UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 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 22-3535916
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
c\o Mariner Mortgage Management, LLC
65 East 55th Street
New York, NY 10022
(Address of principal executive offices)
(Zip Code)
(212) 758-2024
(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 August 14, 2000
<PAGE>
LASER MORTGAGE MANAGEMENT, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION...............................................1
Item 1. Financial Statements...........................................1
Balance Sheet at June 30, 2000 (Unaudited) and December 31, 1999....1
Statement of Operations (Unaudited) for the Three Months and Six
Months Ended June 30, 2000 and June 30, 1999........................2
Statement of Stockholders' Equity (Unaudited) for the Six
Months Ended June 30, 2000..........................................3
Statement of Cash Flows (Unaudited) for the Three Months and
Six Months Ended June 30, 2000 and June 30, 1999....................4
Notes to Financial Statements.......................................5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................14
Item 3. Quantitative and Qualitative Disclosures About Market Risk....25
PART II. OTHER INFORMATION.................................................28
Item 1. Legal Proceedings............................................28
Item 2. Changes in Securities and Use of Proceeds....................28
Item 3. Defaults Upon Senior Securities..............................28
Item 4. Submission of Matters to a Vote of Security Holders..........28
Item 5. Other Information............................................28
Item 6. Exhibits and Reports on Form 8-K.............................28
<PAGE>
LASER MORTGAGE MANAGEMENT, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
BALANCE SHEET AT JUNE 30, 2000 DECEMBER 31, 1999
(UNAUDITED)
ASSETS
<S> <C> <C>
Cash and cash equivalents..................................... $ 3,849,070 $ 16,065,024
Investment in securities at fair value........................ 292,992,044 97,147,637
Investment in mortgage loans at amortized cost................ 3,088,677 3,804,632
Accrued interest and principal paydown receivable............. 2,278,676 840,459
Margin deposits on repurchase agreements...................... -- 425,000
Prepaid assets................................................ 1,854,734 --
------------------ ------------------
Total assets...................................... 304,063,201 $ 118,282,752
------------------ ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Payable for securities purchased............................ $ 81,274,106 $ --
Repurchase agreements....................................... 159,669,000 44,018,000
Accrued interest payable.................................... 467,734 149,260
Accounts payable and accrued expenses....................... 358,510 1,081,061
Payable to Manager.......................................... 61,795 42,754
------------------ ------------------
Total liabilities.................................... 241,831,145 45,291,075
------------------ -------------------
STOCKHOLDERS' EQUITY:
Common stock: par value $.001 per share;
100,000,000 shares authorized, 20,118,749 and
20,099,999 shares issued, respectively.................... 20,119 20,119
Additional paid-in capital.................................. 283,012,967 283,012,967
Accumulated other comprehensive loss........................ (21,139,495) (12,422,818)
Accumulated distributions and losses........................ (166,813,104) (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........................... 62,232,056 72,991,677
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................... $ 304,063,201 $ 118,282,752
================== ===================
See notes to financial statements.
</TABLE>
<PAGE>
STATEMENT OF OPERATIONS (UNAUDITED) FOR
<TABLE>
<CAPTION>
THE THREE MONTHS ENDED THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
--------------------------------------------------------------------------------
Interest income:
<S> <C> <C> <C> <C>
Mortgage loans and securities............ $ 3,362,099 $ 6,643,202 $ 5,246,419 $ 22,196,489
Cash and cash equivalents................ 551,119 523,137 1,055,920 988,310
------------- ------------ --------------- ---------------
Total interest income........... 3,913,218 7,166,339 6,302,339 23,184,799
------------- ------------ --------------- ---------------
Interest expense:
Securities sold short.................... 242,101 242,101
Repurchase agreements.................... 1,753,726 3,801,595 2,333,605 13,975,909
------------- ------------ --------------- ---------------
1,995,827 3,801,595 2,575,706 13,975,909
------------- ------------ ------------------ ---------------
Net interest income........................ 1,917,391 3,364,744 3,726,633 9,208,890
(Loss) gain on sale of securities, swaps
and termination of repurchase agreement 392,608 (3,654,810) (2,012,249) (21,224,228)
General and administrative expenses........ (185,553) 796,039 606,392 2,246,039
Net income (loss).......................... $ 2,495,552 $(1,086,105) $ 1,107,992 $ (14,261,377)
============= ============ =============== ===============
Unrealized (loss) on securities:
Unrealized holding gain (loss) arising
during period.......................... $(10,802,976) $ 1,053,483 $ (10,728,926) $ (16,312,563)
Add: reclassification adjustment for loss
(gain) included in net (loss) income..... (392,608) 3,654,810 2,012,249 21,224,228
------------- ------------ --------------- ---------------
Other comprehensive (loss) income.......... (11,195,584) 4,708,293 (8,716,677) 4,911,665
------------- ------------ --------------- ---------------
Comprehensive income (loss)................ $ (8,700,032) $ 3,622,188 $ (7,608,685) $ (9,349,712)
============= ============ =============== ===============
Net (loss) income per share:
Basic.................................... $ 0.17 $ (0.06) $ 0.08 $ (0.80)
============= ============ =============== ===============
Diluted.................................. $ 0.17 $ (0.06) $ 0.08 $ (0.80)
============= ============ =============== ===============
Weighted average number of shares outstanding:
Basic.................................... 14,557,790 17,775,914 14,702,807 17,791,327
============= ============ =============== ===============
Diluted.................................. 14,557,790 17,775,914 14,702,807 17,791,327
============= ============ =============== ===============
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 2000
ACCUMULATED OTHER
COMMON ADDITIONAL COMPREHENSIVE COMPREHENSIVE
STOCK PAID-IN INCOME INCOME
PAR VALUE CAPITAL (LOSS) (LOSS)
BALANCE
<S> <C> <C> <C> <C>
DECEMBER 31, 1999.................. $ 20,119 $283,012,967 $ (12,422,818)
========== ============ ===============
Comprehensive income (loss)
Net loss.............................. $ (1,387,560)
Other comprehensive income
Unrealized gain on securities,
net of reclassification
adjustment...................... 2,478,907 $ 2,478,907
Comprehensive income.................... $ 1,091,347
==============
Repurchase of common stock..............
BALANCE
MARCH 31, 2000..................... $ 20,119 $283,012,967 $ (9,943,911)
========== ============ ===============
Comprehensive income
Net income.............................. $ 2,495,552
Other comprehensive income
Unrealized loss on securities
net of reclassification adjustment $(11,195,584) $ (11,195,584)
-------------
Comprehensive income.................... $ (8,700,032)
=============
Repurchase of common stock..............
---------- ------------ -------------- --------------
$ 20,119 $283,012,967 $ (21,139,495)
========== ============ ===============
BALANCE
JUNE 30, 2000
Unrealized holding losses arising during $(10,802,976)
period.......................................
Add: reclassification adjustment for losses $ 392,608
-------------
included in net loss....................... $ (11,195,584)
==============
ACCUMULATED TREASURY
DISTRIBUTIONS STOCK
AND LOSSES AT COST TOTAL
BALANCE
DECEMBER 31, 1999.................. $(167,921,096) $(29,697,495) $72,991,677
============== ============= ===========
Comprehensive income (loss)
Net loss.............................. $(1,387,560) $(1,387,560)
Other comprehensive income
Unrealized gain on securities,
net of reclassification
adjustment...................... 2,478,907
Comprehensive income....................
Repurchase of common stock.............. $ (97,875) (97,875)
BALANCE
MARCH 31, 2000..................... $(169,308,656) $(29,795,370) $73,985,149
============== ============= ===========
Comprehensive income
Net income.............................. $ 2,495,552 $ 2,495,552
Other comprehensive income
Unrealized loss on securities
net of reclassification adjustment $(11,195,584)
Comprehensive income....................
Repurchase of common stock.............. (3,053,061) (3,053,061)
------------- ------------ ------------
$(166,813,104) $(32,848,431) $62,232,056
============= ============ ===========
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS STATEMENT (UNAUDITED) FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net (loss) income....................................... $ 2,495,552 $ (1,086,105) $ 1,107,992 $ (14,261,377)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Amortization of mortgage premiums and discounts, net (199,822) 723,545 (368,747) 1,730,835
Gain (loss) on sale of securities................... (392,608) 3,654,810 2,012,249 21,224,228
Decrease (increase) in accrued interest receivable.. (1,862,402) 6,151,645 (1,438,217) 5,377,629
Increase in variation margin on interest rate swaps. -- -- 425,000 --
Decrease in margin deposits on repurchase agreements -- (1,238,875) -- (7,117,098)
Increase in other assets............................ 54,090 (111,695) (1,854,733) (111,695)
Increase (decrease) in accrued interest payable..... 200,548 (1,669,988) 318,474 (2,024,005)
Decrease in accrued expenses and other liabilities.. -- (1,637,567) -- (1,637,567)
Increase (decrease) in accounts payable............. (983,338) 146,860 (722,551) (64,705)
Decrease in payable to Manager...................... (3,173) (416,505) 19,041 (1,125,000)
-------------- ------------- ------------- -------------
Net cash provided by (used in) operating (691,153) 6,993,875 (501,492) 16,225,441
-------------- ------------- -------------- -------------
activities..............................................
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities................................ (309,441,018) -- (371,145,512) --
Proceeds from sale of securities...................... 77,686,748 273,450,820 161,308,800 570,886,009
Decrease in receivables for securities sold........... 81,274,106 193,969,493 81,274,106 (75,372,239)
Principal payments on securities...................... 3,252,298 17,517,923 4,348,081 56,420,405
Other payables........................................ -- -- -- 1,932,774
------------- ------------- ----------- -------------
Net cash provided by (used in) investing (147,227,866) 484,938,236 (124,214,525) 553,866,949
-------------- ------------- ------------- -------------
activities..............................................
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements................... 323,324,625 1,113,443,146 411,142,625 2,814,845,246
Principal payments on repurchase agreements........... (214,218,625) (1,572,306,331) (295,491,625) (3,340,390,547)
Net proceeds from (repurchase) of common stock........ (3,053,062) (237,022) (3,150,937) (215,044)
Distributions paid to stockholders.................... -- (35,607,766) -- (35,607,766)
------------- ------------- ------------- -------------
Net cash provided by (used in) financing 106,052,938 (494,707,973) 112,500,063 (561,368,111)
------------- ------------- ------------- -------------
activities..............................................
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...
(41,866,081) (2,775,862) (12,215,954) 8,724,279
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.......... 45,715,151 41,892,969 16,065,024 30,392,828
------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD................ $ 3,849,070 $ 39,117,107 $ 3,849,070 $ 39,117,107
============= ============= ============= ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid......................................... $ 1,795,281 $ 3,801,595 $ 2,257,232 $ 14,329,926
============= =============
Noncash financing activities:
Net change in unrealized loss on available-for-sale
securities.......................................... (11,195,584) $ 4,708,293 (8,716,677) $ 4,911,665
============= =============
See notes to financial statements.
</TABLE>
<PAGE>
LASER MORTGAGE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
LASER Mortgage Management, Inc. (the "Company") was incorporated in
Maryland on September 3, 1997. The Company commenced its operations on November
26, 1997 (see Note 5).
BASIS OF PRESENTATION - The accompanying unaudited financial
statements have been prepared in conformity with the instructions to Form 10-Q
and Article 10, Rule 10-01 of Regulation S-X for interim financial statements.
The interim financial statements for the three-month and six-month periods are
unaudited; however, in the opinion of the Company's management, all adjustments,
consisting only of normal recurring accruals, necessary for a fair statement of
the results of operations have been included. These unaudited financial
statements should be read in conjunction with the audited financial statements
included in the Company's Annual Report on 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 includes 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 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 1997 and 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 are 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 are 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 June 30, 2000 and December 31, 1999:
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, 2000
AGENCY
FIXED/
FLOATING RATE NON-
MORTGAGE MORTGAGE MORTGAGE
SECURITIES SUBORDINATES SUBORDINATES TOTAL
<S> <C> <C> <C> <C>
Securities, principal $267,153,921 $ 33,593,652 $ 6,379,668 $ 307,127,241
amount
Unamortized discount (3,932,059) (8,668,076) (661,965) (13,262,100)
Unamortized premium 2,429,239 4,603 -- 2,433,842
-------------- ---------------- -------------- ---------------
Amortized cost 265,651,102 24,930,179 5,717,703 296,298,983
Gross unrealized gains 510,642 98,949 -- 609,590
Gross unrealized losses (105,159) (17,561,890) (2,508,169) (20,175,218)
--------------- --------------- ----------- -------------
Estimated fair value $266,056,584 $ 7,467,237 $3,209,533 $276,733,355
============ =============== ========== ============
</TABLE>
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. The Company was thereafter informed that Lend Lease
Asset Management, L.P. ("LLAM"), the Special Servicer for the trust fund, had
notified ASC that this defaulted loan was not a "qualified asset" for the trust
and that this loan should be repurchased by ASC. ASC has disputed this claim by
LLAM, and counsel for LLAM is presently considering a response. On July 6, 2000,
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 Statement of Financial Accounting Standards No.
115, Accounting for Certain Investments in Debt and Equity Securities ("SFAS No.
115"), an entity should recognize an other-than-temporary impairment when it
intends to sell a specifically identified available-for-sale debt security at a
loss shortly after the balance sheet date. The write-down for the impairment
should be recognized in earnings in the period in which the decision is made.
The Company reclassified an amount of approximately $1.1 million from unrealized
loss to realized loss for securities sold in July 1999, as the decision to sell
them was made in June 1999.
DECEMBER 31, 1999
------------------------------------------------------------------------
AGENCY
FIXED/
FLOATING NON-
RATE MORTGAGE MORTGAGE
MORTGAGE SUBORDINATES SUBORDINATES TOTAL
SECURITIES
Securities, $67,029,843 $59,760,702 $6,436,914 $133,227,459
principal amount
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 (1,411,395) (16,866,092) (559,880) (18,837,367)
losses
Estimated fair value $64,801,934 $18,560,619 $5,215,069 $88,577,622
=========== ===========- ========== ===========
During the six months ended June 30, 2000 the Company sold IOs with a
notional amount of $56.3 million and purchased IOs with a notional amount of
$43.1 million.
The fair value of the Company's IOs as of June 30, 2000 and December
31, 1999 are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
FLOATING RATE TOTAL FLOATING RATE TOTAL
<S> <C> <C> <C> <C>
Securities, notional amount $43,188,719 $ 43,188,719 $56,322,389 $56,322,389
Amortized cost, after provision 14,872,544 14,872,544 2,155,466 2,155,466
for impairment
Gross unrealized gains -- -- 6,414,549 6,414,549
Gross unrealized losses (363,855) (363,855) -- --
------------ ------------- ------------ ------------
Estimated fair value $14,508,689 $ 14,508,689 $ 8,570,015 $ 8,570,015
=========== ============ =========== ===========
</TABLE>
During the six months ended June 30, 2000 the Company purchased an
interest rate cap with a notional amount of $100 million. At June 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 six months ended June 30,
2000 the Company recognized market losses of approximately $1.2 million on the
interest rate cap.
The fair value of the Company's interest rate cap as of June 30, 2000
is summarized as follows:
JUNE 30, 2000
Amortized cost $ 2,960,000
Unrealized losses (1,210,000)
-------------
Estimated fair value $ 1,750,000
=============
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
June 30, 2000 and December 31, 1999 which are carried at their amortized cost:
JUNE 30, 2000 DECEMBER 31, 1999
Mortgage Loans, principal amount $ 2,993,952 $ 3,653,788
Unamortized discount -- --
Unamortized premium 94,725 150,844
------------- ---------------
Amortized cost $ 3,088,677 $ 3,804,632
============= ===============
As of June 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 June 30, 2000, the Company had outstanding $159,669,000 of
repurchase agreements with a weighted average borrowing rate of 6.6% and a
weighted average remaining maturity of 16 days. At June 30, 2000, Investments
actually pledged had an estimated fair value of $168.6 million.
As of December 31, 1999, the Company had outstanding $44,018,000 of
repurchase agreements with a weighted average borrowing rate of 5.9% 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.
At June 30, 2000 and December 31, 1999, the repurchase agreements had
the following remaining maturities:
JUNE 30, 2000 DECEMBER 31, 1999
Within 30 days $ 159,669,000 $ 44,018,000
-------------------- --------------------
$ 159,669,000 $ 44,018,000
==================== ====================
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 offerings.
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 six months ended June 30, 2000. The
Company declared distributions in cash of $2.00 per share during the year ended
December 31, 2000.
STOCK REPURCHASES - In March 1998, the Board of Directors of the
Company approved the repurchase of up to $20 million of the Company's common
stock. In June 1998 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 six months
ended June 30, 2000, the Company repurchased 825,600 shares of common stock for
approximately $3.1 million or $3.82 per share (excluding commissions). 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 "Management
Agreement") with the Company, the Former Manager was responsible for the
day-to-day operations of the Company and performed (or caused to be performed)
such services and activities relating to the assets and operations of the
Company as was appropriate, subject to the supervision of the Company's Board of
Directors. For performing these services, the Former Manager received an annual
base management fee of 1.0% of Average Stockholders' Equity. The term "Average
Stockholders' Equity" for any period meant stockholders' equity, calculated in
accordance with GAAP, excluding any mark-to-market adjustments of the investment
portfolio. The Company and the Former Manager have agreed that the provision for
impairment charge on the IOs in the Company's portfolio is not a mark-to-market
adjustment for purposes of these calculations.
The Former Manager also was entitled to receive a quarterly incentive
fee in an amount equal to 20% of the Net Income of the Company for the preceding
fiscal quarter, in excess of the amount that would produce an annualized Return
on Average Stockholders' Equity for such fiscal quarter equal to the Ten-Year
U.S. Treasury Rate plus 1%. The term "Return on Average Stockholders' Equity" is
calculated for any quarter by dividing the Company's Net Income for the quarter
by its Average Stockholders' Equity for the quarter. For such calculations, the
"Net Income" of the Company means the taxable income of the Company within the
meaning of the Code, less capital gains and capital appreciation included in
taxable income, but before the Former Manager's incentive fees and before
deduction of dividends paid. The incentive fee payments to the Former Manager
were computed before any income distributions were made to stockholders. As used
in calculating the Former Manager's fee, the term "Ten-Year U.S. Treasury Rate"
means the arithmetic average of the weekly yield to maturity for actively traded
current coupon U.S. Treasury fixed interest rate securities (adjusted to
constant maturities of ten years) published by the Federal Reserve Board during
a quarter, or, if such rate is not published by the Federal Reserve Board,
published by any Federal Reserve Bank or agency or department of the federal
government selected by the Company.
The Company and the Former Manager terminated the 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 Management Agreement for the fourth quarter of
1998; (b) $708,495, which the Company and the Former Manager agreed to as the
quarterly incentive fee for the fourth quarter of 1998; and (c) $500,000 for
services performed under the Management Agreement for the period January 1, 1999
through February 28, 1999 and for certain transition services with respect to
internalizing the advisory function.
On November 1, 1999, the Company announced that Mariner Mortgage
Management, LLC ("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 Offier 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 agreement with Mariner, Mariner is 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 will equal:
o 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;
o 15% of the difference over $4.00 per share up to $4.50 per share; and
o 20% of the difference over $4.50 per share.
The agreement has a one-year term, but is terminable by the Company
without cause or penalty on 30 days' notice. Mariner may terminate the agreement
in limited circumstances. In addition, Mariner is entitled to receive a minimum
fee if the Company adopts a plan of liquidation prior to the expiration of the
agreement.
Pursuant to the agreement with Mariner, the Company incurred base
management fees of $61,795 and $126,763 for the three and six months ended June
30, 2000. An incentive fee accrual of $(464,518) was reversed for the three
months ended June 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 six months ended June 30, 2000.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 2000
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $ 2,495,552 $ 14,557,790 $ 0.17 $ 1,107,992 $ 14,702,807 $ 0.08
Diluted EPS $ 2,495,552 $ 14,557,790 $ 0.17 $ 1,107,992 $ 14,702,807 $ 0.08
</TABLE>
For the three and six months ended June 30, 2000, the Company had no
deferred common stock reserved for issuance.
For the three and six months ended June 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 and six months ended June 30, 2000.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999
LOSS SHARES PER-SHARE LOSS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $ (1,086,105) $ 17,775,914 $ (0.06) $ (14,261,377) $ 17,791,327 $ (0.80)
Diluted EPS $ (1,086,105) $ 17,775,914 $ (0.06) $ (14,261,377) $ 17,791,327 $ (0.80)
</TABLE>
For the three and six months ended June 30, 1999, the Company had no
deferred common stock reserved for issuance.
For the three and six months ended June 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:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 2000
<S> <C> <C>
Net earnings - as reported $ 2,495,552 $ 1,107,992
Net earnings - pro forma $ 2,492,086 $ 1,104,526
Earnings per share - as reported $ 0.17 $ 0.08
Earnings per share - pro forma $ 0.17 $ 0.08
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1999
Net loss - as reported $ (1,086,105) $ (14,261,377)
Net loss - pro forma $ (1,091,865) $ (14,267,137)
Loss per share - as reported $ (0.06) $ (0.80)
Loss per share - pro forma $ (0.06) $ (0.80)
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants for the three and six months ended June 30, 2000 and
1999: dividend yield of 11.47%; expected volatility of 18%; risk-free interest
rate of 5.82%; and expected lives of ten years.
The following table summarizes information about stock options
outstanding as of June 30, 2000 and 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
RANGE OF REMAINING AVERAGE
EXERCISE OPTIONS CONTRACTUAL EXERCISE
PRICES OUTSTANDING LIFE (YRS.) PRICE
<S> <C> <C> <C> <C>
June 30, 2000 $ 15.00 7,500 7.4 $ 15.00
========== ========
June 30, 1999 $ 15.00 72,000 8.3 $ 15.00
========== ========
</TABLE>
The options become exercisable at the rate of 25% on each of January
2, 1998, January 2, 1999, January 2, 2000 and January 2, 2001, subject to the
holder's continued employment or service. During the 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,
a NOL is estimated at approximately $(30.5) million, or $(1.80) per weighted
average share.
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.
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, and therefore, at this time, cannot predict what, if any,
effect its adoption will have on the Company's financial condition or results of
operations.
* * * * *
<PAGE>
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 Mortgage Management, LLC ("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:
o 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");
o 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;
o Mortgage Loans;
o 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;
o 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
o 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 March 1998. From June 1998 through June 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 June 30, 2000,
the Company had approximately $3 million of these assets remaining to be sold.
During the three months ended June 30, 2000, the Company increased its
portfolio of Agency Securities in an effort to increase its return on equity
without taking a substantial credit and interest rate risk. In order to increase
its portfolio of Agency Certificates, the Company increased its borrowings.
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. The Company was thereafter informed that Lend Lease
Asset Management, L.P. ("LLAM"), the Special Servicer for the trust fund, has
notified ASC that this defaulted loan was not a "qualified asset" for the trust
and that this loan should be repurchased by ASC. ASC has disputed this claim by
LLAM, and counsel for LLAM is presently considering a response. On July 6, 2000,
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.
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.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000
COMPARED TO THE THREE AND SIX MONTHS ENDED JUNE 30, 1999
NET GAIN SUMMARY
For the three months ended June 30, 2000, the Company had a net gain
of $2.50 million, or $0.17 per weighted average share, compared to a net loss of
$(1.09) million, or $(0.06) per weighted average share for the three months
ended June 30, 1999. The weighted average number of shares of common stock
outstanding for the three months ended June 30, 2000 and 1999 were 14,557,790
and 17,775,914, respectively. No dividends were declared during the three months
ended June 30, 2000 and 1999. Return on average equity was 3.30% and (1.35)% on
an unannualized basis (after giving effect to the impairment charges) for the
three months ended June 30, 2000 and 1999, respectively.
For the six months ended June 30, 2000, the Company had a net gain of
$1.11 million, or $0.08 per weighted average share, compared to a net loss of
$(14.26) million, or $(0.80) per weighted average share for the six months ended
June 30, 1999. The weighted average number of shares of common stock outstanding
for the six months ended June 30, 2000 and 1999 were 14,702,807 and 17,791,327,
respectively. No dividends were declared during the six months ended June 30,
2000. Dividends declared per share were $2.00 and $0.81 per weighted average
share, and $35.6 million in total, for the six months ended June 30, 1999.
Return on average equity was 1.46% and (14.09)% on an unannualized basis (after
giving effect to the impairment charges) for the six months ended June 30, 2000
and 1999, respectively.
The realized gains during the three months ended June 30, 2000 were
approximately $0.4 million, or $0.03 per weighted average share, compared to a
loss of approximately $(3.7) million, or $(0.21) per weighted average share for
the three months ended June 30, 1999. Excluding realized gains and losses, the
Company's income for the three months ended June 30, 2000 was approximately $2.1
million, or $0.14 per weighted average share, compared to approximately $2.6
million, or $0.14 per weighted average share for the three months ended June 30,
1999.
The realized losses during the six months ended June 30, 2000 were
approximately $(2.0) million, or $(0.14) per weighted average share, compared to
a loss of approximately $(21.2) million, or $(1.19) per weighted average share
for the six months ended June 30, 1999. Excluding realized gains and losses, the
Company's income for the six months ended June 30, 2000 was approximately $3.1
million, or $0.21 per weighted average share, compared to approximately $7.0
million, or $0.39 per weighted average share for the six months ended June 30,
1999. This reduction of income for the three and six months ended June 30, 2000
compared to the three and six months ended June 30, 1999 is consistent with the
Company's substantially reduced investment portfolio.
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. For the year ended December 31, 1999, a NOL is
estimated at approximately $(30.5) million, or $(1.80) per weighted average
share.
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, G&A Expenses may differ due to differing treatment
of leasehold amortization, certain stock option expenses and other items. As of
June 30, 2000 and 1999, the Company had not taken credit provisions because 90%
and 64%, respectively, of the Company's Investments were Agency Certificates.
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 $178.6 million and $155.9
million for the three and six months ended June 30, 2000, respectively, compared
to average earning assets of $362 million and $610 million for the three and six
months ended June 30, 1999, respectively. The table below shows, for the three
and six months ended June 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.
<TABLE>
<CAPTION>
AVERAGE EARNING ASSET YIELD
(dollars in thousands)
Yield on Yield on
Average Yield on Average Average
Average Amortized Average Average Amortized Interest
Cash Cost of Earning Cash Cost of Earning Interest
Equivalents Securities Assets Equivalents Securities Assets Income
<S> <C> <C> <C> <C> <C> <C> <C>
For the three months $ 37,208 $ 162,067 $ 178,631 5.86% 7.80% 7.85% $ 3,913
ended June 30, 2000
For the three months $ 38,888 $ 322,735 $ 361,623 5.06% 8.17% 7.84% $ 7,166
ended June 30, 1999
For the six months $ 35,229 $ 130,982 $ 155,889 5.92% 7.67% 7.52% $ 6,302
ended June 30, 2000
For the six months $ 38,803 $ 571,047 $ 609,850 5.07% 7.73% 7.56% $ 23,185
ended June 30, 1999
</TABLE>
INTEREST EXPENSE AND THE COST OF FUNDS
For the three months ended June 30, 2000 and 1999, the Company had
average borrowed funds of $115.4 million and $288.6 million, respectively, and
total interest expense of $1.7 and $3.8 million, respectively, with an average
cost of funds of 6.01% and 5.21%, respectively. For the six months ended June
30, 2000 and 1999, the Company had average borrowed funds of $77.5 million and
$502.2 million, respectively, and total interest expense of $2.3 and $14.0
million, respectively, with an average cost of funds of 5.90% and 5.53%,
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 0.29% lower than
one-month LIBOR for the three months ended June 30, 2000 compared to 0.25% above
one-month LIBOR for the three months ended June 30, 1999 and was 0.45% lower
than one-month LIBOR for the six months ended June 30, 2000 compared to 0.58%
above one-month LIBOR for the six months ended June 30, 1999. The Company
generally has structured its borrowings to adjust with one-month LIBOR. During
the three months ended June 30, 2000, average one-month LIBOR, which was 6.466%,
was 0.38% lower than average six-month LIBOR, which was 6.844%. During the three
months ended June 30, 1999, average one-month LIBOR, which was 4.961%, was 0.23%
lower than average six month LIBOR, which was 5.192%. The increase in the
Company's average cost of funds relative to LIBOR in the second quarter of 2000
compared to the second quarter of 1999 was due primarily to a change in the
condition of the financial markets.
The table below shows, for the three and six months ended June 30,
2000 and 1999, the Company's average borrowed funds and average cost of funds
compared to average one and six-month LIBOR.
<TABLE>
<CAPTION>
AVERAGE COST OF FUNDS
(dollars in thousands)
Average Average
One-Month Cost of Average
LIBOR Funds Cost of
Average Relative to Relative Funds
Average Average One-Month Average Average to Relative to
Borrowed Interest Cost of LIBOR Six-Month Six-Month Average Average
Funds Expense Funds LIBOR LIBOR One-Month Six-Month
LIBOR LIBOR
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the three months $ 115,396 $ 1,754 6.01% 6.466% 6.844% (0.38)% (0.45)% (0.83)%
ended June 30, 2000
For the three months $ 288,615 $ 3,802 5.21% 4.961% 5.192% (0.23)% 0.25% 0.02%
ended June 30, 1999
For the six months $ 77,506 $ 2,334 5.90% 6.187% 6.577% (0.39)% (0.29)% (0.68)%
ended June 30, 2000
For the six months $ 502,252 $ 13,976 5.53% 4.957% 5.119% (0.16)% 0.58% 0.41%
ended June 30, 1999
</TABLE>
INTEREST RATE CAPS AND SWAPS
During the three months ended June 30, 2000 the Company purchased an
interest rate cap with a notional amount of $100 million. At June 30, 2000 the
Company's interest rate cap was classified as trading and, therefore reported at
fair value. For the three months ended June 30, 2000 the Company recognized
market losses of $1.2 million on the Interest Rate Cap.
The Company did not enter into any swaps during the three and six
months ended June 30, 1999.
NET INTEREST INCOME
Net interest income, which equals interest income less interest
expense, totaled $1.9 million for the three months ended June 30, 2000 compared
to $3.4 million for the three months ended June 30, 1999. Net interest income
totaled $3.7 million for the six months ended June 30, 2000 compared to $9.2
million for the six months ended June 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 1.63% and 1.51% for the three and
six months ended June 30, 2000, respectively, compared to 2.63% and 2.06% for
the three and six months ended June 30, 1999, respectively. The decrease in net
interest income for the three and six months ended June 30, 2000 compared to the
three and six months ended June 30, 1999 was due to the Company's substantially
reduced investment portfolio. The net interest rate spread decreased for the six
and three months ended June 30, 2000 compared to the six and three months ended
June 30, 1999 due to the mix of Mortgage Assets in the Company's investment
portfolio, which contained a greater percentage of liquid securities which
finance at lower spreads for the three months ended June 30, 2000 compared to
the six and three months ended June 30, 1999.
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 six months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
NET INTEREST INCOME
(dollars in thousands)
Net Average
Interest Income on Yield on Balance
Average Income Average Interest Contrac- Average of Re- Average
Amortized on Cash Income on tual Total Interest purchase Cost Net
Cost of Invest- Equiva- Equi- Commit- Interest Earning Agree- Interest of Interest
Securities ments lents valents ments Income Assets ments Expense Funds Income
For the three
months ended June
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
30, 2000 $162,067 $3,362 $37,208 $ 551 $ -- $ 3,913 7.85% $ 115,396 $ 1,754 6.01% $ 1,917
For the three
months ended June $322,736 $ 6,669 $38,888 $ 497 $ -- $7,166 7.84% $288,615 $ 3,801 5.21% $ 3,365
30, 1999
For the six
months ended June
30, 2000 $155,889 $ 5,246 $35,229 $1,056 6,302 77,506 3,727
For the six
months ended June $571,047 $23,185 $38,803 $ 988 $ -- $23,185 7.56% $502,252 $13,976 5.53% $ 9,209
30, 1999
</TABLE>
CREDIT CONSIDERATIONS
The Company experienced credit losses on its investment portfolio
during the three months ended June 30, 2000 in the amount of approximately $9
million. See "General" for a discussion of these losses. At June 30, 2000 and
1999, the Company had limited its exposure to credit losses on its portfolio by
holding 90% and 64%, respectively, of its investments in Agency Certificates.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses ("operating expenses" or "G&A
expense") were $(185,553) and $606,392 for the three and six months ended June
30, 2000, respectively, consisting of management fees paid to Mariner of $61,795
and $126,763, incentive fees accrued to Mariner of $(464,518) and $0 and
professional and other miscellaneous fees. G&A expenses were $796,039 and
$2,246,039 for the three and six months ended June 30, 1999, respectively,
consisting of fees paid to the Former Manager of $0 and $500,000, fees paid to
BlackRock of $375,000 and $750,000 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
<TABLE>
<CAPTION>
(dollars in thousands)
Total G&A Total G&A
Expense/ Expense/
Deferred Other Total Average Average Efficiency
Management Incentive Stock Consulting G&A G&A Assets Equity Ratio
Fee Fee Expense Fee Expense Expense (Annualized)(Annualized)(Annualized)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
For the three months $62 $ (465) $ -- $ -- $217 $ --% --%
ended June 30, 2000 (186) --%
For the three months $ -- $ -- $ -- $ 375 $ 421 $ 796 0.68% 3.96% 23.66%
ended June 30, 1999
For the six months $127 $ -- $ -- $ -- $479 $606 0.78% 1.16% 16.27%
ended June 30, 2000
For the six months $500 $ -- $91 $ 750 $ 905 $ 2,246 0.68% 4.44% 24.39%
ended June 30, 1999
</TABLE>
NET INCOME (LOSS) AND RETURN ON AVERAGE EQUITY
Net income was $2.5 million and $1.1 million for the three and six
months ended June 30, 2000, respectively, compared to net losses of $(1.09)
million and $(14.3) million for the three and six months ended June 30, 1999,
respectively. Return on average equity, on an unannualized basis, for the three
and six months ended June 30, 2000 was 3.30% and 1.46%, respectively, compared
to (1.35)% and (14.09)% for the three and six months ended June 30, 1999,
respectively.
The table below shows, on an unannualized basis, for the three and six
months ended June 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
<TABLE>
<CAPTION>
Net Interest Gain (Loss) on Impairment Loss
Income/Average Sale of on Interest-Only G&A Expense/ Return on
Equity Securities/ Securities Average Equity Average Equity
Average Equity
<S> <C> <C> <C> <C> <C>
For the three months ended 2.53% .52% -- (.25)% 3.30%
June 30, 2000
For the three months ended 4.19% 4.55% -- 0.99% (1.35)%
June 30, 1999
For the six months ended 4.92% ( 2.66)% -- .80% 1.46%
June 30, 2000
For the six months ended 9.10% (20.96)% -- 2.22% (14.09)%
June 30, 1999
</TABLE>
DISTRIBUTIONS AND TAXABLE INCOME
The Company has elected to be taxed as a REIT under the Code.
Accordingly, the Company intends to distribute substantially all of its taxable
income for each year to stockholders, including income resulting from gains on
sales of securities. For the three and six months ended June 30, 2000, the
Company made no distributions. For the three and six months ended June 30, 1999,
the Company made distributions of $35.6 million.
FINANCIAL CONDITION
INVESTMENTS
As of June 30, 2000 and December 31, 1999, the Company's portfolio
consisted of:
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000 AS OF DECEMBER 31, 1999
------------------- -----------------------
Dollar Amount Dollar Amount
SECURITIES (IN MILLIONS) PERCENTAGE (IN MILLIONS) PERCENTAGE
---------- ------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Agency Certificates........... $ 266 90% $ 65 64%
Subordinate Interests......... 7 2 19 19%
IOs........................... 15 5% 8 8%
Caps.......................... 2 1% _ _
Mortgage Loans................ 3 1% 4 4%
Other fixed-income assets..... 3 1% 5 5%
------------------ -------------------- --------------------- -------------------
Total...................... $ 296 100% $ 101 100%
================== ==================== ===================== ===================
</TABLE>
The Company increased its portfolio of Agency Certificates during the
six months ended June 30, 2000 in an attempt to increase its return on average
equity without increasing the portfolio's susceptibility to basis, interest rate
and credit risk.
Discount balances are accreted as an increase in interest income over
the life of discount investments and premium balances are amortized as a
decrease in interest income over the life of premium investments. At June 30,
2000 and December 31, 1999, the Company had on its balance sheet (excluding IOs)
$13.26 million and $26.1 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 $2.4 million and $.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 million unamortized discount on IOs at June 30,
2000 compared to $54.2 million unamortized premium at December 31, 1999.
Mortgage principal repayments received were $4.3 million for the six
months ended June 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 June 30, 2000
and December 31, 1999.
SECURITIES (EXCLUDING IOs)
(dollars in thousands)
<TABLE>
<CAPTION>
Amortized Estimated Weighted
Cost to Fair Value Average
Principal Net Amortized Principal Estimated To Life
Premiums Principal
Amount (Discount) Cost Amount Fair Value Amount (Years)
<S> <C> <C> <C> <C> <C> <C> <C>
June 30, 2000 $310,087 $ (10,828) $ 299,259 96.51% $ 278,483 89.80% 5.0
December 31, 1999 $133,227 $ (25,822) $ 107,415 80.63% $ 88,578 66.48% 7.1
</TABLE>
MORTGAGE LOANS
(dollars in thousands)
<TABLE>
<CAPTION>
Amortized Estimated Weighted
Cost to Fair Value Average
Principal Net Amortized Principal Estimated To Life
Principal
Amount Premium Cost Amount Fair Value Amount (Years)
<S> <C> <C> <C> <C> <C> <C>
June 30, 2000 $ 2,944 $ 95 $ 3,809 103.16% $ 103.16% 1.0
3,089
December 31, 1999 $ 3,653 $ 151 $ 3,804 104.13% $ 3,804 103.27% 1.0
</TABLE>
At June 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.
<PAGE>
<TABLE>
<CAPTION>
IO SECURITIES
(dollars in thousands)
Amortized Estimated Weighted
Cost to Fair Value Average
Notional Net Premiums Amortized Notional Estimated To Notional Life
Amount (Discount) Cost (1) Amount Fair Value Amount (Years)
<S> <C> <C> <C> <C> <C> <C> <C>
June 30, 2000 $ 43,189 $ (28,316) $ 14,872 34.43% $14,509 33.59% 9.3
December 31, 1999 $ 56,322 $ (54,167) $ 2,155 3.83% $ 8,570 15.21% 7.1
</TABLE>
The table below shows unrealized gains and losses on the securities in
the Company's portfolio at June 30, 2000 and December 31, 1999.
UNREALIZED GAINS AND LOSSES
<TABLE>
<CAPTION>
(dollars in thousands)
AT JUNE 30, 2000 AT DECEMBER 31, 1999
---------------- --------------------
<S> <C> <C>
Unrealized Gain $ 610 $ 6,414
Unrealized Loss (21,749) (18,837)
Net Unrealized Loss (21,139) (12,423)
Net Unrealized Loss as % of Investments Principal/Notional Amount (6.03)% (6.43)%
Net Unrealized Loss as % of Investments Amortized Cost (6.66)% (10.96)%
</TABLE>
The following table sets forth a schedule of Pass-Through Certificates
and Mortgage Loans owned by the Company at June 30, 2000 and December 31, 1999
classified by issuer and by ratings categories.
<TABLE>
<CAPTION>
PASS-THROUGH CERTIFICATES AND MORTGAGE LOANS BY ISSUER AND CREDIT RATING
(dollars in thousands)
AT JUNE 30, 2000 AT DECEMBER 31, 1999
CARRYING VALUE PORTFOLIO MIX CARRYING VALUE PORTFOLIO MIX
<S> <C> <C> <C> <C>
Agency Certificates.............. $ 266,057 90% $ 64,801 64%
Privately Issued Certificates:
AAA/Aaa Rating................ 7,467 2 -- --
BB/Ba Rating and Other........ 3,209 1% 23,776 23%
IOs.............................. 14,509 5% 8,570 8%
Caps............................. 1,750 1% -- --
Mortgage Loans................... 3,089 1% 3,804 5%
--------- ----------- ----------- -------------
Total.............. $ 296,081 100% $ 100,951 100%
========= =========== =========== =============
</TABLE>
The following tables set forth information about the Company's
portfolio of Subordinate Interests, IOs and other fixed-income assets as of June
30, 2000 and December 31, 1999.
SUBORDINATE INTERESTS
(dollars in thousands)
MARKET VALUE AT
DESCRIPTION JUNE 30, 2000 DECEMBER 31, 1999
----------- ------------- -----------------
Commercial $ 7,467 $ 18,561
IO SECURITIES
(dollars in thousands)
MARKET VALUE AT
DESCRIPTION COUPON JUNE 30, 2000 DECEMBER 31, 1999
----------- ------ ------------- -----------------
Residential Floating $14,509 $ 8,570
OTHER FIXED-INCOME ASSETS
(dollars in thousands)
MARKET VALUE AT
DESCRIPTION JUNE 30, 2000 DECEMBER 31, 1999
----------- ------------- -----------------
CBO/CLO $ 3,209 $ 5,215
BORROWINGS
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 June 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.
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 six months ended June 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 16 days at June 30, 2000. At June 30, 2000, the Company
had outstanding $160 million of repurchase agreements. At June 30, 2000, the
weighted average cost of funds for all of the Company's borrowings was 6.60% and
investments actually pledged had an estimated fair value of $168 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 5.9% 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 two 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 six months
ended June 30, 2000 the Company repurchased an additional 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 June 30, 2000 was $62.2 million, or $4.43 per
share, compared to $73.0 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 June 30, 2000 would have been $83.3 million, or $5.94 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 Income (Loss)." By accounting for its
assets in this manner, the Company hopes to provide useful information to
stockholders and creditors and to preserve flexibility to sell assets in the
future without having to change accounting methods.
As a result of this mark-to-market accounting treatment, the book
value and book value per share of the Company are likely to fluctuate far more
than if the Company used historical amortized cost accounting. As a result,
comparison with companies that use historical cost accounting for some or all of
their balance sheet may be misleading.
Unrealized changes in the estimated net market value of securities
have one direct effect on the Company's potential earnings and dividends:
positive 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 $(21.1) million, or (7.14)% of the amortized cost of securities at June 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 $1.08 million from unrealized loss to realized loss for
securities sold in July 1999, as the decision to sell them was made in June
1999.
The table below shows the Company's equity capital base as reported
and on a historical amortized cost basis at June 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.
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
(dollars in thousands, except per share data)
Net Unrealized GAAP Historical GAAP
Historical Losses on Reported Amortized Reported
Amortized Assets Equity Cost Equity
Cost Equity Available Base Equity (Book Value
Base for Sale (Book Value) Per Share Per Share)
<S> <C> <C> <C> <C> <C>
At June 30, 2000 $ 83,371 $(21,139) $62,232 $5.94 $4.43
At December 31, 1999 $ 85,416 $(12,423) $ 72,993 $5.75 $4.91
</TABLE>
CAPITAL AND LEVERAGE STRATEGIES
The Company's operations are leveraged approximately 4.9 to 1 at June
30, 2000 compared to 1.6 to 1 at December 31, 1999. At June 30, 2000, the
Company's equity-to-assets ratio was 20.5%, and has ranged from a high of
approximately 62% to a low of approximately 15% during the past 12 months.
Initially, the Company financed its acquisition of Mortgage Assets through
proceeds of its initial public offering and several concurrent private
placements, and currently finances any acquisitions primarily by borrowing
against or "leveraging" its existing portfolio and using the proceeds to acquire
additional Mortgage Assets. The Company's target for its equity-to-assets ratio
depends on market conditions and other relevant factors.
The equity-to-assets ratio is total stockholders' equity as a
percentage of total assets. The Company's total stockholders' equity, for
purposes of this calculation, equals the Company's stockholders' equity
determined in accordance with GAAP. For purposes of calculating the
equity-to-assets ratio, the Company's total assets include the value of the
Company's investment portfolio on a marked-to-market-basis. For purchased
Mortgage Assets, the Company obtains market quotes for its Mortgage Assets from
independent broker-dealers that make markets in securities similar to those in
the Company's portfolio. The Board of Directors has discretion to deviate from
or change the Company's indebtedness policy at any time. However, the Company
endeavors to maintain an adequate capital base to protect against interest rate
environments in which the Company's financing and hedging costs might exceed
interest income from its Mortgage Assets. These conditions could occur, for
example, when, due to interest rate fluctuations, interest income on the
Company's Mortgage Assets (which occur during periods, such as the first three
quarters of 1998, of rapidly rising interest rates or during periods when the
Mortgage Loans in the portfolio are prepaying rapidly) lags behind interest rate
increases in the Company's variable rate borrowings.
INFLATION
Virtually all of the Company's assets and liabilities are financial in
nature. As a result, interest rates are expected to influence the Company's
performance more directly than inflation. While changes in interest rates do not
necessarily correlate with inflation rates or changes in inflation rates,
interest rates ordinarily increase during periods of high or increasing
inflation and decrease during periods of low or declining inflation.
Accordingly, management believes that the Company's financial condition or
results of operations will be influenced by inflation to the extent interest
rates are affected by inflation.
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, 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. Actual results could differ significantly from
these estimates.
<TABLE>
<CAPTION>
PROJECTED PERCENTAGE CHANGE IN
CHANGE IN INTEREST RATE NET INTEREST INCOME NET PORTFOLIO VALUE
<S> <C> <C>
- 200 Basis Points 1% (2%)
- 100 Basis Points 0% 0%
Base Interest Rate 0% 0%
+ 100 Basis Points (1%) (2%)
+ 200 Basis Points (2%) (6%)
</TABLE>
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 June
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.
<TABLE>
<CAPTION>
June 30, 2000
---------------------------------------------------------------------
More than 1
Within 3 4 to 12 Year to 3 3 Years
MONTHS MONTHS YEARS AND OVER TOTAL
------------ ------------ ----------- ---------- --------
......... (dollars in thousands)
<S> <C> <C> <C> <C> <C>
Rate-Sensitive Assets:
Mortgage Assets.......................... 1,743 3,100 249,200 42,038 296,081
Rate-Sensitive Liabilities:
Repurchase agreements.................... (240,943) -- -- -- (240,943)
Interest rate sensitivity gap............... (239,200) 3,100 249,200 42,038
Cumulative interest rate sensitivity gap.... (236,100) 13,100 55,138
Cumulative interest rate sensitivity gap as
a percentage of total rate-sensitive assets. (81)% (80)% 4% 19%
</TABLE>
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
At June 30, 2000, there were no legal proceedings to which the Company
was a party or of which any of its properties were subject.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on June 7,
2000. The following matters were voted on at the Annual Meeting:
(1) ELECTION OF DIRECTOR. The following person was elected as a
director:
<TABLE>
<CAPTION>
NUMBER OF SHARES
------------------------------
Voted against
NAME VOTED FOR OR ABSTAINED
------------------------ ------------- --------------
<S> <C> <C>
Ronald J. Artinian 9,821,354 3,326,597
William J. Michaelcheck 9,834,454 3,313,497
Jonathan Ilany 9,821,054 3,326,897
</TABLE>
Of the remaining two board members, one will stand for election in
2001 and the other will stand for election in 2002.
(2) APPOINTMENT OF INDEPENDENT AUDITORS. The stockholders approved the
appointment of Deloitte & Touche LLP as independent auditors for the Company for
the year 2000. There were 9,656,803 shares voted for approval; 209,378 shares
voted against and 3,281,770 abstained.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27.1 - Financial Data Schedule
(b) Reports
On July 11, 2000, the Company filed a Current Report on Form 8-K
regarding a press release issued by the Company announcing that the management
of the Company reduced the book value of certain assets.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LASER MORTGAGE MANAGEMENT, INC.
Dated: August 14, 2000 By: /S/ CHARLES R. HOWE
-------------------
Charles R. Howe
Chief Financial Officer
(principal accounting officer)
(authorized officer of registrant)
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT
3.1 Articles of Incorporation of the Registrant (Incorporated by reference
to Exhibit 3.1 to the Registration Statement on Form S-11 (File No.
333-35673))
3.2 Bylaws of the Registrant (Incorporated by reference to Exhibit 3.2 to
the Registration Statement on Form S-11 (File No. 333-35673))
27.1* Summary Financial Data
----------
* Filed herewith.
