average
Exercise Options Contractual Exercise
Prices Outstanding Life (Yrs.) Price
September 30, 2000 $ 15.00 7,500 7.4 $ 15.00
September 30, 1999 $ 15.00 72,000 8.2 $ 15.00
The options become exercisable at the rate of 25% on each of January 2, 1998, January 2, 1999, January 2, 2000 and January 2, 2001, subject to the holder's continued employment or service. During the year ended December 31, 1999, 64,500 stock options terminated.
9. TAXABLE INCOME
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. The Company elected mark-to-market treatment as a securities trader, 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. 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.
Net operating losses ("NOLs") may be carried forward for 20 years. Taxable income (loss) requires an annual calculation; consequently, for the year ended December 31, 2000, taxable income (loss) may be different from net income (loss) as calculated according to GAAP income (loss) as a result of differing treatment of unrealized gains and losses on securities transactions. For the Company’s tax purposes, unrealized gains (losses) will be recognized at the end of the year and will be aggregated with operating gains (losses) to produce total taxable income (loss) for the year. For the year ended December 31, 1999, the NOL was $(60.0) million.
Taxable income (loss) requires an annual calculation; consequently, for the year ended December 31, 2000, taxable income (loss) may be different from GAAP income (loss) as a result of differing treatment of unrealized gains and losses on securities transactions. For the Company's tax purposes, unrealized gains (losses) will be recognized at the end of the year and will be aggregated with operating gains (losses) to produce total taxable income (loss) for the year.
10. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133") which, as issued, was 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. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," which deferred the effective date of FASB No. 133 for one year to fiscal years beginning after June 15, 2000. The Company has not yet completed its evaluation of SFAS No. 133, as amended by SFAS No. 138, 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.
11. SUBSEQUENT EVENTS
On October 6, 2000, the Company announced that the Board of Directors authorized management to prepare a plan of liquidation and an on-going business plan for the Company. The Board of Directors intends to consider both alternatives within the next few months. The Company also announced the appointment of two new directors, Mark Hobbs and Arthur House, and its acceptance of the resignation of two directors, Frederick Khedouri and Stuart Coleman.
On October 23, 2000, the Company filed suit in federal court in the Southern District of New York against Asset Securitization Corp., Nomura Asset Capital Corp. and Nomura Securities International Inc. alleging that the defendants defrauded the Company into purchasing over $19.0 million worth of mortgage pass-through certificates by failing to disclose among other things, that one of largest loans in the mortgage pool was seriously troubled. The Company is seeking rescission of the purchase of the mortgage pass-through certificates.
On November 3, 2000, the Company announced that the management agreement with Mariner was extended for an additional one-year term, with the Company retaining the right to terminate the management agreement on 30 days' notice. A copy of the Amendment to the Management Agreement has been filed on Form 8-K with the SEC. LASER's Board of Directors presently intends to reconsider the issue of the Company's management after a decision has been reached regarding the future direction of the Company.
* * * * *
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
LASER Mortgage Management, Inc. (the "Company"), a Maryland corporation, 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").
Mariner, an affiliate of Mariner Investment Group, Inc., manages the Company's day-to-day operations.
The Company is authorized to acquire the following types of investments:
| • | 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"); |
| • | collateralized mortgage obligations, including regular interests in real estate mortgage investment conduits ("CMOs"), which are fixed and adjustable rate debt obligations collateralized by Mortgage Loans or Pass-Through Certificates; |
| • | Mortgage Loans; |
| • | 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; |
| • | 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 |
| • | other fixed-income securities in an amount not to exceed 5% of total assets. |
The Company maintained a portfolio at its peak of approximately $3.8 billion of Mortgage Assets in June 1998. From June 1998 through March 2000, the Company delevered 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. In November 1999, the Company announced that its Board of Directors authorized management to conduct a competitive sale of its less liquid portfolio assets as part of its ongoing program to reduce the volatility of the Company's assets. As of September 30, 2000, the Company had approximately $3.0 million of these assets remaining to be sold. During the three months ended September 30, 2000, the Company relevered its portfolio of Agency Securities in an effort to increase its return on equity without taking a substantial credit and interest rate risk. To increase its portfolio of Agency Certificates, the Company increased it borrowings.
The Company has elected to be taxed and intends to continue to qualify as a real estate investment trust (a "REIT") under the Internal Revenue Code of 1986, as amended (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
On October 6, 2000, the Company announced that the Board of Directors authorized management to prepare a plan of liquidation and an on-going business plan for the Company. The Board of Directors intends to consider both alternatives within the next few months. The Company also announced the appointment of two new directors, Mark Hobbs and Arthur House, and its acceptance of the resignation of two directors, Frederick Khedouri and Stuart Coleman.
On October 23, 2000, the Company filed suit in federal court in the Southern District of New York against Asset Securitization Corp., Nomura Asset Capital Corp. and Nomura Securities International Inc. alleging that the defendants defrauded the Company into purchasing over $19.0 million worth of mortgage pass-through certificates by failing to disclose among other things, that one of largest loans in the mortgage pool was seriously troubled. The Company is seeking rescission of the purchase of the mortgage pass-through certificates.
On November 3, 2000, the Company announced that the management agreement with Mariner was extended for an additional one-year term, with the Company retaining the right to terminate the management agreement on 30 days' notice. A copy of the Amendment to the Management Agreement has been filed on Form 8-K with the SEC. LASER's Board of Directors presently intends to reconsider the issue of the Company's management after a decision has been reached regarding the future direction of the Company.
Results of Operations for the Three and Nine Months Ended
September 30, 2000
Compared to the Three and Nine Months Ended September 30,
1999
Net Income (Loss) Summary
For the three months ended September 30, 2000, the Company had net income of $2.3 million, or $0.16 per weighted average share, compared to a net loss of $(0.7) million, or $(0.04) per weighted average share for the three months ended September 30, 1999. The weighted average number of shares of common stock outstanding for the three months ended September 30, 2000 and 1999 was 14,038,983 and 17,223,109, respectively. No dividends were declared during the three months ended September 30, 2000 and 1999. Return on average equity was 3.68% and (0.83%) on an unannualized basis for the three months ended September 30, 2000 and 1999, respectively.
For the nine months ended September 30, 2000, the Company had net income of $3.4 million, or $0.24 per weighted average share, compared to a net loss of $(14.9) million, or $(0.85) per weighted average share for the nine months ended September 30, 1999. The weighted average number of shares of common stock outstanding for the nine months ended September 30, 2000 and 1999 was 14,481,532 and 17,601,921, respectively. No dividends were declared during the nine months ended September 30, 2000. Distributions declared per share were $2.00, and $35.6 million in total, for the nine months ended September 30, 1999. Return on average equity was (4.67%) and (15.75%) on an unannualized basis for the nine months ended September 30, 2000 and 1999, respectively.
The realized gains (losses) during the three months ended September 30, 2000, were approximately $0.4 million, or $0.03 per weighted average share, compared to a loss of approximately $(2.2) million, or $(0.13) per weighted average share for the three months ended September 30, 1999. Excluding realized gains and losses, the Company's income for the three months ended September 30, 2000 was approximately $1.9 million, or $0.14 per weighted average share, compared to approximately $1.5 million, or $0.09 per weighted average share, for the three months ended September 30, 1999. The realized losses during the nine months ended September 30, 2000 were approximately $(1.6) million, or $(0.11) per weighted average share, compared to losses of approximately $(23.4) million, or $(1.33) per weighted average share, for the nine months ended September 30, 1999. Excluding realized gains and losses, the Company's income for the nine months ended September 30, 2000 was approximately $5.0 million, or $0.35 per weighted average share, compared to approximately $8.5 million, or $0.48 per weighted average share for the nine months ended September 30, 1999.
Taxable Income (Loss) and GAAP Income (Loss)
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. The Company elected mark-to-market treatment as a securities trader 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. 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.
NOLs may be carried forward for 20 years. Taxable income (loss) requires an annual calculation; consequently, for the year ended December 31, 2000, taxable income (loss) may be different from net income (loss) as calculated according to GAAP income (loss) as a result of differing treatment of unrealized gains and losses on securities transactions. For the Company's tax purposes, unrealized gains (losses) will be recognized at the end of the year and will be aggregated with operating gains (losses) to produce total taxable income (loss) for the year. As of December 31, 1999, the NOL carry forward is estimated at approximately $(112.5) million. The Company believes that during 1999 it experienced an "ownership change" within the meaning of Section 382 of the Code. Consequently, its use of NOL's generated before ownership change to reduce taxable income after the ownership change will be subject to limitations under Section 382.
Taxable income (loss) requires an annual calculation; consequently, for the year ended December 31, 1999, taxable income (loss) may be different from GAAP income (loss) as a result of differing treatment of unrealized gains and losses on securities transactions. For the Company's tax purposes, unrealized gains (losses) will be recognized at the end of the year and will be aggregated with operating gains (losses) to produce total taxable income (loss) for the year.
Taxable income and GAAP income (loss) could also differ for other reasons. For example, the Company may take credit provisions which would affect GAAP income whereas only actual credit losses are deducted in calculating taxable income. In addition, general and administrative expenses may differ due to differing treatment of leasehold amortization, certain stock option expenses and other items. For the nine months ended September 30, 2000, the Company took a $9.0 million credit provision on a mortgage security. See "Credit Considerations." For the nine months ended September 30, 1999, the Company did not take any credit provisions.
The distinction between taxable income 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 $325 million and $219 million for the three and nine months ended September 30, 2000, respectively, compared to average earning assets of $210 million and $477 million for the three and nine months ended September 30, 1999, respectively. The table below shows, for the three and nine months ended September 30, 2000 and 1999, 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.
AVERAGE EARNING ASSET YIELD
(dollars in thousands)
Yield
Yield on on
Average Yield on Average Average
Average Amortized Average Average Amortized Interest
Cash Cost of Earnings Cash Cost of Earning Interest
Equivalents Securities Assets Equivalents Securities Assets Income
For the three months
ended September 30, 2000 $7,402 $318,293 $325,695 6.38% 7.55% 7.52% $6,126
For the three months
ended September 30, 1999 $44,205 $166,034 $210,239 5.27% 9.08% 8.28% $4,449
For the nine months
ended September 30, 2000 $25,954 $193,419 $219,372 6.07% 7.80% 7.52% $12,428
For the nine months
ended September 30, 1999 $40,603 $436,042 $476,645 5.06% 7.89% 7.65% $27,634
Interest Expense and the Cost of Funds
For the three months ended September 30, 2000 and 1999, the Company had average borrowed funds of $247 million and $148 million, respectively, and total interest expense of $3.9 million and $2 million, respectively, with an average cost of funds of 6.11% and 5.27%, respectively. For the nine months ended September 30, 2000 and 1999, the Company had average borrowed funds of $134 million and $384 million, respectively, and total interest expense of $6 million and $16 million, respectively, with an average cost of funds of 5.97% and 5.48%, 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 will 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 0.51% less than one-month LIBOR for the three months ended September 30, 2000 compared to 0.01% less than one-month LIBOR for the three months ended September 30, 1999 and was 0.36% less than one-month LIBOR for the nine months ended September 30, 2000 compared to 0.41% above one-month LIBOR for the nine months ended September 30, 1999. The Company generally has structured its borrowings to adjust with one-month LIBOR. During the three months ended September 30, 2000, average one-month LIBOR, which was 6.33%, was 0.34% lower than average six month LIBOR, which was 6.67%. During the three months ended September 30, 1999, average one-month LIBOR, which was 5.28%, was 0.52% lower than average six month LIBOR, which was 5.80%.
The table below shows, for the three and nine months ended September 30, 2000 and 1999, the Company’s average borrowed funds and average cost of funds compared to average one and six-month LIBOR.
AVERAGE COST OF FUNDS
(dollars in thousands)
Average Average Average
One-Month Cost of Cost of
LIBOR Funds Funds
Relative to Relative Relative to
Average Average Average Average Average to Average Average
Borrowed Interest Cost of One-Month Six-Month Six-Month One-Month Six-Month
Funds Expense Funds LIBOR LIBOR LIBOR LIBOR LIBOR
For the three
months ended
September 30,
2000 $247,918 $ 3,874 6.11% 6.62% 6.84% (0.22)% (0.51)% (0.73)%
For the three
months ended
September 30,
1999 $148,273 $ 1,996 5.27% 5.28% 5.80% (0.52)% (0.01)% (0.53)%
For the nine
months ended
September 30,
2000 $134,310 $ 6,208 5.97% 6.33% 6.67% (0.34)% (0.36)% (0.69)%
For the nine
months ended
September 30,
1999 $384,259 $15,972 5.48% 5.07% 5.35% (0.28)% 0.41% 0.13%
Interest Rate Swaps
During the nine months ended September 30, 2000, the Company purchased an interest rate cap with a notional amount of $100 million. At September 30, 2000, the Company’s interest rate cap was classified as trading and, therefore reported at fair value. For the three months ended September 30, 2000, the Company recognized market losses of $1.9 million on the interest rate cap.
The Company did not enter into any swaps during the three and nine months ended September 30, 2000 and 1999.
Net Interest Income
Net interest income, which equals interest income less interest expense, totaled $2.3 million for the three months ended September 30, 2000 compared to $2.5 million for the three months ended September 30, 1999. Net interest income totaled $6.0 million for the nine months ended September 30, 2000 compared to $11.7 million for the nine months ended September 30, 1999. 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 1.41% and 1.55% for the three and nine months ended September 30, 2000, respectively, compared to 3.04% and 2.20% for the three and nine months ended September 30, 1999, respectively.
The table below shows interest income by earning asset type, average earning assets by type, total interest income, interest expense, average repurchase agreements, average cost of funds, and net interest income for the three and nine months ended September 30, 2000 and 1999.
NET INTEREST INCOME
(dollars in thousands)
Average Interest Net
Amortized Interest Average Income Income on Total
Cost of Income on Cash on Cash Contractual Interest
Securities Investments Equivalents Equivalents Commitments Income
For the three
months ended
September 30,
2000 $318,293 $6,005 $7,402 $121 $-- $6,126
For the three
months ended
September 30,
1999 $166,034 $3,854 $44,205 $595 $-- $4,449
For the nine
months ended
September 30,
2000 $193,419 $11,251 $25,954 $1,174 $-- $12,428
For the nine
months ended
September 30,
1999 $436,042 $26,075 $40,603 $1,559 $-- $27,634
Yield on
Average Average
Interest Balance of Average Net
Earning Repurchase Interest Cost of Interest
Assets Agreements Expense Funds Income
For the three
months ended
September 30,
2000 7.52% $247,918 $3,874 6.11% $2,252
For the three
months ended
September 30,
1999 8.28% $148,273 $1,996 5.27% $2,453
For the nine
months ended
September 30,
2000 7.52% $134,310 $6,208 5.97% $5,978
For the nine
months ended
September 30,
1999 7.65% $384,259 $15,972 5.48% $11,662
Credit Considerations
The Company was notified in June 2000 of a default in a $50,000,000 mortgage loan in a trust fund of which the Company owns subordinated interests. The assets that are affected by this reduction are subordinated classes of Commercial Mortgage Pass-Through Certificates, Series 1997-D5 that represent beneficial ownership interests in a trust fund created by Asset Securitization Corporation ("ASC"), an affiliate of Nomura Securities International, Inc. at the time of the offering. Thereafter, a representative of Nomura Securities notified a representative of the Company that the recovery on this loan may be negligible. As a result, the Company's management is of the opinion that the ASC securities owned by the Company may have little or no value. Accordingly, management has decided to reduce the carrying value of these assets to $1.00, pending further developments. The amount of the write-down, $9,049,309, is included in Unrealized holding gain (loss) arising during period in the accompanying statement of operations. A recovery on this investment may be possible, but management is unable to predict the likelihood of this occurrence. See "Recent Developments."
At September 30, 2000 and December 31, 1999, the Company had limited its exposure to credit losses on its portfolio by holding 92%, and 64%, respectively, of its investments in Agency Certificates.
General and Administrative Expenses
General and administrative expenses ("operating expense" or "G&A expense") were $319,000 and $925,000 for the three and nine months ended September 30, 2000, respectively. G&A expenses were $945,000 and $3.2 million for the three and nine months ended September 30, 1999, respectively, consisting of fees paid to BlackRock Financial Management, Inc. of $375,000 and $1.13 million, salary expenses of $150,000 and $350,000 and fees paid to the Former Manager of $0 and $500,000 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.
G&A EXPENSE RATIOS
(dollars in thousands)
Total Total
G&A G&A
Expense/ Expenses/
Manage- Other Total Average Average Efficiency
ment Consulting G&A G&A Assets Equity Ratio
Fee Fee Expense Expense (Annualized) (Annualized) (Annualized)
For the three
months ended
September 30,
2000 $50 $-- $269 $319 0.39% 2.04% 18.89%
For the three
months ended
Septempber 30,
1999 $-- $375 $570 $945 1.50% 4.50% 38.54%
For the nine
months ended
September 30,
2000 $177 $-- $748 $925 0.56% 1.69% 15.47%
For the nine
months ended
September 30,
1999 $500 $1,125 $1,475 $3,191 0.81% 4.43% 27.37%
Net Income (Loss) and Return on Average Equity
Net income was $2.3 million and $3.4 million for the three and nine months ended September 30, 2000, respectively, compared to net losses of $(0.68) million and $(14.95) million for the three and nine months ended September 30, 1999, respectively. Return on average equity, on an unannualized basis, for the three and nine months ended September 30, 2000 was 3.68% and 4.67%, respectively, compared to (0.83)% and (15.75)% for the three and nine months ended September 30, 1999, respectively.
The table below shows, on an unannualized basis, for the three and nine months ended September 30, 2000 and 1999 the Company's net interest income, gain (loss) on sale of securities and G&A expense each as a percentage of average equity, and the return on average equity.
COMPONENTS OF RETURN ON AVERAGE EQUITY
Gain (Loss)
Net Interest on Sale of Impairment
Income/ Securities/ Loss on Return on
Average Average Interest-Only G&A Expense/ Average
Equity Equity Securities Average Equity Equity
For the three months ended
September 30, 2000 3.59% 0.59% -- 0.51% 3.68%
For the three months ended
September 30, 1999 2.98% (2.66)% -- 1.15% (0.83)%
For the nine months ended
September 30, 2000 8.18% (2.25)% -- 1.27% 4.67%
For the nine months ended
September 30, 1999 12.29% (24.67)% -- 3.36% (15.75)%
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 three and nine months ended September 30, 2000 and 1999, the Company estimated that it had no taxable income. For the three and nine months ended September 30, 2000, the Company did not pay any dividends or distributions. For the three months ended September 30, 1999, the Company did not pay any dividends or distributions. For the nine months ended September 30, 1999, the Company made distributions totaling $35.6 million.
Financial Condition
Investments
As of September 30, 2000 and December 31, 1999 the Company's portfolio consisted of:
Dollar Amount Dollar Amount
Securities (in millions) Percentage (in millions) Percentage
---------- ------------- ---------- -------------- ----------
As of September 30, 2000 As of December 31, 1999
------------------------ -----------------------
Agency Certificates........ $294 92% $65 64%
Subordinate Interests...... 7 2% 19 19%
IOs........................ 13 4% 8 8%
Caps....................... 1 -- -- --
Mortgage Loans............. 3 1% 4 4%
Other fixed-income assets.. 3 1% 5 5%
------------------------------------------------------------------
Total................... $321 100% $101 100%
====== ======== =========== ===========
----------------
(1) Included no emerging market securities.
In an effort to increase its return on equity without taking what Mariner considered to be a substantial credit and interest rate risk, the Company increased its portfolio of Mortgage Assets during the nine months ended September 30, 2000, by relevering its portfolio of Agency Certificates. To increase its portfolio of Agency Certificates, the Company increased its borrowings.
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 September 30, 2000 and December 31, 1999, the Company had on its balance sheet (excluding IOs) $14 million and $26 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 million and $0.9 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 $28.3 million unamortized discount on IOs at September 30, 2000 compared to $54.2 million unamortized discount at December 31, 1999.
Mortgage principal repayments received were $11 million for the nine months ended September 30, 2000. 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 September 30, 2000 and December 31, 1999.
SECURITIES (EXCLUDING IOs)
(dollars in thousands)
Amortized Estimated Weighted
Cost to Fair Value Average
Principal Net Amortized Principal Estimated to Principal Life
Amount Discount Cost Amount Fair Value Amount (Years)
September 30, 2000 $332,471 $(10,856) $321,615 96.73% $303,842 91.39% 4.8
December 31, 1999 $133,227 $(25,822) $107,415 80.63% $88,578 66.48% 7.1
MORTGAGE LOANS
(dollars in thousands)
Amortized Estimated Weighted
Cost to Fair Value Average
Principal Net Amortized Principal Estimated to Principal Life
Amount Discount Cost Amount Fair Value Amount (Years)
September 30, 2000 $2,978 $81 $3,059 102.72% $3,059 102.72% 1.0
December 31, 1999 $3,653 $151 $3,804 104.13% $3,804 103.27% 1.0
At September 30, 2000, the Company had borrowing outstanding from three lenders compared to two lenders at December 31, 1999. Such borrowings are generally short-term (less than 30-day terms) and may not be renewed by the lender at its discretion.
IO SECURITIES
(dollars in thousands)
Amortized Estimated Weighted
Net Cost to Fair Value Average
Notional Premium Amortized Notional Estimated to Notional Life
Amount (Discount) Cost Amount Fair Value Amount (Years)
September 30, 2000 $ 43,189 $(28,316) $14,872 34.43% $13,224 30.62% 9.0
December 31, 1999 $ 56,322 $(54,167) $ 2,155 3.83% $8,570 15.21% 7.1
The table below shows unrealized gains and losses on the securities in the Company’s portfolio at September 30, 2000 and December 31, 1999.
UNREALIZED GAINS AND LOSSES
(dollars in thousands)
At September 30, 2000 At December 31, 1999
Unrealized Gain $2,427 $6,414
Unrealized Loss (23,764) (18,837)
Net Unrealized Loss (21,337) (12,423)
Net Unrealized Loss as % of Investments
Principal/Notional Amount (5.64)% (6.43)%
Net Unrealized Loss as % of Investments Amortized Cost (6.29)% (10.96)%
The following table sets forth a schedule of Pass-Through Certificates and Mortgage Loans owned by the Company at September 30, 2000 and December 31, 1999 classified by issuer and by ratings categories.
PASS-THROUGH CERTIFICATES AND MORTGAGE LOANS BY ISSUER AND CREDIT RATING
(dollars in thousands)
At September 30, 2000 At December 31, 1999
Carrying Value Portfolio Mix Carrying Value Portfolio Mix
Agency Certificates............. $ 293,521 92% $ 64,801 64%
Privately Issued Certificates:
A Rating........................ 7,386 2% -- --
BBB/Baa Rating.................. -- -- 23,776 23%
BB/Ba Rating and Other.......... 3,093 1% 8,570 8%
IOs............................. 13,224 4% -- --
Caps............................ 1,045 -- -- --
Mortgage Loans.................. 3,059 1% 3,804 5%
---------- ------- --------- -------
Total $ 321,328 100% $ 100,951 100%
========== ======= ========= =======
The following tables set forth information about the Company’s portfolio of Subordinate Interests, IOs, and other fixed-income assets as of September 30, 2000 and December 31, 1999.
SUBORDINATE INTERESTS
(dollars in thousands)
Market Value at
---------------
Description September 30, 2000 December 31, 1999
----------- ------------------ -----------------
Commercial $7,386 $18,561
IO SECURITIES
(dollars in thousands)
Market Value at
Description Coupon September 30, 2000 December 31, 1999
----------- ------ ------------------ -----------------
Residential Floating $13,224 $8,570
OTHER FIXED-INCOME ASSETS
(dollars in thousands)
Market Value at
---------------
Description September 30, 2000 December 31, 1999
----------- ------------------ -----------------
CBO/CLO $3,093 $5,215
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 September 30, 2000, the Company had borrowings outstanding from three lenders, compared to two lenders at December 31, 1999. Such borrowings are generally short-term (less than 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 nine months ended September 30, 2000, the term to maturity of the Company’s borrowings has ranged from one to 30 days, with a weighted average remaining maturity of 19 days at September 30, 2000. At September 30, 2000, the Company had outstanding $280.8 million of repurchase agreements. At September 30, 2000, the weighted average cost of funds for all of the Company’s borrowings was 6.61% and investments actually pledged had an estimated fair value of $292.8 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.
For the year ended December 31, 1999, the term to maturity of the Company’s borrowings has ranged from one day to five years, with a weighted average remaining maturity of 15 days at December 31, 1999. At December 31, 1999, the Company had outstanding $44 million of repurchase agreements. At December 31, 1999, the weighted average cost of funds for all of the Company’s borrowings was 5.90% and investments actually pledged had an estimated fair value of $45.4 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.
The availability of financing for the Company's portfolio has been stable during the first three quarters of 2000.
In November 1999, the Board of Directors increased the amount of Common Stock authorized to be repurchased under the Company’s stock repurchase program to $40 million. Pursuant to the repurchase program, for the three months ended September 30, 2000, the Company did not repurchase any shares of Common Stock and for the nine months ended September 30, 2000, the Company repurchased 825,600 shares of Common Stock for approximately $3.1 million. Such shares were purchased at a weighted average price per share of $3.82. For the year ended December 31, 1999, the Company used the proceeds of sales of, and payments from, its portfolio securities to repurchase 2,953,700 shares of Common Stock for approximately $10.3 million in open market transactions. Such purchases were made at a weighted average price per share of $3.50 (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 September 30, 2000 was $64.3 million, or $4.58 per share, compared to $73.6 million, or $4.91 per share, at December 31, 1999. If the Company had used historical amortized cost accounting, the Company’s equity base at September 30, 2000 would have been $85.64 million, or $6.10 per share compared to $85.4 million, or $5.75 per share, at December 31, 1999.
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) income." 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 $(21.4) million, or (6.29)% of the amortized cost of securities at September 30, 2000 and $(12.4) million, or (12.31)% of the amortized cost of securities at December 31, 1999.
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 $2.1 million from unrealized loss to realized loss for securities sold in October 1999, as the decision to sell them was made in September 1999.
The table below shows the Company’s equity capital base as reported and on a historical amortized cost basis at September 30, 2000 and at December 31, 1999. 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.
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)
At September 30, 2000 $ 85,640 $(21,337) $64,304 $6.10 $4.58
At December 31, 1999 $ 85,416 $(12,423) $ 72,993 $5.75 $4.91
Capital and Leverage Strategies
The Company’s operations are leveraged approximately 5.4 to 1 at September 30, 2000 compared to 1.6 to 1 at December 31, 1999. At September 30, 2000, the Company’s equity-to-assets ratio was 18.56%, and has ranged from a high of approximately 65% to a low of approximately 15% during the past nine 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.
During the three and nine months ended September 30, 2000, the Company, in an effort to increase its return on equity without taking what Mariner considered to be a substantial credit and interest rate risk, relevered it portfolio of Agency Certificates. To increase its portfolio of Agency Certificates, the Company increased it borrowings.
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.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), which, as issued, was 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. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," which deferred the effective date of FASB No. 133 for one year to fiscal years beginning after June 15, 2000. The Company has not yet completed its evaluation of SFAS No. 133, as amended by SFAS No. 138, 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk to which the Company is exposed is interest rate risk, which is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond the control of the Company. Changes in the general level of interest rates can affect the Company’s net interest income, which is the difference between the interest income earned on interest-earning assets and the interest expense incurred in connection with its interest-bearing liabilities, by affecting the spread between the Company’s interest-earning assets and interest-bearing liabilities. Changes in the level of interest rates also can affect, among other things, the value of the Company’s Mortgage Securities and its ability to realize gains from the sale of such assets.
The Company may utilize a variety of financial instruments, including interest rate swaps, caps, floors and other interest rate exchange contracts, in order to limit the effects of interest rates on its operations. The use of these types of derivatives to hedge interest-earning assets and/or interest-bearing liabilities carries certain risks, including the risk that losses on a hedge position will reduce the funds available for payments to holders of securities and, indeed, that such losses may exceed the amount invested in such instruments. As described previously, the Company has experienced significant losses as a result of its hedging activities. The profitability of the Company may be adversely affected during any period as a result of changing interest rates.
The following table quantifies the potential changes in net interest income and net portfolio value should interest rates go up or down (shocked) 200 basis points, assuming the yield curves of the rate shocks will be parallel to each other. Net portfolio value is defined as interest-earning assets net of interest-bearing liabilities. All changes in income and value are measured as percentage changes from the projected net portfolio value at the base interest rate scenario. The base interest rate scenario assumes interest rates at September 30, 2000 and various estimates regarding prepayment and all activities are made at each level of rate shock. Actual results could differ significantly from these estimates.
Change in Interest Rate Net Portfolio Value ----------------------- ------------------- - 200 Basis Points 0.5% - 100 Basis Points 1.0% Base Interest Rate -- + 100 Basis Points (1.5)% + 200 Basis Points (3.5)%
Asset and Liability Management
Asset and liability management is concerned with the timing and magnitude of the repricing of assets and liabilities. The Company’s objective is to attempt to control risks associated with interest rate movements. Methods for evaluating interest rate risk include an analysis of the Company’s interest rate sensitivity "gap," which is defined as the difference between interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period. A gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive liabilities. A gap is considered negative when the amount of interest-rate sensitive liabilities exceeds the amount of interest-rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. During a period of declining interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to affect net interest income adversely. Because different types of assets and liabilities with the same or similar maturities may react differently to changes in overall market rates or conditions, changes in interest rates may affect net interest income positively or negatively even if an institution were perfectly matched in each maturity category.
The following table sets forth the estimated maturity or repricing of the Company’s interest-earning assets and interest-bearing liabilities at September 30, 2000. The amounts of assets and liabilities shown within a particular period were determined in accordance with the contractual terms of the assets and liabilities, except (i) floating-rate securities are included in the period in which their interest rates are first scheduled to adjust and not in the period in which they mature and (ii) fixed-rate Mortgage Assets reflect estimated prepayments, which were estimated based on analyses of broker estimates. Management believes that these assumptions approximate actual experience and considers them reasonable; however, the interest rate sensitivity of the Company’s assets and liabilities in the table could vary substantially if different assumptions were used or actual experience differs from the historical experience on which the assumptions are based.
September 30, 2000
More than 1
Within 3 4 to 12 Year to 3 3 Years
Months Months Years and Over Total
-------- -------- ------------ -------- ------
(dollars in thousands)
Rate-Sensitive Assets:
Mortgage Assets........................... $0 $3,093 $60,204 $257,873 $321,170
Rate-Sensitive Liabilities:
Repurchase agreements..................... (280,783) -- -- -- (280,783)
Interest rate sensitivity gap............. (280,783) 3,093 60,204 257,873 40,387
Cumulative interest rate sensitivity gap.. (277,690) (217,486) 40,387
Cumulative interest rate sensitivity
gap as a percentage of total
rate-sensitive assets.................... (87)% (86)% (67)% 13%
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On October 23, 2000, the Company filed suit in federal court in the Southern District of New York against Asset Securitization Corp., Nomura Asset Capital Corp. and Nomura Securities International Inc. alleging that the defendants defrauded the Company into purchasing over $19.0 million worth of mortgage pass-through certificates by failing to disclose among other things, that one of the largest loans in the mortgage pool was seriously troubled. The Company is seeking rescission of the purchase of the mortgage pass-through certificates.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
On October 6, 2000 the Company filed a Current Report on Form 8-K regarding a press release issued by the Company announcing that the Company’s Board of Directors authorized management to prepare a plan of liquidation and an on-going business plan for the Company. The Company also announced the appointment of two new directors, Mark Hobbs and Arthur House, and its acceptance of the resignation of two directors, Frederick Khedouri and Stuart Coleman.
On November 3, 2000 the Company filed a Current Report on Form 8-K regarding a press release issued by the Company announcing that the Company had extended the management agreement with Mariner for an additional one-year term, with the Company retaining the right to terminate the management agreement on 30 days' notice. A copy of the Amendment to the Management Agreement has been filed on Form 8-K with the SEC. LASER's Board of Directors presently intends to reconsider the issue of the Company's management after a decision has been reached regarding the future direction of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27.1 - Financial Data Schedule
(b) Reports
On October 6, 2000 the Company filed a Current Report on Form 8-K pursuant to Item 5 relating to certain announcements by the Company.
On November 3, 2000 the Company filed a Current Report on Form 8-K pursuant to Item 5 relating to the extension of the management agreement with Mariner Mortgage Management, L.L.C.
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: November 14, 2000 | By: /s/ William J. Michaelcheck
(principal executive officer) (authorized officer of registrant) |
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.
|
|