UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE
ACT OF 1934
| For the quarterly period ended: | June 30, 2002 |
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
| For the transition period from _______________ to _________________ |
Commission file number: 1-13563
LASER MORTGAGE MANAGEMENT, INC.
(Exact name of registrant as specified in its charter)
| DELAWARE (State or other jurisdiction of incorporation or organization) |
22-3535916 (I.R.S. Employer Identification No.) |
c\o Mariner Investment Group, Inc.
780 Third Avenue, 16th Floor
New York, NY 10017
(Address of principal executive offices)
(Zip Code)
(212) 758-2024
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:
Yes X No ____
Indicate the number of shares outstanding of each of the issuer's classes of stock, as of the last practicable date: 14,038,983 shares of common stock, $0.001 par value, outstanding as of August 1, 2002.
LASER MORTGAGE MANAGEMENT, INC.
FORM 10-Q
INDEX
| PART I. FINANCIAL INFORMATION | 1 |
| Item 1. Financial Statements | 1 |
| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 13 |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | 18 |
| PART II. OTHER INFORMATION | 19 |
| Item 1. Legal Proceedings | 19 |
| Item 6. Exhibits and Reports on Form 8-K | 19 |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LASER Mortgage Management, Inc.
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AS OF
STATEMENT OF NET ASSETS IN LIQUIDATION JUNE 30, 2002 DECEMBER 31, 2001
(LIQUIDATION BASIS) (UNAUDITED)
- ----------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents.................................. $ 19,464,581 $ 2,960,185
Investment in securities................................... -- 15,305,268
Investment in mortgage loans............................... -- 2,004,114
Interest and principal paydowns receivable................. 3,096 1,649,692
--------------- ---------------
Total assets............................................. 19,467,677 21,919,259
--------------- ---------------
LIABILITIES
Liabilities:
Repurchase agreement..................................... -- 2,028,000
Accrued interest payable................................. -- 30,576
Accounts payable and accrued expenses.................... 472,862 892,513
Reserve for estimated liquidation costs.................. 505,119 524,937
--------------- ---------------
Total liabilities........................................ 977,981 3,476,026
--------------- ---------------
Net assets in liquidation................................ $ 18,489,696 $ 18,443,233
=============== ===============
See notes to financial statements.
LASER Mortgage Management, Inc.
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STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION FOR THE
(LIQUIDATION BASIS) (UNAUDITED) THREE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2002
- ----------------------------------------------------------------------------------------------------
Interest income:
Securities and mortgage loans............................ $ 43,981 $ 174,757
Cash and cash equivalents................................ 84,602 148,446
--------------- ---------------
Total interest income.................................. 128,583 323,203
Interest expense:
Repurchase agreement..................................... 7,708 19,662
--------------- ---------------
Net interest income........................................ 120,875 303,541
Net gain on securities..................................... 78,202 245,352
General and administrative expenses........................ 229,785 502,430
--------------- ---------------
Net (decrease) increase in net assets in liquidation
from operating activities.................................. (30,708) 46,463
Net assets in liquidation at beginning of period........... 18,520,404 18,443,233
--------------- ---------------
Net assets in liquidation at end of period................. $ 18,489,696 $ 18,489,696
=============== ===============
See notes to financial statements.
LASER Mortgage Management, Inc.
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STATEMENTS OF OPERATIONS FOR THE
AND COMPREHENSIVE INCOME THREE MONTHS ENDED SIX MONTHS ENDED
(GOING CONCERN BASIS) (UNAUDITED) JUNE 30, 2001 JUNE 30, 2001
- ----------------------------------------------------------------------------------------------------
Interest income:
Securities and mortgage loans............................ $ 1,658,776 $ 6,758,202
Cash and cash equivalents................................ 253,838 462,426
--------------- ---------------
Total interest income.................................. 1,912,614 7,220,628
Interest expense:
Repurchase agreements.................................... 702,967 3,907,134
--------------- ---------------
Net interest income........................................ 1,209,647 3,313,494
Net realized loss on sale of securities.................... (1,900,461) (4,194,146)
Net loss on interest rate agreement........................ -- (120,000)
General and administrative expenses........................ 569,606 2,357,164
--------------- ---------------
Net loss................................................... $ (1,260,420) $ (3,357,816)
--------------- ---------------
Other comprehensive income:
Unrealized net loss on securities:
Unrealized holding loss arising during period............ (870,262) (3,076,645)
Add: reclassification adjustment for net realized loss
included in net loss................................ 1,900,461 4,194,146
--------------- ---------------
Other comprehensive income............................... 1,030,199 1,117,501
--------------- ---------------
Comprehensive loss......................................... $ (230,221) $ (2,240,315)
=============== ===============
Net loss per share:
Basic.................................................... $ (0.09) $ (0.24)
=============== ===============
Diluted.................................................. $ (0.09) $ (0.24)
=============== ===============
Weighted average number of shares outstanding:
Basic.................................................... 14,038,983 14,038,983
=============== ===============
Diluted.................................................. 14,038,983 14,038,983
=============== ===============
See notes to financial statements.
LASER Mortgage Management, Inc.
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STATEMENTS OF CASH FLOWS FOR THE
(LIQUIDATION BASIS) (UNAUDITED) THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2002
- ----------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net (decrease) increase in net assets in liquidation from
operating activities....................................... $ (30,708) $ 46,463
Adjustments to reconcile net (decrease) increase in net
assets in liquidation from operating activities to net
cash used in operating activities:
Amortization of mortgage premiums.......................... -- (8,766)
Net loss on securities..................................... -- 33,614
Decrease in interest receivable............................ 822 315,182
Decrease in accrued interest payable....................... (42,530) (30,576)
Decrease in accounts payable and accrued expenses.......... (27,417) (419,651)
Decrease in reserve for estimated liquidation costs........ (15,011) (19,818)
--------------- ---------------
Net cash used in operating activities...................... (114,844) (83,552)
--------------- ---------------
Cash Flows From Investing Activities
Proceeds from sale of securities........................... 1,677,563 16,105,648
Principal payments on securities and mortgage loans........ 311,483 2,510,300
--------------- ---------------
Net cash provided by investing activities.................. 1,989,046 18,615,948
--------------- ---------------
Cash Flows From Financing Activities
Repayment of repurchase agreement.......................... (2,028,000) (2,028,000)
--------------- ---------------
Net (decrease) increase in cash and cash equivalents....... (153,798) 16,504,396
Cash and cash equivalents at beginning of period........... 19,618,379 2,960,185
--------------- ---------------
Cash and cash equivalents at end of period................. $ 19,464,581 $ 19,464,581
=============== ===============
Supplemental Disclosure Of Cash Flow Information:
Interest paid............................................ $ (50,238) $ (50,238)
=============== ===============
See notes to financial statements
LASER Mortgage Management, Inc.
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FOR THE
STATEMENTS OF CASH FLOWS THREE MONTHS ENDED SIX MONTHS ENDED
(GOING CONCERN BASIS) (UNAUDITED) JUNE 30, 2001 JUNE 30, 2001
- ----------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net loss................................................... $ (1,260,420) $ (3,357,816)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Amortization of mortgage premiums and discounts, net..... 23,229 (179,179)
Net realized loss on sale of securities and interest
rate agreement......................................... 1,900,461 6,894,146
Unrealized gain on interest rate agreement............... -- (2,580,000)
Change in assets and liabilities:
Decrease in interest and principal paydowns receivable... 1,244,646 1,956,908
Decrease in prepaid expenses............................. 136,530 273,060
Increase (decrease) in accrued interest payable.......... 402,641 (10,997)
Increase in accounts payable and accrued expenses........ 7,855 49,747
Decrease in payable to manager........................... (1,219,285) --
--------------- ---------------
Net cash provided by operating activities................ 1,235,657 3,045,869
--------------- ---------------
Cash Flows From Investing Activities
Purchase of securities..................................... -- (55,048,842)
Decrease in payable for securities acquired................ -- (23,321,844)
Proceeds from sale of securities........................... 24,304,131 255,982,732
Proceeds from sale of interest rate agreement.............. -- 260,000
Principal payments on securities and mortgage loans........ 13,108,306 27,274,332
--------------- ---------------
Net cash provided by investing activities................ 37,412,437 205,146,378
--------------- ---------------
Cash Flows From Financing Activities
Proceeds from repurchase agreements........................ -- 1,960,972,986
Repayments of repurchase agreements........................ (67,366,005) (2,154,458,410)
--------------- ---------------
Net cash used in financing activities...................... (67,366,005) (193,485,424)
--------------- ---------------
Net (decrease) increase in cash and cash equivalents....... (28,717,911) 14,706,823
Cash and cash equivalents at beginning of period........... 46,966,943 3,542,209
--------------- ---------------
Cash and cash equivalents at end of period................. $ 18,249,032 $ 18,249,032
=============== ===============
Supplemental Disclosure Of Cash Flow Information:
Interest paid............................................ $ (300,326) $ (3,918,131)
=============== ===============
Noncash financing activities:
Net change in unrealized gain on
available-for-sale securities.......................... $ 1,030,199 $ 1,117,501
=============== ===============
See notes to financial statements
LASER Mortgage Management Inc.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2002 (UNAUDITED)
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 June 30, 2002, the estimated net realizable value of the Company's net assets in liquidation was $1.32 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 two 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, or thereafter.
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, the write-off of the remaining balance of prepaid expenses, and the 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. As discussed previously, the Company was a wholly-owned subsidiary of LASER Maryland from May 1, 2001 until July 31, 2001 and became the successor by merger to LASER Maryland on that date. Consequently, the statements of operations and cash flows for the three and six months ended June 30, 2001 are presented on a consolidated basis.
The accompanying unaudited financial statements have been prepared on liquidation basis accounting and going concern basis accounting, as appropriate, in conformity with GAAP and the instructions to Form 10-Q and Article 10, Rule 10-01 of Regulation S-X for interim financial statements. Accordingly, these unaudited financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the Company's management, all adjustments, consisting only of normal recurring accruals, considered necessary for a fair presentation, have been included in these financial statements. These unaudited interim financial statements, as of and for the periods ended June 30, 2002 should be read in conjunction with the audited financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. Operating results for any interim period are not necessarily indicative of results that may be expected for a full year.
A summary of the Company's significant accounting policies follows:
Cash Equivalents - Cash equivalents consists of an overnight reverse repurchase agreement. The amount reported on the statements of net assets in liquidation 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 mortgage loans were secured by first or second liens on single-family residential, multi-family residential, commercial or other real property ("Mortgage Loans," and together with Mortgage Securities, "Mortgage Assets"). The Company also invested in other debt and equity securities (together with Mortgage Securities, "Securities," and together with Mortgage Assets, "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 statements of net assets in liquidation, with unrealized gains and losses reported on the statements of changes in net assets in liquidation.
The Company's Mortgage Loans were carried at estimated net realizable value on the statements of net assets in liquidation, with unrealized gains and losses reported on the statements 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 cash equivalents 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 statements of changes in net assets in liquidation or the statements of operations, as appropriate.
Interest Rate Agreement - The Company followed an interest-rate risk-management strategy designed to protect against the adverse effects of major interest rate changes and used a derivative purchased interest rate cap agreement ("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 statements of operations. Interest payments received were recorded as a component of net interest income on the statements of operations.
Repurchase Agreements - The Company utilized repurchase agreements to finance most of its Investments. The repurchase agreements have been 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 statements of net assets in liquidation represented the contractual amount to be repaid under such agreement.
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 statements 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.
Fair Value of Financial Instruments - The fair values of the Company's Investments were based on prices and valuations provided by dealers who make markets in these financial instruments. The fair values reported reflected estimates and were not necessarily indicative of the amounts the Company could have realized in a current market exchange. The carrying values of cash equivalents, interest and principal paydowns receivable, accrued interest payable, the repurchase agreement and other financial liabilities approximated 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, or thereafter.
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
During January 2002, the Company sold all of the Mortgage Securities it owned as of December 31, 2001. The following table shows the Company's Mortgage Securities as of 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
===========
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 the 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
During May 2002, the Company sold all of the remaining Mortgage Loans it owned at their estimated net realizable value of $1,677,563. At December 31, 2001, the estimated net realizable value (and current principal amount) of the Company's Mortgage Loans amounted to $2,004,114.
4. INTEREST RATE AGREEMENT
Cap
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 $100.0 million, for $260,000 in cash and recognized a net loss of $(120,000) in 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. The Company purchased this cap for a premium of $2,960,000 during the second quarter of 2000. 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) in 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 AGREEMENT
During May 2002, the Company repaid its outstanding repurchase agreement of $2,028,000 and the related accrued interest of $50,238. At December 31, 2001, the Company had a $2,028,000 repurchase agreement outstanding with a weighted average borrowing rate of 3.24% and a remaining maturity of 28 days. The associated accrued interest expense payable on the outstanding repurchase agreement amounted to $30,576 at December 31, 2001. At December 31, 2001, the repurchase agreement was collateralized by Investments that had an estimated net realizable value of approximately $2,004,000.
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 June 30, 2002 and December 31, 2001, the reserve for estimated liquidation costs amounted to $505,119 and $524,937, respectively. During the three and six months ended June 30, 2002, the Company paid $15,011 and $19,818, respectively, of liquidation costs.
7. 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 stock incentive plan. Basic and diluted LPS for the three and six months ended June 30, 2001 was as follows:
For the Three Months Ended
June 30, 2001
Net Loss Shares Per-share
(Numerator) (Denominator) Amount
Basic LPS $ (1,260,420) 14,038,983 $ (0.09)
============ ========== ============
Diluted LPS $ (1,260,420) 14,038,983 $ (0.09)
============ ========== ============
For the Six Months Ended
June 30, 2001
Net Loss Shares Per-share
(Numerator) (Denominator) Amount
Basic LPS $ (3,357,816) 14,038,983 $ (0.24)
============ ========== ============
Diluted LPS $ (3,357,816) 14,038,983 $ (0.24)
============ ========== ============
For the three and six months ended June 30, 2001, there were no deferred common shares reserved for issuance and there were no outstanding options to purchase common shares of the Company.
8. MANAGEMENT AGREEMENT
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:
| • | 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; |
| • | 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 |
| • | 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. During the three and six months ended June 30, 2001, the Company incurred base fees of $150,000 and $300,000, respectively.
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 provides 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. For the three and six months ended June 30, 2002, the Company incurred $60,000 and $120,000, respectively, of expenses under the employment agreements and $90,000 and $180,000, respectively, of expenses under the support services agreement. The Compensation Committee continues to review the support services agreement and the employment arrangements with Messrs. Michaelcheck and Howe in connection with the ongoing liquidation of the Company.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Company's financial statements as of and for the three and six months ended June 30, 2002 and notes thereto and with the audited financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. References herein to "LASER" or the "Company" include LASER Mortgage Management, Inc., a Maryland corporation, prior to the date of the Reincorporation described in Note 1 to the Notes to Financial Statements included as part of Item 1.
Forward-Looking Statements
"Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995: Statements in this discussion regarding the Company and its business, which are not historical facts, are "forward-looking statements" that involve risks and uncertainties. Risks and uncertainties, which could cause results to differ from those discussed in the forward-looking statements herein, are listed in the Company's Annual Report filed on Form 10-K.
General
As of June 30, 2002, the Company has liquidated all of its Mortgage Assets pursuant to the Plan of Liquidation and Dissolution, thereby minimizing substantially the risk of loss on the Company's net assets in liquidation. However, the valuation of assets and liabilities at their estimated net realizable values and estimated settlement amounts, respectively, necessarily requires estimates and assumptions. 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.
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 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.
The New York Stock Exchange ("NYSE") announced on May 15, 2002 that, as a consequence of the Company's adoption of the Plan of Liquidation and Distribution, it would take action to delist the Company's common stock. The Company did not challenge the NYSE's actions and the NYSE suspended trading in the common stock on May 24, 2002.
Changes in Net Assets in Liquidation for the Three and Six Months Ended June 30, 2002
Under liquidation basis accounting, net assets in liquidation amounted to $18.5 million at June 30, 2002 and were essentially unchanged for the three and six months then ended. The Company's portfolio of interest earning assets, net of interest bearing liabilities, earned $0.1 million and $0.3 million, respectively, of net interest income. In addition, the Company recorded a net increase of $0.1 million and $0.2 million, respectively, from securities comprised primarily of payments received on a security previously determined to be impaired. General and administrative expenses during these periods amounted to $(0.2) million and $(0.5) million, respectively, and consisted of $(0.1) million and $(0.2) million, respectively, of fees paid pursuant to the support services agreement and $(0.1) million and $(0.3) million, respectively, of professional fees, payroll and other expenses.
During the three and six months ended June 30, 2002, net cash of $1.9 million and $18.5 million, respectively, was generated from the Company's operating and investing activities, including $2.0 million and $18.6 million, respectively, of proceeds from sales of, and principal payments on, securities. At June 30, 2002, the balance of cash and cash equivalents amounted to $19.5 million.
Results of Operations for the Three and Six Months Ended June 30, 2001
Net Income (Loss) Summary
General. For the three months ended June 30, 2001, the Company had net income of $0.6 million, or $0.05 per weighted average share, excluding aggregate net losses from investment activities of $(1.9) million, or $(0.14) per share. For the three months ended June 30, 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 (1.97)% on an actual basis.
For the six months ended June 30, 2001, the Company had net income of $2.2 million, or $0.16 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 accrued incentive fee of $(1.2) million, or $(0.09) per share. For the six months ended June 30, 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 (5.14)% on an actual basis.
Gains/Losses from investment activities. For the three months ended June 30, 2001, the Company sold securities and recorded a net realized loss of $(1.9) million, or $(0.14) per share. Also during this period, the Company recorded a $1.0 million increase in other comprehensive income from the unrealized net gain on securities for an overall net loss in stockholders' equity from securities of $(0.9) million.
For the six months ended June 30, 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 $1.1 million increase in other comprehensive income from the unrealized net gain on securities for an overall net loss in stockholders' equity from securities of $(3.1) million.
Interest Income and Average Interest Earning Asset Yield
Historically, the Company earned interest income primarily from its portfolio of investments and cash equivalents. The table below shows, for the three and six months ended June 30, 2001, 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.
AVERAGE INTEREST EARNING ASSETS, YIELDS AND INTEREST INCOME
(dollars in thousands)
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
For the three months ended:
June 30, 2001 $22,266 $100,899 $123,165 4.51% 6.58% 6.21% $1,913
For the six months ended:
June 30, 2001 $19,015 $183,233 $202,248 4.84% 7.38% 7.14% $7,221
During the three and six months ended June 30, 2001, the Company reduced its portfolio of Mortgage Securities and Mortgage Derivatives and the leverage financing used to maintain the portfolio in contemplation of a liquidation or sale of the Company.
Interest Expense and the Average Cost of Funds
Historically, the Company incurred interest expense primarily from borrowed funds under short-term repurchase agreements that financed 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 three and six months ended June 30, 2001, the Company's average borrowed funds, interest expense and average cost of funds compared to average one and six-month LIBOR.
AVERAGE COST OF FUNDS
(dollars in thousands)
Average Average Average
One-Month Cost of Cost of
LIBOR Funds Funds
Relative 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
For the three months ended:
June 30, 2001 $ 61,308 $ 703 4.54% 4.30% 4.14% 0.16% 0.24% 0.40%
For the six months ended:
June 30, 2001 $139,756 $3,907 5.56% 4.90% 4.66% 0.24% 0.66% 0.90%
During the first and second quarters of 2001, interest rates decreased due primarily to the interest rate setting actions taken by the Federal Reserve Board.
Interest Rate Agreement
The Company followed an interest-rate risk-management strategy designed to protect against the adverse effects of major interest rate changes and used a derivative purchased interest rate cap agreement ("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.
The Company did not enter into any other interest rate agreement during the three and six months ended June 30, 2001.
General and Administrative Expenses
General and administrative expenses ("operating expenses" or "G&A expense") were $0.6 million and $2.3 million for the three and six months ended June 30, 2001, respectively, consisting of management and incentive fees incurred to Mariner of $0.2 million and $1.5 million, respectively, and professional and other expenses of $0.4 million and $0.8 million, respectively. 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
Earning Stockholders' Efficiency
Management Incentive Other G&A Total G&A Assets Equity Ratio
Fee Fee Expense Expense (Actual) (Actual) (Actual)
For the three months ended:
June 30, 2001 $ 150 $ -- $ 420 $ 570 0.46% 0.89% 47.09%
For the six months ended:
June 30, 2001 $ 300 $1,219 $ 838 $2,357 1.17% 3.61% 71.14%
Net Loss and Return on Average Stockholders' Equity
Net loss was $(1.3) million and $(3.4) million for the three and six months ended June 30, 2001, respectively. Return on average stockholders' equity, on an actual basis, for the three and six months ended June 30, 2001 was (1.97)% and (5.14)%, respectively.
The table below shows, on an actual basis, for the three and six months ended June 30, 2001 the Company's net interest income, losses from investment activities and G&A expense each as a percentage of average stockholders' equity, and the return on average stockholders' equity.
COMPONENTS OF RETURN ON AVERAGE STOCKHOLDERS' EQUITY
Return on
Losses from Average
Net Interest Investment Stockholders'
Income Activities G&A Expense Equity
For the three months ended:
June 30, 2001 1.90% (2.98)% 0.89% (1.97)%
For the six months ended:
June 30, 2001 5.07% (6.60)% 3.61% (5.14)%
Distributions
For the three and six months ended June 30, 2002 and 2001, the Company did not make any capital distributions or declare any dividends.
Financial Condition
Investments
During the six months ended June 30, 2002, the Company disposed of all of its remaining Mortgage Securities and Mortgage Loans that it held on December 31, 2001 at their carrying values, pursuant to the Plan of Liquidation and Dissolution. As of December 31, 2001, the Company's portfolio (stated at estimated net realizable value) consisted of:
As of December 31, 2001
-----------------------
Dollar Amount
Securities (in millions) Percentage
---------- ------------- ----------
Agency Certificates................ $15.3 88.4%
Mortgage Loans..................... 2.0 11.6%
-------------------- ---------------
Total........................... $17.3 100.0%
==================== ===============
The tables below summarize the Company's investments at December 31, 2001.
SECURITIES
(dollars in thousands)
Estimated
Net
Amortized Realizable
Cost to Estimated Value to
Current Current Net Current Weighted
Principal Net Amortized Principal Realizable Principal Average
Amount Discount Cost Amount Value Amount Life (Years)
December 31, 2001 $ 14,855 $ 218 $ 15,073 101.47% $ 15,305 103.03% 3.0
MORTGAGE LOANS
(dollars in thousands)
Estimated
Net
Current Realizable
Principal Estimated Value to
Amount and Net Current Weighted
Amortized Realizable Principal Average
Cost Value Amount Life (Years)
December 31, 2001 $ 2,004 $ 2,004 100.00% 16.0
The table below shows gross and net unrealized gains and (losses) on all securities in the Company's portfolio at December 31, 2001 (stated at estimated net realizable value).
UNREALIZED GAINS AND LOSSES
(dollars in thousands)
At December 31, 2001
--------------------
Unrealized Gain $ 233
Unrealized Loss --
--------------
Net Unrealized Gain $ 233
==============
Net Unrealized Gain as % of Investments
Principal Amount 1.38%
Net Unrealized Gain as % of Investments
Amortized Cost 1.36%
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. As of June 30, 2002, all of the Company's non-cash assets were converted into cash. At June 30, 2002, the balance of cash and cash equivalents amounted to $19.5 million. The Company will continue to generate liquidity through net earnings held prior to distribution to stockholders. The Company believes that its cash on hand and earnings from its cash equivalents will be adequate to support the Company and pay its obligations during the liquidation period.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk exposure that the Company had been subject to is the movement in interest rates with respect to its portfolio of Mortgage Assets, which were 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. As a result of the sales of all of the remaining Mortgage Assets during the six months ended June 30, 2002, the Company's market risk with respect to its portfolio of Mortgage Assets has been eliminated.
The Company is exposed to interest rate risk as an investor in an overnight reverse repurchase agreement. Due to the short-term maturity, the interest rate risk to the Company is not significant.
Additionally, the Company is a party to certain other financial instruments, including interest receivable, accounts payable and other accrued expenses that are not interest rate sensitive.
PART II. OTHER INFORMATION
References in this Part II to "LASER" or the "Company" include LASER Mortgage Management, Inc., a Maryland corporation, prior to the date of the reincorporation described in Note 1 to the Notes to Financial Statements included as part of Item 1.
Item 1. 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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index.
(b) Reports
None.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
Dated: August 12, 2002 |
LASER MORTGAGE MANAGEMENT, INC. By: /s/ Charles R. Howe, II Charles R. Howe, II Chief Financial Officer (principal accounting officer) (authorized officer of registrant) |
CERTIFICATION
I, William J. Michaelcheck, Chief Executive Officer of LASER Mortgage Management, Inc. (the "Company"), pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, do hereby certify as follows:
1. The Quarterly Report on Form 10-Q of the Company for the period ended June 30, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: August 13, 2002
|
/s/ William J. Michaelcheck
William J. Michaelcheck Chief Executive Officer, Chairman and Director |
CERTIFICATION
I, Charles R. Howe, II, Chief Financial Officer of LASER Mortgage Management, Inc. (the "Company"), pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, do hereby certify as follows:
1. The Quarterly Report on Form 10-Q of the Company for the period ended June 30, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: August 12, 2002.
|
/s/ Charles R. Howe, II
Charles R. Howe, II Vice President, Chief Financial Officer and Treasurer |
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.) |
| 99.1 | Certificate of Dissolution (Incorporated by reference to Exhibit 99.1 to Registrant's Quarterly Report on Form 10-Q dated September 30, 2001.) |