SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
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
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LASER MORTGAGE MANAGEMENT, INC.
(EXACT NAME OF THE REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-3535916
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
C\O MARINER INVESTMENT GROUP, INC.
780 THIRD AVENUE, 16TH FLOOR, NEW YORK, NEW YORK 10017
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 758-2024
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS: ON WHICH REGISTERED:
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COMMON STOCK, $.001 PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL 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 BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. [X]
AT MARCH 1, 2002, THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT WAS APPROXIMATELY $16,285,000, BASED UPON THE
CLOSING SALE PRICE OF THE COMMON STOCK ON THE NEW YORK STOCK EXCHANGE ON THAT
DATE. AT MARCH 1, 2002, THE REGISTRANT HAD OUTSTANDING 14,038,983 SHARES OF
COMMON STOCK.
DOCUMENTS INCORPORATED BY REFERENCE
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NONE.
LASER MORTGAGE MANAGEMENT, INC.
TABLE OF CONTENTS
PART I
Item 1. Business........................................................1
Item 2. Properties......................................................8
Item 3. Legal Proceedings...............................................8
Item 4. Submission of Matters to a Vote of Security Holders.............9
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................................10
Item 6. Selected Financial Data........................................11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................12
Item 7A. Quantitative and Qualitiative Disclosures About Market Risk....27
Item 8. Financial Statements and Supplementary Data....................27
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................27
PART III
Item 10. Directors and Executive Officers of the Registrant.............27
Item 11. Executive Compensation.........................................29
Item 12. Security Ownership of Certain Beneficial Owners and
Management.....................................................30
Item 13. Certain Relationships and Related Transactions.................31
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.......................................................32
Financial Statements.........................................................F-1
PART I
ITEM 1. BUSINESS.
REFERENCE IS MADE TO THE GLOSSARY COMMENCING ON PAGE 33 OF THIS REPORT FOR
DEFINITIONS OF TERMS USED IN THE FOLLOWING DESCRIPTION OF THE COMPANY'S BUSINESS
AND ELSEWHERE IN THIS REPORT.
GENERAL
LASER Mortgage Management, Inc. (the "Company") was incorporated in
Delaware on May 1, 2001, as a wholly-owned subsidiary of LASER Mortgage
Management, Inc., a Maryland corporation ("LASER Maryland"), and is the
successor by merger to LASER Maryland. LASER Maryland was incorporated in
Maryland on September 3, 1997 and commenced its operations on November 26, 1997.
On May 30, 2001, the Company's Board of Directors and sole stockholder, LASER
Maryland, approved the liquidation and dissolution of the Company under the
terms and conditions of the Plan of Liquidation and Dissolution, subject to the
approval of the Plan of Liquidation and Dissolution by the stockholders of LASER
Maryland. On July 27, 2001, the stockholders of LASER Maryland, at the annual
meeting, approved the reincorporation of LASER Maryland in Delaware (the
"Reincorporation"), through the merger of LASER Maryland with and into the
Company, and the subsequent liquidation and dissolution of the Company under the
terms and conditions of the Plan of Liquidation and Dissolution. On July 31,
2001, LASER Maryland completed the Reincorporation by merging with and into the
Company. As of the effective date of the Reincorporation, LASER Maryland ceased
to exist. On August 3, 2001, the Company filed a certificate of dissolution with
the Secretary of State of the State of Delaware, and the dissolution of the
Company was effective upon such filing. The Company has ceased to conduct normal
business operations and now operates solely for the purpose of providing for the
satisfaction of its obligations, adjusting and winding-up its business and
affairs and distributing its remaining net assets. References herein to "LASER"
or the "Company" include LASER Maryland prior to the date of the
Reincorporation, as applicable.
In accordance with the Plan of Liquidation and Dissolution, on November 8,
2001, the Board of Directors filed a petition with the Delaware Court of
Chancery for permission to make an initial distribution to stockholders of $3.00
per outstanding common share. On November 28, 2001, the Delaware Court of
Chancery approved this initial distribution to stockholders. On December 28,
2001, a distribution of $3.00 per outstanding share of common stock was made to
stockholders of record as of December 17, 2001. As of December 31, 2001, the
estimated net realizable value of the Company's net assets in liquidation was
$1.31 per share. After providing for expenses and subject to court approval, the
Company expects to distribute the majority of the remaining net assets in
liquidation over the next three years with a final liquidating distribution to
occur thereafter. The total amount of distributions to stockholders is subject
to change based on numerous factors, including operating expenses, the Delaware
Court of Chancery modifying the distribution amounts and timing currently
envisioned by the Board of Directors under the Plan of Liquidation and
Dissolution, unanticipated claims or expenses and income received, if any, from
the pending litigation against Asset Securitization Corporation ("ASC"), Nomura
Asset Capital Corporation ("Nomura Asset") and Nomura Securitization
International, Inc. ("Nomura"), as well as other factors beyond the control of
the Company.
At its inception, the Company elected to be taxed 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.
The Company qualified as a REIT for the taxable years ended December 31, 1997
through 2001. The Company does not expect to qualify as a REIT for the year
beginning January 1, 2002. See "--Federal Income Tax Considerations."
As described above, stockholders approved the Plan of Liquidation and
Dissolution of the Company on July 27, 2001. As a result, the Company adopted
liquidation basis accounting on July 28, 2001. Prior to July 28, 2001, the
Company's operating results were presented in accordance with the historical
cost (or going concern) basis accounting. Under liquidation basis accounting,
the Company's income, expenses and other comprehensive income are reported as
changes in net assets in liquidation in lieu of a statement of operations and
comprehensive income. Additionally, under liquidation basis accounting, the
Company's assets are carried at their estimated net realizable values and the
Company's liabilities are reported at their expected settlement amounts in a
statement of net assets in liquidation in lieu of a balance sheet.
RECENT DEVELOPMENTS
Continuing through January 2002, the Company has liquidated substantially
all of its Mortgage Assets pursuant to the Plan of Liquidation and Dissolution,
thereby minimizing the risk of loss on the Company's net assets in liquidation.
As a result of the proceeds of the sales of Mortgage Assets in 2002, the Company
has increased its cash and cash equivalents by $15.3 million from December 31,
2001.
The Company conducted its operations before January 2002 so as not to
become regulated as an "investment company" under the Investment Company Act of
1940 (the "Investment Company Act"). As a result of the sales of Mortgage Assets
described above, and applicable provisions of the Investment Company Act, the
Company will not engage in any transactions except those which are "merely
incidental to its dissolution" so as to avoid having to register as an
"investment company" under the Investment Company Act.
At its inception, the Company elected to be taxed for federal income tax
purposes as a REIT under the REIT Provisions of the Code. In order to qualify as
a REIT, the Company must satisfy a number of asset, income and distribution
tests, including the requirement that 75% of its gross income be derived from
real estate sources. The Company does not expect to qualify as a REIT for the
year beginning January 2002 because less than 75% of the Company's gross income
for the 2002 taxable year is expected to be derived from real estate sources.
See "--Federal Income Tax Considerations."
INVESTMENT STRATEGY
The Company was organized to create and manage an investment portfolio of
primarily mortgage-backed securities and mortgage loans that, in combination
with financing and hedging activities, would generate income for distribution to
its stockholders while preserving the Company's capital base. The
mortgage-backed securities included mortgage pass-through certificates,
collateralized mortgage obligations, other securities representing interests in,
or obligations backed by, pools of mortgage loans and mortgage derivative
securities (collectively, the "Mortgage Securities"). The mortgage loans are
secured by first or second liens on single-family residential, multi-family
residential, commercial or other real property (the "Mortgage Loans" and,
together with the Mortgage Securities, the "Mortgage Assets").
The Company was also 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 (collectively,
"Agency Certificates");
o collateralized mortgage obligations, including regular interests in
real estate mortgage investment conduits, which are fixed and
adjustable rate debt obligations collateralized by Mortgage Loans or
Pass-Through Certificates;
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 June 1998. From June 1998 through March 2000, the
Company delevered its portfolio by selling certain securities and repaying
borrowings in an attempt to reduce the portfolio's susceptibility to basis and
interest rate risk and to create additional liquidity. In November 1999, the
Company announced that its Board of Directors authorized management to conduct a
competitive sale of its less liquid portfolio assets as part of its ongoing
program to reduce the volatility of the Company's assets.
In order to maximize stockholder value, the Board of Directors continuously
reviewed the Company's strategic position and its short-term and long-term
prospects. The Board of Directors determined that adverse developments in the
markets for mortgage-backed securities, REIT stocks in general and the Company's
shares in particular made it more difficult for the Company to enhance
stockholder value by growing its business as an independent entity and that the
Company would continue to experience difficulties in obtaining new debt or
equity financing at a reasonable cost. Therefore, the Board of Directors
unanimously agreed in April 2001 that the liquidation and dissolution of the
Company was the best alternative available to maximize stockholder value.
From time to time before the adoption by the stockholders of the Plan of
Liquidation and Dissolution, the Company received inquiries from third parties
concerning a possible acquisition of the Company or its outstanding shares of
common stock. Some of those inquiries concerned a possible acquisition only
after an initial liquidating distribution had been made to stockholders. None of
those inquiries resulted in a transaction proposal that the Board of Directors
viewed as being as favorable to stockholders as the liquidation and dissolution
of the Company. Now that an initial liquidating distribution has been made,
management and the Board of Directors will review any inquiries to determine
whether any of the inquiries offers an alternative transaction proposal that the
Board of Directors views as being as or more favorable to stockholders than the
current liquidation and dissolution of the Company pursuant to the Plan of
Liquidation and Dissolution.
During the period July 28, 2001 through December 31, 2001, the Company
began the process of liquidating its assets pursuant to the Plan of Liquidation
and Dissolution. At December 31, 2001, the Company's remaining portfolio
amounted to $17.3 million and consisted primarily of Agency Certificates. In
January 2002, the Company disposed of all of its remaining Agency Certificates.
OPERATING POLICIES AND STRATEGIES
HISTORICAL CAPITAL AND LEVERAGE POLICIES
Initially, the Company financed its acquisition of Mortgage Assets through
proceeds of its initial public offering in December 1997 and several concurrent
private placements, and subsequently financed any acquisitions primarily by
borrowing against or "leveraging" its existing portfolio and using the proceeds
to acquire additional Mortgage Assets. Historically, the Company's target for
its equity-to-assets ratio depended upon market conditions and other relevant
factors. In connection with its liquidation and dissolution, the Company has
substantially reduced its portfolio of Mortgage Securities and the leverage
financing used to maintain its portfolio.
HISTORICAL SHORT-TERM BORROWING
Mortgage Assets were financed primarily at short-term borrowing rates
through repurchase agreements. Repurchase agreements are sales of pledged
securities to a lender at discounted prices in return for an agreement by the
lender to resell the same or substantially similar securities to the borrower on
some future date at an agreed price.
Repurchase agreements are structured as sale and repurchase obligations
that allow a borrower to pledge purchased Mortgage Assets as collateral securing
short-term loans to finance the purchase of such Mortgage Assets. Typically, the
lender in a repurchase arrangement makes a loan in an amount equal to a
percentage of the market value of the pledged collateral. At maturity, the
borrower is required to repay the loan and the pledged collateral is released.
Pledged Mortgage Assets continue to pay principal and interest to the borrower.
Repurchase agreements also require the Company to deposit additional collateral
(a "margin call") or reduce its borrowings thereunder, if the market value of
the pledged collateral declines below certain levels. The Company has met every
margin call to date initiated by its lenders.
The Company has entered into repurchase agreements with financially sound
institutions, primarily broker-dealers. The Company has liquidated substantially
all of its Mortgage Securities pursuant to the Plan of Liquidation and
Dissolution and has used the proceeds from the sales of Mortgage Securities to
repay substantially all of the outstanding repurchase agreements. The Company
does not intend to enter into any new repurchase agreements.
HISTORICAL INTEREST RATE RISK MANAGEMENT STRATEGY AND HEDGING ACTIVITIES
The Company followed an interest rate risk management strategy designed to
protect against the adverse effects of major interest rate changes. As part of
this strategy, the Company entered into hedging transactions which included
interest rate swaps and an interest rate cap. These instruments were used to
hedge as much of the interest rate risk of the Company as the investment manager
determined was in the best interest of the stockholders, given the cost of such
hedges and the prior need to maintain the Company's status as a REIT.
PRIOR LOSSES ON HEDGING STRATEGIES
In December 1997, the Company entered into interest rate swaps with an
aggregate notional amount of $1,035 million. The Company used these interest
rate swaps to hedge its available-for-sale portfolio of fixed-rate Agency
Certificates. The primary objective of this hedging strategy was to change the
interest rate characteristics of these securities from fixed to variable rates,
to better correspond to the maturity and repricing characteristics of the
short-term repurchase agreements used by the Company to fund these investments.
This primary objective was the basis for the Company's hedge accounting
treatment. The Company continually monitored the swaps to ensure that they were
effective at changing the interest rate characteristics of the securities. A
secondary objective was to offset fluctuations in the fair value of the
securities caused by fluctuations in market interest rates.
In September 1998, the Company experienced margin calls and believed it
prudent to increase its liquidity and, therefore, liquidated a large portion of
its Agency Certificates. In conjunction with the liquidation of these securities
positions, the Company also discontinued hedge accounting for the related swaps
with an aggregate notional amount of $485 million. The Company recognized the
unrealized loss on these swaps as an element of the overall loss on the
liquidation of the securities of $(26.0) million. In October 1998, the Company
liquidated Agency Certificates in response to continued margin calls and the
need for liquidity. The overall October 1998 loss on the liquidation of Agency
Certificates, including losses recognized upon suspension of hedge accounting
for the remaining swap with a notional amount of $550 million, totaled $(35.0)
million. On the day of each suspension of hedge accounting, the affected swaps
were closed out without additional gain or loss.
The valuations and other information previously used by the Company to
monitor the effectiveness of its interest rate swap hedging strategy were
obtained through multiple independent dealer quotes. This same information was
used to record the investments and swaps in the Company's financial statements
and to determine the Company's net asset value. The Company has never purchased
or written options to enter into swaps.
The Company did not enter into any interest rate swaps during 1999, 2000
and 2001, after having used them extensively in 1997 and 1998.
In May 2000, the Company purchased a cap with a notional amount of $100
million for a premium of $3.0 million to reduce the risk of rising interest
rates on the cost of the short-term repurchase agreements used to finance its
investments. The cap agreement had a term of three years and provided for
monthly payments of interest to the Company to the extent that the one-month
London Interbank Offered Rate ("LIBOR") exceeded 6.54% as applied to the
notional amount. At December 31, 2000, the cap had an estimated fair value of
$0.4 million and the Company recorded an unrealized loss of $(2.6) million in
the statement of operations. As a result of the subsequent reduction in interest
rates, the Company closed out the cap in January 2001 for $0.3 million and
recognized an additional loss of $(0.1) million in the statement of operations.
The Company did not purchase any interest rate caps in 2001.
MANAGEMENT ARRANGEMENTS
From November 1, 1999 to November 1, 2001, Mariner Mortgage Management,
L.L.C. ("Mariner") served as the external manager of the Company and was
responsible for the day-to-day management of the Company's investments and
operations.
Under the most recent management agreement, which was entered into on
November 1, 2000 and terminated on November 1, 2001, Mariner became entitled to
be paid an incentive fee upon the earlier of (1) the termination date of the
management agreement or (2) the date on which the Board of Directors adopted
resolutions approving the liquidation and dissolution, referred to as the
anniversary date, which it did on April 25, 2001, equal to the number of shares
outstanding on the applicable date, multiplied by:
o 10% of the difference between the 15-day average closing market price
(plus any distributions per share other than common stock) of the
Company's common stock preceding November 1, 2001 (or such earlier
anniversary date, as set forth in the agreement) and $3.317 per share
(which approximates the average closing price of the Company's common
stock for the fifteen days ended October 31, 2000) up to the
equivalent of $3.50 per share;
o 15% of the difference between the 15-day average closing market price
(plus any distributions per share other than common stock) of the
Company's common stock preceding November 1, 2001 or on the
anniversary date, whichever is earlier, and $3.50 per share up to
$4.00 per share; and
o 20% of the difference between the 15-day average closing market price
(plus any distributions per share other than common stock) of the
Company's common stock preceding November 1, 2001 or on the
anniversary date, whichever is earlier, and $4.00 per share.
Based upon this calculation, an incentive fee of $1,219,285 was paid to
Mariner on May 1, 2001. Mariner was not entitled to receive any other fee in
connection with the Plan of Liquidation and Dissolution.
In accordance with the terms of the management agreement, Mariner continued
to receive its base management fee of $50,000 per month until the termination of
the management agreement.
For the period November 1, 1999 to November 1, 2000, the annual base fee
under the terms of the management agreement then in effect, was payable monthly
in cash and based on 0.45% of the aggregate value of the Company's outstanding
equity as of the end of such month; the annual incentive fee calculation for
that period was similar to the computation described above.
The table below shows the base fees incurred to the Company pursuant to the
terms of the Mariner management agreement.
FOR THE PERIOD: Base Fees Incurred
July 28, 2001 through November 1, 2001 $ 150,000
January 1, 2001 through July 27, 2001 $ 350,000
January 1, 2000 through December 31, 2000 $ 294,193
November 1, 1999 through December 31, 1999 $ 42,754
No incentive fees were incurred during the period July 28, 2001 through
December 31, 2001, or during the years ended December 31, 2000 and 1999. As
described above, an incentive fee of $1,219,285 was paid to Mariner during the
period January 1, 2001 through July 27, 2001.
Upon the termination of the management agreement on November 1, 2001, the
Company became self managed and entered into employment agreements with William
J. Michaelcheck, the President and Chief Executive Officer of the Company, and
Charles R. Howe, II, the Vice President, Treasurer and Secretary of the Company,
each at a salary of $10,000 per month. Messrs. Michaelcheck and Howe previously
were responsible for managing the Company's portfolio at Mariner and continue to
have significant responsibilities at Mariner. On November 1, 2001, the Company
also entered into a support services agreement with Mariner Investment Group,
Inc. ("Mariner Investment Group"), an affiliate of Mariner, under which Mariner
Investment Group will provide the Company with office space and services,
bookkeeping and accounting services and such other services as may be agreed
upon from time to time by the Company and Mariner Investment Group for a fee of
$30,000 per month.
Prior to November 1, 1999, the Company was engaged in a consulting
arrangement with BlackRock Financial Management, Inc. ("BlackRock") and in a
management agreement with LASER Advisers, Inc. (the "Former Manager").
The management agreement with the Former Manager was terminated effective
February 28, 1999. During the time the management agreement was in effect, it
provided for an annual base management fee of 1.0% of average stockholders'
equity, as defined in the management agreement, and a quarterly incentive fee in
an amount equal to 20% of the excess quarterly net income of the Company over a
hurdle, all as defined.
For the year ended December 31, 1999, the Company incurred consulting fees
to BlackRock in the amount of $1.1 million and management fees to the Former
Manager of approximately $0.5 million for the year ended December 31, 1999.
FEDERAL INCOME TAX CONSIDERATIONS
TAXATION OF THE COMPANY
At its inception, the Company elected to be taxed for federal income tax
purposes as a REIT under the REIT Provisions of the Code. As such, the Company
generally was entitled to a deduction for all dividends it paid to its
stockholders for a taxable year. As a result, the Company was not subject to
federal income taxation with respect to its distributed income. Because less
than 75% of the Company's gross income for the 2002 taxable year is expected to
derive from the prescribed real estate sources, the Company does not expect to
qualify as a REIT for the year beginning January 2002.
If, in 2002, the Company fails to qualify as a REIT or the Company revokes
its election to be taxed as a REIT, it will no longer be entitled to deduct
dividends paid to stockholders from its taxable income. In this case, the
Company would be subject to federal income tax at corporate rates (including any
applicable alternative minimum tax) with respect to gains from liquidating sales
of assets and income from operations for that year and for subsequent taxable
years. These federal income taxes should reduce the amounts otherwise
distributable to its stockholders.
Revenue Procedure 99-17 provided 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 "IRS"). The Company elected mark-to-market treatment as a securities
trader, and accordingly, recognizes gains and losses prior to the actual
disposition of its securities. Moreover, some if not all of these constructive
gains and losses, as well as some if not all gains or losses from actual
dispositions of securities, for both 1998 and beyond, are being 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.
The Company believes that during 1999 it experienced an "ownership change"
within the meaning of Section 382 of the Code. Consequently, the Company's use
of NOLs generated before the ownership change to reduce taxable income after the
ownership change will be subject to limitations under Code Section 382.
Generally, Code Section 382 limits the use of NOLs in any year to the value of
the Company's common stock on the date of the ownership change multiplied by the
long-term tax-exempt rate (published by the IRS) with respect to that date.
TAX CONSEQUENCES OF LIQUIDATING DISTRIBUTIONS TO STOCKHOLDERS
The Company believes that the distributions of proceeds of sales of assets
to stockholders pursuant to the Plan of Liquidation and Dissolution should be
treated as distributions in a complete liquidation. In this case, distributions
should not be treated as dividends received by a stockholder, but rather as if
the stockholder had sold its shares. Also in this case, a stockholder should
recognize gain or loss with respect to each share held by the stockholder,
measured by the difference between:
o the total amount of cash and fair market value of other property, if
any, received by the stockholder with respect to such share pursuant
to the Plan of Liquidation and Dissolution; and
o the stockholder's basis in that share.
If a stockholder holds blocks of shares acquired at different times or at
different costs, each liquidating distribution would be allocated ratably among
the various blocks of shares, and gain or loss would be computed separately with
respect to each block of shares.
Gain or loss recognized by a stockholder would be capital gain or loss if
the shares are held by the stockholder as capital assets. Capital gain or loss
would be long-term if the shares were held for more than 12 months. Corporate
stockholders may deduct capital losses in the year recognized only to the extent
of capital gains recognized during such year. Unused capital losses of a
corporation may generally be carried back three years and forward for five
years, but may not be carried to any year in which they would create or increase
a net operating loss. Individual stockholders may deduct capital losses each
year to the extent of their capital gains, plus $3,000. Any unused capital loss
may be carried forward indefinitely by individual taxpayers until the individual
recognizes sufficient capital gains to absorb them or recognizes such losses at
the rate of up to $3,000 per year. Capital losses may not be carried back by an
individual.
The liquidation and dissolution will result in more than one liquidating
distribution to the stockholders. Each liquidating distribution would be first
applied against the adjusted tax basis of each of a stockholder's shares and
gain would be recognized with respect to a share only after an amount equal to
the adjusted tax basis of such share has been fully recovered. Any losses with
respect to a share could be recognized by a stockholder only after we have made
our final distribution, if any, or after the last substantial liquidating
distribution was determinable with reasonable certainty. As a consequence of the
foregoing, stockholders that would realize losses under the Plan of Liquidation
and Dissolution would likely be prevented from recognizing such losses until the
receipt of the final distribution.
TAX CONSEQUENCES OF LIQUIDATING DISTRIBUTIONS TO NON-UNITED STATES
STOCKHOLDERS
Because liquidating distributions pursuant to the Plan of Liquidation and
Dissolution should be treated as paid in exchange for a stockholder's shares and
not as dividends, no withholding on liquidating distributions should generally
be required.
Although the Company will not be required to withhold against liquidating
distributions to any non-U.S. stockholder (non-U.S. stockholders, as used
herein, refer to stockholders that are not "U.S. persons" as defined in section
7701(a)(30) of the Code) a non-U.S. stockholder nevertheless will be subject to
U.S. federal income tax with respect to liquidating distributions under the
following circumstances. First, if a non-U.S. stockholder's investment in the
Company's shares is effectively connected with the non-U.S. stockholder's U.S.
trade or business, the non-U.S. stockholder generally will be subject to the
same treatment as U.S. stockholders with respect to liquidating distributions,
and if the non-U.S. stockholder is a corporation, it may also be subject to the
branch profits tax. Second, if the non-U.S. stockholder is a nonresident alien
individual who is present in the United States for 183 days or more during the
taxable year in which the liquidating distributions are received and certain
other conditions apply, the nonresident alien individual will be subject to a
30% tax on the individual's capital gains.
Non-U.S. stockholders should consult their own tax advisors regarding the
U.S. federal income tax consequences of receiving liquidating distributions.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Company reports to its U.S. stockholders and to the IRS the amount of
distributions paid during each calendar year, and the amount of tax withheld, if
any. Under the backup withholding rules, a stockholder may be subject to backup
withholding at the rate of 30% with respect to distributions paid unless such
holder (i) is a corporation or comes within certain other exempt categories and,
when required, demonstrates this fact, or (ii) provides a taxpayer
identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with the applicable requirements of the
backup withholding rules. A stockholder who does not provide the Company with
his correct taxpayer identification number also may be subject to penalties
imposed by the IRS. Any amount paid as backup withholding will be creditable
against the stockholder's income tax liability. The Treasury Department has
issued regulations regarding the backup withholding rules as applied to non-U.S.
stockholders that unify and tighten current certification procedures and forms
and clarify reliance standards.
STATE AND LOCAL TAXES
The Company and its stockholders may be subject to state and local tax in
various states and localities, including those states and localities in which it
or they transact business, own property, or reside. The state and local tax
treatment of the Company and its stockholders in such jurisdictions may differ
from the federal income tax treatment described above. Consequently,
stockholders should consult their own tax advisors regarding the effect of state
and local tax laws on ownership of the Common Stock.
EMPLOYEES
The Company currently has two employees. Mariner Investment Group provides
various support services to the Company pursuant to a support services agreement
described in Item 2.
ITEM 2. PROPERTIES.
On November 1, 2001, the Company entered into a support services agreement
with Mariner Investment Group, an affiliate of Mariner, under which Mariner
Investment Group will provide the Company with office space and services,
bookkeeping and accounting services and such other services as may be agreed
upon from time to time by the Company and Mariner Investment Group for a fee of
$30,000 per month.
The Company's executive offices are located within Mariner Investment
Group's offices at 780 Third Avenue, 16th Floor, New York, New York 10017.
ITEM 3. LEGAL PROCEEDINGS.
On October 23, 2000, the Company filed suit in federal court in the
Southern District of New York against ASC, Nomura Asset and Nomura alleging that
the defendants defrauded the Company into purchasing over $19.0 million worth of
mortgage pass-through certificates by failing to disclose among other things,
that one of largest loans in the mortgage pool was seriously troubled. On
December 8, 2000, the defendants filed a motion to dismiss the action. On
September 5, 2001, such motion was granted with respect to the claims brought
under Sections 12(a)(2) and 15 of the Securities Act of 1933 and denied with
respect to the common law fraud claims and claims brought under Sections 10(b)
and 20(a) of Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder. Discovery is proceeding with regard to the surviving claims. A
recovery of this investment may be possible, but management is unable to predict
the likelihood of this occurrence.
In accordance with the Plan of Liquidation and Dissolution, on November 8,
2001, the Board of Directors filed a petition with the Delaware Court of
Chancery for permission to make an initial distribution to stockholders of $3.00
per outstanding common share. On November 28, 2001, the Delaware Court of
Chancery approved this initial distribution to stockholders. On December 28,
2001, a distribution of $3.00 per outstanding share of common stock was made to
stockholders of record as of December 17, 2001.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's executive officers are as follows:
OFFICER
NAME AGE SINCE POSITION
- ----------------------------- --- ------- ------------------------------------------------
William J. Michaelcheck...... 55 1999 Chief Executive Officer, President and Director
Charles R. Howe, II.......... 40 2000 Chief Financial Officer, Treasurer and Secretary
The Company's officers are elected by the Board of Directors and serve at
the discretion of the Board.
WILLIAM J. MICHAELCHECK has been the President and Chief Executive Officer
of the Company since November 1999 and the Chairman and sole member of Mariner
since its inception in October 1999. Mr. Michaelcheck has been the Chairman and
sole stockholder of Mariner Investment Group since 1992. Formerly, he was
Executive Vice President of the Bear Stearns Companies Inc. and a Senior
Managing Director of Bear, Stearns & Co. Inc., where he was co-head of the
Fixed-Income Department and also responsible for a large segment of the firm's
trading activities and risk management. Mr. Michaelcheck joined Bear Stearns in
1979 as co-creator of the Government Bond Department, becoming a General Partner
in 1981 and a Senior Managing Director when Bear Stearns became a publicly-held
corporation. He was named Executive Vice President in 1987, and served on the
firm's Executive Committee and Management and Compensation Committee until
leaving Bear Stearns in October 1992.
CHARLES R. HOWE, II has been the Chief Financial Officer, Treasurer and
Secretary of the Company since January 2000 and the Chief Financial Officer of
Mariner since its inception and of Mariner Investment Group for more than five
years.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock trades on the New York Stock Exchange under the symbol
"LMM." The following table sets forth, for the periods indicated, the high and
low sales prices per share of Common Stock as reported on the NYSE composite
tape and the cash dividends and distributions declared per share of Common
Stock. To comply with applicable provisions of the Investment Company Act, the
Company may be required to delist its Common Stock from the NYSE. In any event,
based on conversations with the NYSE, the Company believes that the NYSE will
take action to delist the Common Stock because the Company will not be able to
maintain continued compliance with the NYSE's listing requirements. Accordingly,
if the Common Stock is delisted from the NYSE, trading, if any, would thereafter
be conducted on the over-the-counter market in the so-called "pink sheets." As a
result, it may be more difficult to dispose of, or to obtain accurate quotations
as to the price of, the Common Stock.
Stock Prices Cash Dividends/
------------ Distributions
High Low Declared Per Share
---- --- ------------------
2000
First Quarter $4.06 $3.75 $--
Second Quarter $3.94 $3.63 --
Third Quarter $3.81 $3.00 --
Fourth Quarter $3.50 $3.00 --
2001
First Quarter $3.92 $3.37 --
Second Quarter $4.24 $3.86 --
Third Quarter $4.17 $3.97 --
Fourth Quarter $4.17 $1.05 $3.00
2002
First Quarter (through March 1, 2002) $1.16 $1.04 --
As of March 1, 2002, the Company had 14,038,983 shares of Common Stock
issued and outstanding which were held by 48 holders of record.
DISTRIBUTIONS
In accordance with the Plan of Liquidation and Dissolution, on November 8,
2001, the Board of Directors filed a petition with the Delaware Court of
Chancery for permission to make an initial distribution to stockholders of $3.00
per outstanding common share. On November 28, 2001, the Delaware Court of
Chancery approved this initial distribution to stockholders. On December 28,
2001, a distribution of $3.00 per outstanding share of common stock was made to
stockholders of record as of December 17, 2001. As of December 31, 2001, the
estimated net realizable value of the Company's net assets in liquidation was
$1.31 per share. After providing for expenses and subject to court approval, the
Company expects to distribute the majority of the remaining net assets in
liquidation over the next three years with a final liquidating distribution to
occur thereafter. The total amount of distributions to stockholders is subject
to change based on numerous factors, including operating expenses, the Delaware
Court of Chancery modifying the distribution amounts and timing currently
envisioned by the Board of Directors under the Plan of Liquidation and
Dissolution, unanticipated claims or expenses and income received, if any, from
the pending litigation against ASC, Nomura Asset and Nomura, as well as other
factors beyond the control of the Company.
ITEM 6. SELECTED FINANCIAL DATA.
The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and all of the financial statements and the notes thereto and other
financial information included elsewhere herein.
- -------------------------------------------------------------------------------------------------------------------
Period from
January 1, 2001
through July 27, Period from
2001 (the date November 26,
immediately prior 1997
to the date of (Commencement
adoption of Year Ended Year Ended Year Ended of Operations)
liquidation basis December 31, December 31, December 31, through
accounting 2000 1999 1998 December 31, 1997
----------------- ------------ ------------ ------------ -----------------
(in thousands, except share and per share data)
STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME DATA:
Interest income:
Securities and mortgage loans......... $ 7,231 $ 17,194 $ 28,139 $ 182,733 $ 10,078
Cash and cash equivalents............. 526 1,250 1,805 4,053 811
----------- ----------- ----------- ----------- -----------
Total interest income.............. 7,757 18,444 29,944 186,786 10,889
----------- ----------- ----------- ----------- -----------
Interest expense:
Repurchase agreements................. 4,060 10,654 16,812 154,757 8,489
Other................................. -- 21 -- -- --
----------- ----------- ----------- ----------- -----------
Total interest expense............. 4,060 10,675 16,812 154,757 8,489
----------- ----------- ----------- ------------ -----------
Net interest income..................... 3,697 7,769 13,132 32,029 2,400
Net realized (loss) gain on sale of
securities and swaps.................. (4,218) (1,125) (19,829) (52,443) 588
Net loss on interest rate agreement..... (120) (2,580) -- -- --
Impairment loss on securities........... -- (17,597) -- (51,474) --
General and administrative expenses..... 2,528 1,617 4,325 8,384 415
----------- ----------- ----------- ----------- -----------
Net (loss) income...................... $ (3,169) $ (15,150) $ (11,022) $ (80,272) $ 2,573
----------- ----------- ----------- ----------- -----------
Other Comprehensive (Loss) Income:
Unrealized net gain (loss) on securities:
Unrealized holding (loss) gain
arising during the period.......... (3,017) (9,973) (17,506) (67,793) 1,192
Add: reclassification adjustment
for net realized loss (gain)
included in net (loss) income...... 4,218 18,722 19,829 52,443 (588)
----------- ----------- ----------- ----------- -----------
Other comprehensive income (loss)....... 1,201 8,749 2,323 (15,350) 604
----------- ----------- ----------- ----------- -----------
Comprehensive (loss) income............. $ (1,968) $ (6,401) $ (8,699) $ (95,622) $ 3,177
=========== =========== =========== =========== ===========
Net (loss) income per share:
Basic................................. $ (0.23) $ (1.05) $ (0.65) $ (4.16) $ 0.13
=========== =========== =========== =========== ===========
Diluted............................... $ (0.23) $ (1.05) $ (0.65) $ (4.16) $ 0.13
=========== =========== =========== =========== ===========
Weighted average number of shares
outstanding:
Basic................................. 14,038,983 14,369,081 16,925,143 19,313,865 20,019,999
=========== =========== =========== =========== ===========
Diluted............................... 14,038,983 14,369,081 16,925,143 19,313,865 20,019,999
=========== =========== =========== =========== ===========
- -------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF NET BALANCE SHEET DATA
ASSETS IN
LIQUIDATION
As of As of As of As of As of As of
December 31, 2001 July 27, 2001 December 31, 2000 December 31, 1999 December 31, 1998 December 31, 1997
----------------- ------------- ----------------- ----------------- ----------------- -----------------
Cash and cash equivalents $ 2,960 $ 22,592 $ 3,542 $ 16,065 $ 30,393 $ 82,627
Total assets 21,919 109,391 327,928 118,283 874,071 3,793,239
Total liabilities 3,476 47,919 264,488 45,291 746,514 3,510,805
Stockholders' equity -- 61,472 63,440 72,992 127,557 282,434
Net assets in liquidation 18,443 -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
As a result of the stockholders approving the Plan of Liquidation and
Dissolution, the Company adopted liquidation basis accounting effective July 28,
2001. Accordingly, the Company's assets are stated at their estimated net
realizable values and liabilities are stated at their estimated settlement
amounts, including an accrual for estimated expenses associated with the
liquidation of the Company. This information should also be read in conjunction
with "Item 1. Business" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations," as well as the audited financial
statements and notes thereto included in "Item 8. Financial Statements and
Supplementary Data."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion in conjunction with "Selected
Financial Data" and the financial statements and notes thereto included
elsewhere herein.
GENERAL
On July 27, 2001, the stockholders of LASER Maryland, at the annual
meeting, approved the Reincorporation of LASER Maryland in Delaware, through the
merger of LASER Maryland with and into the Company, and the subsequent
liquidation and dissolution of the Company under the terms and conditions of the
Plan of Liquidation and Dissolution. On July 31, 2001, LASER Maryland completed
the Reincorporation by merging with and into the Company. As of the effective
date of the Reincorporation, LASER Maryland ceased to exist. On August 3, 2001,
the Company filed a certificate of dissolution with the Secretary of State of
the State of Delaware, and the dissolution of the Company was effective upon
such filing. The Company has ceased to conduct normal business operations and
now operates solely for the purpose of providing for the satisfaction of its
obligations, adjusting and winding-up its business and affairs and distributing
its remaining net assets.
In accordance with the Plan of Liquidation and Dissolution, on November 8,
2001, the Board of Directors filed a petition with the Delaware Court of
Chancery for permission to make an initial distribution to stockholders of $3.00
per outstanding common share. On November 28, 2001, the Delaware Court of
Chancery approved this initial distribution to stockholders. On December 28,
2001, a distribution of $3.00 per outstanding share of common stock was made to
stockholders of record as of December 17, 2001. As of December 31, 2001, the
estimated net realizable value of the Company's net assets in liquidation was
$1.31 per share. After providing for expenses and subject to court approval, the
Company expects to distribute the majority of the remaining net assets in
liquidation over the next three years with a final liquidating distribution to
occur thereafter. The total amount of distributions to stockholders is subject
to change based on numerous factors, including operating expenses, the Delaware
Court of Chancery modifying the distribution amounts and timing currently
envisioned by the Board of Directors under the Plan of Liquidation and
Dissolution, unanticipated claims or expenses and income received, if any, from
the pending litigation against ASC, Nomura Asset and Nomura, as well as other
factors beyond the control of the Company.
As a result of the stockholders approving the Plan of Liquidation and
Dissolution, the Company adopted liquidation basis accounting effective July 28,
2001. Accordingly, the Company's assets are stated at their estimated net
realizable values and liabilities are stated at their estimated settlement
amounts, including an accrual for estimated expenses associated with the
liquidation of the Company. Before the adoption of liquidation basis accounting,
the Company operated as a continuing business and followed going concern basis
accounting. Because substantially all of the existing assets and liabilities of
the Company were carried at approximate fair value in accordance with generally
accepted accounting principles ("GAAP"), the adoption of liquidation basis
accounting did not have a material impact on the Company's financial statements
other than requiring the Company to charge stockholders' equity for the:
reduction in the carrying value of securities to reflect their estimated net
realizable value, write-off of the remaining balance of prepaid expenses, and
reserve for estimated expenses associated with the liquidation of the Company.
However, the valuation of assets and liabilities at their estimated net
realizable values and estimated settlement amounts, respectively, necessarily
requires estimates and assumptions. Changes in market conditions, actual costs
associated with the liquidation, and other factors may affect the amounts
ultimately realized or settled, and those amounts may differ, perhaps
materially, from the carrying values on the Company's financial statements.
At its inception, the Company elected to be taxed as a REIT under the Code,
commencing with its short taxable year ended December 31, 1997. The Company
qualified as a REIT for the taxable years ended December 31, 1997 through 2001.
The Company does not expect to qualify as a REIT for the year beginning January
1, 2002. See "Business--Federal Income Tax Considerations."
CHANGES IN NET ASSETS IN LIQUIDATION FOR THE PERIOD JULY 28, 2001 THROUGH
DECEMBER 31, 2001
Under liquidation basis accounting, net assets in liquidation increased by
$1.8 million for the period July 28, 2001 through December 31, 2001 excluding
the $(42.1) million cash liquidation distribution paid on December 28, 2001. At
December 31, 2001, net assets in liquidation amounted to $18.4 million. The
Company's portfolio of interest earning assets, net of interest bearing
liabilities, earned $1.8 million of net interest income. In addition, the
Company recorded a net increase of $0.6 million from gains on sales of
securities and changes in the estimated net realizable value of the portfolio.
General and administrative expenses during that period amounted to $(0.6)
million and consisted of $(0.2) million of management fees and $(0.4) million of
professional fees, payroll and other expenses.
During the period July 28, 2001 through December 31, 2001, a net $66.8
million of cash was generated from the Company's operating and investing
activities, including $66.0 million of proceeds from sales of, and principal
payments on, securities. Additionally, the Company paid $(44.4) million to
substantially reduce its outstanding repurchase agreements and paid a cash
liquidation distribution of $(42.1) million. Cash and cash equivalents amounted
to $3.0 million at December 31, 2001.
At adoption of liquidation basis accounting, certain adjustments were made
to stockholders' equity, as determined under going concern basis accounting, to
reflect more accurately the estimated net realizable values of the remaining net
assets of the Company. In that regard, reductions in the aggregate amount of
$(2.7) million were charged to stockholders' equity of $61.4 million at that
time. These adjustments consist of a $(0.9) million reduction in the carrying
value of securities, the immediate write-off of the remaining balance of all
prepaid expenses and the recognition of the estimated costs associated with the
liquidation. However, the valuation of assets and liabilities at their estimated
net realizable values and estimated settlement amounts, respectively,
necessarily requires estimates and assumptions. Changes in market conditions,
actual costs associated with the liquidation, and other factors may affect the
amounts ultimately realized or settled, and those amounts may differ, perhaps
materially, from the carrying values on the Company's financial statements.
RESULTS OF OPERATIONS
PERIOD JANUARY 1, 2001 THROUGH JULY 27, 2001 COMPARED TO YEAR ENDED DECEMBER 31,
2000
NET INCOME (LOSS) SUMMARY
GENERAL. For the period January 1, 2001 through July 27, 2001, the Company
had net income of $2.3 million, or $0.17 per weighted average share, excluding
aggregate net losses from investment activities and the interest rate agreement
of $(4.3) million, or $(0.31) per share, and the incentive fee of $(1.2)
million, or $(0.09) per share. For the period January 1, 2001 through July 27,
2001, the weighted average number of shares of Common Stock outstanding was
14,038,983; no distributions or dividends were declared or paid and return on
average stockholders' equity was (4.87%) on an actual basis.
For the year ended December 31, 2000, the Company had net income of $2.4
million or $0.17 per weighted average share, before giving effect to charges
relating to the impairment of certain Subordinate Interests. The impairment
charge of $(17.6) million or $(1.22) per share resulted in the Company reporting
a net loss of $(15.2) million or $(1.05) per share. For the year ended December
31, 2000, the weighted average number of shares of Common Stock outstanding was
14,369,081; no distributions or dividends were declared or paid; and return on
average equity was (18.03)% (after giving effect to the impairment charges).
GAINS/LOSSES FROM INVESTMENT ACTIVITIES. For the period January 1, 2001
through July 27, 2001, the Company sold securities and recorded a net realized
loss of $(4.2) million, or $(0.30) per share. Also during this period, the
Company recorded a $1.2 million increase in other comprehensive income from the
unrealized net gain on securities resulting in an overall net loss in
stockholders' equity from securities of $(3.0) million.
For the year ended December 31, 2000, the Company realized a net loss of
$(1.1) million or $(0.08) per share from the sale of securities, recognized an
unrealized loss of $(2.6) million or $(0.18) per share on the change in the
estimated fair value of an interest rate cap agreement in effect at year-end and
recorded an impairment charge of $(17.6) million or $(1.22) per share relating
to the impairment of certain Subordinate Interests. See "--Losses from
Impairment Charges." Also during the year, the Company recorded an $(8.7)
million reduction in other comprehensive loss from the unrealized net gain on
securities for an aggregate net loss in stockholders' equity from securities of
$(12.6) million. The unrealized net gain recorded during the year ended December
31, 2000 included a credit of $17.6 million for the recognition of the
previously mentioned impairment charge - such recognition had no effect on
stockholders' equity.
LOSSES FROM IMPAIRMENT CHARGES. 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 securities that are affected by this event are
subordinated classes of Commercial Mortgage Pass-Through Certificates, Series
1997-D5 that represent beneficial ownership interests in a trust fund created by
ASC, an affiliate of Nomura, at the time of the offering. Thereafter, a
representative of Nomura notified a representative of the Company that the
amount of the recovery of the securities might be negligible. Accordingly,
management increased the unrealized loss on those securities at that time by
approximately $(9.1) million representing the remaining total aggregate carrying
value of those securities, pending further developments.
On October 23, 2000 the Company filed suit in the Southern District of New
York against ASC, Nomura Asset and Nomura alleging that the defendants defrauded
the Company into purchasing approximately $19.0 million worth of ASC securities
by failing to disclose among other things, that one of largest loans in the
mortgage pool was seriously troubled. On December 8, 2000, the defendants filed
a motion to dismiss the action. The Company is seeking rescission of the
purchase of the securities. During the quarter ended December 31, 2000, the
Company recognized the probable other-than-temporary impairment of those
securities by charging the statement of operations and crediting accumulated
other comprehensive loss on the balance sheet for the aggregate cumulative loss
of $(17.6) million; such recognition had no further impact on stockholders'
equity from the time of the earlier increase in unrealized loss.
On September 5, 2001, defendants' motion to dismiss the action was granted
with respect to the claims brought under Sections 12(a)(2) and 15 of the
Securities Act of 1933 and denied with respect to the common law fraud claims
and claims brought under Sections 10(b) and 20(a) of Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder. Discovery is proceeding with regard
to the surviving claims. A recovery of this investment may be possible, but
management is unable to predict the likelihood of this occurrence.
TAXABLE INCOME (LOSS)
For the tax years ended December 31, 2001 and 2000, net operating losses as
calculated for tax purposes ("NOLs") are estimated at approximately $(1.4)
million and $(6.2) million, respectively. NOLs generally may be carried forward
for 20 years. The Company believes that during 1999 it experienced an "ownership
change" within the meaning of Section 382 of the Code. Consequently, its use of
NOLs generated before the ownership change to reduce taxable income after the
ownership change will be subject to limitations under Section 382. Generally,
the use of NOLs in any year is limited to the value of the Company's stock on
the date of the ownership change multiplied by the long-term tax exempt rate
(published by the IRS) with respect to that date. The Company believes that the
annual limitation with respect to the use of its pre-ownership change NOLs is
approximately $3.0 million. The Company believes that as of December 31, 2001,
approximately $92.5 million of the estimated cumulative NOL of $120.1 million is
subject to the annual limitation.
Taxable income (loss) requires an annual calculation; consequently, for the
tax year ended December 31, 2001, taxable income (loss) may be different from
GAAP net income (loss) primarily as a result of differing treatment of
unrealized net gains (losses) on securities transactions. For the Company's tax
purposes, unrealized net 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 tax years ended December 31, 2001
and 2000, the Company had unrealized net gains of approximately $3.9 million and
$8.7 million, respectively.
The distinction between taxable income (loss) and GAAP net income (loss) is
important to the Company's stockholders because the Company does not expect to
be treated as a REIT for 2002, and taxes are computed on the basis of taxable
income.
INTEREST INCOME AND AVERAGE INTEREST EARNING ASSET YIELDS
Historically, the Company earned interest income primarily from its
portfolio of investments and cash equivalents. The table below shows, for the
period January 1, 2001 through July 27, 2001 and for the year ended December 31,
2000, the Company's average balance of cash equivalents, investments, the yields
earned on each type of interest earning asset, the yield on average interest
earning assets and total interest income.
Total Yield on Yield on
Average Average Yield on Average Average
Average Amortized Interest Average Amortized Interest Total
Cash Cost of Earning Cash Cost of Earning Interest
Equivalents Investments Assets Equivalents Investments Assets Income
(dollars in thousands)
For the period January 1, 2001
through July 27, 2001 $19,109 $169,793 $188,902 4.67% 7.30% 7.04% $7,757
For the year ended
December 31, 2000 $20,469 $223,211 $243,680 6.01% 7.70% 7.57% $18,444
During 2001, the Company reduced its portfolio of Mortgage Securities
and Mortgage Derivatives and the leverage financing used to maintain the
portfolio in connection with the liquidation or sale of the Company. During
2000, the Company was engaged in an effort to increase its return on
stockholders' equity without exposing itself to substantial credit and interest
rate risk by increasing its portfolio of Agency Certificates and Mortgage
Derivatives.
INTEREST EXPENSE AND THE AVERAGE COST OF FUNDS
Historically, the Company incurred interest expense primarily from
borrowed funds under short-term repurchase agreements that finance most of its
portfolio of investments. Interest expense is calculated in the same manner for
tax and GAAP purposes. The Company generally has structured its borrowings to
closely correlate the Company's cost of borrowed funds with changes in one-month
LIBOR.
The table below shows, for the period January 1, 2001 through July 27,
2001 and the year ended December 31, 2000, the Company's average borrowed funds,
interest expense and average cost of funds compared to average one and six-month
LIBOR.
Average Average Average
One-Month Cost of Cost of
LIBOR Funds Funds
Relative Relative Relative
to to to
Average Average Average Average Average Average Average
Borrowed Interest Cost of One-Month Six-Month Six-Month One-Month Six-Month
Funds Expense Funds LIBOR LIBOR LIBOR LIBOR LIBOR
(dollars in thousands)
For the period January
1, 2001 through July 27, 2001 $126,104 $4,060 5.47% 4.74% 4.53% 0.21% 0.72% 0.94%
For the year ended
December 31, 2000 $162,123 $10,654 6.46% 6.41% 6.65% (0.24)% 0.05% (0.19)%
During 2001, interest rates decreased and, during 2000, interest rates
increased due primarily to the effect of interest rate setting actions taken by
the Federal Reserve Board.
INTEREST RATE AGREEMENTS
The Company has followed an interest-rate risk-management strategy designed
to protect against the adverse effects of major interest rate changes through
the use of derivative interest rate agreements, such as a purchased interest
rate cap ("cap").
As a result of the reduction in interest rates in January 2001, the Company
closed out the existing cap, with a notional amount of $100.0 million, for $0.3
million in cash and recognized a net loss of $(0.1) million, or $(0.01) per
share in the statement of operations that is comprised of a realized loss of
$(2.7) million and an unrealized gain of $2.6 million from the reversal of the
unrealized loss on the cap at December 31, 2000 due to its sale.
During the second quarter of 2000, the Company purchased this cap with a
notional amount of $100.0 million for a premium of $3.0 million to reduce the
risk of rising interest rates on the cost of the short-term repurchase
agreements used to finance its investments. The cap agreement had a term of
three years and provided for monthly payments of interest to the Company to the
extent that the one-month LIBOR exceeded 6.54% as applied to the notional
amount. At December 31, 2000, the cap had an estimated fair value of $0.4
million and the Company recorded an unrealized loss of $(2.6) million in the
statement of operations. As a result of the reduction in interest rates, the
Company closed out the cap in January 2001 for $0.3 million and recognized an
additional loss of $(0.1) million in the statement of operations.
The Company did not enter into any other interest rate agreements during
2001 and 2000.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses ("operating expense" or "G&A expense")
consist of management and incentive fees incurred to Mariner and professional
and other expenses.
Management Incentive Other G&A Total
Fees Fees Expense G&A Expense
(dollars in thousands)
For the period January 1, 2001
through July 27, 2001 $350 $1,219 $959 $2,528
For the year ended December 31, 2000 $294 $ -- $1,323 $1,617
NET INCOME (LOSS) AND RETURN ON AVERAGE STOCKHOLDERS' EQUITY
Net loss was $(3.2) million for the period January 1, 2001 through July 27,
2001 compared to net loss of $(15.2) million for the year ended December 31,
2000. Return on average stockholders' equity for the period January 1, 2001
through July 27, 2001 was (4.87)% compared to (18.03)% for the year ended
December 31, 2000. The table below shows, on an actual basis, for the period
January 1, 2001 through July 27, 2001 and the year ended December 31, 2000, the
Company's net interest income, losses from investment activities, losses from
impairment charges and G&A expense each as a percentage of average stockholders'
equity and the return on average stockholders' equity.
Return on
Losses from Losses from Average
Net Interest Investment Impairment G&A Stockholders'
Income Activities Charges Expense Equity
For the period January 1, 2001
through July 27, 2001 5.67% (6.66)% -- (3.88)% (4.87)%
For the Year Ended
December 31, 2000 9.24% (4.41)% (20.94)% (1.92)% (18.03)%
DISTRIBUTIONS AND TAXABLE INCOME
The Company elected to be treated as a REIT under the Code for 2001 and
2000. Accordingly, the Company would normally distribute substantially all of
its taxable income for each year to stockholders, including income resulting
from gains on sales of securities. For the tax years ended December 31, 2001 and
2000, the Company determined that it had no taxable income. On December 28,
2001, the Company made a cash liquidation distribution of $3.00 per outstanding
share to stockholders. In 2000, the Company did not make any distributions.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
NET INCOME (LOSS) SUMMARY
GENERAL. For the year ended December 31, 2000, the Company had net income
of $2.4 million or $0.17 per weighted average share, before giving effect to
charges relating to the impairment of certain Subordinate Interests. The
impairment charge of $(17.6) million or $(1.22) per share resulted in the
Company reporting a net loss of $(15.2) million or $(1.05) per share. For the
year ended December 31, 2000, the weighted average number of shares of Common
Stock outstanding was 14,369,081 and return on average stockholders' equity was
(18.03)% (after giving effect to the impairment charges).
For the year ended December 31, 1999, the Company had a net loss of $(11.0)
million, or $(0.65) per weighted average share; the weighted average number of
shares of Common Stock outstanding was 16,925,143, distributions were $2.00 per
share, or $35.6 million in total and return on average stockholders' equity was
(12.39)%.
LOSSES FROM INVESTMENT ACTIVITIES. For the year ended December 31, 2000,
the Company realized a net loss of $(1.1) million or $(0.08) per share from the
sale of securities and recognized an unrealized loss of $(2.6) million or
$(0.18) per share on the change in the estimated fair value of an interest rate
cap agreement in effect at year-end.
For the year ended December 31, 1999, the Company realized a net loss of
$(19.8) million or $(1.17) per share as a result of losses incurred in sales of
securities and early terminations of long-term repurchase agreements.
LOSSES FROM IMPAIRMENT CHARGES. 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 securities that are affected by this event are
subordinated classes of Commercial Mortgage Pass-Through Certificates, Series
1997-D5 that represent beneficial ownership interests in a trust fund created by
ASC, an affiliate of Nomura, at the time of the offering. Thereafter, a
representative of Nomura notified a representative of the Company that the
amount of the recovery of the securities might be negligible. Accordingly,
management increased the unrealized loss on those securities at that time by
approximately $(9.1) million representing the remaining total aggregate carrying
value of those securities, pending further developments.
On October 23, 2000 the Company filed suit in the Southern District of New
York against ASC, Nomura Asset and Nomura alleging that the defendants defrauded
the Company into purchasing approximately $19.0 million worth of ASC securities
by failing to disclose among other things, that one of largest loans in the
mortgage pool was seriously troubled. On December 8, 2000, the defendants filed
a motion to dismiss the action. The Company is seeking rescission of the
purchase of the securities. During the quarter ended December 31, 2000, the
Company recognized the probable other-than-temporary impairment of those
securities by charging the statement of operations and crediting accumulated
other comprehensive loss on the balance sheet for the aggregate cumulative loss
of $(17.6) million; such recognition had no further impact on stockholders'
equity from the time of the earlier increase in unrealized loss.
The Company did not take any impairment charges for the year ended December
31, 1999.
TAXABLE INCOME (LOSS) AND GAAP NET INCOME (LOSS)
For the years ended December 31, 2000 and 1999, a net operating loss as
calculated for tax purposes is estimated at approximately $(6.2) million and
$(60.0) million, respectively, or $(0.44) and $(3.55), respectively, per
weighted average share. NOLs generally may be carried forward for 20 years. The
Company believes that during 1999 it experienced an "ownership change" within
the meaning of Section 382 of the Code. Consequently, its use of NOLs generated
before the ownership change to reduce taxable income after the ownership change
will be subject to limitations under Section 382. Generally, the use of NOLs in
any year is limited to the value of the Company's stock on the date of the
ownership change multiplied by the long-term tax exempt rate (published by the
IRS) with respect to that date. The Company believes that the annual limitation
with respect to the use of its pre-ownership change NOLs is approximately $3.0
million. The Company believes that as of December 31, 2000, approximately $91.0
million of the estimated cumulative NOL is subject to the annual limitation.
Taxable income (loss) requires an annual calculation; consequently, for the
year ended December 31, 2000, taxable income (loss) may be different from GAAP
net income (loss) primarily as a result of differing treatment of unrealized net
gains (losses) on securities transactions. For the Company's tax purposes,
unrealized net 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 years ended December 31, 2000 and 1999, the Company
had unrealized net gains of approximately $8.7 million and $2.3 million,
respectively.
INTEREST INCOME AND AVERAGE INTEREST EARNING ASSET YIELDS
The Company had average interest earning assets of $243.7 million for the
year ended December 31, 2000 compared to $393.4 million for the year ended
December 31, 1999. Historically, the Company earned interest income primarily
from its portfolio of investments and cash equivalents. The table below shows,
for the years ended December 31, 2000 and 1999, the Company's average balance of
cash equivalents, investments, the yields earned on each type of earning asset,
the yield on average earning assets and total interest income.
Total Yield on Yield on
Average Average Yield on Average Average
Average Amortized Interest Average Amortized Interest Total
Cash Cost of Earning Cash Cost of Earning Interest
Equivalents Investments Assets Equivalents Investments Assets Income
(dollars in thousands)
For the Years Ended:
December 31, 2000 $20,469 $223,211 $243,680 6.01% 7.70% 7.57% $18,444
December 31, 1999 $34,990 $358,370 $393,360 5.22% 7.85% 7.61% $29,944
During 2000, the Company was engaged in an effort to increase its return on
stockholders' equity without exposing itself to substantial credit and interest
rate risk by increasing its portfolio of Agency Certificates and Mortgage
Derivatives while during 1999, the Company's portfolio contained a greater
percentage of less liquid and higher yielding securities.
INTEREST EXPENSE AND THE AVERAGE COST OF FUNDS
Historically, the Company incurred interest expense primarily from borrowed
funds under short-term repurchase agreements that finance most of its portfolio
of investments. Interest expense is calculated in the same manner for tax and
GAAP purposes. The Company generally has structured its borrowings to closely
correlate the Company's cost of borrowed funds with changes in one-month LIBOR.
For the year ended December 31, 2000, the Company had average borrowed
funds under short-term repurchase agreements of $162.1 million and interest
expense of $10.7 million with an average cost of funds of 6.46% compared to
average borrowed funds under short-term repurchase agreements of $302.7 million
and interest expense of $16.8 million with an average cost of funds of 5.60% for
the year ended December 31, 1999. The Company's average cost of funds was 0.05%
above one-month LIBOR for the year ended December 31, 2000 compared to 0.30%
above one-month LIBOR for the year ended December 31, 1999. During the year
ended December 31, 2000, average one-month LIBOR, which was 6.41%, was 0.24%
lower than average six-month LIBOR, which was 6.65%. During the year ended
December 31, 1999, average one-month LIBOR, which was 5.30%, was 0.10% lower
than average six-month LIBOR, which was 5.40%.
The table below shows, for the years ended December 31, 2000 and 1999, the
Company's average borrowed funds, interest expense and average cost of funds
compared to average one and six-month LIBOR.
Average Average Average
One-Month Cost of Cost of
LIBOR Funds Funds
Relative Relative Relative
Average to to to
Average Cost Average Average Average Average Average
Borrowed Interest of One-Month Six-Month Six-Month One-Month Six-Month
Funds Expense Funds LIBOR LIBOR LIBOR LIBOR LIBOR
(dollars in thousands)
For the Years Ended:
December 31, 2000 $162,123 $10,654 6.46% 6.41% 6.65% (0.24)% 0.05% (0.19)%
December 31, 1999 $302,736 $16,812 5.60% 5.30% 5.40% (0.10)% 0.30% 0.20%
During 2000, interest rates rose sharply during the first half of the year
primarily in connection with the interest rate setting actions taken by the
Federal Reserve Board. The higher cost of funds level that was attained as a
result of the effect of these actions remained virtually unchanged for the
remainder of the year and was the significant factor contributing to the cost of
funds increase in 2000 over 1999.
INTEREST RATE AGREEMENTS
The Company has followed an interest-rate risk-management strategy designed
to protect against the adverse effects of major interest rate changes through
the use of derivative interest rate agreements, such as a purchased interest
rate cap.
During the second quarter of 2000, the Company purchased a cap with a
notional amount of $100.0 million for a premium of $3.0 million to reduce the
risk of rising interest rates on the cost of the short-term repurchase
agreements used to finance its investments. The cap agreement had a term of
three years and provided for monthly payments of interest to the Company to the
extent that the one-month LIBOR exceeded 6.54% as applied to the notional
amount. At December 31, 2000, the cap had an estimated fair value of $0.4
million and the Company recorded an unrealized loss of $(2.6) million in the
statement of operations. The Company did not enter into any other interest rate
agreements during 2000 and 1999.
NET INTEREST INCOME
Net interest income, which equals total interest income less total interest
expense, amounted to $7.8 million for the year ended December 31, 2000 compared
to $13.1 million for the year ended December 31, 1999. Net interest rate spread,
which equals the yield on the Company's interest earning assets (excluding cash
and cash equivalents) less the average cost of funds for the period was 1.24%
for the year ended December 31, 2000 compared to 2.25% for the year ended
December 31, 1999.
The table below shows the components of net interest income, yield on
average interest earning assets and average cost of funds for the years ended
December 31, 2000 and 1999.
Yield on Average
Average Interest Interest Average Balance
Amortized Income Average Income on Total Amortized of Total Average Net
Cost of on Cash Cash Interest Cost of Repurchase Interest Cost of Interest
Investments Investments Equivalents Equivalents Income Investments Agreements Expense Funds Income
(dollars in thousands)
For the Years Ended:
December 31, 2000 $223,211 $17,194 $20,469 $1,250 $18,444 7.70% $162,123 $10,675 6.46% $ 7,769
December 31, 1999 $358,370 $28,139 $34,990 $1,805 $29,944 7.85% $302,736 $16,812 5.60% $13,132
The overall decrease in net interest income was due primarily to the
Company's substantially reduced investment portfolio and higher average cost of
funds, partially offset by the reduced level of financing. For the year ended
December 31, 2000, the sharp increase in short-term borrowing rates coupled with
an emphasis on lower risk Agency Certificates lowered the net interest rate
spread from the prior year.
CREDIT CONSIDERATIONS
During 2000, the Company recognized the probable other-than-temporary
impairment in the value of certain Subordinate Interests as a result of a
default in one of the underlying Mortgage Loans. See "--Net Income (Loss)
Summary -- Losses from Impairment Charges." The impairment in value recognized
by the Company represents the maximum amount; however, the ultimate amount of
the impairment loss may be lower but is indeterminable at this time.
At December 31, 2000 and December 31, 1999, the Company had limited its
exposure to credit losses on its portfolio (excluding the impaired securities)
by holding 94% and 73%, respectively, of its investments in Agency Certificates
(including IOs, fixed/floating rate mortgage securities and fixed rate
pass-through mortgage securities).
GENERAL AND ADMINISTRATIVE EXPENSES
G&A expense for the year ended December 31, 2000 consisted primarily of
management fees paid to Mariner of $0.3 million and professional and other
expenses of $1.3 million. For the year ended December 31, 2000, the Company
incurred no incentive fee under the Mariner management agreement and did not
incur salary expense. G&A expense for the year ended December 31, 1999 consisted
of consulting fees paid to BlackRock of $1.1 million, salary expense of $0.6
million, management fees paid to the Former Manager of $0.5 million and
professional and other expenses of $2.1 million. G&A expense significantly
decreased in 2000 compared to 1999 due primarily to the restructuring of the
management arrangement in connection with engaging Mariner as external manager.
There were no differences in the calculation of G&A expense for taxable and GAAP
income purposes. The "Efficiency Ratio" is the G&A expense divided by the net
interest income.
G&A EXPENSE RATIOS
(dollars in thousands)
Total
G&A
Expense/ Total G&A
Average Expense/
Interest Average
Management Consulting Other G&A Total G&A Earning Stockholders' Efficiency
Fees Fees Expense Expense Assets Equity Ratio
For the Years Ended:
December 31, 2000 $294 $ -- $1,323 $1,617 0.66% 1.92% 20.81%
December 31, 1999 $543 $1,125 $2,658 $4,326 1.09% 4.86% 32.94%
NET (LOSS) AND RETURN ON AVERAGE STOCKHOLDERS' EQUITY
Net loss was $(15.2) million for the year ended December 31, 2000 compared
to net loss of $(11.0) million for the year ended December 31, 1999. Return on
average stockholders' equity for the year ended December 31, 2000 was (18.03)%
compared to (12.39)% for the year ended December 31, 1999. The table below shows
for the years ended December 31, 2000 and 1999, the Company's net interest
income, losses from investment activities, losses from impairment charges and
G&A expense each as a percentage of average stockholders' equity, and the return
on average stockholders' equity.
Return on
Losses from Losses from Average
Net Interest Investment Impairment G&A Stockholders'
Income Activities Charges Expense Equity
For the Years Ended:
December 31, 2000 9.24% (4.41)% (20.94)% (1.92)% (18.03)%
December 31, 1999 14.76% (22.28)% -- (4.86)% (12.39)%
DISTRIBUTIONS AND TAXABLE INCOME
The Company elected to be taxed as a REIT under the Code for 2000 and 1999.
For the years ended December 31, 2000 and 1999, the Company determined that it
had no taxable income. In 2000, the Company did not make any distributions, and
in 1999 the Company made return of capital distributions of $35.6 million.
FINANCIAL CONDITION
INVESTMENTS
As of December 31, 2001 (stated at estimated net realizable value) and 2000
(stated at estimated fair value), the Company's portfolio consisted of:
As of December 31,
------------------
2001 2000
---- ----
Dollar Amount Dollar Amount
Securities (in millions) Percentage (in millions) Percentage
---------- ------------- ---------- ------------- ----------
Agency Certificates........ $ 15.3 88.4% $ 275.2 86.5%
Subordinate Interests...... -- -- 7.3 2.3%
IOs........................ -- -- 31.3 9.8%
Mortgage Loans............. 2.0 11.6% 2.7 0.8%
Other fixed-income assets.. -- -- 1.8 0.6%
------------- ---------- ------------- ----------
Total.................. $ 17.3 100.0% $ 318.3 100.0%
============= ========== ============= ==========
During 2001, in connection with the liquidation or sale of the Company, the
Company reduced its portfolio of Mortgage Securities and the leverage financing
used to maintain the portfolio. The Company has continued to liquidate its
assets in the last quarter of 2001 pursuant to the Plan of Liquidation and
Dissolution. The proceeds from sales of assets are used to repay the repurchase
agreements with the excess available for liquidating distributions to
stockholders. See "Distributions and Taxable Income; REIT Status."
The Company increased its portfolio of Mortgage Assets during the year
ended December 31, 2000 by relevering its portfolio of Agency Certificates and
IOs in an effort to increase its return on stockholders' equity without exposing
itself to substantial credit and interest rate risk.
At December 31, 2001 and 2000, the Company had on its balance sheet $0.0
million and $4.5 million, respectively, of 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
$0.2 million and $1.2 million, respectively, of total 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) included as part of the amortized cost of the Company's Mortgage Assets.
Unamortized discount balances are accreted as an increase in interest income
over the life of Mortgage Assets purchased at a discount to principal value and
unamortized premium balances are amortized as a decrease in interest income over
the life of Mortgage Assets purchased at a premium to principal value.
Mortgage principal repayments received were $30.8 million and $22.7 million
for the period January 1, 2001 through July 27, 2001 and the year ended December
31, 2000, respectively.
The tables below summarize the Company's investments at December 31, 2001
and 2000.
SECURITIES (EXCLUDING IOs)
(dollars in thousands)
Estimated
Net
Realizable
Amortized or Fair
Cost to Value to Weighted
Current Current Estimated Net Current Average
Principal Net Premium Amortized Principal Realizable or Principal Life
Amount (Discount) Cost Amount Fair Value Amount (Years)
December 31, 2001 $ 14,855 $ 218 $ 15,073 101.47% $ 15,305 103.03% 3.0
December 31, 2000 $ 284,768 $ (3,419) $ 281,349 98.80% $ 284,263 99.82% 4.8
MORTGAGE LOANS
(dollars in thousands)
Estimated
Net
Realizable
Amortized or Fair
Cost to Value to Weighted
Current Current Estimated Net Current Average
Principal Amortized Principal Realizable or Principal Life
Amount Net Premium Cost Amount Fair Value Amount (Years)
December 31, 2001 $ 2,004 -- $ 2,004 100.00% $ 2,004 100.00% 16.0
December 31, 2000 $ 2,648 $ 52 $ 2,700 101.98% $ 2,700 101.98% 17.1
IO SECURITIES
(dollars in thousands)
Estimated
Amortized Fair
Cost to Value to Weighted
Current Current Current Average
Notional Amortized Notional Estimated Notional Life
Amount Cost Amount Fair Value Amount (Years)
December 31, 2001 -- -- -- -- -- --
December 31, 2000 $ 204,337 $ 37,886 18.54% $ 31,298 15.32% 6.8
The table below shows gross unrealized gains and losses on all securities
in the Company's portfolio at December 31, 2001 (stated at estimated net
realizable value) and December 31, 2000 (stated at estimated fair value).
UNREALIZED GAINS AND LOSSES
At December 31,
2001 2000
---- ----
(dollars in thousands)
Unrealized Gain $ 233 $ 6,405
Unrealized Loss -- (10,079)
------------ ------------
Net Unrealized Loss $ 233 $ (3,674)
============ ============
Net Unrealized Gain (Loss) as % of
Investments Principal/Notional Amount 1.38% (0.75)%
Net Unrealized Gain (Loss) as % of
Investments Amortized Cost 1.36% (1.14)%
The following table sets forth a schedule of Pass-Through Certificates and
Mortgage Loans owned by the Company at December 31, 2001 (stated at estimated
net realizable value) and 2000 (stated at estimated fair value) classified by
issuer and by ratings categories.
PASS-THROUGH CERTIFICATES AND MORTGAGE LOANS BY ISSUER AND CREDIT RATING
(dollars in thousands)
December 31, 2001 December 31, 2000
----------------- -----------------
Carrying Value Portfolio Mix Carrying Value Portfolio Mix
-------------- ------------- -------------- -------------
Agency Certificates.............. $ 15,305 88.4% $275,181 86.5%
Privately Issued Certificates:
A Rating....................... -- -- 7,312 2.3%
BB/Ba Rating and Other......... -- -- 1,770 0.6%
IOs.............................. -- -- 31,298 9.8%
Mortgage Loans................... 2,004 11.6% 2,700 0.8%
-------- ----- -------- -----
Total............. $ 17,309 100.0% $318,261 100.0%
======== ===== ======== =====
The following tables set forth information about the Company's portfolio of
Subordinate Interests, IOs, and other fixed-income assets as of December 31,
2000 (stated at estimated fair value). As of December 31, 2001, the Company did
not own any IOs and the estimated net realizable value of the Company's
Subordinate Interests other fixed-income assets was $0.0.
SUBORDINATE INTERESTS
(dollars in thousands)
Description December 31, 2000
----------- -----------------
Commercial $ 7,312
IO SECURITIES
(dollars in thousands)
Description Coupon December 31, 2000
----------- ------ -----------------
Residential Fixed $ 25,112
Commercial Fixed $ 6,186
OTHER FIXED-INCOME ASSETS
(dollars in thousands)
Description December 31, 2000
----------- -----------------
CBO/CLO $ 1,770
LIQUIDITY AND CAPITAL RESOURCES
Liquidity measures the Company's ability to turn non-cash assets into cash
during the liquidation period to satisfy its commitments to repay existing
borrowings, to pay ongoing general and administrative expenses including
estimated costs of liquidation, and to make distributions to stockholders. In
January 2002, the Company liquidated all of the remaining Agency Certificates
that it held on December 31, 2001. Proceeds of the sales added $15.3 million to
the Company's cash balances. In addition, collections of interest and principal
paydowns receivables at December 31, 2001 have subsequently increased liquidity.
The Company will continue to generate liquidity through Mortgage Loan principal
repayments and net earnings held prior to distribution to stockholders. The
Company believes that its cash on hand and earnings from its investments in
Mortgage Loans will be adequate to support the Company and pay its obligations
during the liquidation period.
The Company's debt has consisted entirely of borrowings collateralized by a
pledge of the Company's investments. These borrowings appear on the statement of
net assets in liquidation and 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. At December 31, 2001
and December 31, 2000, the Company had borrowings outstanding from one and three
lenders, respectively. Such borrowings are generally short-term (up to 30-day
terms) and may be renewed by the lender at its discretion. The availability of
financing for the Company's portfolio has been stable during 2001. The Company
does not intend to obtain new sources of short-term financing on its portfolio.
At December 31, 2001, the Company had outstanding $2.0 million of
repurchase agreements with a weighted average remaining maturity of 28 days
compared to $239.9 million outstanding at December 31, 2000 with a weighted
average remaining maturity of 11 days. All of the Company's borrowings have a
cost of funds that generally moves in relation to the one-month LIBOR. At
December 31, 2001 and December 31, 2000, the weighted average cost of funds for
all of the Company's borrowings was 3.2% and 6.7%, respectively. This decrease
was due primarily to the effect of interest rate setting actions taken by the
Federal Reserve Board. At December 31, 2001, investments actually pledged had an
estimated fair value of $2.0 million compared to $249.5 million at December 31,
2000.
In 2001, the Company did not repurchase any shares of common stock under
its stock repurchase program. As of December 31, 2001, an aggregate 6,079,766
shares of the Company's issued common stock had been reacquired at an aggregate
cost of $32.8 million.
DISTRIBUTIONS AND TAXABLE INCOME; REIT STATUS
At its inception, the Company elected to be taxed as a REIT under the Code
commencing with its short taxable year ended December 31, 1997. The Company
qualified as a REIT for the taxable years ended December 31, 1997 through 2001.
The Company does not expect to qualify as a REIT for the year beginning January
1, 2002.
In accordance with the Plan of Liquidation and Dissolution, on November 8,
2001, the Board of Directors filed a petition with the Delaware Court of
Chancery for permission to make an initial distribution to stockholders of $3.00
per outstanding common share. On November 28, 2001, the Delaware Court of
Chancery approved this initial distribution to stockholders. On December 28,
2001, a distribution of $3.00 per outstanding share of common stock was made to
stockholders of record as of December 17, 2001. As of December 31, 2001, the
estimated net realizable value of the Company's net assets in liquidation was
$1.31 per share. After providing for expenses and subject to court approval, the
Company expects to distribute the majority of the remaining net assets in
liquidation over the next three years with a final liquidating distribution to
occur thereafter. The total amount of distributions to stockholders is subject
to change based on numerous factors, including operating expenses, the Delaware
Court of Chancery modifying the distribution amounts and timing currently
envisioned by the Board of Directors under the Plan of Liquidation and
Dissolution, unanticipated claims or expenses and income received, if any, from
the pending litigation against ASC, Nomura Asset and Nomura, as well as other
factors beyond the control of the Company.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2001, the Company adopted the provisions of SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" as amended
by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities - an Amendment of Statement No. 133." The adoption of the
provisions of these accounting pronouncements with respect to the Company's sole
derivative instrument at that time, the interest rate agreement, had no impact
on the Company's financial condition or results of operations.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained under "Item 1. Business" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations," and other statements contained herein regarding matters that are
not historical facts, are forward-looking statements (as such term is defined in
the Private Securities Litigation Reform Act of 1995). Because such
forward-looking statements include risks and uncertainties, actual results may
differ materially from those expressed or implied by such forward-looking
statements. Factors that could cause actual results to differ materially
include, but are not limited to, those described below:
o On August 3, 2001, the Company filed a certificate of dissolution with
the Secretary of State of the State of Delaware, and the dissolution
of the Company was effective upon such filing. The Company no longer
conducts normal business operations and now operates solely for the
purpose of providing for the satisfaction of its obligations,
adjusting and winding-up its business and affairs and distributing its
remaining net assets.
o The Company does not expect to qualify as a REIT for the year
beginning 2002.
o If, in 2002, the Company fails to qualify as a REIT or the Company
revokes its election to be taxed as a REIT, it will no longer be
entitled to deduct dividends paid to stockholders from its taxable
income. In this case, the Company would be subject to federal income
tax at corporate rates (including any applicable alternative minimum
tax) with respect to gains from liquidating sales of assets and income
from operations for that year and for subsequent taxable years. These
federal income taxes would reduce the amounts otherwise distributable
to its stockholders.
o The amount and timing of the liquidation proceeds depends largely on
factors beyond the control of the Company, including, without
limitation, the approval of the Delaware Court of Chancery, the
availability of financing to prospective purchasers, the timing of the
sale of the of the Company's remaining assets, the amount and nature
of any unknown contingent liabilities, and the ability of the Company
to collect its receivables and recoveries, including income received,
if any, from the pending litigation against ASC, Nomura Asset and
Nomura.
ITEM 7A. 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 exposure that the Company has been subject to is the
movement in interest rates with respect to its portfolio of Mortgage Securities,
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, among other things, the spread between the
Company's interest-earning assets and interest-bearing liabilities and the value
of the Company's Mortgage Securities. However, during 2001, the Company
mitigated this exposure by (1) substantially reducing its overall portfolio of
Mortgage Securities and the leverage financing used to maintain the portfolio
and (2) selling all of its fixed rate mortgage pass-through certificates. At
December 31, 2001, approximately 88% of the carrying value of the Company's
portfolio was represented by two short-term adjustable rate Agency Certificates
with the balance being a pool of fixed rate single-family conventional mortgage
whole loans.
In January 2002, the Company sold the remaining adjustable rate Agency
Certificates at their December 31, 2001 value, leaving only the pool of mortgage
whole loans in its portfolio. The remaining mortgage whole loans provide for an
aggregate fixed contract rate of approximately 10%, are fully amortizing, have a
weighted average maturity of 16 years and a remaining principal balance of $2.0
million. Declining interest rates would generally increase the value of these
mortgage whole loans while concurrently increasing the potential for prepayment;
increasing interest rates would generally have the converse effects. However, no
significant prepayment activity has occurred in the current low interest rate
environment with regard to these mortgage whole loans. Although these mortgage
whole loans are subject to interest rate risk and prepayment risk, the Company
believes that these risks will not create a significant impact on the overall
value of the mortgage whole loans.
Additionally, the Company is exposed to interest rate risk as an investor
in an overnight reverse repurchase agreement and as a borrower under a
short-term repurchase agreement that matures monthly. Due to their short term
maturities, the interest rate risk to the Company is not significant.
Finally, the Company is a party to certain other financial instruments,
including receivables for interest and principal paydowns, accounts payable and
other accrued expenses that are not interest rate sensitive.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of the Company and the related notes, together
with the Independent Auditors' Report thereon, are set forth beginning on page
F-1 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS
The Company's Certificate of Incorporation and bylaws provide that the
Board of Directors will consist of five directors, divide the Board of Directors
into three classes, Class I, II and III, with the classes serving staggered
three-year terms, and provide that the number of directors may be changed by a
majority vote of the entire Board of Directors. The Company's bylaws provide
that, except in the case of a vacancy, a majority of the members of the Board of
Directors will at all times be independent directors that are not affiliated
directly or indirectly with any person or entity, if any, responsible for
directing or performing the day-to-day business affairs of the Corporation, and
that any vacancies may be filled by a majority vote of the remaining directors.
The Company's directors are as follows:
DIRECTOR
NAME AGE POSITION SINCE
Ronald J. Artinian........ 53 Director - Class.II 2000
Mark W. Hobbs............. 46 Director - Class I 2000
Arthur House.............. 59 Director - Class II 2000
Jonathan Ilany............ 48 Director - Class III 1998
William J. Michaelcheck... 55 Chief Executive Officer, 1999
Chairman and Director - Class III
The Company is not aware of any family relationship between any director or
executive officer.
RONALD J. ARTINIAN is a private investor in First Real Estate Investment
Trust of New Jersey and, since 1992, has been a member of its Board of Trustees
and a member of its Executive and Audit Committees. Before his involvement with
First Real Estate Investment Trust of New Jersey, Mr. Artinian held various
positions at Smith Barney Inc. from 1989 to 1998, including Senior Managing
Director - National Manager of Taxable Fixed Income, and was the Executive Vice
President - National Manager of Taxable Fixed Income for Lehman Brothers Inc.
from 1976 to 1989.
MARK W. HOBBS has been a director of LASER since October 2000, and is
currently President and Chief Operating Officer of J Net Enterprises, Inc., a
NYSE-listed company. From 1995 until his appointment to J Net Enterprises in
June 2000, Mr. Hobbs was a partner in Mariner Investment Group, an affiliate of
Mariner. Prior to Mariner Investment Group, Mr. Hobbs was involved in private
investing and financial consulting from 1991 to 1995. From 1982 to 1991, Mr.
Hobbs was President of Rosewood Financial, Inc., a private investment management
company.
ARTHUR HOUSE has been a director of LASER since October 2000, and is
currently President and Chief Executive Officer of Meridian Worldwide LLC, an
international public affairs firm. Mr. House was formerly Senior Vice President,
Corporate Affairs at Tenneco Inc., from June 1992 to September 1997.
JONATHAN ILANY has been a director of the Company since 1998 and an
employee of Mariner Investment Group since September 2000. Prior to joining
Mariner Investment Group, Mr. Ilany was the Chief Executive Officer and a
director of Angiosonics, Inc., a private medical device company with operations
in the United States and Israel. Before joining Angiosonics, Inc. in 1996, Mr.
Ilany had been, since 1987, a Senior Managing Director of Bear, Stearns & Co.
Inc. ("Bear Stearns") and served on the Board of Directors of The Bear Stearns
Companies Inc. until 1995.
WILLIAM J. MICHAELCHECK has been the President and Chief Executive Officer
of the Company since November 1999 and the Chairman and sole member of Mariner
since its inception in October 1999. Mr. Michaelcheck has been the Chairman and
sole stockholder of Mariner Investment Group since 1992. Formerly, he was
Executive Vice President of The Bear Stearns Companies and a Senior Managing
Director of Bear Stearns, where he was co-head of the Fixed-Income Department
and also responsible for a large segment of the firm's trading activities and
risk management. Mr. Michaelcheck joined Bear Stearns in 1979 as co-creator of
the Government Bond Department, becoming a General Partner in 1981 and a Senior
Managing Director when Bear Stearns became a publicly-held corporation. He was
named Executive Vice President in 1987, and served on the firm's Executive
Committee and Management and Compensation Committee until leaving Bear Stearns
in October 1992.
EXECUTIVE OFFICERS
See the information appearing under the caption "Executive Officers" of the
Registrant in Part I of the Form 10-K.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's executive officers and directors, and persons who own
more than 10% of the Company's common stock to file reports of ownership and
changes in ownership with the SEC and the New York Stock Exchange. Officers,
directors and greater than ten-percent stockholders are required by SEC
regulations to furnish the Company with copies of all such reports they file.
Based solely on a review of the copies of such reports furnished to the
Company, or written representations that no Form 5 was required, the Company
believes that all Section 16(a) filing requirements applicable to its officers,
directors and greater than ten-percent beneficial owners were complied with
through December 31, 2001.
ITEM 11. EXECUTIVE COMPENSATION.
From November 1, 1999 to November 1, 2001, Mariner served as the external
manager of the Company. Under the most recent management agreement with Mariner
which was entered into on November 1, 2000 and terminated on November 1, 2001,
LASER did not pay any compensation to the Company's executive officers for their
services, as they were employed by Mariner. Upon the termination of the
management agreement on November 1, 2001, the Company became self managed and
entered into employment agreements with William J. Michaelcheck, the President
and Chief Executive Officer of the Company, and Charles R. Howe, II, the Vice
President, Treasurer and Secretary of the Company, each at a salary of $10,000
per month. The Company paid no other compensation to its executive officers in
2001. Messrs. Michaelcheck and Howe continue to have significant
responsibilities at Mariner.
GRANTS OF AWARDS
During 2001, no deferred stock awards were granted. No stock options or
stock appreciation rights were outstanding as of December 31, 2001 and none were
owned by any of the Company's executive officers during 2001.
COMPENSATION OF DIRECTORS
The Company pays each independent director compensation of $10,000 per
annum and a fee of $500 for each meeting of the Board of Directors that he
attends. The Company reimburses each director for ordinary and necessary
expenses related to such director's attendance at Board of Directors and
committee meetings. During 2001, no options were granted to any directors under
the Company's Long-Term Stock Incentive Plan, which was terminated upon the
effectiveness of the Reincorporation.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Artinian, Hobbs and House currently are independent directors and
serve on the Compensation Committee. No interlocking relationship exists between
members of the Company's Board of Directors or the Compensation Committee or
officers responsible for compensation decisions and the Board of Directors or
compensation committee of any other company, nor has such interlocking
relationship existed in the past.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to the Company
with respect to beneficial ownership of its common stock as of March 26, 2002,
by (i) each executive officer and director, (ii) any person known to the Company
to be the beneficial owner of five percent or more of the common stock and (iii)
all directors and executive officers as a group. Unless otherwise indicated in
the footnotes to the table, the beneficial owners named have, to the knowledge
of the Company, sole voting and investment power with respect to the shares
beneficially owned, subject to community property laws where applicable.
SHARES
BENEFICIALLY OWNED
NAME AND ADDRESS OF BENEFICIAL OWNER (1) NUMBER
- ------------------------------------ OF SHARES PERCENT
William J. Michaelcheck (2)................................ 836,900 5.96%
Charles R. Howe, II (2).................................... 836,900 5.96%
Jonathan Ilany (2)......................................... 836,900 5.96%
Ronald J. Artinian......................................... 6,000 *
Mark W. Hobbs.............................................. 0 *
Arthur House............................................... 0 *
Highfields Capital Management L.P. (3)..................... 3,275,900 23.33%
Legg Mason, Inc. (4)....................................... 1,938,330 13.81%
Warren E. Buffett (5)...................................... 1,360,000 9.69%
SLS Management (6)......................................... 1,137,600 8.10%
SSF Investments, L.P (7)................................... 962,800 6.86%
Jay Buck (8)............................................... 899,500 6.41%
Mariner Investment Group, Inc. (2)......................... 836,900 5.96%
Lloyd I. Miller, III (9)................................... 731,400 5.21%
All directors and executive officers as a group (6 persons) 842,900 6.00%
_______________
* Less than one percent
(1) The address of each of the executive officers, and directors of LASER is
c/o LASER Mortgage Management, Inc., c/o Mariner Investment Group, Inc. 780
Third Avenue, 16th Floor, New York, New York, 10017. The address of
Highfields Capital Management L.P. is 200 Clarendon Street, 51st Floor,
Boston, Massachusetts 02117. The address of Legg Mason, Inc. is 100 Light
Street, Baltimore, Maryland 21202. The address of Warren E. Buffett is 1440
Kiewit Plaza, Omaha, Nebraska 68131. The address of SLS Management, LLC is
140 West 57th Street, New York, New York 10019. The address of SSF
Investments, L.P. is 645 Fifth Avenue, 21st Floor, New York, New York
10022. The address of New Ellington Partners LP is 53 Forest Avenue, Old
Greenwich, Connecticut 06870. The address of Jay Buck is 104 Field Point
Road, Greenwich, Connecticut 06830. The address of Mariner Investment
Group, Inc. is 780 Third Avenue, 16th Floor, New York, New York 10017. The
address of Lloyd I. Miller is 4550 Gordon Drive, Naples, Florida 34102.
(2) Based on Schedule 13D filed on November 12, 1999. Includes all of the
shares of common stock owned beneficially by clients advised by Mariner
Investment Group, Inc., of which Mr. Michaelcheck is the sole stockholder,
Mr. Howe is the Chief Financial Officer and Mr. Ilany is an employee.
(3) Based on Schedule 13G filed on February 16, 1999. Includes all of the
shares of common stock owned beneficially by Highfields
Capital Ltd., Highfields Capital I LP and Highfields Capital II LP. Mr.
Richard L. Grubman and Jonathon S. Jacobson are the managing members of
Highfields Associates, which directs the affairs of Highfields Capital I LP
and Highfield Capital II LP., and Highfields GP LLC, the general partner of
Highfields Capital Management LP.
(4) Based on Schedule 13G filed on February 12, 1999. Includes all of the
shares of common stock owned beneficially by certain mutual funds advised
by Legg Mason, Inc.
(5) Based on Schedule 13G/A filed on February 14, 2002.
(6) Based on Schedule 13G/A filed on February 13, 2002. Includes all of the
shares of common stock owned beneficially by other entities.
(7) Based on Schedule 13G/A filed on February 14, 2002.
(8) Based on Schedule 13G filed on July 24, 2000. Includes all of the shares of
common stock owned beneficially by Rockwood Asset Management Inc., Rockwood
Partners and Demeter Asset Management, controlled by Mr. Buck.
(9) Based on Schedule 13G filed on February 28, 2002. Includes all of the
shares of common stock owned beneficially by certain family trusts Mr.
Miller is the investment advisor to the trustee of the trusts.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
From November 1, 1999 to November 1, 2001, Mariner served as the external
manager of the Company and was responsible for the day-to-day management of the
Company's investments and operations.
Under the most recent management agreement, which was entered into on
November 1, 2000 and terminated on November 1, 2001, Mariner became entitled to
be paid an incentive fee upon the earlier of (1) the termination date of the
management agreement or (2) the date on which the Board of Directors adopted
resolutions approving the liquidation and dissolution, referred to as the
anniversary date, which it did on April 25, 2001, equal to the number of shares
outstanding on the applicable date, multiplied by:
o 10% of the difference between the 15-day average closing market price
(plus any distributions per share other than common stock) of the
Company's common stock preceding November 1, 2001 (or such earlier
anniversary date, as set forth in the agreement) and $3.317 per share
(which approximates the average closing price of the Company's common
stock for the fifteen days ended October 31, 2000) up to the
equivalent of $3.50 per share;
o 15% of the difference between the 15-day average closing market price
(plus any distributions per share other than common stock) of the
Company's common stock preceding November 1, 2001 or on the
anniversary date, whichever is earlier, and $3.50 per share up to
$4.00 per share; and
o 20% of the difference between the 15-day average closing market price
(plus any distributions per share other than common stock) of the
Company's common stock preceding November 1, 2001 or on the
anniversary date, whichever is earlier, and $4.00 per share.
Based upon this calculation, an incentive fee of $1,219,285 was paid to
Mariner on May 1, 2001. Mariner was not entitled to receive any other fee upon
the adoption of the Plan of Liquidation and Dissolution.
In accordance with the terms of the management agreement, Mariner continued
to receive its base management fee of $50,000 per month until the termination of
the management agreement.
Upon the termination of the most recent management agreement on November 1,
2001, the Company became self managed and entered into employment agreements
with William J. Michaelcheck, the President and Chief Executive Officer of the
Company, and Charles R. Howe, II, the Vice President, Treasurer and Secretary of
the Company, each at a salary of $10,000 per month. Messrs. Michaelcheck and
Howe previously were responsible for managing the Company's portfolio at Mariner
and continue to have significant responsibilities at Mariner. On November 1,
2001, the Company also entered into a support services agreement with Mariner
Investment Group, an affiliate of Mariner, under which Mariner Investment Group
will provide the Company with office space and services, bookkeeping and
accounting services and such other services as may be agreed upon from time to
time by the Company and Mariner Investment Group for a fee of $30,000 per month.
William J. Michaelcheck, the Chairman of Mariner, and the Chairman and sole
stockholder of Mariner Investment Group, is LASER's President and Chief
Executive Officer. Charles R. Howe, II, is the Chief Financial Officer of
Mariner, and Mariner Investment Group, is LASER's Vice President, Treasurer and
Secretary. Jonathan Ilany, a Director of LASER, is an employee of Mariner
Investment Group.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report on Form 10-K:
1. Financial Statements. The financial statements of the Company and
the related notes, together with the Independent Auditors' Report thereon,
are set forth beginning on page F-1 of this Form 10-K.
2. Schedules to Financial Statements: All financial statement
schedules have been omitted because they are either inapplicable or the
information required is provided in the Company's Financial Statements and
Notes thereto, included in Part II, Item 8 of this Annual Report on Form
10-K.
3. Exhibits: See "Exhibit Index."
(b) On December 3, 2001, the Company filed a Current Report on Form 8-K pursuant
to Item 5 announcing that the Delaware Court of Chancery approved an initial
distribution to the Company's stockholders of $3.00 per outstanding share of
common stock.
(c) On December 7, 2001, the Company filed a Current Report on Form 8-K pursuant
to Item 5 announcing that it would make an initial cash liquidation distribution
of $3.00 per outstanding share of common stock on December 28, 2001 to its
stockholders.
GLOSSARY
As used herein, the capitalized and other terms listed below have the
meanings indicated.
"Agency Certificates" means Federal Home Loan Mortgage Corporation
Certificates, Federal National Mortgage Association Certificates and Government
National Mortgage Association Certificates.
"ASC" means Asset Securitization Corporation, an affiliate of Nomura.
"BlackRock" means BlackRock Financial Management, Inc.
"Board of Directors" means the Board of Directors of the Company.
"Cap" means a purchased interest rate cap.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Stock" means shares of the Company's common stock, $.001 par value
per share.
"Company" means LASER Mortgage Management, Inc., a Delaware corporation.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Former Manager" means LASER Advisers Inc., a Delaware corporation.
"G&A Expense" means general and administrative expenses.
"GAAP" means generally accepted accounting principles.
"GAAP income (loss)" means income calculated according to GAAP.
"Investment Company Act" means the Investment Company Act of 1940, as
amended.
"Interest-Only Security" or "IO" means a type of Mortgage Security which
receives a portion of the interest payments from an underlying pool of Mortgage
Loans but will receive little or no principal payments and hence will have
little or no face value.
"IRS" means the United States Internal Revenue Service.
"LASER Maryland" means Laser Mortgage Management Inc., a Maryland
corporation.
"LIBOR" means London Interbank Offered Rate.
"Mariner" means Mariner Mortgage Management, L.L.C.
"Mariner Investment Group" means Mariner Investment Group, Inc.
"Mortgage Assets" means (i) Mortgage Securities and (ii) Mortgage Loans.
"Mortgage Derivatives" means Mortgage Securities which provide for the
holder to receive interest only, principal only, or interest and principal in
amounts that are disproportionate to those payable on the underlying Mortgage
Loans.
"Mortgage Loans" means mortgage loans secured by first or second liens on
single-family residential, multi-family residential, commercial or other real
property.
"Mortgage Securities" means (i) Pass-Through Certificates, (ii)
collateralized mortgage obligations, and (iii) other securities representing
interests in, or obligations backed by, pools of Mortgage Loans.
"NOL" means net operating losses as calculated for tax purposes.
"Nomura" means Nomura Securitization International, Inc.
"Nomura Asset" means Nomura Asset Capital Corporation.
"NYSE" means the New York Stock Exchange.
"Operating Expense" means general and administrative expenses.
"Pass-Through Certificates" means securities (or interests therein) other
than Mortgage Derivative Securities and Subordinate Interests evidencing
undivided ownership interests in a pool of Mortgage Loans, the holders of which
receive a "pass-through" of the principal and interest paid in connection with
the underlying Mortgage Loans in accordance with the holders' respective,
undivided interests in the pool. Pass-Through Certificates include Agency
Certificates, as well as other certificates evidencing interests in loans
secured by single-family residential, multi-family residential, commercial
and/or other real property.
"Privately-Issued Certificates" means privately-issued Pass-Through
Certificates issued by a third party issuer which is not an Agency Certificate.
"Reincorporation" means the Reincorporation of LASER Maryland in Delaware,
approved by the stockholders of LASER Maryland at the July 27, 2001 annual
meeting.
"REIT" means Real Estate Investment Trust.
"REIT Provisions of the Code" means Sections 856 through 860 of the Code.
"SFAS" means Statement of Financial Accounting Standards.
"Subordinate Interests" means a class of Mortgage Securities that is junior
to other classes of Mortgage Securities in the right to receive payments from
the underlying Mortgage Loans.
LASER MORTGAGE MANAGEMENT, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
INDEPENDENT AUDITORS' REPORT.................................................F-2
FINANCIAL STATEMENTS:
Statement of Net Assets in Liquidation as of December 30, 2001
(Liquidation Basis) and Balance Sheet as of December 31, 2000
(Going Concern Basis)...................................................F-3
Statement of Changes in Net Assets in Liquidation for the period
from July 28, 2001 through December 31, 2001 (Liquidation Basis)........F-4
Statements of Operations and Comprehensive Income for the period from
January 1, 2001 through July 27, 2001 and for the years ended
December 31, 2000 and 1999 (Going Concern Basis)........................F-5
Statements of Stockholders' Equity for the period from January 1, 2001
through July 27, 2001 and for the years ended December 31, 2000
and 1999 (Going Concern Basis)..........................................F-6
Statement of Cash Flows for the period from July 28, 2001 through
December 31, 2001 (Liquidation Basis)...................................F-7
Statements of Cash Flows for the period from January 1, 2001 through
July 27, 2001 and for the years ended December 31, 2000 and 1999
(Going Concern Basis)...................................................F-8
Notes to Financial Statements...........................................F-9
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
LASER Mortgage Management, Inc.
We have audited the accompanying statement of net assets in liquidation of LASER
Mortgage Management, Inc. (the "Company") as of December 31, 2001 and the
related statements of changes in net assets in liquidation and cash flows for
the period from July 28, 2001 through December 31, 2001. In addition, we have
audited the accompanying balance sheet of the Company as of December 31, 2000
and the related statements of operations and comprehensive income, stockholders'
equity and cash flows for the period from January 1, 2001 through July 27, 2001,
and for the years ended December 31, 2000 and 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 1 to the financial statements, on July 27, 2001, the
stockholders of LASER Maryland (as defined in Note 1 to the financial
statements), at the annual meeting, approved the reincorporation of LASER
Maryland in Delaware, through the merger of LASER Maryland with and into the
Company, and the subsequent liquidation and dissolution of the Company under the
terms and conditions of the Plan of Liquidation and Dissolution. As a result,
the Company changed its basis of accounting from the going concern basis to the
liquidation basis effective as of July 28, 2001.
In our opinion, such financial statements present fairly, in all material
respects, the net assets in liquidation of the Company as of December 31, 2001,
the changes in its net assets in liquidation and its cash flows for the period
from July 28, 2001 through December 31, 2001, its financial position as of
December 31, 2000 and the results of its operations and its cash flows for the
period from January 1, 2001 through July 27, 2001, and for the years ended
December 31, 2000 and 1999, in conformity with accounting principles generally
accepted in the United States of America.
March 28, 2002
Deloitte & Touche LLP
LASER MORTGAGE MANAGEMENT, INC.
STATEMENT OF NET ASSETS IN LIQUIDATION AS OF DECEMBER 31, 2001 (LIQUIDATION
BASIS) AND BALANCE SHEET AS OF DECEMBER 31, 2000 (GOING CONCERN BASIS)
- --------------------------------------------------------------------------------
AS OF
DECEMBER 31, 2001 DECEMBER 31, 2000
- --------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents................... $ 2,960,185 $ 3,542,209
Investment in securities.................... 15,305,268 315,560,905
Investment in mortgage loans................ 2,004,114 2,699,838
Interest rate agreement..................... -- 380,000
Interest and principal paydowns receivable.. 1,649,692 4,328,489
Prepaid expenses............................ -- 1,416,792
--------------- ---------------
Total assets...................... 21,919,259 $ 327,928,233
--------------- ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Repurchase agreements..................... 2,028,000 $ 239,877,000
Payable for securities acquired........... -- 23,321,844
Accrued interest payable.................. 30,576 560,130
Accounts payable and accrued expenses..... 892,513 729,703
Reserve for estimated liquidation costs... 524,937 --
--------------- ---------------
Total liabilities................. 3,476,026 264,488,677
--------------- ---------------
Stockholders' Equity:
Common stock: par value $.001 per share;
100,000,000 shares authorized;
20,118,749 shares issued................. 20,119
Additional paid-in capital................ 283,012,967
Accumulated other comprehensive loss...... (3,673,678)
Accumulated distributions and losses...... (183,071,421)
Treasury stock at cost (6,079,766 shares). (32,848,431)
---------------
Total stockholders' equity........ 63,439,556
---------------
Total liabilities and
stockholders' equity.............. $ 327,928,233
===============
Net assets in liquidation......... $ 18,443,233
===============
See notes to financial statements.
LASER MORTGAGE MANAGEMENT, INC.
STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION FOR THE PERIOD FROM JULY 28,
2001 THROUGH DECEMBER 31, 2001 (LIQUIDATION BASIS)
- --------------------------------------------------------------------------------
Interest Income:
Securities and mortgage loans............................ $ 1,963,752
Cash and cash equivalents................................ 225,897
---------------
Total interest income............................. 2,189,649
Interest Expense:
Repurchase agreements.................................... 419,590
---------------
Net interest income........................................ 1,770,059
Net gain on securities..................................... 607,650
General and administrative expenses........................ 552,796
---------------
Increase in net assets in liquidation from operating
activites................................................. 1,824,913
---------------
Liquidation distribution to stockholders................... (42,116,949)
---------------
Adjustments to reflect the change to liquidation basis
accounting:
Reduction to reflect estimated net realizable value of
securities.............................................. (938,188)
Write-off of prepaid expenses............................ (1,098,222)
Reserve for estimated liquidation costs.................. (700,000)
---------------
Adjustment to liquidation basis accounting....... (2,736,410)
---------------
Net assets in liquidation at beginning of period........... 61,471,679
---------------
Net assets in liquidation at end of period................. $ 18,443,233
===============
See notes to financial statements.
LASER MORTGAGE MANAGEMENT, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(GOING CONCERN BASIS)
- ---------------------------------------------------------------------------------------------------------------------------
FOR THE PERIOD FROM YEAR ENDED YEAR ENDED
JANUARY 1, 2001 DECEMBER 31, DECEMBER 31,
THROUGH 2000 1999
JULY 27, 2001
- ---------------------------------------------------------------------------------------------------------------------------
Interest Income:
Securities and mortgage loans.................... $ 7,231,003 $ 17,194,218 $ 28,139,101
Cash and cash equivalents........................ 525,563 1,249,762 1,805,346
----------- ------------ ------------
Total interest income...................... 7,756,566 18,443,980 29,944,447
----------- ------------ ------------
Interest Expense:
Repurchase agreements............................ 4,059,974 10,654,039 16,812,335
Other -- 20,629 --
----------- ------------ ------------
Total interest expense..................... 4,059,974 10,674,668 16,812,335
----------- ------------ ------------
Net interest income................................. 3,696,592 7,769,312 13,132,112
Net realized loss on securities..................... (4,218,425) (1,125,623) (19,828,790)
Net loss on interest rate agreement................. (120,000) (2,580,000) --
Impairment loss on securities....................... -- (17,596,917) --
General and administrative expenses................. 2,527,690 1,617,097 4,325,681
----------- ------------ ------------
Net loss............................................ $(3,169,523) $(15,150,325) $(11,022,359)
----------- ------------ ------------
Other Comprehensive Income:
Unrealized net gain (loss) on securities:
Unrealized holding loss arising during the period (3,016,779) (9,973,400) (17,505,679)
Add: reclassification adjustment for net realized loss
included in net loss.......................... 4,218,425 8,722,540 19,828,790
----------- ------------ ------------
Other comprehensive income.......................... 1,201,646 8,749,140 2,323,111
----------- ------------ ------------
Comprehensive loss.................................. $(1,967,877) $(6,401,185) $(8,699,248)
=========== ============ ============
NET LOSS PER SHARE:
Basic............................................ $ (0.23) $ (1.05) $ (0.65)
=========== =========== ============
Diluted.......................................... $ (0.23) $ (1.05) $ (0.65)
=========== =========== ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic............................................ 14,038,983 14,369,081 16,925,143
=========== ============ ============
Diluted.......................................... 14,038,983 14,369,081 16,925,143
=========== ============ ============
See notes to financial statements.
LASER MORTGAGE MANAGEMENT, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 1, 2001 THROUGH JULY 27, 2001 AND
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999(GOING CONCERN BASIS)
- ------------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER
ADDITIONAL COMPREHENSIVE ACCUMULATED TREASURY TOTAL
COMMON PAID-IN INCOME DISTRIBUTIONS AND STOCK STOCKHOLDERS'
STOCK CAPITAL (LOSS) LOSSES AT COST EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998............ $20,100 $282,921,970 $ (14,745,929) $(121,290,971) $(19,348,394) $127,556,776
------------- ------------
Comprehensive loss:
Net loss -- -- -- (11,022,359) -- (11,022,359)
------------
Other comprehensive income:
Unrealized holding loss arising
during the year.................. -- -- (17,505,679) -- -- (17,505,679)
Reclassification adjustment for
net realized loss included in
net loss......................... -- -- 19,828,790 -- -- 19,828,790
------------- ------------
Other comprehensive income........ -- -- 2,323,111 2,323,111
------------
Comprehensive loss.................. (8,699,248)
Common stock issued................... 19 90,997 -- -- -- 91,016
Repurchase of common stock............ -- -- -- -- (10,349,101) (10,349,101)
Dividends/Distributions declared -
$2.00 per share...................... -- -- -- (35,607,766) -- (35,607,766)
------- ------------ ------------- ------------- ------------ ------------
BALANCE, DECEMBER 31, 1999............ 20,119 283,012,967 (12,422,818) (167,921,096) (29,697,495) 72,991,677
------------- ------------
Comprehensive loss:
Net loss -- -- -- (15,150,325) -- (15,150,325)
------------
Other comprehensive income:
Unrealized holding loss arising
during the year.................. -- -- (9,973,400) -- -- (9,973,400)
Reclassification adjustment for
net realized loss included in
net loss......................... -- -- 18,722,540 -- -- 18,722,540
------------- ------------
Other comprehensive income........ -- -- 8,749,140 -- -- 8,749,140
------------- ------------
Comprehensive loss.................. (6,401,185)
Repurchase of common stock............ -- -- -- -- (3,150,936) (3,150,936)
------- ------------ ------------- ------------- ------------ ------------
BALANCE, DECEMBER 31, 2000............ 20,119 283,012,967 (3,673,678) (183,071,421) (32,848,431) 63,439,556
------------- ------------
Comprehensive loss:
Net loss -- -- -- (3,169,523) -- (3,169,523)
------------
Other comprehensive income:
Unrealized holding loss arising
during the period............... -- -- (3,016,779) -- -- (3,016,779)
Reclassification adjustment for
net realized loss included in
net loss......................... -- -- 4,218,425 -- -- 4,218,425
------------- ------------
Other comprehensive income........ -- -- 1,201,646 -- -- 1,201,646
------------
Comprehensive loss.................. (1,967,877)
------- ------------ ------------- ------------- ------------ ------------
BALANCE, JULY 27, 2001................ $20,119 $283,012,967 $ (2,472,032) $(186,240,944) $(32,848,431) $ 61,471,679
======= ============ ============= ============= ============ ============
See notes to financial statements
LASER MORTGAGE MANAGEMENT, INC.
STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM JULY 28, 2001
THROUGH DECEMBER 31, 2001 (LIQUIDATION BASIS)
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Increase in net assets in liquidation from operating activities................ $ 1,824,913
Adjustments to reconcile increase in net assets in liquidation
from operating activities to net cash provided by operating activities:
Amortization of mortgage premiums and discounts, net........................... (44,472)
Net gain on securities......................................................... (607,650)
Decrease in interest receivable................................................ 416,991
Decrease in accrued interest payable........................................... (671,397)
Increase in accounts payable and accrued expenses.............................. 66,500
Decrease in reserve for estimated liquidation costs ........................... (175,063)
------------
Net cash provided by operating activities...................................... 809,822
------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of securities............................................... 45,069,534
Principal payments on securities and mortgage loans............................ 20,969,010
------------
Net cash provided by investing activities...................................... 66,038,544
------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of repurchase agreements............................................ (44,363,576)
Liquidation distribution to stockholders....................................... (42,116,949)
------------
Net cash used in financing activities.......................................... (86,480,525)
------------
Net decrease in cash and cash equivalents...................................... (19,632,159)
Cash and cash equivalents at beginning of period............................... 22,592,344
------------
Cash and cash equivalents at end of period..................................... $ 2,960,185
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid.................................................................. $ (1,090,987)
============
SUPPLEMENTAL DISCLOSURE OF NON-CASH OPERATING ACTIVITIES:
Adjustment to liquidation basis accounting.................................... $ (2,736,410)
=============
See notes to financial statements
LASER MORTGAGE MANAGEMENT, INC.
FOR THE PERIOD
JANUARY 1, 2001 YEAR ENDED YEAR ENDED
STATEMENTS OF CASH FLOWS THROUGH DECEMBER 31, DECEMBER 31,
(GOING CONCERN BASIS) JULY 27, 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,169,523) $ (15,150,325) $ (11,022,359)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Amortization of mortgage premiums and discounts, net............... (186,354) (835,665) 2,590,314
Unrealized (gain) loss on interest rate agreement.................. (2,580,000) 2,580,000 --
Impairment loss on securities...................................... -- 17,596,917 --
Net realized loss on sale of securities and interest rate agreement 6,918,425 1,125,623 19,828,790
Change in assets and liabilities:
Decrease (increase) in interest receivable......................... 2,280,392 (2,048,041) 9,613,217
Decrease in margin deposits on repurchase agreements............... -- 425,000 6,692,098
Decrease (increase) in prepaid expenses............................ 318,570 (1,416,792) --
Increase (decrease) in accrued interest payable.................... 141,843 410,870 (2,296,977)
Increase (decrease) in accounts payable and accrued expenses....... 96,310 (351,357) 523,514
Decrease in payable to manager..................................... -- (42,754) (1,082,246)
---------------- ---------------- ----------------
Net cash provided by operating activities............................ 3,819,663 2,293,476 24,846,351
---------------- ---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities............................................. (55,048,842) (511,979,144) (42,695,021)
(Decrease) increase in payable for securities acquired............. (23,321,844) 23,321,844 --
Purchase of interest rate agreement................................ -- (2,960,000) --
Proceeds from sale of securities................................... 255,982,732 261,390,441 681,131,529
Proceeds from sale of interest rate agreement...................... 260,000 -- --
Principal payments on securities and mortgage loans................ 30,843,850 22,702,504 66,622,098
---------------- ---------------- ----------------
Net cash provided by (used in) investing activities.................. 208,715,896 (207,524,355) 705,058,606
---------------- ---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements................................ 1,960,972,986 1,706,908,627 3,512,626,247
Repayments of repurchase agreements................................ (2,154,458,410) (1,511,049,627) (4,210,993,157)
Payments for repurchase of common stock, net of issuances.......... -- (3,150,936) (10,258,085)
Distributions paid to stockholders................................. -- -- (35,607,766)
---------------- ---------------- ----------------
Net cash (used in) provided by financing activities.................. (193,485,424) 192,708,064 (744,232,761)
---------------- ---------------- ----------------
Net increase (decrease) in cash and cash equivalents................. 19,050,135 (12,522,815) (14,327,804)
Cash and cash equivalents at beginning of period..................... 3,542,209 16,065,024 30,392,828
---------------- ---------------- ----------------
Cash and cash equivalents at end of period........................... $ 22,592,344 $ 3,542,209 $ 16,065,024
================ ================ ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid...................................................... $ (3,918,131) $ (10,054,489) $ (19,109,312)
================ ================ ================
NONCASH FINANCING ACTIVITIES:
Net change in unrealized gain on available-for-sale securities... $ 1,201,646 $ 8,749,140 $ 2,323,111
================ ================ ================
See notes to financial statements.
LASER MORTGAGE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
LASER Mortgage Management, Inc. (the "Company") was incorporated in
Delaware on May 1, 2001, as a wholly-owned subsidiary of LASER Mortgage
Management, Inc., a Maryland corporation ("LASER Maryland"), and is the
successor by merger to LASER Maryland. LASER Maryland was incorporated in
Maryland on September 3, 1997 and commenced its operations on November 26, 1997.
On May 30, 2001, the Company's Board of Directors and sole stockholder, LASER
Maryland, approved the liquidation and dissolution of the Company under the
terms and conditions of the Plan of Liquidation and Dissolution, subject to the
approval of the Plan of Liquidation and Dissolution by the stockholders of LASER
Maryland. On July 27, 2001, the stockholders of LASER Maryland, at the annual
meeting, approved the reincorporation of LASER Maryland in Delaware (the
"Reincorporation"), through the merger of LASER Maryland with and into the
Company, and the subsequent liquidation and dissolution of the Company under the
terms and conditions of the Plan of Liquidation and Dissolution. On July 31,
2001, LASER Maryland completed the Reincorporation by merging with and into the
Company. As of the effective date of the Reincorporation, LASER Maryland ceased
to exist. On August 3, 2001, the Company filed a certificate of dissolution with
the Secretary of State of the State of Delaware, and the dissolution of the
Company was effective upon such filing. The Company has ceased to conduct normal
business operations and now operates solely for the purpose of providing for the
satisfaction of its obligations, adjusting and winding-up its business and
affairs and distributing its remaining net assets. References herein to "LASER"
or the "Company" include LASER Maryland prior to the date of the
Reincorporation, as applicable.
In accordance with the Plan of Liquidation and Dissolution, on November 8,
2001, the Board of Directors filed a petition with the Delaware Court of
Chancery for permission to make an initial distribution to stockholders of $3.00
per outstanding common share. On November 28, 2001, the Delaware Court of
Chancery approved this initial distribution to stockholders. On December 28,
2001, a distribution of $3.00 per outstanding share of common stock was made to
stockholders of record as of December 17, 2001. As of December 31, 2001, the
estimated net realizable value of the Company's net assets in liquidation was
$1.31 per share. After providing for expenses and subject to court approval, the
Company expects to distribute the majority of the remaining net assets in
liquidation over the next three years with a final liquidating distribution to
occur thereafter. The total amount of distributions to stockholders is subject
to change based on numerous factors, including operating expenses, the Delaware
Court of Chancery modifying the distribution amounts and timing currently
envisioned by the Board of Directors under the Plan of Liquidation and
Dissolution, unanticipated claims or expenses and income received, if any, from
the pending litigation against Asset Securitization Corporation ("ASC"), Nomura
Asset Capital Corporation ("Nomura Asset") and Nomura Securitization
International, Inc. ("Nomura"), as well as other factors beyond the control of
the Company.
The Company was organized to create and manage an investment portfolio of
primarily mortgage-backed securities and mortgage loans that, in combination
with financing and hedging activities, would generate income for distribution to
its stockholders while preserving the Company's capital base. At its inception,
the Company elected to be taxed 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. The Company qualified as a
REIT for the taxable years ended December 31, 1997 through 2001. The Company
does not expect to qualify as a REIT for the year beginning January 1, 2002.
BASIS OF PRESENTATION - As described above, stockholders approved the Plan
of Liquidation and Dissolution of the Company on July 27, 2001. As a result, the
Company adopted liquidation basis accounting effective July 28, 2001.
Accordingly, the Company's assets are stated at their estimated net realizable
values and liabilities are stated at their estimated settlement amounts,
including an accrual for estimated expenses associated with the liquidation of
the Company. Before the adoption of liquidation basis accounting, the Company
operated as a continuing business and followed going concern basis accounting.
Because substantially all of the existing assets and liabilities of the Company
were carried at approximate fair value in accordance with generally accepted
accounting principles ("GAAP"), the adoption of liquidation basis accounting did
not have a material impact on the Company's financial statements other than
requiring the Company to charge stockholders' equity for the: reduction in the
carrying value of securities to reflect their estimated net realizable value,
write-off of the remaining balance of prepaid expenses, and reserve for
estimated expenses associated with the liquidation of the Company. However, the
valuation of assets and liabilities at their estimated net realizable values and
estimated settlement amounts, respectively, necessarily requires estimates and
assumptions. Changes in market conditions, actual costs associated with the
liquidation, and other factors may affect the amounts ultimately realized or
settled, and those amounts may differ, perhaps materially, from the carrying
values on the Company's financial statements.
A summary of the Company's significant accounting policies follows:
CASH EQUIVALENTS - Cash equivalents consist of an overnight reverse
repurchase agreement. The amount reported on the statement of net assets in
liquidation or balance sheet, as appropriate, represents the amount advanced
under the agreement.
INVESTMENTS - The Company invested primarily in mortgage-backed securities
and mortgage loans. The mortgage-backed securities included privately issued or
U.S. government or agencies issued 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 invested 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").
Before the adoption of liquidation basis accounting and in accordance with
the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", the Company
classified its Securities as available-for-sale. The available-for-sale
classification required that those Securities be carried at estimated fair
value, with unrealized gains and losses reported on the balance sheet as a
separate component of stockholders' equity within accumulated other
comprehensive loss. This classification was appropriate since the Company may
have needed to sell, from time to time, any of its Securities as part of its
overall management of its balance sheet even though the Company generally
intended to hold most of its Securities until maturity.
After the adoption of liquidation basis accounting, the Company's
Investments are carried at estimated net realizable value on the statement of
net assets in liquidation, with unrealized gains and losses reported on the
statement of changes in net assets in liquidation.
The Company's Mortgage Loans are carried at estimated net realizable value
on the statement of net assets in liquidation, with unrealized gains and losses
reported on the statement of changes in net assets in liquidation. Before the
adoption of liquidation basis accounting, the Company's Mortgage Loans were
carried on the balance sheet 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.
Realized gains and losses on Investment transactions are determined on the
specific identification basis and have been recorded on the statement of changes
in net assets in liquidation or the statement of operations, as appropriate.
INTEREST RATE AGREEMENTS - The Company has followed an interest-rate
risk-management strategy designed to protect against the adverse effects of
major interest rate changes and used derivative interest rate agreements, such
as a purchased interest rate cap ("cap").
A cap is a contractual agreement for which the Company pays an initial
premium in return for subsequent cash flows to the Company to the extent that a
specific interest rate index exceeds the contractual fixed rate, applied to a
notional amount. The amount of the risk of loss on a cap is the premium paid.
The cap was recorded and carried at estimated fair value with changes in fair
value reported on the statement of operations. Interest payments received were
recorded as a component of net interest income on the statement of operations.
REPURCHASE AGREEMENTS - The Company utilized repurchase agreements to
finance most of its Investments. The repurchase agreements are collateralized by
certain of the Company's Investments and bear interest rates that generally move
in close relation to the one-month London Interbank Offered Rate ("LIBOR"). The
amount reported on the statement of net assets in liquidation or balance sheet,
as appropriate, represents the contractual amount to be repaid under such
agreements.
RESERVE FOR ESTIMATED LIQUIDATION COSTS - Under liquidation basis
accounting, the Company is required to estimate and accrue the costs associated
with the liquidation. The amount recorded in the statement of net assets in
liquidation represents estimated professional fees and other expenses expected
to be incurred in connection with liquidation activities and paid out over the
course of the liquidation. The ultimate amount paid might vary significantly due
to, among other things, the timing of the liquidation.
SECURITIES SOLD, NOT YET PURCHASED - Securities sold, not yet purchased
represent an obligation to replace borrowed Securities that were sold. The
Company had carried the obligation at its estimated fair value on the balance
sheet, with changes in fair value reported on the statement of operations. While
the transaction was open, the interest accruing on the borrowed Securities
represented an expense to the Company and was recorded as other interest expense
on the statement of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS -The fair values of the Company's
Investments and interest rate agreement were based on prices and valuations
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. The carrying
values of cash equivalents, interest receivable and payable, repurchase
agreements and other financial assets and liabilities approximates their
estimated fair value because of the short-term nature of these financial
instruments. Estimated net realizable value approximates estimated fair value as
presented in these financial statements.
INCOME TAXES - At its inception, the Company elected to be taxed as a REIT
under the Internal Revenue Code of 1986, as amended, commencing with its short
taxable year ended December 31, 1997. As such, the Company generally has been
entitled to a deduction for all dividends it paid to its stockholders for a
taxable year. As a result, the Company has not been subject to federal income
taxation with respect to its distributed income. Qualification as a REIT
requires that the Company satisfy a number of asset, income and distribution
tests. The Company qualified as a REIT for the taxable years for the years ended
December 31, 1997 through 2001. The Company does not expect to qualify as a REIT
for the year beginning January 1, 2002.
USE OF ESTIMATES - The preparation of financial statements in conformity
with 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 income and expenses during the reporting period. Actual results could differ
from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS - Effective January 1, 2001, the Company
adopted the provisions of SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" as amended by SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an Amendment of
Statement No. 133." The adoption of the provisions of these accounting
pronouncements with respect to the Company's sole derivative instrument at that
time, the interest rate agreement, had no impact on the Company's financial
condition or results of operations.
2. MORTGAGE SECURITIES
The following tables show the Company's Mortgage Securities as of December
31, 2001 (stated at estimated net realizable value) and as of December 31, 2000
(stated at estimated fair value), excluding interest-only mortgage derivatives
("IOs").
DECEMBER 31, 2001
AGENCY
FLOATING
RATE MORTGAGE
SECURITIES
-------------
Current principal amount $14,854,868
Unamortized discount --
Unamortized premium 217,674
-----------
Amortized cost 15,072,542
Gross unrealized gains 232,726
Gross unrealized losses --
-----------
Estimated net realizable value $15,305,268
===========
DECEMBER 31, 2000
AGENCY
FIXED/
FLOATING RATE NON-
MORTGAGE MORTGAGE MORTGAGE
SECURITIES SUBORDINATES SUBORDINATES TOTAL
Current principal amount $271,728,664 $7,316,580 $ 5,722,553 $284,767,797
Unamortized discount (3,939,630) -- (600,000) (4,539,630)
Unamortized premium 1,117,677 2,684 -- 1,120,361
------------ ---------- ----------- ------------
Amortized cost 268,906,711 7,319,264 5,122,553 281,348,528
Gross unrealized gains 6,290,740 -- -- 6,290,740
Gross unrealized losses (16,251) (7,256) (3,352,893) (3,376,400)
------------ ---------- ----------- ------------
Estimated fair value $275,181,200 $7,312,008 $ 1,769,660 $284,262,868
============ ========== =========== ============
The Company did not hold any IOs in its portfolio as of December 31, 2001.
The following table shows the IOs as of December 31, 2000 (stated at estimated
fair value).
DECEMBER 31, 2000
FIXED RATE FIXED RATE
RESIDENTIAL COMMERCIAL TOTAL
Current notional amount $ 104,492,206 $ 99,844,649 $ 204,336,855
============= ============= ===============
Amortized cost $ 31,815,356 $ 6,070,699 $ 37,886,055
Gross unrealized gains -- 114,987 114,987
Gross unrealized losses (6,703,005) -- (6,703,005)
------------- ------------- ---------------
Estimated fair value $ 25,112,351 $ 6,185,686 $ 31,298,037
============= ============= ===============
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 Securities that are affected by this event are subordinated classes of
Commercial Mortgage Pass-Through Certificates, Series 1997-D5 that represent
beneficial ownership interests in a trust fund created by ASC, an affiliate of
Nomura, at the time of the offering. Thereafter, a representative of Nomura
notified a representative of the Company that the amount of the recovery of the
Securities may be negligible. Accordingly, management increased the unrealized
loss on those Securities at that time by approximately $(9.1) million
representing the remaining total aggregate carrying value of those Securities,
pending further developments.
On October 23, 2000 the Company filed suit in the Southern District of New
York against ASC, Nomura Asset and Nomura alleging that the defendants defrauded
the Company into purchasing approximately $19.0 million worth of ASC securities
by failing to disclose, among other things, that one of largest loans in the
mortgage pool was seriously troubled. The Company is seeking rescission of the
purchase of the Securities. During the quarter ended December 31, 2000, the
Company recognized the probable other-than-temporary impairment of those
Securities by charging the statement of operations and crediting accumulated
other comprehensive loss on the balance sheet for the aggregate cumulative loss
of $(17,596,917); such recognition had no further impact on stockholders' equity
from the time of the earlier increase in unrealized loss.
On December 8, 2000, the defendants filed a motion to dismiss the action.
On September 5, 2001, such motion was granted with respect to the claims brought
under Sections 12(a)(2) and 15 of the Securities Act of 1933 and denied with
respect to the common law fraud claims and claims brought under Sections 10(b)
and 20(a) of Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder. Discovery is proceeding with regard to the surviving claims. A
recovery of this Investment may be possible, but management is unable to predict
the likelihood of this occurrence.
3. MORTGAGE LOANS
The following table shows the Company's Mortgage Loans at December 31, 2001
(stated at estimated net realizable value) and December 31, 2000 (stated at
amortized cost).
2001 2000
Principal amount $ 2,004,114 $ 2,647,455
Unamortized premium -- 52,383
---------------- ----------------
Net carrying value amount $ 2,004,114 $ 2,699,838
================ ================
As of December 31, 2000, the amortized cost of the Mortgage Loans
approximated their estimated fair value.
4. INTEREST RATE AGREEMENT
CAPS
The Company used a cap during 2000, and continuing into January 2001, to
reduce the risk of rising interest rates on the cost of the short-term
repurchase agreements used to finance its Investments.
As a result of the reduction in interest rates in January 2001, the Company
closed out the existing cap, with a notional amount of $100,000,000, for
$260,000 in cash and recognized a net loss of $(120,000) on the statement of
operations that is comprised of a realized loss of $(2,700,000) and an
unrealized gain of $2,580,000 from the reversal of the unrealized loss on the
cap at December 31, 2000 due to its sale. During the second quarter of 2000, the
Company purchased this cap for a premium of $2,960,000. The cap agreement had a
term of three years and provided for monthly payments of interest to the Company
to the extent that the one-month LIBOR exceeded 6.54%, as applied to the
notional amount. By December 31, 2000, the Company had recorded an unrealized
loss of $(2,580,000) on the statement of operations with respect to the cap to
reflect its estimated fair value of $380,000 in the balance sheet at that time.
5. REPURCHASE AGREEMENTS
Most of the Company's Investments were financed by repurchase agreements.
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.
The Company has been liquidating its assets pursuant to the Plan of
Liquidation and Dissolution. The proceeds from sales of assets are used to repay
the repurchase agreements. At December 31, 2001 and December 31, 2000, the
Company had $2,028,000 and $239,877,000, respectively, of repurchase agreements
outstanding with a weighted average borrowing rate of 3.24% and 6.66%,
respectively, and a weighted average remaining maturity of 28 days and 11 days,
respectively. The repurchase agreement outstanding at December 31, 2001 matures
in 28 days. The associated accrued interest expense payable on the outstanding
repurchase agreements amounted to $30,576 and $560,130 at December 31, 2001 and
December 31, 2000, respectively. At December 31, 2001 and December 31, 2000, the
repurchase agreements were collateralized by Investments that had an estimated
value of approximately $2,004,000 (stated at estimated net realizable value) and
$249,500,000 (stated at estimated fair value), respectively.
During the first quarter of 1999, to improve its liquidity, the Company
terminated a $500,000,000, five year repurchase agreement and recognized a loss
of approximately $(8,500,000) in net realized loss on securities on the
statement of operations.
6. RESERVE FOR ESTIMATED LIQUIDATION COSTS
At the time of the adoption of liquidation basis accounting, the Company
recorded $700,000 for estimated professional fees and other expenses anticipated
over the course of the liquidation. At December 31, 2001, the reserve for
estimated liquidation costs amounted to $524,937. During the period July 28,
2001 through December 31, 2001, the Company paid $175,063 of liquidation costs.
During the period January 1, 2001 through July 27, 2001, the Company incurred
approximately $1.4 million of costs directly related to the liquidation of the
Company. Such costs were recorded in general and administrative expenses on the
statement of operations.
7. STOCKHOLDERS' EQUITY
COMMON STOCK - At each of December 31, 2001 and 2000, the Company had
100,000,000 common shares authorized and 20,118,749 common shares issued.
During the year ended December 31, 1999, an aggregate of 80,000 shares of
common stock was issued as deferred stock awards to certain employees of the
Company at a value of $91,016 (see note 8).
DIVIDENDS/DISTRIBUTIONS - On December 28, 2001, a cash liquidation
distribution of $3.00 per outstanding share of common stock, or $42,116,949, was
made in accordance with the Company's Plan of Liquidation and Dissolution.
During the year ended December 31, 1999, the Company declared and subsequently
paid dividends and distributions in cash of $2.00 per outstanding common share
or $35,607,766.
TREASURY STOCK - In November 1998, the Board of Directors of the Company
increased the amount of common stock authorized to be repurchased under the
Company's stock repurchase program to $40.0 million. Pursuant to the common
stock repurchase program, the Company repurchased 825,600 shares and 2,953,700
shares of common stock for $3,150,936 and $10,349,101 and during the years ended
December 31, 2000 and 1999, respectively. No shares of common stock were
repurchased during 2001. At December 31, 2001 and 2000, an aggregate 6,079,766
shares of the Company's issued common stock had been reacquired at an aggregate
cost of $32,848,431.
8. LONG-TERM STOCK INCENTIVE PLAN
LASER Maryland had adopted a Long-Term Stock Incentive Plan for directors,
executive officers and key employees (the "Incentive Plan"). The Incentive Plan
authorized the Compensation Committee of the Board of Directors to grant awards,
including incentive stock options as defined under Section 422 of the Code,
options not so qualified and deferred common stock. The Incentive Plan
authorized an aggregate of 2,066,666 shares of LASER Maryland's common stock for
the granting of options or other awards. Upon the effectiveness of the
Reincorporation, the Incentive Plan was terminated.
There were no outstanding awards under the Incentive Plan during 2001 and
none were outstanding or reserved for issuance at December 31, 2000. During the
years ended December 31, 2000 and 1999, stock options of 10,000 and 210,000,
respectively, were terminated. During the year ended December 31, 1999, 18,750
shares of deferred common stock awards were issued at cost of $91,016 (see note
7) and all other deferred common stock awards previously granted to employees
who had subsequently left the Company were terminated.
9. LOSS PER SHARE ("LPS")
Basic LPS is computed by dividing the net loss attributable to common
shares by the weighted average number of common shares outstanding during the
period. The calculation of diluted LPS considers the effect of all dilutive
potential common shares that were outstanding during the period under the
Company's Incentive Plan. Basic and diluted LPS for the period January 1, 2001
through July 27, 2001 and for the years ended December 31, 2000 and 1999 was as
follows:
FOR THE PERIOD JANUARY 1, 2001 THROUGH
JULY 27, 2001
NET LOSS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
Basic LPS $ (3,169,523) 14,038,983 $ (0.23)
============= =============== =============
Diluted LPS $ (3,169,523) 14,038,983 $ (0.23)
============= =============== =============
FOR THE YEAR ENDED
DECEMBER 31, 2000
NET LOSS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
Basic LPS $ (15,150,325) 14,369,081 $ (1.05)
============= =============== =============
Diluted LPS $ (15,150,325) 14,369,081 $ (1.05)
============= =============== =============
FOR THE YEAR ENDED
DECEMBER 31, 1999
NET LOSS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
Basic LPS $ (11,022,359) 16,925,143 $ (0.65)
============= =============== =============
Diluted LPS $ (11,022,359) 16,925,143 $ (0.65)
============= =============== =============
For the period January 1, 2001 through July 27, 2001, there were no
deferred common shares reserved for issuance and there were no outstanding
options to purchase common shares of the Company.
For the years ended December 31, 2000 and 1999, there were no deferred
common shares reserved for issuance. For the years ended December 31, 2000 and
1999, options to purchase 7,500, and 100,000 shares of the Company's common
stock were outstanding, respectively, and were excluded from the computation of
diluted LPS for the year then ended because they were anti-dilutive.
10. MANAGEMENT AGREEMENTS
From November 1, 1999 to November 1, 2001, Mariner Mortgage Management,
L.L.C. ("Mariner") served as the external manager of the Company and was
responsible for the day-to-day management of the Company's investments and
operations.
Under the most recent management agreement, which was entered into on
November 1, 2000 and terminated on November 1, 2001, Mariner became entitled to
be paid an incentive fee upon the earlier of (1) the termination date of the
management agreement or (2) the date on which the Board of Directors adopted
resolutions approving the liquidation and dissolution, referred to as the
anniversary date, which it did on April 25, 2001, equal to the number of shares
outstanding on the applicable date, multiplied by:
o 10% of the difference between the 15-day average closing market price
(plus any distributions per share other than common stock) of the
Company's common stock preceding November 1, 2001 (or such earlier
anniversary date, as set forth in the agreement) and $3.317 per share
(which approximates the average closing price of the Company's common
stock for the fifteen days ended October 31, 2000) up to the
equivalent of $3.50 per share;
o 15% of the difference between the 15-day average closing market price
(plus any distributions per share other than common stock) of the
Company's common stock preceding November 1, 2001 or on the
anniversary date, whichever is earlier, and $3.50 per share up to
$4.00 per share; and
o 20% of the difference between the 15-day average closing market price
(plus any distributions per share other than common stock) of the
Company's common stock preceding November 1, 2001 or on the
anniversary date, whichever is earlier, and $4.00 per share.
Based upon this calculation, an incentive fee of $1,219,285 was paid to
Mariner on May 1, 2001. Mariner was not entitled to receive any other fee upon
the adoption of the Plan of Liquidation and Dissolution.
In accordance with the terms of the management agreement, Mariner continued
to receive its base management fee of $50,000 per month until the termination of
the management agreement.
For the period November 1, 1999 to November 1, 2000, the annual base fee
under the terms of the management agreement then in effect, was payable monthly
in cash and based on 0.45% of the aggregate value of the Company's outstanding
equity as of the end of such month; the annual incentive fee calculation for
that period was similar to the computation described above.
The table below shows the base fees incurred to the Company pursuant to the
terms of the Mariner management agreement.
FOR THE PERIOD: BASE FEES INCURRED
July 28, 2001 through November 1, 2001 $ 150,000
January 1, 2001 through July 27, 2001 $ 350,000
January 1, 2000 through December 31, 2000 $ 294,193
November 1, 1999 through December 31, 1999 $ 42,754
No incentive fees were incurred during the period July 28, 2001 through
December 31, 2001 or during the years ended December 31, 2000 and 1999. As
described above, an incentive fee of $1,219,285 was paid to Mariner during the
period January 1, 2001 through July 27, 2001.
Upon the termination of the most recent management agreement on November 1,
2001, the Company became self managed and entered into employment agreements
with William J. Michaelcheck, the President and Chief Executive Officer of the
Company, and Charles R. Howe, II, the Vice President, Treasurer and Secretary of
the Company, each at a salary of $10,000 per month. Messrs. Michaelcheck and
Howe previously were responsible for managing the Company's portfolio at Mariner
and continue to have significant responsibilities at Mariner. On November 1,
2001, the Company also entered into a support services agreement with Mariner
Investment Group, Inc. ("Mariner Investment Group"), an affiliate of Mariner,
under which Mariner Investment Group will provide the Company with office space
and services, bookkeeping and accounting services and such other services as may
be agreed upon from time to time by the Company and Mariner Investment Group for
a fee of $30,000 per month.
Prior to November 1, 1999, the Company was engaged in a consulting
arrangement with BlackRock Financial Management, Inc. ("BlackRock") and in a
management agreement with LASER Advisers, Inc. (the "Former Manager").
The management agreement with the Former Manager was terminated effective
February 28, 1999. During the time the management agreement was in effect, it
provided for an annual base management fee of 1.0% of average stockholders'
equity, as defined, and a quarterly incentive fee in an amount equal to 20% of
the excess quarterly net income of the Company over a hurdle, all as defined.
For the year ended December 31, 1999, the Company incurred consulting fees
to BlackRock in the amount of $1,125,000; $500,000 was payable at December 31,
1999. Under the management agreement with the Former Manager, the Company
incurred base management fees of approximately $500,000 for the year ended
December 31, 1999.
11. TAXABLE INCOME (LOSS)
At its inception, the Company elected to be taxed as a REIT under the
Internal Revenue of 1986, as amended, commencing with its short taxable year
ended December 31, 1997. As such, the Company generally has been entitled to a
deduction for all dividends it paid to its stockholders for a taxable year. As a
result, the Company has not been subject to federal income taxation with respect
to its distributed income. Qualification as a REIT requires that the Company
satisfy a number of asset, income and distribution tests. The Company qualified
as a REIT for the taxable years ended December 31, 1997 through 2001. Because
less than 75% of the Company's gross income for the 2002 taxable year is
expected to derive from certain required REIT investments, the Company does not
expect to qualify as a REIT for the year beginning January 2002. If, in 2002,
the Company fails to qualify as a REIT, it will no longer be entitled to deduct
dividends paid to stockholders from its taxable income. In this case, the
Company would be subject to federal income tax at corporate rates (including any
applicable alternative minimum tax) with respect to gains from liquidating sales
of assets and income from operations for that year and for subsequent taxable
years. The federal income taxes would reduce the amounts otherwise distributable
to its stockholders.
Revenue Procedure 99-17 provided 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
("IRS"). The Company elected mark-to-market treatment as a securities trader,
and accordingly, recognizes 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.
Taxable income (loss) requires an annual calculation; consequently, for the
tax year ended December 31, 2001, taxable income (loss) may be different from
GAAP net income (loss) as a result of differing treatment of the change in
unrealized net gains (losses) on Securities transactions. For the Company's tax
purposes, the change in unrealized net gains (losses) will be recognized at the
end of the year and will be aggregated with operating income (losses) to produce
total taxable income (loss) for the year. For the tax year ended December 31,
2001, the Company had unrealized net gains of $3,906,403.
For the tax years ended December 31, 2001, 2000 and 1999, net operating
losses as calculated for tax purposes ("NOLs") are estimated at approximately
$(1,400,000), $(6,200,000) and $(60,000,000), respectively. NOLs generally may
be carried forward for 20 years. The Company believes that during 1999 it
experienced an "ownership change" within the meaning of Section 382 of the Code.
Consequently, the Company's use of NOLs generated before the ownership change to
reduce taxable income after the ownership change will be subject to limitations
under Code Section 382. Generally, Code Section 382 limits the use of NOLs in
any year to the value of the Company's common stock on the date of the ownership
change multiplied by the long-term tax-exempt rate (published by the IRS) with
respect to that date. The Company believes that the annual limitation with
respect to the use of its NOLs is approximately $3,000,000. The Company believes
that as of December 31, 2001, approximately $92,500,000 of the estimated
cumulative NOL of $120,100,000 is subject to the annual limitation.
12. SUMMARIZED QUARTERLY RESULTS (UNAUDITED)
The quarterly results of operations for the period January 1, 2001 through
July 27, 2001 and the year ended December 31, 2000 follow:
QUARTER ENDED QUARTER ENDED PERIOD JULY 1, 2001
MARCH 31, 2001 JUNE 30, 2001 THROUGH JULY 27, 2001
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME DATA:
Interest income:
Securities and mortgage loans. $ 5,099 $ 1,659 $ 473
Cash and cash equivalents..... 209 254 63
---------- ---------- -----------
Total interest income......... 5,308 1,913 536
---------- ---------- -----------
Interest expense:
Repurchase agreements......... 3,204 703 153
---------- ---------- -----------
Net interest income............. 2,104 1,210 383
Net realized loss on sale of
securities..................... (2,294) (1,900) (24)
Net loss on interest rate
agreement...................... (120) -- --
General and administrative
expenses....................... 1,787 570 171
---------- ---------- -----------
Net (loss) income............... $ (2,097) $ (1,260) $ 188
---------- ---------- -----------
Other Comprehensive Income:
Unrealized net gain on
securities:
Unrealized holding (loss)
gain arising during period... (2,206) (870) 60
Add: reclassification
adjustment for net realized
loss included in net (loss)
income..................... 2,293 1,900 24
---------- ---------- -----------
Other comprehensive income.... 87 1,030 84
---------- ---------- -----------
Comprehensive (loss) income..... $ (2,010) $ (230) $ 272
========== ========== ===========
Net (loss) income per share:
Basic......................... $ (0.15) $ (0.09) $ 0.01
========== ========== ===========
Diluted....................... $ (0.15) $ (0.09) $ 0.01
========== ========== ===========
Weighted average number of
shares outstanding:
Basic......................... 14,038,983 14,038,983 14,038,983
Diluted....................... 14,038,983 14,038,983 14,038,983
QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED
MARCH 31, 2000 JUNE 30, 2000 SEPTEMBER 30, 2000 DECEMBER 31, 2000
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME DATA:
Interest income:
Securities and mortgage loans. $ 1,884 $ 3,362 $ 6,005 $ 5,943
Cash and cash equivalents..... 505 551 121 73
---------- ---------- ---------- ----------
Total interest income......... 2,389 3,913 6,126 6,016
---------- ---------- ---------- ----------
Interest expense:
Repurchase agreements......... 580 1,754 3,874 4,447
Other......................... -- 242 -- (222)
---------- ---------- ---------- ----------
Total interest expense........ 580 1,996 3,874 4,225
---------- ---------- ---------- ----------
Net interest income............. 1,809 1,917 2,252 1,791
Net realized (loss) gain on
sale of securities............. (2,405) 393 371 516
Unrealized loss on interest
rate agreement................. -- -- -- (2,580)
Impairment loss on securities... -- -- -- (17,597)
General and administrative
expenses....................... 792 (186) 319 692
---------- ---------- ---------- ----------
Net (loss) income............... $ (1,388) $ 2,496 $ 2,304 $ (18,562)
---------- ---------- ---------- ----------
Other Comprehensive Income
(Loss):
Unrealized net gain (loss) on
securities:
Unrealized holding gain
(loss) arising during period. 74 (10,803) 139 617
Add: reclassification
adjustment for net realized
loss (gain) included in net
(loss) income during period.. 2,405 (393) (371) 17,081
Other comprehensive
income (loss).................. 2,479 (11,196) (232) 17,698
---------- ---------- ---------- ----------
Comprehensive income (loss)..... $ 1,091 $ (8,700) $ 2,072 $ (864)
========== ========== ========== ==========
Net (loss) income per share:
Basic......................... $ (0.09) $ 0.17 $ 0.16 $ (1.32)
========== ========== ========== ==========
Diluted....................... $ (0.09) $ 0.17 $ 0.16 $ (1.32)
========== ========== ========== ==========
Weighted average number of
shares outstanding:
Basic......................... 14,847,825 14,557,790 14,038,983 14,038,983
========== ========== ========== ==========
Diluted....................... 14,847,825 14,557,790 14,038,983 14,038,983
========== ========== ========== ==========
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York.
LASER MORTGAGE MANAGEMENT, INC.
By: /s/ Charles R. Howe, II
------------------------------------
Name: Charles R. Howe, II
Title: Vice President, Chief Financial
Officer and Treasurer
Dated: March __, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons in the
capacities and on the date indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
Chief Executive Officer, Chairman March __, 2002
- ------------------------- and Director
William J. Michaelcheck (Principal Executive Officer)
/S/ CHARLES R. HOWE, II Vice President, Chief Financial March 27, 2002
- ------------------------- Officer and Treasurer
Charles R. Howe, II (Principal Financial and
Accounting Officer)
/S/ RONALD J. ARTININAN Director March 27, 2002
- -------------------------
Ronald J. Artinian
/S/ MARK HOBBS Director March 27, 2002
- -------------------------
Mark Hobbs
/S/ ARTHUR HOUSE Director March 27, 2002
- -------------------------
Arthur House
/S/ JONATHAN ILANY Director March 27, 2002
- -------------------------
Jonathan Ilany
EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT
- -------------- -------
2.1 The Articles of Merger (Incorporated by reference to Exhibit
2.1 to Registrant's Quarterly Report on Form 10-Q dated June
30, 2001.)
2.2 The Certificate of Ownership and Merger (Incorporated by
reference to Exhibit 2.2 to Registrant's Quarterly Report on
Form 10-Q dated June 30, 2001.)
2.3 Plan of Liquidation and Dissolution of LASER Mortgage
Management, Inc. (Incorporated by reference to Exhibit 2.3
to Registrant's Quarterly Report on Form 10-Q dated June 30,
2001.)
3.1 Restated Certificate of Incorporation of LASER Mortgage
Management, Inc., a Delaware corporation (Incorporated by
reference to Exhibit 3.1 to Registrant's Quarterly Report on
Form 10-Q dated June 30, 2001.)
3.2 Bylaws of LASER Mortgage Management, Inc., a Delaware
corporation (Incorporated by reference to Exhibit 3.2 to
Registrant's Quarterly Report on Form 10-Q dated June 30,
2001.)
10.1 Management Agreement between the Registrant and LASER
Advisers, Inc. (Incorporated by reference to Exhibit 10.2 to
the Registrant's Annual Report on Form 10-K for the year
ending December 31, 1997)
10.2 Termination Agreement dated as of February 28, 1999 between
the Registrant and LASER Advisers Inc. (Incorporated by
reference to Exhibit 10.1 to the Registrant's Current Report
on Form 8-K dated February 28, 1999)
10.3 Consulting Agreement dated as of February 28, 1999 between
the Registrant and BlackRock Financial Management, Inc.
(Incorporated by reference to Exhibit 10.2 to the
Registrant's Current Report on Form 8-K dated February 28,
1999)
10.4 Management Agreement between the Registrant and Mariner
Mortgage Management, L.L.C. (Incorporated by reference to
Exhibit 10.1 to the Registrant's Current Report on Form 8-K
dated November 5, 1999)
10.5 First Amendment to the Management Agreement dated as of
November 1, 2000 by and between the Registrant and Mariner
Mortgage Management, L.L.C. (Incorporated by reference to
Exhibit 10.1 to Registrant's Current Report on Form 8-K
dated November 3, 2000.)
10.6 Support Services Agreement dated as of November 1, 2001
between the Registrant and Mariner Investment Group, Inc.
(Incorporated by reference to Exhibit 10.1 to Registrant's
Quarterly Report on Form 10-Q dated September 30, 2001.)
10.7 Employment Agreement dated as of November 1, 2001 between
the Registrant and William J. Michaelcheck (Incorporated by
reference to Exhibit 10.2 to Registrant's Quarterly Report
on Form 10-Q dated September 30, 2001.)
10.8 Employment Agreement dated as of November 1, 2001 between
the Registrant and Charles R. Howe, II (Incorporated by
reference to Exhibit 10.3 to Registrant's Quarterly Report
on Form 10-Q dated September 30, 2001.) Form of
Indemnification Agreement between the Registrant and each of
Ronald
10.9* J. Artinian, Mark Hobbs, Arthur House, Jonathan Ilany,
William J. Michaelcheck, Charles R. Howe, II, Thomas Arleo,
A. George Kallop, William Petersen, and Dennis Winter
Certificate of Dissolution (Incorporated by reference to
Exhibit 99.1 to
99.1 Registrant's Quarterly Report on Form 10-Q dated September
30, 2001.)
*Filed herewith.