-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KY+JBE92upmqihgEek6IsEB7vwjD14wksEd0k6bxpOebkFaPpe+WcPc4JGq27vx1 53i0NJ0vKgzS9/Ul1YrJAw== 0000912057-97-010909.txt : 19970401 0000912057-97-010909.hdr.sgml : 19970401 ACCESSION NUMBER: 0000912057-97-010909 CONFORMED SUBMISSION TYPE: S-11/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: OCWEN ASSET INVESTMENT CORP CENTRAL INDEX KEY: 0001033643 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-11/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-21965 FILM NUMBER: 97568372 BUSINESS ADDRESS: STREET 1: 1675 PALM BEACH LAKES BLVD STREET 2: STE 532 CITY: WEST PALM BEACH STATE: FL ZIP: 33401 BUSINESS PHONE: 5616818000 MAIL ADDRESS: STREET 1: 1675 PALM BEACH LAKES BLVD CITY: WEST PALM BEACH STATE: FL ZIP: 33401 S-11/A 1 FORM S-11/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 28, 1997 REGISTRATION NO. 333-21965 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-11 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ OCWEN ASSET INVESTMENT CORP. (Exact name of registrant as specified in governing instruments) 1675 PALM BEACH LAKES BLVD., SUITE 1000 WEST PALM BEACH, FLORIDA 33401 (561) 681-8000 (Address of principal executive officer) ------------------------ WILLIAM C. ERBEY 1675 PALM BEACH LAKES BLVD., SUITE 1000 WEST PALM BEACH, FLORIDA 33401 (Name and address of agent for service) ------------------------ COPIES TO: JACK A. MOLENKAMP, ESQ. LEE MEYERSON, ESQ. Hunton & Williams Simpson Thacher & Bartlett Riverfront Plaza 425 Lexington Avenue 951 East Byrd Street New York, New York 10017 Richmond, Virginia 23219 (212) 455-2000 (804) 788-8200
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If this Form is filed to register additional securities for an offering pursuant to Rule 463(b) under the Securities Act, please check the following box and list the Securities Act registration number of the earliest effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ------------------------ This registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until this registration shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CROSS REFERENCE SHEET PURSUANT TO RULE 501(A) OF REGISTRATION 8-K
ITEM NUMBER AND CAPTION HEADING IN PROSPECTUS - ----------------------------------------------------------------- ------------------------------------------------------ 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus.............................. Outside Front Cover Page 2. Inside Front and Outside Back Cover Page of Prospectus............................................ Inside Cover Page; Outside Back Cover Page 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges............................. Outside Front Cover Page; Prospectus Summary; Risk Factors; The Company 4. Determination of Offering Price....................... Outside Front Cover Page; Underwriting 5. Dilution.............................................. Not Applicable 6. Selling Security Holders.............................. Not Applicable 7. Plan of Distribution.................................. Outside Front Cover Page; Underwriting 8. Use of Proceeds....................................... Use of Proceeds. 9. Selected Financial Data............................... Not Applicable. 10. Management's Discussion and Analysis of Financial Condition and Results of Operations................... Not Applicable. 11. General Information as to Registrant.................. Prospectus Summary; The Company; Certain Provisions of Virginia Law and OAIC's Articles of Incorporation and Bylaws 12. Policy with Respect to Certain Activities............. Prospectus Summary; Risk Factors; Operating Policies and Objectives; Certain Provisions of Virginia Law and OAIC's Articles of Incorporation and Bylaws; Description of Capital Stock 13. Investment Policies of Registrant..................... Operating Policies and Objectives; Prospectus Summary; 14. Description of Real Estate............................ Prospectus Summary; Initial Investments; Appendix A 15. Operating Data........................................ Initial Investments; Appendix A 16. Tax Treatment of Registrant and its Security Holders............................................... Prospectus Summary; Federal Income Tax Considerations 17. Market Price of and Dividends on the Registrant's Common Equity and Related Shareholder Masters......... Not Applicable 18. Description of Registrant's Securities................ Description of Capital Stock 19. Legal Proceedings..................................... Not Applicable 20. Security Ownership of Certain Beneficial Owners and Management............................................ Prospectus Summary
ITEM NUMBER AND CAPTION HEADING IN PROSPECTUS - ----------------------------------------------------------------- ------------------------------------------------------ 21. Directors and Executive Officers...................... The Company 22. Executive Compensation................................ The Company 23. Certain Relationships and Related Transactions........ Prospectus Summary; Risk Factors; Initial Investments 24. Selection Management and Custody of Registrant's Investments........................................... Outside Front Cover Page; Prospectus Summary; Operating Policies and Objectives; Management of Operations 25. Policies With Respect to Certain Transactions......... Risk Factors; Operating Policies and Objectives; Management of Operations 26. Limitations of Liability.............................. Management of Operations; The Company 27. Financial Statements and Information.................. Financial Statements 28. Interests of Named Experts and Counsel................ Legal Matters; Experts 29. Disclosure of Commission Position on Indemnification for Securities Act Liabilities........................ The Company
SUBJECT TO COMPLETION, DATED , 1997 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. PROSPECTUS 12,500,000 SHARES OCWEN ASSET LOGO INVESTMENT CORP. COMMON STOCK --------------------- Ocwen Asset Investment Corp. ("OAIC" and, together with its subsidiaries on a consolidated basis, the "Company") is a newly organized Virginia corporation that intends to generate income for distribution to its stockholders primarily from the net cash flows on its assets as described herein. OAIC will elect to be taxed as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986. Ocwen Capital Corporation (the "Manager"), a wholly-owned subsidiary of Ocwen Financial Corporation ("Ocwen Financial"), will manage the day-to-day operations of the Company, subject to the supervision of OAIC's Board of Directors. All of the 12,500,000 shares of Common Stock offered pursuant to this Prospectus are being offered by the Company. In addition, 1,875,000 shares of Common Stock will be sold by the Company to Ocwen Financial, upon the closing of this offering, at the initial public offering price net of any underwriting discounts or commissions. After such sale Ocwen Financial will own approximately 13% of the Common Stock of the Company, assuming that the Underwriters do not exercise their over-allotment option. It is currently anticipated that the initial public offering price for shares of Common Stock will be $16 per share. Prior to this offering, there has been no market for the shares of Common Stock of the Company. The public offering price has been determined by negotiation between the Company and the Underwriters. See "Underwriting." The Company intends to apply to have the Common Stock listed on The Nasdaq Stock Market under the symbol "OAIC." ------------------------------ SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK INCLUDING, AMONG OTHERS: - The sensitivity of the Company's investments (particularly those in non-investment grade mortgage-backed securities) to changes in prevailing interest rates and to events of loss, such as credit losses due to borrower default, hazard losses and state law enforceability issues; - The acquisition of large amounts of multifamily and commercial real estate, including distressed real estate, that entail significant risks, such as the risk that such real estate will not generate sufficient revenue to generate a return after meeting operating expenses and debt service; - Limitations on ownership of Common Stock by any stockholder other than Ocwen Financial to 9.1% of the outstanding Common Stock, which may deter third parties from seeking to control or acquire the Company; - Taxation of OAIC as a corporation if it fails to qualify as a REIT; and - Conflicts of interest relating to the formation of the Company and the operation of its business. ------------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------
PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT(1) COMPANY(2) Per Share..................... $[16] $[ ] $[ ] Total (3)(4).................. $[ ] $[ ] $[ ]
(1) The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting". (2) Net of expenses in connection with the offering, estimated at $[ ], which will be payable by the Company. (3) The Company has granted the several Underwriters a 30-day option to purchase up to 1,875,000 additional shares of Common Stock to cover over-allotments. If all such shares of Common Stock are purchased, the total Price to Public, Underwriting Discount and Proceeds to Company, before expenses of this Offering, will be $[ ], $[ ] and $[ ]. See "Underwriting." (4) The total Price to Public and the total Proceeds to Company reflect the sale of 1,875,000 shares of Common Stock to Ocwen Financial net of the Underwriting Discounts and Commissions. The shares of Common Stock are offered by the Underwriters subject to receipt and acceptance by the Underwriters, approval of certain legal matters by counsel for the Underwriters and certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offers and to reject orders in whole or in part. It is expected that delivery of the shares of Common Stock will be made in New York, New York on or about , 1997. FRIEDMAN, BILLINGS, RAMSEY & CO., INC. EVEREN SECURITIES, INC. THE DATE OF THIS PROSPECTUS IS , 1997 CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING STABILIZATION, THE PURCHASE OF COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING." ii PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information included elsewhere in this Prospectus. Unless otherwise indicated, the information contained in this Prospectus assumes that (i) the transactions relating to the formation of the Company (the "Formation Transactions") are consummated, (ii) the Underwriters' overallotment option is not exercised and (iii) the offering price (the "Offering Price") is $16 per share. Unless the context otherwise requires, all references in this Prospectus to the (i) "Company" shall mean Ocwen Asset Investment Corp. ("OAIC") and its subsidiaries, including (a) Ocwen General, Inc. (the "General Partner"), (b) Ocwen Limited, Inc. (the "Initial Limited Partner"), and (c) Ocwen Partnership, L.P. (the "Operating Partnership"); and (ii) "Common Stock" shall mean OAIC's common shares, par value $.01 per share. Capitalized terms used but not defined herein shall have the meanings set forth in the Glossary beginning on page 84. THE COMPANY OAIC is a newly organized Virginia corporation that will elect to be taxed as a REIT under the Code. The Company will be externally managed and advised. See "Management of Operations." The Company intends to enhance the value of its Common Stock by pursuing advantageous investments that capitalize on inefficiencies in the real estate and mortgage markets. The Company's investments will include several categories of real estate and real estate related assets. SUBORDINATED INTERESTS AND DISTRESSED REAL PROPERTY. The Company intends to generate income for distribution to its stockholders primarily through investments in (i) subordinated interests ("Subordinated Interests") in collateralized mortgage obligations and other mortgage-backed securities (collectively, "MBS"), and (ii) commercial and multifamily real property ("Real Property"), including properties acquired by a mortgage lender at foreclosure (or by deed in lieu of foreclosure) ("REO Property") and other underperforming or otherwise distressed real property (together with REO Property, "Distressed Real Property"). The Company believes that the combination of these investment activities should prove beneficial from both a cash flow and a tax planning perspective. No assurances can be made, however, that the Company's investment strategy will be successful. OTHER REAL ESTATE RELATED ASSETS. The Company may invest, by way of purchase or origination, in commercial, multifamily and single family residential mortgage loans ("Mortgage Loans"), including both (i) Mortgage Loans that are current as to payments of principal and interest, including construction and rehabilitation loans and mezzanine loans ("Performing Mortgage Loans"), and (ii) Mortgage Loans that are in default ("Non Performing Mortgage Loans"), or for which default is likely or imminent or for which the borrower is currently making monthly payments in accordance with a forbearance plan ("Sub- Performing Mortgage Loans" and, together with Nonperforming Mortgage Loans, "Distressed Mortgage Loans"). The Company also may invest in various classes of MBS, including interest only classes ("IOs") and inverse floating rate interest only classes ("Inverse IOs"). In addition, the Company may also acquire Real Property that is (i) environmentally distressed or (ii) located outside the United States, or Mortgage Loans secured by such Real Property and other real property interests. In order to invest the net proceeds of the Offering as quickly as is appropriate and to provide current returns, the Company expects initially to emphasize investments in the assets described in the preceding paragraph (collectively, "Other Real Estate Related Assets"). Although the Company does not expect to emphasize the acquisition of such assets as a long-term investment strategy, the Company will take an opportunistic approach to its investments and, accordingly, the Company may invest in Other Real Estate Related Assets at any time. 1 THE MANAGER The business and investment affairs of the Company will be managed by Ocwen Capital Corporation (the "Manager"), a Florida corporation wholly-owned by Ocwen Financial Corporation ("Ocwen Financial"), a publicly owned Florida corporation. Ocwen Financial and its wholly-owned subsidiary, Ocwen Federal Bank FSB, a federally-chartered savings bank, have substantial experience in the acquisition and resolution of troubled loans and the management of diverse real estate related assets. Ocwen Financial, acting through a former subsidiary, entered the loan resolution business in 1986, by providing private mortgage insurance for residential loans. Since 1991, Ocwen Financial through its subsidiaries has acquired over $4.2 billion of distressed loans, including $1.7 billion of distressed commercial mortgage loans. To date, Ocwen Financial has owned 607 commercial REO properties, having a market value of approximately $298 million which it acquired by purchasing and foreclosing on distressed mortgage loans. As a result of this experience, Ocwen Financial has developed the procedures, facilities and systems that it considers necessary to evaluate, acquire and manage distressed loans appropriately and to resolve such loans in a timely and profitable manner. Furthermore, Ocwen Financial has experience in the acquisition and management of MBS, including over $223 million of subordinated securities, the majority of which have been sold. Since 1993, Ocwen Financial has also acquired or originated $1.1 billion of performing multifamily residential and commercial mortgage loans, including construction, rehabilitation and other loans with respect to which Ocwen Financial participates in net operating income of the property and increases in value of the property. The Company believes that Ocwen Financial's systems and procedures have substantial applicability to the Company's lines of business, and that the Company's access, through the Management Agreement, to Ocwen Financial's information technology will be a key factor in the Company's ability to compete. There can be no assurances, however, in this regard. Although many of the Company's prospective competitors may have access to greater capital and other advantages, the Company believes that it has a competitive advantage as a result of the experience of Ocwen Financial in acquiring and managing MBS and in acquiring, managing and resolving distressed mortgage loans. Ocwen Financial has made substantial investments in the computer systems, technology and other resources that it believes are necessary to conduct this business, and has developed strategic relationships and contacts in connection with these activities. MANAGEMENT AGREEMENT The Company will enter into an agreement or agreements (collectively, the "Management Agreement") with the Manager pursuant to which the Manager, subject to the supervision of OAIC's Board of Directors, will formulate operating strategies for the Company, conduct due diligence on potential assets for the Company, arrange for the acquisition of assets by the Company, arrange for various types of financing for the Company, including reverse repurchase agreements, secured lines of credit, mortgage loans and the issuance of collateralized mortgage obligations, monitor the performance of the Company's assets and provide certain administrative and managerial services in connection with the operation of the Company. For performing these services, the Manager will receive (i) a quarterly base management fee in an amount equal to 1% per annum of the Average Invested Assets of the Company, which is intended to cover the Manager's costs of providing management services to the Company, and (ii) a quarterly incentive fee in an amount equal to the product of (A) 25% of the dollar amount by which (1)(a) Funds From Operations (before the incentive fee) of the Company per share of Common Stock (based on the weighted average number of shares outstanding) plus (b) gains (or minus losses) from debt restructuring or sales of property per share of Common Stock (based on the weighted average number of shares outstanding), exceed (2) an amount equal to (a) the weighted average of the price per share at initial offering and the prices per share at any secondary offerings by the Company multiplied by (b) the Ten-Year U.S. Treasury Rate plus five percent per annum multiplied by (B) the weighted average number of shares of Common Stock outstanding. The Board of Directors of the Company may adjust the base management fee in the future if necessary to align the fee more closely with the actual costs of such services. 2 In addition, because the Manager's employees will perform certain due diligence tasks that outside consultants otherwise would perform, the Manager will be reimbursed for its costs for performing such due diligence on assets purchased by the Company or considered for purchase by the Company. Finally, the Manager also will be reimbursed for out of pocket expenses incurred on behalf of the Company. See "Management of Operations." Ocwen Financial will purchase 1,875,000 shares of Common Stock on the Closing Date at the initial public offering price net of underwriting discounts and commissions, after which Ocwen Financial will own approximately 13% of the Common Stock of the Company assuming that the Underwriters do not exercise their over-allotment option. To provide an incentive for the Manager to enhance the value of the Common Stock, the Company will grant the Manager options to purchase 1,437,500 shares of Common Stock (1,625,000 shares if the Underwriters exercise their over-allotment option) or, at the option of the Company, units of limited partnership interest in the Operating Partnership ("Units"), at a price per share (or Unit) equal to the initial offering price of the Common Stock. The Manager may redeem any Units so purchased for cash, or, at the election of the General Partner, shares of Common Stock, on a one-for-one basis. One quarter of the Manager's options will be exercisable on each of the first four anniversaries of the Closing Date. Unexercised options will terminate on the tenth anniversary of the Closing Date. See "Management of Operations--Incentive Options." OPERATING POLICIES AND STRATEGIES The Company intends to implement policies and strategies for investment in Subordinated Interests, Distressed Real Properties and Other Real Estate Related Assets designed to enable it to maximize income for distribution to its stockholders, consistent with acceptable levels of risk. The Company's operating income will result primarily from the excess of (i) the sum of the Company's cash flows on the assets of the Company, reinvestment income thereon and related income, over (ii) the sum of the Company's obligations with respect to its assets, borrowings and operating expenses. The Company's objective will be to build a diverse portfolio of assets that will provide a high risk-adjusted rate of return to its stockholders. The Company's strategies to achieve this objective will include the use of appropriate amounts of borrowings and other forms of leverage. There can be no assurance, however, that this objective can be met. The Company intends to invest in Subordinated Interests and Distressed Real Property when opportunities that the Company considers advantageous become available. To invest in appropriate assets quickly during approximately the first year following Closing, and from time to time thereafter, the Company intends also to invest in Other Real Estate Related Assets, including Mortgage Loans, MBS and other real property interests. Until appropriate real estate related acquisitions are made, however, the net proceeds of the Common Stock offering may be invested in readily marketable securities, consistent with maintaining the Company's REIT qualification, or in interest bearing deposit accounts. Investors should be aware that it may take considerable time for the Company to find appropriate investments, during which time the Company's assets will be invested in relatively low yield instruments. One of the Company's primary investment focuses will be purchasing Subordinated Interests. Subordinated Interests offer the potential of a higher yield than relatively more senior classes (customarily rated investment grade), but carry greater credit risk, including a substantially greater risk of loss of principal and non-payment of interest than investment grade rated classes. In connection with its acquisition of Subordinated Interests, the Company will attempt, where appropriate, to mitigate these risks by obtaining "Special Servicing" rights with respect to the underlying mortgage loans. See "Operating Policies and Procedures--The Company's Assets" and "Risk Factors--Investment Activity Risks--Risk from Ownership of Subordinated Interests in Pools of Commercial and Residential Mortgage Loans." The Company's other main investment focus will be distressed commercial and multifamily real estate, including real estate acquired by mortgage lenders in connection with foreclosures or by deed in 3 lieu of foreclosure of mortgage loans (collectively, "Distressed Real Properties"). Distressed Real Properties generally do not generate sufficient cash flow to provide a current cash return on the investment therein after meeting operating expenses and debt service. The Company believes, however, that there are significant opportunities to purchase Distressed Real Properties at attractive prices, to leverage Ocwen Financial's ability to manage distressed assets, and then, at an opportune time, to sell the property at a profit. Although the time during which the Company will hold Distressed Real Properties will vary, the Company anticipates holding most Distressed Real Properties for more than four years but less than ten years. The Company believes that its long-term strategy of investing primarily in a combination of Subordinated Interests and Distressed Real Property will be beneficial for several reasons. First, the combination is designed to provide both long-term capital gains and current income for distribution to stockholders. By contrast the Company does not expect its investments in Distressed Real Properties to produce income in excess of operating expenses and interest expense at the time of acquisition. Instead, the Company will rely upon the ability of Ocwen Financial to improve the cash flow from and value of Distressed Real Properties through intensive marketing, asset and property management and thereafter to refinance or sell the property at an opportune time at a profit. The Company expects that its investments in Subordinated Interests will produce monthly income, primarily in the form of interest and principal distributions, which can be used to meet the Company's expenses and to pay dividends to shareholders. No assurance can be made, however, that this strategy will be successful. Second, the Company believes that the combination should prove beneficial to the Company from a tax planning perspective. Subordinated Interests are typically deemed to have original issue discount ("OID") for federal income tax purposes. Subordinated Interests also may be deemed to have market discount for federal income tax purposes. The income generated by Subordinated Interests for federal income tax purposes will consist of accretion of the OID, the market discount and the coupon interest associated with the instruments. The Company will be required to recognize a portion of the OID and market discount as income each year, which will increase the REIT distribution requirement in such year, although there may be no contemporaneous corresponding receipt of cash by the Company. Depreciation deductions associated with the Company's investments in Distressed Real Estate, however, should help offset the adverse tax effects of the OID and market discount generated by the Company's Subordinated Interests. See "Risk Factors--Legal and Tax Risks--Tax Risks." The Manager and Ocwen Financial have agreed that as long as the Management Agreement has not been terminated, the Company will have an exclusive right to invest in Subordinated Interests and Distressed Real Properties that become available to the Manager or to Ocwen Financial, subject to certain exceptions and conditions. See "Management of Operations--Certain Relationships; Conflicts of Interest." The Company also may invest in a variety of Other Real Estate Related Assets. The Company may originate or acquire Performing Mortgage Loans that are well-suited for financing through the issuance of collateralized mortgage obligations. As a result of such transactions, the Company will retain an equity ownership interest in the Performing Mortgage Loans that has economic characteristics similar to those of a Subordinated Interest. In addition, the Company may take advantage of opportunities to provide construction or rehabilitation financing on commercial property, ("Construction Loans") and to invest in loans that are subordinate to first lien mortgage loans on commercial real estate ("Mezzanine Loans"). These Construction and Mezzanine Loans generally would provide the Company the right to receive a stated interest rate on the loan balance plus a percentage of net operating income or gross revenues from the property, payable to the Company on an ongoing basis, and a percentage of any increase in value of the property, payable upon maturity or refinancing of the loan, or otherwise would allow the Company to charge an interest rate that would provide an attractive risk-adjusted return. Loans with these cash flow participation and shared 4 appreciation provisions are commonly referred to as acquisition, development and construction loans or "ADC Loans." See "Operating Policies and Procedures -- The Company's Assets -- Construction Financing and Loans Subject to Prior Liens" and "Risk Factors -- Investment Activity Risks -- Risks from Multifamily, Residential, Commercial and Construction Lending Activities." The Company may invest in other classes of MBS, including IOs and Inverse IOs, as a short term liquidity tool or as a longer term investment strategy. Although these investments can present increased risks, the Company believes that a managed portfolio of both IOs and Inverse IOs can produce attractive returns in a variety of interest rate environments. See "Risk Factors--Risk from Ownership of IOs, Inverse IOs and Sub IOs." The Company may invest in Nonperforming Mortgage Loans from time to time. In addition to its domestic activities, the Company may acquire or originate Mortgage Loans secured by real estate located outside the United States or purchase such real estate. An investment in real estate located in foreign countries contains risks associated with the uncertainty of foreign laws and markets and currency conversion risks. See "Risk Factors--Investment Activity Risks--Risks from Ownership of Foreign Real Properties." Moreover, the Company may invest in real estate or Mortgage Loans secured by real estate with known material environmental problems. If so, the Company will take certain steps to limit its liability for such environmental problems, but there are risks associated with such an investment. See "Risk Factors--Investment Activity Risks--Risks from Ownership of Real Properties with Known Environmental Problems." Although Ocwen Financial has no experience in investing in foreign real estate and only limited experience in investing in real estate with known environmental risks, the Company believes that Ocwen Financial's experience with distressed assets generally will be helpful to the management of such assets. The Company will leverage its assets when there is an expectation that it will benefit the Company. The use of leverage creates certain risks for the Company. See "Risk Factors--Economic and Business Risks--Risks from Use of Leverage." The Company may also engage in a variety of interest rate risk management techniques for the purpose of managing the effective maturity or interest rate of its assets. These techniques also may be used to attempt to protect against declines in the market value of the Company's assets resulting from general trends. Any such transaction is subject to risks or to limiting the potential earnings on the Company's investments. CONFLICTS OF INTEREST The Company will be managed by the Manager, and Ocwen Federal Bank FSB (the "Bank") is expected to provide mortgage servicing and certain asset management services for the Company. Both the Manager and the Bank are wholly-owned subsidiaries of Ocwen Financial, which will own 13% of the outstanding shares of Common Stock in OAIC immediately after the Closing. Because of the Company's relationship with the Manager, the Bank and Ocwen Financial, the Company will be subject to various potential conflicts of interest. To protect the Company's shareholders from risks related to these potential conflicts, a majority of the Company's Board of Directors will be unaffiliated with the Manager ("Independent Directors"). The Independent Directors will approve the execution of the Management Agreement and will establish general guidelines for the Company's investments, borrowings and operations (the "Guidelines"). Although the Manager will perform the day to day operations of the Company, the Independent Directors will review transactions on a quarterly basis to ensure compliance with the Guidelines. In such a review, the Independent Directors will rely primarily on information provided by the Manager. The Management Agreement does not limit the Manager's right to engage in business or to render services to others that compete with the Company. The Manager is required to give the Company an exclusive right to invest in Distressed Real Property and Subordinated Interests, with certain exceptions as described herein, but not with respect to Other Real Estate Related Assets. 5 The Company will acquire certain MBS from an affiliate of the Manager soon after the Closing, and the Independent Directors will not be asked to approve those sales in advance, but will review them for compliance with the Guidelines. The Company will obtain a price quotation (a "Confirming Price Evaluation") from the placement agent of such MBS confirming that the price paid for such MBS is not unreasonable. Because there is no liquid market for MBS, however, Confirming Price Evaluations are limited in their reliability. The Company may acquire additional assets from the Manager's affiliates in the future, and, if so, the Company will obtain an appraisal, Confirming Price Evaluation or similar estimate, and the Independent Directors will be asked to approve the transaction, relying, however, primarily on information provided by the Manager. THE OFFERING Shares offered to the public(1)(2).............................................. 12,500,000 Shares to be outstanding after offering(1)(2)................................... 14,375,000
- ------------------------ (1) Assumes that the Underwriters' option to purchase up to an additional 1,875,000 shares to cover over-allotments is not exercised. (2) See "Description of Capital Stock" and "Capitalization." USE OF PROCEEDS The Company has contracted with affiliates of the Manager to purchase certain assets upon completion of this Offering for a purchase price of approximately $36.0 million, which is equal to approximately [ ]% of the expected net proceeds of this Offering. These Initial Investments will consist of certain Subordinated Interests and IOs, described herein. In addition, the Company expects to purchase a Subordinated Interest from a third party for a purchase price of approximately $10 million. The Company intends temporarily to invest the balance of the net proceeds of this Offering in readily marketable, interest-bearing securities until the Company finds appropriate Subordinated Interests, Distressed Real Properties and Other Real Estate Related Assets in which to invest. In order fully and quickly to invest its assets in real estate related assets, the Company expects initially to emphasize investments in Other Real Estate Related Assets. Once a substantial portion of the Company's assets are invested, the Company intends to focus primarily on acquiring appropriate Subordinated Interests and Distressed Real Property. See "Operating Policies and Strategies." DISTRIBUTION POLICY OAIC intends to make distributions to its stockholders of all or substantially all of its net taxable income each year (subject to certain adjustments) so as to qualify for the tax benefits accorded to REITs under the Code. OAIC intends to make distributions at least quarterly. It is anticipated that the first distribution to stockholders will be made promptly after the first full calendar quarter following the Closing Date. TAX STATUS OF THE COMPANY OAIC intends to qualify and will elect to be taxed as a REIT under sections 856 through 860 of the Code, commencing with its short taxable year ending December 31, 1997. If OAIC qualifies for taxation as a REIT, OAIC generally will not be subject to federal corporate income tax on its taxable income that is distributed to its stockholders. A REIT is subject to a number of organizational and operational requirements, including a requirement that it currently distribute at least 95% of its annual taxable income. Although OAIC does not intend to request a ruling from the Internal Revenue Service (the "Service") as to its REIT status, OAIC has received an opinion of its legal counsel that OAIC qualifies as a REIT, which 6 opinion is based on certain assumptions and representations about OAIC's ongoing businesses and investment activities and other matters. No complete assurance can be given that OAIC will be able to comply with such assumptions and representations in the future. Furthermore, such opinion is not binding on the Service or on any court. Failure to qualify as a REIT would render OAIC subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates and distributions to OAIC's stockholders would not be deductible. Even if OAIC qualifies for taxation as a REIT, the Company may be subject to certain federal, state and local taxes on its income and property. OAIC will adopt the calendar year as its taxable year. In connection with OAIC's election to be taxed as a REIT, OAIC's Articles of Incorporation impose restrictions on the transfer of the Common Stock. See "Risk Factors--Legal Risks--Tax Risks" and "Federal Income Tax Considerations--Taxation of the Company." RISK FACTORS An investment in the Common Stock involves various risks, and prospective investors should consider carefully the matters discussed under "Risk Factors" prior to an investment in the Company. Such risks include, among others: - real estate investment considerations, such as the effect of economic and other conditions on cash flows and values, the need to allocate significant management resources and the illiquidity of certain real estate investments, all of which may affect adversely the value of such investments, and thus the Company's ability to make distributions to its stockholders; - risks attendant to the acquisition of significant amounts of non-investment grade mortgage-backed securities, which investments may be subject to special leveraged loss risks, including a greater risk of loss of principal and non-payment of interest than investments in whole mortgage loans or senior, investment grade rated securities; - risks relating to the ability of the Company's Distressed Real Properties (which may have significant amounts of unleased space) to generate sufficient revenue to provide a return on the investment after meeting operating expenses and interest expense; - risks of losses related to the ownership of Mortgage Loans and MBS, including borrower default, hazard losses and state or foreign law enforceability issues; - heightened risks of investing in commercial, multifamily residential and construction loans, as compared to single-family residential loans, due to generally larger loan balances, dependency on the successful completion or operation of the project for repayment, difficulties in estimating costs and loan terms that require little or no amortization of the loan over its term (typically, five years), but instead provide for a balloon payment at stated maturity; - interest rate risks, including the risk that in periods of declining interest rates, prepayments on mortgage loans and MBS generally increase and the Company likely will have to reinvest such funds in lower-yielding investments, and the risk that in periods of rising interest rates, prepayments on mortgage loans and MBS generally decrease and the value of fixed-rate investments generally declines; - risks associated with the ownership of IOs and Inverse IOs, including the risks that IOs and Inverse IOs will be negatively affected by faster than anticipated prepayment rates, which are generally associated with a declining interest rate environment; and the risk to investors in Inverse IOs, which have interest rates that vary inversely with changes to an index, of higher than anticipated levels of the index; 7 - risks of OAIC, a company with no operating history and minimal Initial Investments, investing in highly competitive business, albeit with the assistance of a manager that has substantial experience investing in similar assets; - risks resulting from applying leverage to the Company's assets, which can compound losses; - taxation of OAIC as a corporation if it fails to qualify as a REIT; - maintenance of the Company's exemption from regulation under the Investment Company Act, which requires, among other things, that the Company invest 55% of its assets in Qualifying Interests and an additional 25% in Qualifying Interests or other real estate-related assets within one year of Closing; - conflicts of interests between the Company and Ocwen Financial in relation to business decisions regarding the Company, which conflicts of interest could result in decisions that do not fully reflect the interests of all of OAIC's stockholders; - risks related to the Company's reliance on the Manager's experience, including the risk that the Independent Directors must rely on information provided by the Manager to review transactions of the Company with Ocwen Financial and its affiliates; and - other calls on the time of the directors and officers of the Company. 8 ORGANIZATION AND RELATIONSHIPS The Company intends to generate income for distributions to its stockholders primarily from cash flow on Subordinated Interests and Distressed Real Properties. The Manager will manage the day-to-day operations of the Company, subject to the supervision of OAIC's Board of Directors. The relationship among OAIC, its affiliates and the Manager is depicted in the picture shown below. [GRAPHIC SHOWING RELATIONSHIP AMONG OCWEN ASSET INVESTMENT CORP., OCWEN GENERAL, INC., OCWEN LIMITED, INC., OCWEN PARTNERSHIP, L.P. (COLLECTIVELY, THE "COMPANY") AND OCWEN FINANCIAL CORP., OCWEN CAPITAL CORPORATION AND OCWEN FEDERAL BANK FSB.] (1) OAIC, a Virginia corporation taxable as a REIT, will issue approximately 13% of its common stock to Ocwen Financial and approximately 87% of its common stock to public investors. (2) OAIC will incorporate and capitalize two qualified REIT subsidiaries, Ocwen General, Inc. ("General Partner") and Ocwen Limited, Inc. ("Limited Partner"). (3) Limited Partner and General Partner will organize and capitalize Ocwen Partnership, L.P. (the "Operating Partnership"), with the Limited Partner to hold a 99% limited partnership interest in the Operating Partnership, and the General Partner to hold a 1% general partnership interest in the Operating Partnership. (4) Ocwen Financial will sell the Initial Investments to the Operating Partnership for cash. (5) The Operating Partnership will undertake the business of OAIC, including the acquisition of Subordinated Interests, Distressed Real Properties and other assets. (6) The Operating Partnership will assign to Ocwen Federal Bank FSB (the "Bank") any Special Servicing rights and obligations (other than the right to direct foreclosure) received in connection with mortgage-backed securities acquisitions. The Bank is a wholly-owned subsidiary of Ocwen Financial. (7) Ocwen Financial will incorporate and capitalize Ocwen Capital Corporation (the "Manager"). (8) The Manager will enter into a Management Agreement with OAIC and the Operating Partnership, pursuant to which the Manager will formulate operating strategies and provide certain managerial and administrative functions for the entities shown within the box on the chart (collectively, the "Company"), subject to the supervision of OAIC's Board of Directors. 9 RISK FACTORS An investment in the Common Stock involves various risks. Before purchasing shares of Common Stock offered hereby, prospective investors should give special consideration to the information set forth below, in addition to the information set forth elsewhere in this Prospectus. INVESTMENT ACTIVITY RISKS RISK FROM OWNERSHIP OF SUBORDINATED INTERESTS IN POOLS OF COMMERCIAL AND RESIDENTIAL MORTGAGE LOANS. The Company intends to acquire a significant amount of Subordinated Interests, including "first loss" unrated, credit support Subordinated Interests. A first loss security is the most subordinated class of a multi-class issuance of pass-through or debt securities and is the first to bear the loss upon a default on the underlying collateral. Such classes are subject to special risks, including a substantially greater risk of loss of principal and non-payment of interest than more senior, rated classes. While the market values of most Subordinated Interest classes tend to react less to fluctuations in interest rate levels than more senior, rated classes, the market values of Subordinated Interests classes tend to be more sensitive to changes in economic conditions than more senior, rated classes. As a result of these and other factors, Subordinated Interests generally are not actively traded and may not provide holders thereof with liquidity of investment. The yield to maturity on Subordinated Interests of the type the Company intends to acquire will be extremely sensitive to the default and loss experience of the underlying mortgage loans and the timing of any such defaults or losses. Because the Subordinated Interests of the type the Company intends to acquire generally have no credit support, to the extent there are realized losses on the mortgage loans comprising the mortgage collateral for such classes, the Company may not recover the full amount or, indeed, any of its initial investment in such Subordinated Interests. When the Company acquires a Subordinated Interest, it may not acquire the right to service the underlying mortgage loans, even those that become defaulted, although the Company generally will seek to obtain Special Servicing Rights with respect to such loans. The servicer of the mortgage loans is responsible to holders of the senior classes of MBS, whose interests may not be the same as those of the holder of the Subordinated Interest. Accordingly, the underlying mortgage loans may not be serviced in the same manner as they would be serviced by the Company or in a manner that is most advantageous to the Company as the holder of the Subordinated Interest. The subordination of Subordinated Interests to more senior classes may affect adversely the yield on the Subordinated Interests even if realized losses are not ultimately allocated to such classes. On any payment date, interest and principal are paid on the more senior classes before interest and principal are paid with respect to the unrated or non-investment grade credit support classes. Typically, interest deferred on these credit support classes is payable on subsequent payment dates to the extent funds are available, but such deferral may not itself bear interest. Such deferral of interest will affect adversely the yield on the Subordinated Interests. The yield of the Subordinated Interests also will be affected by the rate and timing of payments of principal (including prepayments, repurchase, defaults and liquidations) on the mortgage loans underlying a series of MBS. The rate of principal payments may vary significantly over time depending on a variety of factors such as the level of prevailing mortgage loan interest rates and economic, demographic, tax, legal and other factors. Prepayments on the mortgage loans underlying a series of MBS are generally allocated to the more senior classes of MBS until those classes are paid in full or until the end of a lock-out period, typically of five years or more. Generally, prepayments of principal from the mortgage loans are not received by the Subordinated Interest holders for a period of at least five years. As a result, the weighted-average lives of the Subordinated Interests may be longer than would be the case if, for example, prepayments were allocated pro rata to all classes of MBS. To the extent that the holder of Subordinated Interests is not paid compensating interest on interest shortfalls due to prepayments, liquidations or otherwise, the yield on the Subordinated Interests may be affected adversely. 10 GENERAL RISKS OF INVESTING IN REAL ESTATE. The Company expects to invest in Distressed Real Properties, which are subject to varying degrees of risk generally incident to the ownership of real property. The underlying value of the Distressed Real Properties and the Company's income and ability to make distributions to its stockholders are dependent upon the ability of the Manager to operate the Distressed Real Properties in a manner sufficient to maintain or increase revenues in excess of operating expenses and debt service or, in the case of real property leased to a single lessee, the ability of the lessee to make rent payments. Revenues may be adversely affected by adverse changes in national economic conditions, adverse changes in local market conditions due to changes in general or local economic conditions and neighborhood characteristics, competition from other properties offering the same or similar services, changes in interest rates and in the availability, cost and terms of mortgage funds, the impact of present or future environmental legislation and compliance with environmental laws, the ongoing need for capital improvements (particularly in older structures), changes in real estate tax rates and other operating expenses, adverse changes in governmental rules and fiscal policies, civil unrest, acts of God, including earthquakes, hurricanes and other natural disasters (which may result in uninsured losses), acts of war, adverse changes in zoning laws, and other factors which are beyond the control of the Company. RISKS OF INVESTING IN DISTRESSED REAL PROPERTIES. The Company intends to invest in Distressed Real Properties, which may have significant amounts of unleased space. The Company is subject to the risk that a property cannot be leased to the extent necessary to produce sufficient revenue both to meet operating expenses and debt service and to provide a return on the investment. ILLIQUIDITY OF REAL ESTATE. Real estate investments are relatively illiquid. The ability of the Company to vary its portfolio in response to changes in economic and other conditions will be limited. No assurances can be given that the fair market value of any of the Distressed Real Properties will not decrease in the future. UNINSURED AND UNDERINSURED LOSSES. The Company intends to maintain comprehensive insurance on each of the Distressed Real Properties, including liability and fire and extended coverage, in amounts sufficient to permit the replacement of the properties in the event of a total loss, subject to applicable deductibles. The Company will endeavor to obtain coverage of the type and in the amount customarily obtained by owners of properties similar to the Distressed Real Properties. There are certain types of losses, however, generally of a catastrophic nature, such as earthquakes, floods and hurricanes, that may be uninsurable or not economically insurable. Inflation, changes in building codes and ordinances, environmental considerations, and other factors also might make it infeasible to use insurance proceeds to replace a property if it is damaged or destroyed. Under such circumstances, the insurance proceeds received by the Company might not be adequate to restore its economic position with respect to the affected Distressed Real Property. PROPERTY TAXES. Each Distressed Real Property will be subject to real and, in some instances, personal property taxes. The real and personal property taxes on properties in which the Company invests may increase or decrease as property tax rates change and as the properties are assessed or reassessed by taxing authorities. If property taxes increase, the Company's ability to make expected distributions to its stockholders could be adversely affected. COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT AND OTHER CHANGES IN GOVERNMENTAL RULES AND REGULATIONS. Under the Americans with Disabilities Act of 1990 (the "ADA"), all public properties are required to meet certain federal requirements related to access and use by disabled persons. Distressed Real Properties acquired by the Company may not be in compliance with the ADA. If a property is not, the Company will be required to make modifications to such property to bring it in compliance, or face the possibility of an imposition of fines or an award of damages to private litigants. In addition, changes in governmental rules and regulations or enforcement policies affecting the use and operation of the Distressed Real Properties, including changes to building codes and fire and life-safety codes, may occur. If the Company were required to make substantial modifications at the Distressed Real Properties to comply 11 with the ADA or other changes in governmental rules and regulations, the Company's ability to make expected distributions to its stockholders could be adversely affected. ENVIRONMENTAL MATTERS. Operating costs and the value of the Distressed Real Property may be affected by the obligation to pay for the cost of complying with existing environmental laws, ordinances and regulations, as well as the cost of future legislation. Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under or in such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Therefore, an environmental liability could have a material adverse effect on the underlying value of the Distressed Real Property, the Company's income and cash available for distribution to Stockholders. The Company intends to obtain Phase I environmental assessments on all Distressed Real Properties prior to their acquisition by the Company. The purpose of Phase I environmental assessments is to identify potential environmental contamination that is made apparent from historical reviews of the properties, reviews of certain public records, preliminary investigations of the sites and surrounding properties, and screening for the presence of hazardous substances, toxic substances and underground storage tanks. It is possible, however, that these reports will not reveal all environmental liabilities or that there are material environmental liabilities of which the Company is unaware. RISK FROM OWNERSHIP OF REAL PROPERTIES WITH KNOWN ENVIRONMENTAL PROBLEMS. The Company may invest in real estate, or mortgage loans secured by real estate, with known environmental problems that materially impair the value of the real estate. If so, the Company will take certain steps to limit its liability for such environmental problems, such as creating a special purpose entity to own such real estate. Despite these steps, there are risks associated with such an investment. Ocwen Financial has only limited experience in investing in real estate with known environmental risks, but the Company believes that Ocwen Financial's experience in managing Distressed Real Properties will assist the Company in managing real estate with environmental problems. The Company intends to limit its investments in environmentally distressed real property to no more than 10% of the Company's portfolio. RISK FROM OWNERSHIP OF FOREIGN REAL PROPERTIES. In addition to purchasing Distressed Real Properties, the Company may invest in real estate, or mortgage loans secured by real estate, located outside the United States. Investing in real estate located in foreign countries creates risks associated with the uncertainty of foreign laws and markets. Moreover, investments in foreign assets are subject to currency conversion risks. Although Ocwen Financial has no experience in investing in foreign real estate, the Company believes that Ocwen Financial's experience with distressed assets will be helpful to the management of such assets. The Company intends to limit its investments in foreign real estate to no more than 25% of the Company's portfolio. RISK FROM MULTIFAMILY RESIDENTIAL, COMMERCIAL AND CONSTRUCTION LENDING ACTIVITIES. The Company may originate or acquire loans secured by existing commercial real estate or multifamily residential real estate, including loans that are subordinate to first liens on such real estate. Loans that are subordinate to first liens on real estate are subject to greater risks of loss than first lien mortgage loans. An overall decline in the real estate market could adversely affect the value of the property securing the loans such that the aggregate outstanding balance of the loan made by the Company and the balance of the more senior loan on the property exceed the value of the property. The Company may, in some cases, seek to mitigate this risk by providing a Mezzanine Loan to the entity that owns a property, secured by a controlling equity interest in such owner, so that, in the event of a default, the Company can take over the management of the property and seek to reduce the amount of losses. There can be no assurance, however, that it will be able to do so. Alternatively, the Mezzanine Loans could take the form of a non-voting preferred equity investment in a single purpose entity. 12 The Company also may originate loans for the construction or rehabilitation of commercial and multifamily residential real estate. Multifamily residential and commercial real estate lending, particularly construction and rehabilitation lending is considered to involve a higher degree of risk than single family residential lending because of a variety of factors, including generally larger loan balances, dependency on successful completion or operation of the project for repayment, difficulties in estimating construction costs and loan terms that often require little to no amortization of the loan over its term (typically five years) and, instead, provide for a balloon payment at stated maturity. Furthermore, the Mezzanine Loans and Construction Loans generally will have higher loan to value ratios than conventional loans because of the shared appreciation provisions. Although the borrower will have an equity investment of 10% to 15% of total project costs, such equity may not be sufficient to protect the Company's investment. RISK FROM OWNERSHIP OF IOS, INVERSE IOS AND SUB IOS. The Company may acquire classes of MBS that are entitled to no (or only nominal) payments of principal, but only to payments of interest ("IOs"). The yield to maturity of IOs is very sensitive to changes in the weighted average life of such securities, which in turn is dictated by the rate of prepayments on the underlying mortgage loans. In periods of declining interest rates, rates of prepayments on mortgage loans generally increase, and if the rate of prepayments is faster than anticipated, then the yield on IOs will be negatively affected. Some IOs bear interest at a floating rate that varies inversely with (and often at a multiple of) changes in a specified index ("Inverse IOs"). The Company may invest in Inverse IOs for the purpose of hedging its portfolio of IOs. The yield to maturity of an Inverse IO is extremely sensitive to changes in the related index. The Company also expects to invest in Sub IOs. Interest amounts otherwise allocable to Sub IOs generally are used to make payments on more senior classes or to fund a reserve account for the protection of senior classes until overcollateralization or the balance in the reserve account reaches a specified level. The yield to maturity of a Sub IO is very sensitive not only to default losses but also to the rate and timing of prepayments on the underlying loans. See "Operating Policies and Objectives--Yield Considerations Related to the Company's Investments in MBS--IOs and Inverse IOs." RISK FROM OWNERSHIP OF REMIC RESIDUAL INTERESTS. The Company also may invest in certain classes of MBS that are designated as the residual interest in the related REMIC (a "REMIC Residual Interest") and that receive principal and interest payments in excess of amounts needed to make payments on other classes of securities or to fund a reserve account. Like interest otherwise allocable to Sub IOs, principal and interest amounts otherwise allocable to such REMIC Residual Interests are used to protect the senior classes of securities from credit losses on the underlying Mortgage Loans. Moreover, in any given year, the taxable income produced by a REMIC Residual Interest may exceed its cash flow. See "--Legal and Tax Risks." LIMITED AVAILABLE INVESTMENTS. The results of the Company's operations are dependent upon the availability of opportunities for the acquisition of assets. The Initial Investments of the Company will be small relative to the Common Stock outstanding, and it may take considerable time for the Company to find appropriate additional investments. In general, the results of the Company's operations will be affected by the level and volatility of interest rates, by conditions in the housing and financial markets, and general economic conditions. No assurances can be given that the Company will be successful in acquiring economically desirable assets or that the assets, once acquired, will maintain their economic desirability. To the extent that the Company acquires assets other than those detailed herein, such other acquisitions may pose risks to the Company and to the Company's stockholders that are different from or in addition to the risks enumerated herein. RISKS ASSOCIATED WITH USE OF PROCEEDS. A substantial portion of the net proceeds of the sale of the Common Stock will be producing little income immediately after the Closing. The Company intends temporarily to invest the net proceeds of this offering (other than those used to purchase the Initial Investments) in readily marketable, interest-bearing securities until the Company finds appropriate Subordinated Interests, Distressed Real Property and Other Real Estate Related Assets in which to invest. 13 In order fully and quickly to invest its assets in real estate related assets, the Company expects initially to emphasize investments in Other Real Estate Related Assets, particularly Mortgage Loans. Once a substantial portion of the Company's assets are invested, the Company intends to focus primarily on acquiring appropriate Subordinated Interests and Distressed Real Property, although the Company may invest in Other Real Estate Related Assets as opportunities arise. There can be no assurance, however, that the Company will identify Distressed Real Properties, Subordinated Interests or other appropriate assets that meet its investment criteria or that any such assets will produce a return on the Company's investment. Moreover, because the Company has identified only a small number of investments to acquire at Closing, the Company will have broad authority to invest the remaining proceeds in whatever Real Estate Related Assets the Company deems appropriate at the time of their acquisition. In making these investment decisions, the Company will rely on the Manager's recommendations and on the Guidelines. The Independent Directors will approve and monitor compliance with the Guidelines. Subject to the Guidelines, the Manager will have great latitude in the types of Real Estate Related assets it may decide are proper investments for the Company. No assurance can be made that the Manager's decisions in this regard will result in a profit for the Company. ECONOMIC AND BUSINESS RISKS INTEREST RATE RISK. The value of MBS is affected substantially by prepayment rates on the mortgage loans comprising the mortgage collateral for such securities. Prepayment rates on MBS are influenced by changes in current interest rates and a variety of economic, geographic and other factors and cannot be predicted with certainty. In periods of declining mortgage interest rates, prepayments on MBS generally increase. If general interest rates also decline, the amounts available for reinvestment by the Company during such periods are likely to be reinvested at lower interest rates than the Company was earning on the MBS that were prepaid. MBS may decrease in value as a result of increases in interest rates and may benefit less than other fixed-income securities from declining interest rates because of the risk of prepayment. In general, changes in both prepayment rates and interest rates will change the total return on MBS, which in turn will affect the amount available for distribution to stockholders. This volatility may be greater with certain MBS, such as IOs and Inverse IOs, that the Company intends to acquire. The value of adjustable rate mortgage loans and MBS paying adjustable coupon rates, which the Company may acquire in the future, generally will vary inversely with changes in prevailing interest rates. Under certain interest rate or prepayment rate scenarios, the Company may fail to recoup fully its cost of acquisition of such investments. The Company's operating results depend in part on the difference between the interest income earned on interest-earning assets and the interest expense incurred in connection with its interest-bearing liabilities. Changes in the general level of interest rates can affect the Company's income by affecting the spread between the Company's interest-earning assets and interest-bearing liabilities, as well as, among other things, the value of the Company's interest-earning assets and its ability to realize gains from the sale of assets and the average life of the Company's interest-earning assets. Interest rates are 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. The Company may employ a hedging strategy to limit the effects of changes in interest rates on its operations, including engaging in interest rate swaps, caps, floors and other interest rate exchange contracts. The use of these types of derivatives to hedge a portfolio carries certain risks, including the risk that losses on a hedge position will reduce the funds available for distribution to shareholders and, indeed, that such losses may exceed the amount invested in such instruments. There is no perfect hedge for any investment, and a hedge may not perform its intended use of offsetting losses on an investment. Moreover, with respect to certain of the instruments used as hedges for the Company's portfolio, the Company is exposed to the risk that the counterparties with which the Company trades may cease making markets and quoting prices in such instruments, which may render the Company unable to enter into an offsetting 14 transaction with respect to an open position. If the Company anticipates that the income from any such hedging transaction will not be qualifying income for REIT income test purposes, the Company may conduct part or all of its hedging activities through a to-be-formed corporate subsidiary that is fully subject to federal corporate income taxation. See "Federal Income Tax Considerations--Requirements for Qualification--Income Tests." The profitability of the Company may be adversely affected during any period as a result of changing interest rates. RISKS FROM USE OF LEVERAGE. After the initial "start-up" period, the Company intends to leverage its portfolio through borrowings, generally through the use of reverse repurchase agreements, bank credit facilities, warehouse lines of credit on pools of real estate and mortgage loans, mortgage loans on real estate and other borrowings. The percentage of leverage used will vary depending on the Company's estimate of the stability of the portfolio's cash flow. To the extent that changes in market conditions cause the cost of such financing to increase relative to the income that can be derived from the assets acquired, the Company may reduce the amount of leverage it utilizes. Although there is no specified limitation on the Company's indebtedness, in general the Company expects the ratio of the Company's overall indebtedness (as defined below) to its equity not to exceed four to one. For these purposes "indebtedness" includes only full recourse debt of the Company, but not any debt issued in a securitization transaction or otherwise for which recourse is limited to a fixed pool of assets. However, the Company's Articles and Bylaws do not limit the amount of indebtedness the Company can incur, and the Board of Directors has the discretion to deviate from or change this indebtedness policy at any time, without consent from or notice to the Company's shareholders. Leverage creates an opportunity for increased net income, but at the same time creates risks. For example, leverage can reduce the net income available for distributions to stockholders. The Company will leverage assets only when there is an expectation that it will enhance returns, although there can be no assurance that the Company's use of leverage will prove to be beneficial. Moreover, there can be no assurance that the Company will be able to meet its debt service obligations and, to the extent that it cannot, the Company risks the loss of some or all of its assets. GENERAL ECONOMIC CONDITIONS. The Company's success is dependent upon the general economic conditions in the geographic areas in which a substantial number of its investments are located. Adverse changes in national economic conditions or in the economic conditions of the regions in which the Company conducts substantial business likely would have an adverse effect on real estate values, interest rates and, accordingly, the Company's business. COMPETITION. The Company intends to engage in a highly competitive business. The acquisition of Subordinated Interests and Distressed Real Properties is often based on competitive bidding. In addition, the Company's competitors may seek to establish relationships with the financial institutions and other firms from whom the Company intends to purchase such assets. Many of the Company's anticipated competitors, including Goldman Sachs' Whitehall Street Real Estate Fund, BlackRock Capital Finance, AMRESCO, General Electric Capital Corporation, First Chicago Commercial Assets, LaSalle National Bank, and CRIIMI MAE Inc., are significantly larger than the Company, have established operating histories and procedures, may have access to greater capital and other resources, and may have other advantages over the Company in conducting certain businesses and providing certain services. LEGAL AND TAX RISKS TAX RISKS. OAIC intends to operate in a manner so as to qualify as a REIT for federal income tax purposes. Although OAIC does not intend to request a ruling from the Service as to its REIT status, OAIC has received an opinion of its legal counsel that, based on certain assumptions and representations, it so qualifies. Investors should be aware, however, that opinions of counsel are not binding on the Service or any court. The REIT qualification opinion only represents the view of counsel to OAIC based on counsel's 15 review and analysis of existing law, which includes no controlling precedent. Furthermore, both the validity of the opinion and the continued qualification of OAIC as a REIT will depend on OAIC's satisfaction of certain asset, income, organizational, distribution and stockholder ownership requirements on a continuing basis. If OAIC were to fail to qualify as a REIT in any taxable year, OAIC would be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates, and distributions to stockholders would not be deductible by OAIC in computing its taxable income. Any such corporate tax liability could be substantial and would reduce the amount of cash available for distribution to stockholders, which in turn could have an adverse impact on the value of, and trading prices for, the Common Stock. Unless entitled to relief under certain Code provisions, OAIC also would be disqualified from taxation as a REIT for the four taxable years following the year during which OAIC ceased to qualify as a REIT. OAIC must distribute annually at least 95% of its net taxable income (excluding any net capital gain) in order to avoid corporate income taxation of the earnings that it distributes. In addition, OAIC will be subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions paid by it with respect to any calendar year are less than the sum of (i) 85% of its ordinary income for that year, (ii) 95% of its capital gain net income for that year, and (iii) 100% of its undistributed taxable income from prior years. OAIC intends to make distributions to its stockholders to comply with the 95% distribution requirement and to avoid the nondeductible excise tax. However, differences in timing between the recognition of taxable income and the actual receipt of cash could require the Company to borrow funds or sell assets on a short-term basis to meet the 95% distribution requirement and to avoid the nondeductible excise tax. Gain from the disposition of any asset held primarily for sale to customers in the ordinary course of business generally will be subject to a 100% tax. In addition, gain from the sale of securities held for less than one year and real property (including interests in mortgages on real property) held for less than four years generally will be nonqualifying income for purposes of the 30% gross income test. See "Federal Income Tax Considerations -- Income Tests." The requirement to distribute a substantial portion of OAIC's net taxable income could cause OAIC (i) to sell assets in adverse market conditions, (ii) to distribute amounts that represent a return of capital, or (iii) to distribute amounts that would otherwise be spent on future acquisitions, unanticipated capital expenditures, or repayment of debt. The Company expects to acquire Subordinated Interests and other debt obligations that are deemed to have OID for federal income tax purposes, which is generally equal to the difference between an obligation's issue price and its redemption price. The Company also may acquire Subordinated Interests and other debt obligations that are deemed to have market discount for federal income tax purposes, which generally is equal to the excess of an obligation's redemption price over the basis of the obligation at the time of purchase. The income generated by such instruments for federal income tax purposes will consist of amortization of the OID, the market discount and the coupon interest associated with the instruments. OAIC will be required to recognize as income each year the portion of the OID and market discount that accrues during that year, which will increase the REIT distribution requirement for that year, notwithstanding the fact that there may be no corresponding contemporaneous receipt of cash by OAIC. REMIC Residual Interests also may generate taxable income in excess of cash flow or economic income in any year. In addition, certain taxable income produced by a REMIC Residual Interest ("Excess Inclusion") may cause OAIC's stockholders to suffer certain adverse tax consequences. See "Federal Income Tax Considerations." Consequently, an acquisition by OAIC of Subordinated Interests, other debt obligations that are deemed to have OID or market discount, or REMIC Residual Interests could have the effect of requiring OAIC to incur borrowings or to liquidate a portion of its portfolio at rates or times that OAIC regards as unfavorable to meet the REIT distribution requirement. The Company does intend to invest in Distressed Real Property, however, and depreciation deductions associated with those investments should help offset the adverse tax effects of the OID and market discount generated by the Company's other holdings. 16 EFFECTS OF OWNERSHIP LIMITATION. In order for the Company to maintain its qualification as a REIT, not more than 50% in value of its outstanding shares of capital stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities). For the purpose of preserving the Company's REIT qualification, the Articles of Incorporation generally prohibit direct or indirect ownership of more than (i) 9.1% (or, with respect to Ocwen Financial, 13%) of the number of outstanding shares of Common Stock, or (ii) 9.9% of the number of outstanding shares of any series of Preferred Stock (the "Ownership Limitation"). The Ownership Limitation could have the effect of discouraging a takeover or other transaction in which holders of some, or a majority, of the shares of Common Stock might receive a premium for their shares of Common Stock over the then prevailing market price or which such holders might believe to be otherwise in their best interests. See "Description of Capital Stock--Restrictions on Transfer" and "Federal Income Tax Considerations--Requirements for Qualification." ERISA RISKS. The Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and section 4975 of the Code prohibit certain transactions that involve (i) certain pension, profit-sharing, employee benefit, or retirement plans or individual retirement accounts (each a "Plan") and (ii) the assets of a Plan. A "party in interest" or "disqualified person" with respect to a Plan will be subject to (x) an initial 5% excise tax on the amount involved in any prohibited transaction involving the assets of the Plan and (y) an excise tax equal to 100% of the amount involved if any prohibited transaction is not corrected. Consequently, the fiduciary of a Plan contemplating an investment in the Common Stock should consider whether the Company, any other person associated with the issuance of the Common Stock, or any affiliate of the foregoing is or might become a "party in interest" or "disqualified person" with respect to the Plan. In such a case, the acquisition or holding of Common Stock by or on behalf of the Plan could be considered to give rise to a prohibited transaction under ERISA and the Code. See "ERISA Considerations--Employee Benefit Plans, Tax Qualified Retirement Plans, and IRAs." PREFERRED STOCK MAY PREVENT CHANGE IN CONTROL. The Articles of Incorporation authorize the Board of Directors to issue up to 25 million shares of preferred stock and to establish the preferences and rights of any shares of preferred stock issued. Although the Company has no current intention to issue any series of preferred stock in the foreseeable future, the issuance of any series of preferred stock could have the effect of delaying or preventing a change in control of the Company even if a change in control were in the interests of the Common stockholders. See "Description of Capital Stock--Preferred Stock." VIRGINIA ANTI-TAKEOVER STATUTES. As a Virginia corporation, the Company is subject to various provisions of the Virginia Stock Corporation Act, which impose certain restrictions and require certain procedures with respect to certain takeover offers and business combinations, including, but not limited to, combinations with interested holders and share repurchases from certain holders. See "Certain Provisions of Virginia Law and the Company's Articles of Incorporation and Bylaws--Business Combinations" and "--Control Share Acquisitions." ABILITY OF BOARD OF DIRECTORS TO CHANGE CERTAIN POLICIES. The major policies of the Company, including its investment policy and other policies with respect to acquisitions, financing, growth, operations, debt and distributions, are determined by its Board of Directors. The Board of Directors may amend or revise these and other policies, or approve transactions that deviate from these policies, from time to time without a vote of the Common Stockholders. The effect of any such changes may be positive or negative. The Company cannot change its policy of seeking to maintain its qualification as a REIT without the approval of the holders of two-thirds of the outstanding shares of Common Stock. See "Policies and Objectives with Respect to Certain Activities" and "Certain Provisions of Virginia Law and of the Company's Articles of Incorporation and Bylaws." INVESTMENT COMPANY ACT EXEMPTION. The Company believes that it will not be, and intends to conduct its operations so as not to become, regulated as an investment company under the Investment Company Act. The Investment Company Act exempts entities that, directly or through majority-owned 17 subsidiaries, are "primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate" ("Qualifying Interests"). Under current interpretations by the Staff of the Securities and Exchange Commission (the "Commission"), in order to qualify for this exemption, the Company, among other things, must maintain at least 55% of its assets in Qualifying Interests and also may be required to maintain an additional 25% in Qualifying Interests or other real estate-related assets. The assets that the Company may acquire therefore may be limited by the provisions of the Investment Company Act. In connection with its acquisition of Subordinated Interests, the Company intends, where appropriate, to obtain foreclosure rights, by obtaining the Special Servicing, with respect to the underlying mortgage loans, although there can be no assurance that it will be able to do so on acceptable terms. As a result of obtaining such rights, the Company believes that the related Subordinated Interests will constitute Qualifying Interests for the purpose of the Investment Company Act. The Company does not intend, however, to seek an exemptive order, no-action letter or other form of interpretive guidance from the Commission or its Staff on this position. If the Commission or its staff were to take a different position with respect to whether such Subordinated Interests constitute Qualified Interests, the Company could, among other things, be required either (a) to change the manner in which it conducts its operations to avoid being required to register as an investment company or (b) to register as an investment company, either of which could have an adverse effect on the Company and the market price for the Common Stock. LIMITATION ON LIABILITY OF MANAGER AND OFFICERS AND DIRECTORS OF THE COMPANY. The Articles of Incorporation of the Company contain a provision which, subject to certain exceptions, eliminates the liability of a director or officer to the Company or its stockholders for monetary damages for any breach of duty as a director or officer. This provision does not eliminate such liability to the extent that it is proved that the director or officer engaged in willful misconduct or a knowing violation of criminal law or of any federal or state securities law. The Company will indemnify the Manager and its officers and directors from any action or claim brought or asserted by any party by reason of any allegation that the Manager for one or more of its officers or directors is otherwise accountable or liable for the debts or obligations of the Company or its affiliates. In addition, the Manager and its officers and directors will not be liable to the Company, and the Company will indemnify the Manager and its officers and directors for acts performed pursuant to the Management Agreement, except for claims arising from acts constituting bad faith, willful misconduct, gross negligence or reckless disregard of their duties under the Management Agreement. See "Management of Operations-Limits of Responsibility." OTHER RISKS CONFLICTS OF INTEREST IN THE BUSINESS OF THE COMPANY. The Company will be subject to various potential conflicts of interest arising from its relationship with the Manager and its affiliates. With a view toward protecting the interests of the Company's stockholders, the Articles of Incorporation of the Company provide that a majority of the Board of Directors (and a majority of each committee of the Board of Directors) must not be affiliates of the Manager (the "Independent Directors"). The execution of the Management Agreement will be approved by a majority of Independent Directors. Moreover, the renewal of the Management Agreement after the initial two-year term will require the affirmative vote of a majority of the Independent Directors, and a majority of the Independent Directors may terminate the Management Agreement at any time after two years upon 60 days' notice and payment of a termination fee. See "Management of Operations--The Management Agreement." The Company believes that the compensation provisions of the Management Agreement will provide an incentive for the Manager and its personnel to seek to maximize stockholder value, by tying the Manager's incentive compensation to Funds From Operations per share, before the incentive fee and adjusted by 18 adding gains (or subtracting losses) from debt restructuring and sales of properties. See "Management of Operations--Management Fees." Funds from Operations, as defined by the National Association of Real Estate Investment Trusts ("NAREIT"), means net income (computed in accordance with GAAP) excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. Funds from Operations does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income as an indication of the Company's performance or to cash flows as a measure of liquidity or ability to make distributions. Although the Independent Directors will approve the Management Agreement, daily operations between the Company and the Manager and its affiliates will not be required to be approved by a majority of the Company's Independent Directors. Instead, the majority of the Independent Directors will establish general guidelines ("Guidelines") for the Company's investments, borrowings and operations. On a quarterly basis, the Independent Directors will review transactions engaged in by the Company to monitor compliance with the Guidelines. Moreover, the Independent Directors will review the Guidelines, and the Company's investment policies, annually. Although the Independent Directors will review the Guidelines periodically and will monitor compliance with those Guidelines, investors should be aware that, in conducting this review, the Independent Directors will rely primarily on information provided to them by the Manager. The Manager will obtain evaluations of the price for Subordinated Interests and other classes of MBS ("Confirming Price Evaluations") and appraisals for Distressed Real Properties purchased from the Manager or its affiliates. Confirming Price Evaluations typically issued by the underwriter or placement agent of the MBS can provide only a general sense of the value of an MBS; and with respect to unregistered MBS, a Confirming Price Evaluation does not necessarily represent the price that can be obtained for the MBS because the market for such securities is illiquid. The Independent Directors are likely to rely substantially on information and analysis provided by the Manager to evaluate the Company's Guidelines, compliance therewith and other matters relating to the Company's investments. The Company has contracted with Ocwen Financial to purchase Subordinated Interests and IOs (the "Initial Investments") soon after the Closing for an aggregate purchase price of approximately $36.0 million plus accrued interest. Ocwen Financial will realize a book gain of approximately $2.5 million as a result of this sale. Although a Confirming Price Evaluation has been obtained, the Independent Directors will not be asked to approve this transaction prior to the Closing. As part of their periodic review of previous transactions, however, the Independent Directors will review the purchase of the Initial Investments for conformity with the Guidelines. The Management Agreement does not limit or restrict the right of the Manager or any of its officers, directors, employees or affiliates from engaging in any business or rendering services of any kind to any other person, including the purchase of or rendering advice to others purchasing real estate assets that meet the Company's policies and criteria. The Manager and Ocwen Financial have agreed, however, that if either learns of any opportunity to invest in Distressed Real Property, the Company will have an exclusive right to that investment, unless (i) the investment is not well-suited for the Company, (ii) the Company is unable financially to take advantage of the opportunity, or (iii) the Distressed Real Property is part of a pool of both real estate and loans. From time to time, mortgage lenders offer for sale large pools of mortgage loans and REO Properties pursuant to a competitive bidding process. In such a case, Ocwen Financial may, but is not required to, invite the Company to submit a joint bid for such pool. In the alternative, Ocwen Financial may choose an unaffiliated entity with which to submit a joint bid for the pool, as long as Ocwen Financial takes title only to the mortgage loans and not to the real estate. The Company does not currently intend to participate in mortgage loans originated, purchased or otherwise owned by the Manager or its affiliates. To the extent that the Company does so participate, the 19 Independent Directors must approve the transaction. Generally, the terms of the participation would be structured so that the Bank would service the loans for a market servicing fee and after such servicing fee, the remaining proceeds from the loan would be shared pari passu in accordance with their interests in the loan. Any material deviation from these terms would need to be approved by the independent Directors. The Manager and Ocwen Financial also have agreed to give the Company an exclusive right to purchase Subordinated Interests that become available unless (i) the investment is not well-suited for the Company, (ii) the Company is unable financially to take advantage of the opportunity, or (iii) the mortgage loans collateralizing the MBS were owned by an affiliate of Ocwen Financial, in which case Ocwen Financial or one of its affiliates may choose to retain the Subordinated Interest. See "Management of Operations--Certain Relationships; Conflicts of Interest." Ocwen Financial has no obligation to reveal to the Company any business opportunities to invest in Other Real Estate Related Assets and may compete with the Company for such assets. 20 RISK THAT MARKET FOR COMMON STOCK WILL NOT DEVELOP. Prior to this offering, there has not been a public market for the shares of Common Stock offered hereby. The initial public offering price will be determined by the Company and representatives of the Underwriters. There can be no assurance that the price at which the shares of Common Stock will sell in the public market after the offering will not be lower than the price at which they are sold by the Underwriter. While there can be no assurance that a market for the Company's Common Stock will develop, the Company has applied for quotation of the Common Stock through The Nasdaq Stock Market. Quotation through The Nasdaq Stock Market does not ensure that a market will develop for the Company's Common Stock. NEWLY ORGANIZED CORPORATION. The Company has no operating history, and its operating policies and strategies are untried. The Company will be dependent upon the experience and expertise of the Manager in administering its day-to-day operations. Certain officers, directors and employees of the Manager and its affiliates have significant experience in managing distressed real estate assets and MBS, including Subordinated Interests. However, such officers, directors and employees have never managed a REIT. There can be no assurance that the Manager will be able to implement successfully the strategies that the Company intends to pursue. EXTERNAL MANAGEMENT OF THE COMPANY. The Company will be managed by the Manager, subject to the supervision of the Board of Directors. Thus, the Company will depend on the services of the Manager and its officers and employees for the success of the Company. Moreover, the Company is subject to the risk that the Manager will terminate the Management Agreement and that no suitable replacement can be found to manage the Company. REGULATION OF MANAGER'S AFFILIATES. The Manager is a wholly-owned subsidiary of Ocwen Financial, a registered savings and loan holding company that conducts most of its operations through Ocwen Federal Bank FSB (the "Bank"), a federally-chartered savings bank. Both Ocwen Financial and the Bank are subject to extensive government supervision and regulation, intended primarily for the protection of depositors. In addition, each of Ocwen Financial and the Bank are subject to changes in federal and state laws, including changes in tax laws that could materially affect the real estate industry, as well as changes in regulations, governmental policies and accounting principles. Such changes may increase Ocwen Financial's and the Bank's costs of doing business and assist their competitors. Any such added burdens may adversely affect the Manager's ability to carry out its management functions or the Bank to provide mortgage loan servicing and Special Servicing for the Company or may have an effect on the ability of the Manager and its affiliates to enter into other arrangements with the Company. OPERATING POLICIES AND OBJECTIVES GENERAL. The Company will seek to generate cash flow primarily from investments in (i) Subordinated Interests in commercial and multifamily mortgage backed securitizations ("CMBS"); (ii) Subordinated Interests in one- to four-family residential mortgage backed securitizations ("RMBS"); and (iii) distressed commercial and multifamily real estate ("Distressed Real Property"), including real estate acquired in connection with foreclosure on non-performing loans ("REO Property"). There can be no assurances that the Company will be able to acquire such assets, that the terms or results of such acquisitions will be beneficial to the Company, or that the Company will achieve its objectives. See "Risk Factors." Although the Company expects that its primary emphasis will be on the acquisition of Subordinated Interests and Distressed Real Properties, future acquisitions may include Other Real Estate Related Assets. Moreover, to invest the net proceeds of the Offering quickly in appropriate real estate assets, the Company expects to acquire or originate single family residential, multifamily residential and commercial Performing Mortgage Loans to be used as collateral for CMOs, with the Company retaining an equity ownership interest in such Mortgage Loans. In addition, particularly during this initial period, the Company may originate or acquire Mezzanine Loans on commercial or multifamily residential properties, 21 secured by a controlling equity interest in the entity that owns the property, or make Construction Loans to facilitate construction or rehabilitation of commercial or multifamily residential real estate. The Company may decide in the future to pursue other available acquisition opportunities it deems suitable for the Company's portfolio. It will seek to maximize yield by managing the credit risk through credit underwriting, although there can be no assurances that the Company will be successful in this regard. The Company cannot anticipate with any certainty the percentage of the proceeds of the Offering that will be invested in each category of Real Estate Related Assets, except that the Company does not anticipate investing more than 25% of its assets in foreign real estate and foreign loans or more than 10% of its assets in real estate or loans with known material environmental problems. Subject to the Guidelines, the Company has a great deal of discretion in the manner in which to invest the proceeds of the Offering. There can be no assurance that the Company will be successful in its investment strategy. The Company will have no predetermined limitations or targets for concentration of property type or geographic location. Instead, the Company plans to make acquisition decisions through asset and collateral analysis, evaluating investment risks on a case-by-case basis. To the extent that the Company's assets become concentrated in a few states or a particular region, the return on an investment in the Common Stock will become more dependent on the economy of such states or region. The Company intends to seek to maximize yield through the use of leverage, consistent with maintaining an acceptable level of risk, although there are practical limits to the leverage that can be applied to the Company's investments. The Company will acquire the Initial Investments from Ocwen Financial, and in the future may acquire additional assets from affiliates of the Manager. OCWEN FINANCIAL'S EXPERIENCE. Ocwen Financial has substantial experience in the acquisition, management and disposition of distressed commercial, multifamily and single family mortgage loans and the resultant REO Properties, and the management of diverse real estate assets. This experience, together with Ocwen Financial's personnel, systems and operating policies, will be made available to the Company through the Management Agreement. The Company believes that the availability of Ocwen Financial's resources will allow the Company effectively to manage Distressed Real Property and also will have substantial applications in the investment in Subordinated Interests in CMBS and RMBS, and in exercising Special Servicing rights with respect to the mortgage loans underlying such Subordinated Interests. Ocwen Financial, acting through a former subsidiary, entered the loan resolution business in 1986, by providing private mortgage insurance for residential loans. Since 1991, Ocwen Financial has acquired over $4.2 billion of distressed loans, including $1.7 billion of distressed commercial mortgage loans secured by apartments, shopping centers, office buildings, hotels, and industrial properties located throughout the United States. To date, Ocwen Financial has owned 607 commercial REO properties, which it acquired by purchasing and foreclosing on distressed mortgage loans. As of the date of sale or the most recent appraisal, these REO properties had a market value of approximately $298 million. In the early years of the program, Ocwen Financial acquired distressed mortgage loans primarily from the FDIC and the Resolution Trust Corporation, primarily in auctions of pools of loans acquired from the large number of financial institutions that failed during the late 1980s and early 1990s. Although governmental agencies, such as the FDIC and HUD, continue to be potential sources of distressed mortgage loans, in recent years Ocwen Financial has obtained Distressed Mortgage Loans primarily from various private sector sellers, such as banks, savings institutions, mortgage companies and insurance companies. As a result of this substantial experience, Ocwen Financial has developed the procedures, facilities and systems that it believes are necessary to identify, evaluate, acquire and manage distressed loans appropriately and to resolve such loans in a timely and profitable manner. Furthermore, Ocwen Financial has significant experience in the acquisition and management of MBS, including over $223 million of subordinated securities, the majority of which have been sold. The Company 22 believes that this experience will enable the Manager appropriately to identify, evaluate, price and manage Subordinated Interests and other classes of MBS for the Company. Since 1993, Ocwen Financial has acquired or originated $1.1 billion of performing multifamily residential and commercial mortgage loans. Ocwen Financial has experience in value added financing, including Construction Loans. Ocwen Financial has invested in a computer infrastructure that includes significant capacity for expansion and upgrade. The Company believes that Ocwen Financial's systems and procedures have substantial applicability to the Company's lines of business, and that the Company's access, through the Management Agreement, to Ocwen Financial's information technology will be a key factor in the Company's ability to compete. In addition to its standard industry software applications, Ocwen Financial has internally developed fully integrated applications designed to provide acquisition pricing, decision support, automation of decision execution and tracking and exception reporting. Ocwen Financial has implemented a data warehouse system which provides corporate data on a centralized basis for decision support. The Company believes these resources will be key to achieving a competitive advantage in the Company's business. However, there can be no assurance of the Company's success. Although many of the Company's prospective competitors may have access to greater capital and have other advantages, the Company believes that it has a competitive advantage relative to many of its competitors as a result of the experience of Ocwen Financial in managing and resolving Distressed Mortgage Loans, Ocwen Financial's large investment in the computer systems, technology and other resources that are necessary to conduct this business, and Ocwen Financial's national reputation and the strategic relationships and contacts which it has developed in connection with these activities. Ocwen Financial files reports and other information with the Commission pursuant to the Securities Exchange Act of 1934. Additional information about Ocwen Financial, therefore, may be inspected or copied at the public reference facilities maintained by the Commission. THE COMPANY'S ASSETS The discussion below describes the principal categories of assets that the Company intends to acquire. SUBORDINATED INTERESTS. The Company intends to acquire Subordinated Interests in CMBS and RMBS. Mortgage-backed securities ("MBS") typically are divided into two or more classes, sometimes called "tranches." The senior classes are higher "rated" securities, which would be rated from low investment grade "BBB" to higher investment grade "AA" or "AAA." The junior, subordinated classes typically would include a lower rated, non-investment grade "BB" and "B" class, and an unrated, higher-yielding, credit support class (which generally is required to absorb the first losses on the underlying mortgage loans). MBS generally are issued either as collateralized mortgage obligations ("CMOs" or "CMO Bonds") or pass-through certificates ("Pass-Through Certificates"). CMO Bonds are debt obligations of special purpose corporations, owner trusts or other special purpose entities secured by commercial mortgage loans or MBS. Pass-Through Certificates evidence interests in trusts, the primary assets of which are mortgage loans. CMO Bonds and Pass-Through Certificates may be issued or sponsored by private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage bankers, commercial banks, investment banks and other entities. MBS are not guaranteed by an entity having the credit status of a governmental agency or instrumentality and generally are structured with one or more of the types of credit enhancement described below. In addition, MBS may be illiquid. See "Risk Factors--Investment Activity Risks--Risk From Ownership of Subordinated Interests in Pools of Commercial and Residential Mortgage Loans." In most mortgage loan securitizations, a series of MBS is issued in multiple classes in order to obtain investment-grade ratings for the senior classes and thus increase their marketability. Each class of MBS 23 may be issued with a specific fixed or variable coupon rate and has a stated maturity or final scheduled distribution date. Principal prepayments on the mortgage loans comprising the Mortgage Collateral may cause the MBS to be retired substantially earlier than their stated maturities or final scheduled distribution dates, although, with respect to commercial mortgage loans, there generally are penalties for or limitations on the ability of the borrower to prepay the loan. Interest is paid or accrued on MBS on a periodic basis, typically monthly. The credit quality of MBS depends on the credit quality of the underlying Mortgage Collateral. Among the factors determining the credit quality of the underlying mortgage loans will be the ratio of the mortgage loan balances to the value of the properties securing the mortgage loans, the purpose of the mortgage loans (e.g., refinancing or new purchase), the amount of the mortgage loans, their terms and the geographic diversification of the location of the properties, and, in the case of commercial mortgage loans, the credit-worthiness of tenants. Moreover, the principal of and interest on the underlying mortgage loans may be allocated among the several classes of a MBS in many ways, and the credit quality of a particular class results primarily from the order and timing of the receipt of cash flow generated from the underlying mortgage loans. Subordinated Interests carry significant credit risks. Typically, in a "senior-subordinated" structure, the Subordinated Interests provide credit protection to the senior classes by absorbing losses from loan defaults or foreclosures before such losses are allocated to senior classes. Moreover, typically, as long as the more senior tranches of securities are outstanding, all prepayments on the mortgage loans generally are paid to those senior tranches, at least until the end of a lock-out period, which typically is five years or more. In some instances, particularly with respect to Subordinated Interests in commercial securitizations, the holders of Subordinated Interests are not entitled to receive scheduled payments of principal until the more senior tranches are paid in full or until the end of a lock-out period. Because of this structuring of the cash flows from the underlying mortgage loans, Subordinated Interests in a typical securitization are subject to a substantially greater risk of non-payment than are those more senior tranches. Accordingly, the Subordinated Interests are assigned lower credit ratings, or no ratings at all. Neither the Subordinated Interests nor the underlying mortgage loans are guaranteed by agencies or instrumentalities of the U.S. government or by other governmental entities and accordingly are subject, among other things, to credit risks. See "Risk Factors--Investment Activity Risks--Risk From Ownership of Subordinated Interests in Pools of Commercial and Residential Mortgage Loans." The Company may acquire IOs that have characteristics of Subordinated Interests, known as Sub IOs. A Sub IO is entitled to no payments of principal; moreover, interest on a Sub IO often is withheld in a reserve fund or spread account and is used to fund required payments of principal and interest on the more senior tranches. Once the balance in the spread account reaches a certain level, interest on the Sub IO is paid to the holders of the Sub IO. These Sub IOs provide credit support to the senior classes, and thus bear substantial credit risks. Moreover, because a Sub IO receives only interest payments, its yield is extremely sensitive to changes in the weighted average life of the class, which in turn is dictated by the rate of prepayments on the underlying loans. See "Risk Factors-Investment Activity Risks--Risk from Ownership of IOs, Inverse IOs and Sub IOs." Some Sub IOs are designated as REMIC Residual Interests. Such a Sub IO typically generates Excess Inclusion or other forms of "phantom income." Before acquiring a Subordinated Interest, the Company performs a number of due diligence tasks to evaluate the investment and to verify the information and material provided by the seller. With respect to RMBS, the Manager creates two sample pools: 1) a random sample and 2) an adverse sample, with characteristics (such as high loan-to-value ratios or poor delinquency histories) that make them likely to perform more poorly than the average loans in the pool under consideration. The Manager will obtain broker's price opinions ("BPOs") from one of its approved brokers for each of the loans in the sample pools. The Manager evaluates each BPO to verify its reasonableness, and, if appropriate, additional information is obtained until the Manager is satisfied that a reasonable determination of the value of the 24 loan can be made. The Manager also estimates the potential for increases or decreases in estimated property values based on local real estate trends. Losses on mortgage loans are measured in two ways, loss frequency and loss severity. Loss frequency (the monthly percentage of the loan balances projected to default during the life of the securitization) is estimated by using industry standard predictive models, supplemented by Ocwen Financial's historical data and experience. Loss severity (the amount of loss expected to be realized on defaulted loans) is estimated by projecting the net resolution proceeds expected to be derived from the defaulted loans based upon Ocwen Financial's proprietary in-house computer models. This net resolution analysis reviews all potential forms of resolution, including full payoff, discounted payoff, reinstatement, foreclosure and sale, deed-in-lieu and sale, and takes into account, among other things, real estate value, carrying costs (that is, property taxes, insurance and maintenance) and average months to foreclose in the particular state. With respect to CMBS, the Company determines on a loan-by-loan basis which loans will undergo a full-scope review and which loans will undergo a more streamlined "desktop analysis." Considerations that influence the choice for scope of review are loan size, debt service coverage ratio, loan to value ratio, loan maturity, lease rollover, property type and geographic location. A full-scope review may include, among other factors, a property site inspection, tenant-by-tenant rent roll analysis, review of historical income and expenses for each property securing the loan, a review of major leases for each property (if available); recent appraisals (if available), engineering and environmental reports (if available), and a BPO review. After completing the review of the documentation and the property inspection, the information compiled will be analyzed to determine collateral value for each property securing the loans. Based on these factors, the Manager will determine a resolution value for each loan. After completing the foregoing evaluations, the Manager will re-engineer the RMBS or CMBS securitization, estimating future cash flows to be received by the Subordinated Interests, after adjustments for estimated future losses, and, using that information, the Manager will determine the price at which it would effect the purchase of the Subordinated Interest on behalf of the Company. The Company also intends in many instances to acquire Special Servicing rights with respect to the mortgage loans underlying MBS in which the Company owns a Subordinated Interest. Such Special Servicing rights will give the Company, among other things, some control over the timing of foreclosures on such mortgage loans and, thus, may enable the Company to reduce losses on such mortgage loans. No assurances can be made, however, that the Company will be able to acquire such Special Servicing rights or that losses on the mortgage loans will not exceed the Company's expectations. Although the Company's strategy is to purchase Subordinated Interests at a price designed to return the Company's investment and generate a profit thereon, there can be no assurance that such goal will be met or, indeed, that the Company's investment in a Subordinated Interest will be returned in full or at all. See "Risk Factors-- Investment Activity Risks" and "--Economic and Business Risks." Moreover, many of the Subordinated Interests to be acquired by the Company will not have been registered under the Securities Act, but instead initially were sold in private placements. Because Subordinated Interests acquired in private placements have not been registered under the Securities Act, they will be subject to certain restrictions on resale and, accordingly, will have more limited marketability and liquidity. Although there are some exceptions, most issuers of multi-class MBS elect to be treated, for federal income tax purposes, as REMICs. The Company intends to acquire not only Subordinated Interests that are treated as regular interests in REMICs, but also those that are designated as REMIC Residual Interests. Unlike regular interests in REMICs, REMIC Residual Interests typically generate Excess Inclusion or other forms of "phantom income" that bear no relationship to the actual economic income that is generated by a REMIC. Consequently, if a Subordinated Interest that is designated as a REMIC 25 Residual Interest generates a significant amount of phantom income in any taxable year, the Company could be required to borrow funds or to liquidate assets in order to meet the REIT distribution requirement for such taxable year. Subordinated Interests (other than REMIC Residual Interests and Sub IOs) generally are issued at a significant discount to their outstanding principal balance, which gives rise to OID for federal income tax purposes. The Company will be required to accrue the OID as taxable income over the life of the related Subordinated Interest on a level-yield method in advance of the receipt of the related cash flow. The OID income attributable to a Subordinated Interest generally will increase the Company's REIT distribution requirement in the early years of the Company's ownership of the Subordinated Interest even though the Company may not receive the related cash flow from the Subordinated Interest until a later taxable year. As a result, the Company could be required to borrow funds or to liquidate assets in order to satisfy the REIT distribution requirement for any taxable year. See "Risk Factors--Legal Risks--Tax Risks." There can be no assurance that the Company's strategy for investing in Subordinated Interests will be successful. COMMERCIAL MORTGAGE-BACKED SECURITIES. It is expected that many of the Subordinated Interests acquired by the Company will be Subordinated Interests in CMBS. The Mortgage Collateral supporting CMBS may be mortgage pass-through securities (discussed below) or pools of whole loans. Of the interests in CMBS that the Company acquires, most will be Subordinated Interests, but the Company also may purchase more senior tranches or combined tranches of first-loss and more senior CMBS. Unlike RMBS, which typically are backed by thousands of single family mortgage loans, CMBS are backed generally by a more limited number of commercial or multifamily mortgage loans with larger principal balances than those of single family mortgage loans. As a result, a loss on a single mortgage loan underlying a CMBS will have a greater negative effect on the yield of such CMBS, especially the Subordinated Interests in such CMBS. The Company believes that there will be significant opportunities to invest in Subordinated Interests in CMBS. Increasingly, owners of commercial mortgage loans are choosing to securitize their portfolios. However, no assurances can be made that appropriate opportunities for investment in CMBS will continue to be available. RESIDENTIAL MORTGAGE-BACKED SECURITIES. The Company intends to acquire Subordinated Interests in RMBS backed by "non-conforming" mortgage loans, that is, one- to four-family mortgage loans that do not qualify for sale to FHLMC or FNMA. Typically, non-conforming mortgage loans do not meet agency guarantee criteria because their principal balance exceeds agency limits (e.g., $214,600 is the current single-family mortgage loan limit of both FNMA and FHLMC). Sometimes the mortgage loans or the borrower does not meet other agency credit underwriting standards. The process of a single-family mortgage loan securitization is similar to the process of a commercial mortgage loan securitization. As in CMBS, a typical RMBS series allocates the cash flow on the underlying mortgage loans so that the Subordinated Interests shield the more senior classes from losses due to defaults on the underlying residential mortgage loans, resulting in substantially greater credit risk to the Subordinated Interests. In addition to creating credit support for the more senior classes, another general goal in allocating cash flows from the mortgage loans to the various classes of a securitization, particularly an RMBS issuance, is to create certain tranches on which the expected cash flows have a higher degree of predictability than the cash flow on the underlying mortgage loans. As a general matter, the more predictable the cash flow is on a particular RMBS tranche, the lower the anticipated yield will be on that tranche at the time of issuance relative to prevailing market yields on certain other RMBS. As part of the process of creating more predictable cash flows on certain tranches of a non-conforming mortgage loan securitization, one or more tranches generally must be created that absorb most of the changes in the cash flows from the Mortgage Collateral. The yields on these tranches generally are higher than prevailing 26 market yields on mortgage-backed securities with similar expected average lives. Because of the uncertainty of the cash flows on these tranches, the market prices of, and yields on, these tranches are more volatile. Although Subordinated Interests in RMBS bear substantial credit risk, because of the "shifting interest" structure typically provided, such Subordinated Interests (other than Sub IOs) tend to be less subject to a substantial prepayment risk. A shifting interest structure shifts all prepayments of principal to the more senior, generally investment-grade, RMBS classes (for at least five years for fixed-rate mortgage loans and ten years for adjustable-rate mortgage loans) in order to increase the outstanding percentage of subordination. After this initial period during which prepayments are shifted to the more senior RMBS classes, prepayments then are made pro rata or more likely phased in over a five-year period until all classes are receiving their pro rata share. The net effect on the subordinated classes is a degree of call protection because the principal amounts of the subordinated classes are not reduced by prepayments of the mortgage loans, generally for at least five years. The "shifting interest" mechanism creates a Subordinated Interest in RMBS with a longer but more predictable average life. The Company may acquire Subordinated Interests in RMBS secured by lower credit quality mortgage loans known as "B," "C" and "D" mortgage loans. B, C and D mortgage loans are loans made to borrowers who have credit histories of a lower overall quality than "A" borrowers. These credit histories generally result from previous repayment difficulties, brief job histories, previous bankruptcies or other causes. The loan-to-value ratio for a B, C and D mortgage loan is typically significantly lower than the loan-to-value ratio of an "A" mortgage loan, and the pass-through coupon of a B, C and D mortgage loan is typically higher than the coupon on an A mortgage loan. The Company also expects to obtain a higher yield on RMBS secured by B, C and D mortgage loans. As a result of the typically lower loan-to-value ratios and higher yields on B, C and D mortgage loans, the Company believes these RMBS with B, C and D mortgage loan collateral may justify accepting the higher credit risk associated with such borrowers. Although the RMBS market has matured, the Company believes that attractive acquisition opportunities continue to be available in Subordinated Interests in RMBS. The Company believes that the acquisition of Subordinated Interests in RMBS presents the opportunity to obtain a higher yield compared to similar corporate securities (e.g., similar maturity and risk) and also may present opportunities for capital appreciation. The Company will seek, among other things, to maximize yield by managing the credit risks associated with making this type of investment through certain credit underwriting procedures (that is, a review of the expected economic performance of, and risks associated with, such interests) and through leverage. No assurance can be given that any of the foregoing developments actually will occur. SPECIAL SERVICING. Unlike the owner of mortgage loans, the owner of Subordinated Interests in RMBS or CMBS ordinarily cannot control the servicing of the underlying mortgage loans. The Company intends, however, generally to acquire Special Servicing rights with respect to the mortgage loans underlying Subordinated Interests it purchases. Acquiring these rights will give the Company control of the underlying mortgage loans within certain parameters. The terms of Special Servicing agreements vary considerably, and the Company cannot predict with certainty the precise terms of the Special Servicing agreements into which it will enter. In general, however, the Company will attempt to negotiate Special Servicing agreements that will permit the Company to service, or to direct the servicing of, mortgage loans that are more than 90-days delinquent. At that point, the Company would have the right (and the obligation) to decide whether to begin foreclosure proceedings or to seek alternatives to foreclosure, such as forbearance agreements, partial payment forgiveness, repayment plans, loan modification plans, loan sales and loan assumption plans. Thus, the Company will have within its control, subject to obligations to the related senior classes, some ability to minimize losses on mortgage loans underlying Subordinated Interests owned by the Company. Because the Operating Partnership generally will be the entity that acquires the Subordinated Interests, it also will acquire the related Special Servicing rights. The Operating Partnership intends to 27 assign to Ocwen Federal Bank FSB (formerly Berkeley Federal Bank & Trust FSB), a federally-chartered stock savings bank (the "Bank"), all of its Special Servicing rights and obligations (other than the right to direct foreclosure). It is expected that most or all of the Special Servicing compensation will be paid to the Bank, and thus the Company will benefit from the Special Servicing rights primarily from enhanced value of the related Subordinated Interests due to better Special Servicing of the loans, and not from receipt of material amounts of Special Servicing fees. The Bank, a wholly-owned subsidiary of Ocwen Financial, has considerable experience in servicing distressed loans, has been approved as a servicer by HUD, FHLMC and FNMA and has been rated in the second highest applicable category, "above average," by Fitch Investors Service, Inc. ("Fitch"), as a special servicer of commercial mortgage loans. Moreover, Standard & Poor's and Moody's have rated the Bank as a servicer of single family residential loans. Because the acquisition and Special Servicing of distressed real estate is one of the Bank's business focuses, the Bank has an established network of real estate professionals throughout the United States to assist its asset management activities. The Bank maintains working relationships with approved engineers, environmental consultants and real estate brokers nationwide, and calls upon these local advisors for assistance when appropriate. The legal aspects of the mortgage loans that underlie the Subordinated Interests owned and to be acquired by the Company affect the value of those assets. For a discussion of certain legal aspects of mortgage loans, see "Certain Legal Aspects of Mortgage Loans and Real Property." DISTRESSED REAL PROPERTIES. The Company believes that under appropriate circumstances the acquisition of commercial and multifamily real estate acquired by a mortgage lender at foreclosure, or by receipt of a deed in lieu of foreclosure ("REO Properties") and other underperforming and otherwise distressed commercial and multifamily real estate (together with REO Properties, "Distressed Real Properties") offers significant opportunities to the Company. The Company expects to acquire Distressed Real Properties solely for its own portfolio. From time to time, however, the Company and a co-investor may submit a joint bid to acquire a pool of Distressed Real Property in order to enhance the prospects of submitting a successful bid. If successful, the Company and the co-investor generally would split up the acquired assets in an agreed-upon manner, although in certain instances the Company and the co-investor may continue to have a joint interest in the acquired assets. The Company's policy will be to conduct an investigation and evaluation of the properties in a portfolio of Distressed Real Property before purchasing such a portfolio. Prior to purchasing assets, the Manager will generally identify and contact real estate brokers and/or appraisers in the market area of the subject properties to obtain rent and sale comparables and BPOs for each asset in a portfolio. This information is used to supplement due diligence that is performed by the Manager's employees. The Company's due diligence will generally include the review of market studies for each market within a portfolio. The studies typically will include area economic data, employment trends, absorption rates and market rental rates. Due diligence will also include site inspections by the Manager's employees or agents of most properties in a portfolio and a review of all available asset files and documentation. To the extent possible those will include examinations of available legal documents, litigation files, correspondence, title reports, operating statements, appraisals and engineering and environmental reports. The information compiled is then analyzed to determine a valuation for each property. The property valuation process utilizes a variety of tools which may include various proprietary financial models that have been developed by Ocwen Financial and will be available to the Company through the Management Agreement. Sources of information examined to determine value may include: (a) current and historical operating statements; (b) existing appraisals; (c) BPOs; (d) rent and sales comparables; (e) industry statistics and reports regarding operating expenses such as those compiled by the 28 Institute of Real Estate Management; (f) leases; (g) deferred maintenance observed during site inspections or described in structural reports, reports and correspondence found in the loan files. The Manager develops projections of net operating income and cash flows taking into account lease rollovers, tenant improvement costs and leasing commissions. The Manager will compare its estimates of revenue and expenses to historical operating statements and estimates provided in BPOs, appraisals and general industry and regional statistics. Market capitalization rates and discount rates are then applied to the cash flow projections to estimate values. These values are then compared to available appraisals, BPOs and market sale comparables to determine recommended bid prices for each asset. The bids take into account projected holding periods, capital costs and projected profit expectations. Recommended bid prices are then reviewed with senior management and a decision whether to bid is made. The amount offered by the Company generally will be the price that the Manager estimates is sufficient to generate an acceptable risk-adjusted return on the Company's investment. After the Company acquires Distressed Real Property, the Company's goal will be to improve management of the property so as to increase the cash flow from the property. Following increased cash flows and stabilization of the property, the Company will begin to seek an opportunity to sell the property. Although the period during which the Company will hold Distressed Real Properties will vary considerably from asset to asset, the Company believes that most such properties will be held in its portfolio more than four years and generally fewer than ten years. If the Company is offered the opportunity to purchase a Distressed Real Property that is likely to be held for fewer than four years, the Company intends to establish a corporation in which the Operating Partnership will hold a 95% non-voting ownership interest to make the purchase. Such a corporation will not be eligible for taxation as a qualified REIT subsidiary, and any profits that it earns on its activities will be subject to federal corporate income tax before they are distributable to the Company. If the Company purchases a Distressed Real Property with the intent to hold it in the Operating Partnership for more than four years, but an opportunity arises to sell the property sooner, the Company will consider certain strategies, such as a like-kind exchange, to reduce any negative tax consequences relating to the sale. Although the Company believes that a permanent market for the acquisition of Distressed Real Property has emerged in recent years within the private sector, there can be no assurance that the Company will be able to acquire the desired amount and type of Distressed Real Property in future periods or that there will not be significant inter-period variations in the amount of such acquisitions. See "Risk Factors--Investment Activity Risks--Available Investments." Moreover, there can be no assurance that the Company will be effective in making any asset acquired more valuable than the price paid to acquire it. See "Risk Factors--Investment Activity Risks." PERFORMING MORTGAGE LOANS FOR SECURITIZATION. The Company intends to purchase single family residential, multifamily residential and commercial Performing Mortgage Loans, to pool such loans in a special purpose entity, and to issue CMOs secured by such mortgage loans. The Company would retain the equity ownership interest in the Mortgage Loans, subject to the CMO debt, thereby creating the economic equivalent of a Subordinated Interest. 29 CONSTRUCTION FINANCING AND LOANS SUBJECT TO PRIOR LIENS. The Company may take advantage of opportunities to provide construction or rehabilitation financing on commercial property, lending generally 85% to 90% of total project costs, and taking a first lien mortgage to secure the debt ("Construction Loans"). The Company also may invest in loans that are subordinate to first lien mortgage loans on commercial real estate ("Mezzanine Loans"). For example, on a commercial property subject to a first lien mortgage loan with a principal balance equal to 70% of the value of the property, the Company could lend the owner of the property (typically a partnership) an additional 15% to 20% of the value of the property. Typically the loan would be secured, either by the property subject to the first lien (giving the Company a second lien position) or by a controlling equity interest in the owner. If the equity interest is pledged, then the Company would be in a position to make decisions with respect to the operation of the property in the event of a default by the owner. These Construction and Mezzanine Loans generally would provide the Company with the right to receive a stated interest rate on the loan balance plus a percentage of net operating income or gross revenues from the property, payable to the Company on an ongoing basis, and a percentage of any increase in value of the property, payable upon maturity or refinancing of the loan, or otherwise would allow the Company to charge an interest rate that would provide an attractive risk- adjusted return. SALE LEASEBACK TRANSACTIONS. In addition, the Company may participate in sale leaseback transactions, in which the Company would purchase improved or unimproved real estate from a seller and then lease such real estate back to the seller under a long-term triple net lease. The Company also may provide financing necessary to build commercial improvements on the land, to refinance existing debt on the property or to provide additional funds to operate the business. After participating in a number of these transactions, the Company may pool the leases, and issue debt backed by the leases in a securitization transaction. OTHER MBS. The Company may invest not only in classes of Subordinated Interests but also in other classes of MBS. For example, the Company may invest in IOs, which are entitled to no (or only nominal) payments of principal, but only to payments of interest. If the mortgage loans underlying an IO prepay slowly, then the weighted average life of the IO will be extended, which will increase the yield to maturity on the IO. Conversely, faster prepayments have an adverse effect on the yield to maturity of an IO. The Company also may invest in Inverse IOs, which bear interest at a floating rate that varies inversely with (and often at a multiple of) changes in a specified index, for purposes of hedging its portfolio of IOs. The yield to maturity of a class of Inverse IOs is not only very sensitive to the rate of prepayments on the underlying mortgage loans, but also changes in the related index. See "Risk Factors--Investment Activity Risks--Risks from Ownership of IOs, Inverse IOs and Sub IOs." FOREIGN REAL PROPERTIES. In addition to purchasing Distressed Real Properties, the Company may acquire or originate Mortgage Loans secured by real estate located outside the United States or purchase such real estate, but the Company does not intend to invest more than 25% of the portfolio in foreign real estate. Investing in real estate located in foreign countries creates risks associated with the uncertainty of foreign laws and markets and risks related to currency conversion. Although Ocwen Financial has no experience in investing in foreign real estate, the Company believes that Ocwen Financial's experience with distressed assets will be helpful in the management of such assets. The Company may be subject to foreign income tax with respect to its investments in foreign real estate. However, any foreign tax credit that otherwise would be available to the Company for U.S. federal income tax purposes will not flow through to the Company's stockholders. REAL PROPERTY WITH KNOWN ENVIRONMENTAL PROBLEMS. The Company may acquire or originate mortgage loans secured by real estate with known environmental problems that materially impair the value of the property, or purchase such real estate. If so, the Company will take certain steps to limit its liability for such environmental problems, but there are risks associated with such an investment. Although Ocwen Financial has little experience in investing in real estate with known environmental risks, the Company believes that Ocwen Financial's experience with distressed assets will be helpful to the management of such 30 assets. The Company does not intend to invest more than 10% of its portfolio in environmentally distressed real estate. PORTFOLIO MANAGEMENT The following describes some of the investment management practices that the Company may employ from time to time to earn income, facilitate portfolio management (including managing the effect of maturity or interest rate sensitivity) and mitigate risk (such as the risk of changes in interest rates). There can be no assurance that the Company will not amend or deviate from these policies or adopt other policies in the future. LEVERAGE AND BORROWING. The Company intends to leverage its assets through the use of reverse repurchase agreements, bank credit facilities, mortgage loans on real estate and other borrowings, when there is an expectation that such leverage will benefit the Company. However, the Company does not intend to borrow funds from the Manager or its affiliates. If changes in market conditions cause the cost of such financing to increase relative to the income that can be derived from securities purchased with the proceeds thereof, the Company may reduce the amount of leverage it utilizes. Leverage creates an opportunity for increased income but, at the same time, creates special risks. For example, leveraging magnifies changes in the net worth of the Company and affects the amounts available for distribution to stockholders. Although the amount owed will be fixed, the Company's assets may change in value during the time the debt is outstanding. Leverage will create interest expenses for the Company which can exceed the revenues from the assets retained. To the extent the revenues derived from assets acquired with borrowed funds exceed the interest expense the Company will have to pay, the Company's net income will be greater than if borrowing had not been used. Conversely, if the revenues from the assets acquired with borrowed funds are not sufficient to cover the cost of borrowing, the net income of the Company will be less than if borrowing had not been used, and therefore the amount available for distribution to stockholders will be reduced. See "Risk Factors--Economic and Business Risks--Risks From Use of Leverage." Under certain circumstances, and notwithstanding adverse interest rate or market conditions, the Company may use leverage to obtain sufficient cash to make required distributions of dividends or to fund share repurchases and tender offers when such leveraging is deemed to be in the best interests of stockholders. Such situations may arise if OAIC's status as a REIT or its ability to maintain minimum liquidity levels is endangered. REVERSE REPURCHASE AGREEMENTS. The Company intends to enter into reverse repurchase agreements, which are agreements under which the Company would sell assets to a third party with the commitment that the Company repurchase such assets from the purchaser at a fixed price on an agreed date. Reverse repurchase agreements may be characterized as loans to the Company from the other party that are secured by the underlying assets. The repurchase price reflects the purchase price plus an agreed market rate of interest. BANK CREDIT FACILITIES. The Company intends to borrow money through various bank credit facilities, which will have varying interest rates, which may be fixed or adjustable, and varying maturities. MORTGAGE LOANS ON REAL ESTATE OWNED BY THE COMPANY. The Company expects to borrow funds secured by mortgages on the Company's real estate, including any Distressed Real Properties owned by the Company. CMOS AND WAREHOUSE LINES OF CREDIT. The Company intends to originate or purchase Performing Mortgage Loans and to issue CMOs collateralized by such loans. Moreover, the Company may issue CMOs collateralized by previously issued CMOs or MBS in transactions known as "resecuritizations." 31 During the period in which the Company is acquiring mortgage loans for securitization, the Company is likely to borrow funds secured by such loans pursuant to warehouse lines of credit. INTEREST RATE MANAGEMENT TECHNIQUES. The Company may engage in a variety of interest rate management techniques for the purpose of managing the effective maturity or interest rate of its assets. These techniques also may be used to attempt to protect against declines in the market value of the Company's assets resulting from general trends in debt markets. Any such transaction is subject to risks, and may limit the potential earnings on the Company's investment in real estate related assets. Such techniques may include puts and calls on securities or indices of securities, Eurodollar futures contracts and options on such contracts, interest rate swaps (the exchange of fixed-rate payments for floating-rate payments), or other such transactions. Applicable REIT qualification rules may limit the Company's ability to use these techniques, except through a corporate subsidiary that is fully subject to corporate income taxation. See "Federal Income Tax Considerations--Requirements for Qualification--Income Tests." YIELD CONSIDERATIONS RELATED TO THE COMPANY'S INVESTMENTS Before purchasing any Real Estate Related Assets, the Company, with the assistance of the Manager, will consider the expected yield of the asset. The Company considers the expected yield of an investment to be a benchmark for evaluating profitability of all types of assets over time. The Company primarily analyzes two components of yield: current yield, that is, the current cash flow expected, and yield to maturity. Yield to maturity is dependent, among other things, on the expected future value, holding period and carrying costs of the asset. The Company will consider both components when making any investment decision. Unless the context indicates otherwise, the term "yield" as used in the following discussion refers to a blended calculation of current yield and yield to maturity. Despite the Manager's substantial experience in evaluating potential yields on Real Estate Related Assets, no assurances can be given that the Company can make an accurate assessment of the yield to be produced by an asset. Many factors beyond the control of the Company are likely to influence the yield on the Company's investments. SUBORDINATED INTERESTS The yield to maturity on any class of Subordinated Interests will depend upon, among other things, the price at which such class is purchased, the interest rate for such class and the timing and aggregate amount of distributions on the securities of such class, which in turn will depend primarily on (i) whether there are any losses on the underlying loans allocated to such class and (ii) whether and when there are any prepayments of the related Mortgage Loans (which include both voluntary prepayments by the obligors on the Mortgage Loans and prepayments resulting from liquidations due to defaults and foreclosures). The yield on the Subordinated Interests acquired by the Company will be extremely sensitive to defaults on the mortgage loans comprising the Mortgage Collateral for such securities and the severity of losses resulting from such defaults, as well as the timing of such defaults and actual losses. The Company's right as a holder of Subordinated Interests to distributions of principal and interest will be subordinated to all of the more senior classes of securities. Actual losses on the Mortgage Collateral (after default, where the proceeds from the foreclosure sale of the real estate securing the loan are less than the unpaid balance of the mortgage loan plus interest thereon and disposition costs) will be allocated first to the Subordinated Interests prior to being allocated to the more senior securities. The Subordinated Interests the Company intends to acquire with the proceeds from this offering are subject to special risks, including a substantially greater risk of loss of principal and non-payment of interest than the more senior securities of such series. If the Company acquires Subordinated Interests with an anticipated yield as of the acquisition date based on an assumed rate of default and severity of loss on the mortgage loans comprising the Mortgage Collateral that is lower than the actual default rate and severity of loss, its yield will be lower than the Company initially anticipated. In the event of substantial losses, the Company may not recover the full amount (or, indeed, any) of its acquisition cost. The timing of actual losses also will affect the Company's yield, even if the rate of default and severity of loss are consistent with the Company's anticipation. In 32 general, the earlier a loss occurs, the greater the adverse effect on the Company's yield. Additionally, the yield on CMBS and RMBS collateralized by adjustable rate mortgage loans will vary depending on the amount of and caps on the adjustments to the interest rates of such mortgage loans. There can be no assurance as to the rate of delinquency, severity of loss or the timing of any such losses on mortgage loans underlying Subordinated Interests and thus as to the actual yield received by the Company. The aggregate amount of distributions on the Company's Subordinated Interests and their yield also will be affected by the amount and timing of principal prepayments on the mortgage loans comprising the Mortgage Collateral. To the extent that more senior tranches of Subordinated Interests are outstanding, all prepayments of principal on the underlying mortgage loans typically will be paid to the holders of more senior classes, and typically none (or very little) will be paid to the Company during the first five years, and in some cases a longer period, after the original issue date of the related Subordinated Interests. This subordination of the Subordinated Interests to more senior classes may affect adversely the yield on the Subordinated Interests acquired by the Company. Even if there are no actual losses on the mortgage loans, interest and principal payments are made on the more senior classes before interest and principal are paid with respect to the Subordinated Interests. Typically, interest deferred on Subordinated Interests is payable on subsequent payment dates to the extent funds are available, but such deferral does not itself bear interest. Such deferral of interest will reduce the actual yield on the Company's Subordinated Interests. Because the Company will acquire Subordinated Interests at a significant discount from their outstanding principal balance, if the Company estimates the yield on a security based on a faster rate of payment of principal than actually occurs, the Company's yield on that security will be lower than the Company anticipated. Whether and when there are any principal prepayments on the Mortgage Loans will be affected by a variety of factors, including, without limitation, the terms of the Mortgage Loans, the level of prevailing interest rates, the availability of mortgage credit and economic, tax, legal and other factors. Principal prepayments on Mortgage Loans secured by multifamily residential and commercial properties are likely to be affected by lock-out periods and prepayment premium provisions applicable to each of the Mortgage Loans, and by the extent to which the Servicer is able to enforce such prepayment premium provisions. Moreover, the yield to maturity on such Subordinated Interests may also be affected by any extension of the scheduled maturity dates of the Mortgage Loans as a result of modifications of the Mortgage Loans by the Servicer, if permitted. The timing of any prepayments on the mortgage loans underlying MBS owned by the Company may significantly affect the Company's yield to maturity, even if the average rate of principal payments is consistent with the Company's expectation. In general, the earlier a prepayment of principal of the mortgage loans, the greater the effect on an investor's yield. The effect on the Company's yield of principal payments occurring at a rate higher (or lower) than the rate anticipated by the Company during any particular period may not be fully offset by a subsequent like decrease (or increase) in the rate of principal payments. Because the rate and timing of principal payments on the underlying mortgage loans will depend on future events and on a variety of factors, no assurances can be given as to such rate or the timing of principal payments on the Subordinated Interests the Company owns or acquires. For a discussion of yield considerations relating to the Initial Subordinated Interests, see Appendix B. DISTRESSED REAL PROPERTIES. The yield on the Company's investments in Real Properties, including Distressed Real Properties, will depend upon the price that the Company pays for such investments, the costs of capital improvements and other costs of managing the properties, the level of rents and other income generated by the properties, the length of time between acquisition and disposition and the price at which the Company ultimately disposes of such properties. Although the Manager's skills in managing a Distressed Real Property will be a primary influence on the yield of such an investment, the yield may be adversely affected by factors 33 beyond the Company's control, such as adverse changes in economic conditions, neighborhood characteristics and competition from other properties offering the same or similar services. See "Risk Factors-- Investment Activity Risks--General Risks of Investing in Real Properties." The Company will rely on the substantial experience of Ocwen Financial, made available to the Company through the Management Agreement, in acquiring, managing and disposing of Distressed Real Property, and in predicting and managing problems that arise. See "Management of Operations." No assurances can be given, however, that the Company will be successful in this endeavor. MORTGAGE LOANS The yield to maturity on the Company's investment in Mortgage Loans will depend, among other things, upon (i) whether there are any losses on such Mortgage Loans, (ii) whether and when there are any prepayments of such Mortgage Loans, (iii) the interest rates on such Mortgage Loans, and (iv) the purchase price of such Mortgage Loans. The yield to maturity on all Mortgage Loans will be sensitive to defaults by the borrower and the severity of the losses that might result from such defaults. Construction and Mezzanine Loans will be particularly sensitive to defaults because they generally have higher loan to value ratios than traditional mortgage loans. The borrower generally will have an equity investment of 10% to 15% of total project costs, but if the borrower defaults there can be no assurance that losses will not exceed such amount. Because the borrower's equity may not be adequate to protect the Company's investment, the Company's yield on such loans is particularly sensitive to defaults. If the Company acquires a Mortgage Loan at a significant discount from its outstanding principal balance and the Company estimates the yield on the Mortgage Loan based on a faster rate of payment of principal than actually occurs, the Company's yield on that Mortgage Loan will be lower than the Company anticipated. Conversely, if the Company acquires a Mortgage Loan at a significant premium to its outstanding principal balance, estimating the yield on such Mortgage Loan based on a slower rate of payment of principal than actually occurs, the Company's yield on that Mortgage Loan will be lower than anticipated. Whether and when there are any principal prepayments on the Mortgage Loans will be affected by a variety of factors, including, without limitation, the terms of the Mortgage Loans, the level of prevailing interest rates, the availability of mortgage credit and economic, tax, legal and other factors. Principal prepayments on Mortgage Loans secured by multifamily residential and commercial properties are likely to be affected by lock-out periods and prepayment premium provisions applicable to each of the Mortgage Loans, and by the extent to which the Servicer is able to enforce such prepayment premium provisions. Moreover, the yield to maturity on Mortgage Loans may also be affected by any extension of the scheduled maturity dates of the Mortgage Loans as a result of modifications of the Mortgage Loans by the servicer, if permitted. IOS AND INVERSE IOS. The Company's earnings resulting from its investments in IOs and Inverse IOs will be extremely sensitive to changes in the prepayment rates on the underlying mortgage loans, and investments in Inverse IOs will be very sensitive to changes in the index used to calculate the interest on such classes. The yield on IOs declines as prepayments on the underlying mortgage loans increase. As market interest rates decline, prepayments on the underlying loans typically increase as borrowers refinance their mortgage loans, although commercial and multifamily loans typically have provisions that prohibit or provide disincentives for prepayments for specified periods. Prepayment rates on mortgage loans on which there is no prepayment penalty or prepayment "lock out" period (as is typical for single-family residential loans) may be particularly sensitive to changes in interest rates and, therefore, quite volatile. Faster than anticipated prepayment rates can result in a loss of part or all of the purchase price for the IO. 34 The Company intends to invest in Inverse IOs solely for the purpose of hedging the Company's portfolio of IOs. In general, interest on an Inverse IO is payable at a floating rate that varies inversely with (and often at a multiple of) a specified index, such as the prime rate, one-month, three-month or six-month LIBOR, or a U.S. Treasury rate. Generally, if the index exceeds a certain level, the Inverse IO receives no payments. Moreover, Inverse IOs generally have a cap on the interest rate payable on such class. Investors in Inverse IOs are subject to the risk that higher than anticipated levels of the index could result in actual yields to investors that are significantly lower than the anticipated yields, and that the interest rate on the class will be 0% at or above specified levels of the index. In addition, the interest rate on an Inverse IO cannot exceed its specified maximum rate, regardless of the level of the index. Further, high levels of the index (especially in combination with fast prepayment rates on the Mortgage Loans) may result in the failure of the Company to recover fully its investments in Inverse IOs. For example, the holder of an Inverse IO with a per annum interest rate equal to 8.5% minus one-month LIBOR, subject to a maximum rate of 8.5%, would receive no interest if one-month LIBOR were to equal or exceed 8.5%. Moreover, under no circumstance will such Inverse IO accrue interest at a rate greater than 8.5% per annum. Changes in the index may not correlate with changes in mortgage interest rates. It is possible that lower prevailing mortgage interest rates (which would be expected to result in faster prepayments) could occur concurrently with a higher level of the index, thereby compounding the negative effects of each separate factor on the yields to investors in the Inverse IOs. Conversely, higher prevailing mortgage interest rates (which would be expected to result in slower prepayments) could occur concurrently with a lower level of the index. It is highly unlikely that the index will remain constant at any level. The timing of changes in the level of the index may affect the actual yield to the Company, even if the average level is consistent with the Company's expectation. In general, the earlier a change in the level of the index, the greater the effect on the Company's yield. As a result, the effect on the Company's yield of the index level that is higher (or lower) than the rate anticipated by the Company during earlier periods is not likely to be offset by a later equivalent reduction (or increase). For a discussion of yield considerations relating to the Initial IOs, see Appendix B. INITIAL INVESTMENTS GENERAL The Company has contracted with the Bank to purchase the Subordinated Interests and other classes of MBS described below (the "Initial Investments") for an aggregate cash price equal to approximately $36.0 million plus accrued interest ( % of the expected net proceeds of this Offering). In addition, the Company has contracted to purchase from a third party a Subordinated Interest expected to be issued in April 1997 (the "Supplemental Initial Investment") at a purchase price of approximately $10 million. The purchase price for the Initial Investments and Supplemental Initial Investment was derived by considering a number of factors, including the amount and timing of potential net cash flows on the Initial Investments, the range of possible returns on such purchases and the risks associated with such purchases, including the risk that the ultimate return will be significantly affected by losses, if any, realized on the underlying mortgage loans and other factors that are not controlled by the Company, such as prepayment experience on the underlying mortgage loans. These factors may result in a below market rate of return or a loss on the purchase price in certain situations. See "Risk Factors--Risks from Ownership of Subordinated Interests in Pools of Commercial and Residential Mortgage Loans." The Bank will realize a book gain of approximately $2.5 million on the sale of the Initial Investments to the Company. The sale of the Initial Investments and Supplemental Initial Investment to the Company will not be approved by the Independent Directors prior to the Closing, although the Independent Directors will review these transactions for compliance with the Guidelines during their first periodic 35 review. See "Management of Operations--Certain Relationships; Conflicts of Interests." The Company will account for the Initial Investments in accordance with SFAS No. 115. MLMC, SERIES 1993-M1, CLASSES B AND C The Initial Investments include Merrill Lynch Mortgage Capital Inc., Multifamily Mortgage Pass-Through Certificates, Series 1993-M1, Class B and Class C (the "MLMC Subordinated Interests"), which were issued on September 28, 1993. The securities to be purchased represent 100% of the outstanding principal balance of each class purchased. The MLMC Subordinated Interests were acquired by the Bank on August 11, 1995, have a book value as of February 28, 1997 of approximately $21.4 million and will be acquired by the Company for approximately $23.6 million plus accrued interest. Each of the MLMC Subordinated Interests is subordinated in right of payments of principal and interest and protects the more senior classes from losses on the related mortgage loans (the "MLMC Mortgage Loans"). Moreover, the MLMC Subordinated Interests will receive no principal distributions until the principal balance of the Class A Securities of such series has been reduced to less than 67% of the scheduled principal balance of the MLMC Mortgage Loans. The MLMC Mortgage Loans are secured by multifamily residential properties. At origination, most of the MLMC Mortgage Loans had ten year terms and bore interest at a fixed interest rate that was subject to a one-time adjustment at year five. As of February 1, 1997, the interest rates on most of these loans have been adjusted, so that such loans currently bear interest at a rate that is fixed until maturity. However, one MLMC Mortgage Loan is still subject to a one-time adjustment, and three MLMC Mortgage Loans are adjustable rate loans subject to periodic interest rate adjustments. Substantially all of the MLMC Mortgage Loans are balloon loans, which provide for little or no amortization prior to stated maturity. The MLMC Mortgage Loans had an aggregate principal balance as of September 1, 1993 of $258,764,596 and an aggregate principal balance as of February 1, 1997 of $124,036,129. Most MLMC Mortgage Loans have substantially the same prepayment provisions. Generally, their ten year terms were divided into two five year periods, separated by an interest rate reset date and a prepayment window. Most have passed the reset date and prepayment window and have fewer than five years until stated maturity. During the first three years of this five-year period, the loans cannot be prepaid. In the remaining two years, the loan may be prepaid, subject to a prepayment premium of 4%, which decreases by 1% each six months. These prepayment provisions are designed to create an economic disincentive for the borrower to prepay a loan. Any prepayment premiums will be distributed as excess interest to the more senior class of MBS, and not to the MLMC Subordinated Interests. Additional information relating to the MLMC Subordinated Interests and the MLMC Mortgage Loans is set forth in Appendix A. A discussion of the yield considerations relating to the MLMC Subordinated Interests is set forth in Appendix B. DLJMAC, SERIES 1993-MF17, CLASSES B-2, B-3, C-1, S-1 AND S-2 The Initial Investments also include DLJ Mortgage Acceptance Corporation, Multi-family Mortgage Pass-Through Certificates, Series 1993-MF17, Class B-2, Class B-3 and Class C-1 (the "DLJ Subordinated Interests"), and Class S-1 and Class S-2 (the "DLJ IOs," and, together with the DLJ Subordinated Interests, the "DLJ Investments,"), which were issued on November 12, 1993. The securities to be purchased represent 100% of the outstanding principal balance (or notional balance) of each class purchased, except that the Company is purchasing $8,500,000 in principal balance of Class B-2, which represents approximately 64.9% of such class. The DLJ Investments were acquired by the Bank in October and November of 1996, have a book value as of February 28, 1997 of approximately $12.0 million, and will be acquired by the Company for approximately $12.3 million plus accrued interest. Each of the DLJ Subordinated Interests is subordinated in right of payments of principal and interest and protects the more senior classes from losses on the related mortgage loans (the "DLJ Mortgage 36 Loans"). The DLJ IOs are not entitled to payments of principal, but are entitled to interest payments on their notional balances. The DLJ Mortgage Loans are monthly-pay, fixed rate, balloon mortgage loans secured by multifamily residential properties. The DLJ Mortgage Loans had an initial aggregate principal balance of $139,183,000 and an aggregate principal balance as of February 1, 1997, of $125,737,405. The terms of the DLJ Mortgage Loans prohibit voluntary prepayment during the first five years after origination. Thereafter, the DLJ Mortgage Loans can be prepaid in whole or in part, provided that prepayments during the sixth and seventh years must be accompanied by a yield maintenance premium. After the seventh year following origination, the DLJ Mortgage Loans can be prepaid in whole or in part without any penalty or prepayment premium. The yield maintenance premium requirement creates an economic disincentive for the borrower to prepay a loan. Any prepayment premiums will be distributed generally as excess interest to the more senior classes of MBS, and not to the DLJ Subordinated Interests. Additional information relating to the DLJ Investments and the DLJ Mortgage Loans is set forth in Appendix A. A discussion of the yield considerations relating to the DLJ Investments is set forth in Appendix B. SUPPLEMENTAL INITIAL INVESTMENT On or soon after the Closing, the Company anticipates purchasing not only the Initial Investments, but also a Subordinated Interest to be issued as part of a securitization transaction scheduled to close in late April 1997 (the "Supplemental Initial Investment"). The Company intends to acquire from an independent third party 100% of the Supplemental Initial Investment, which is expected to have a principal balance of approximately $26.5 million and will be purchased for approximately $10 million. The Supplemental Initial Investment is expected to be subordinated in right of payments of principal and interest and will protect the more senior classes of MBS from losses on the related mortgage loans (the "Supplemental Mortgage Loans"). Unlike the MLMC Mortgage Loans and the DLJ Mortgage Loans, which are secured by multifamily residential properties, the Supplemental Mortgage Loans will be secured by one-to-four family residential properties. The Supplemental Mortgage Loans are being serviced, and will continue to be serviced after the transaction is closed, by the Bank, except that the Bank will convey to the Company the unilateral right to direct foreclosure on the properties underlying the Supplemental Mortgage Loans. It is expected that there will be over 6,000 Supplemental Mortgage Loans with an aggregate unpaid principal balance as of February 1, 1997, of over $257 million and an aggregate legal balance (that is, principal balance plus arrearages) as of February 1, 1997 of $312.5 million. The Supplemental Mortgage Loans have scheduled payments that are due monthly, and they may be prepaid at any time without a prepayment penalty or premium. The Supplemental Mortgage Loans have a history of delinquency, but will not be included in the transaction unless they have made recent scheduled payments. Investors should note that the Company cannot control when or whether the Supplemental Initial Investment will be issued, the precise terms of the Supplemental Initial Investment if issued, nor the identity of the Supplemental Mortgage Loans. If the Supplemental Initial Investment is issued with terms materially different from those noted above, the Company may choose nevertheless to acquire it. Similarly, although the Supplemental Mortgage Loans have been preliminarily identified, it is possible that some of the identified loans will not be included in the final pool of Supplemental Mortgage Loans. Thus, the information contained herein concerning the Supplemental Initial Investment and the Supplemental Mortgage Loans is subject to change that is not within the control of the Company. 37 MANAGEMENT OF OPERATIONS OCWEN FINANCIAL CORPORATION Ocwen Financial is a diversified financial services company that is primarily engaged in the acquisition and resolution of troubled loans and in diverse mortgage lending activities. The activities of Ocwen Financial are primarily conducted through Ocwen Federal Bank FSB (the "Bank"), formerly known as "Berkeley Federal Bank & Trust FSB," a federally-chartered savings bank and a wholly-owned subsidiary of Ocwen Financial. At December 31, 1996, Ocwen Financial had $2.48 billion of total assets and stockholders' equity of $203.6 million. Ocwen Financial is a Florida corporation, organized in February 1988 in connection with its acquisition of the Bank. During the early 1990s, Ocwen Financial sought to take advantage of the general decline in asset quality of financial institutions in many areas of the country and the large number of failed savings institutions during this period by establishing its distressed loan acquisition and resolution program. This program commenced with the acquisition of distressed single-family residential loans in 1991 and was expanded to cover the acquisition and resolution of distressed multi-family residential and commercial real estate loans in 1994. Ocwen Financial is a registered savings and loan holding company subject to regulation by the OTS. The Bank is subject to regulation by the OTS, as its chartering authority, and by the FDIC as a result of its membership in the SAIF, which insures the Bank's deposits up to the maximum extent permitted by law. The Bank also is subject to certain regulation by the Federal Reserve Board and currently is a member of the FHLB of New York, one of the 12 regional banks which comprise the FHLB System. Ocwen Financial's executive offices are located at 1675 Palm Beach Lakes Boulevard, West Palm Beach, Florida 33401, and the telephone number of its executive offices is (561) 681-8000. THE MANAGER The Manager is a wholly-owned subsidiary of Ocwen Financial. The following tables set forth certain information about the directors and executive officers of the Manager. Each of the directors of the Manager is also a director of the Company. Other than William C. Erbey and John R. Erbey, who are brothers, no director or executive officer is related by blood, marriage or adoption to any other director or executive officer of the Company or the Manager or any of their respective affiliates. DIRECTORS OF THE MANAGER
NAME AGE POSITION(S) HELD - ----------------------------------------------------- --- ----------------------------------------------------- William C. Erbey..................................... 47 Chairman, President and Chief Executive Officer John R. Erbey........................................ 55 Managing Director and Secretary Christine A. Reich................................... 35 Managing Director and Chief Financial Officer
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
NAME AGE POSITION(S) HELD - ----------------------------------------------------- --- ----------------------------------------------------- John R. Barnes....................................... 54 Senior Vice President Joseph A. Dlutowski.................................. 32 Senior Vice President Jordan C. Paul....................................... 35 Senior Vice President
38 The principal occupation for the last five years of each director of the Manager, as well as some other information, is set forth below. Mr. William C. Erbey has served as President and Chief Executive Officer of Ocwen Financial since January 1988, and became Chairman of the Board in September 1996. Mr. Erbey has served as Chairman of the Board of the Bank since February 1988 and as President and Chief Executive Officer of the Bank since June 1990. From 1983 to 1995, Mr. Erbey served as a Managing General Partner of The Oxford Financial Group ("Oxford"), a private investment company, in charge of merchant banking. From 1975 to 1983, he served at General Electric Credit Corporation ("GECC") in various capacities, most recently as President and Chief Operating Officer of General Electric Mortgage Insurance Corporation, a subsidiary of General Electric Company engaged in the mortgage insurance business. Mr. Erbey also served as Program General Manager of GECC's Commercial Financial Services Department and its subsidiary Acquisition Funding Corporation. He received a Bachelor of Arts in Economics from Allegheny College and a Master of Business Administration from the Harvard Graduate School of Business Administration. Mr. John R. Erbey has served as a Managing Director of Ocwen Financial since January 1993, and as Secretary of Ocwen Financial since June 1989, and served as Senior Vice President of Ocwen Financial from June 1989 until January 1993. Mr. Erbey has served as a director of the Bank since 1990, as a Managing Director of the Bank since May 1993 and as Secretary of the Bank since July 1989. Previously, he served as Senior Vice President of the Bank from June 1989 until May 1993. From 1971 to 1989, he was a member of the Law Department of Westinghouse Electric Corporation and held various management positions, including Associate General Counsel and Assistant Secretary from 1984 to 1989. Previously, he held the positions of Assistant General Counsel of the Industries and International Group and Assistant General Counsel of the Power Systems Group of Westinghouse. Mr. Erbey is a graduate of Allegheny College and Vanderbilt University School of Law. Ms. Reich has served as a Managing Director of Ocwen Financial since June 1994 and as Chief Financial Officer of Ocwen Financial since January 1990. Ms. Reich served as Senior Vice President of Ocwen Financial from January 1993 until June 1994 and as Vice President from January 1990 until January 1993. Ms. Reich has served as a director of the Bank since 1993, as a Managing Director of the Bank since June 1994 and as Chief Financial Officer of the Bank since May 1990. Ms. Reich served as Senior Vice President of the Bank from May 1993 to June 1994 and Vice President of the Bank from January 1990 to May 1993. From 1987 to 1990, Ms. Reich served as an officer of another subsidiary of Ocwen Financial. Prior to 1987, Ms. Reich was employed by KPMG Peat Marwick LLP, most recently in the position of Manager. She is a graduate of the University of Southern California. The background for the last five years of each executive officer of the Company who is not a director is set forth below. Mr. Barnes has served as Senior Vice President of Ocwen Financial and the Bank since May 1994 and served as Vice President of the same from October 1989 to May 1994. Mr. Barnes was a Tax Partner in the firm of Deloitte Haskins & Sells from 1986 to 1989 and in the firm of Arthur Young & Co. from 1979 to 1986. Mr. Barnes was the Partner in Charge of the Cleveland Office Tax Department of Arthur Young & Co. from 1979 to 1984. Mr. Barnes is a graduate of Ohio State University. Mr. Dlutowski was elected a Senior Vice President of Ocwen Financial and the Bank on March 21, 1997. Mr. Dlutowski joined the Bank in October 1992 and served as a Vice President from May 1993 until March 1997. From 1989 to 1991, Mr. Dlutowski was associated with the law firm of Baker and Hostetler. He holds a Bachelor of Science from the University of Pennsylvania, and a Master of Business Administration and Juris Doctor from the University of Pittsburgh. Mr. Paul has served as Senior Vice President of the Bank since March 1996 and served as Vice President of the same since February 1994. Mr. Paul joined the Bank in September 1993 establishing its commercial loan acquisition and asset management divisions. From 1990 to 1993 Mr. Paul was an attorney 39 in the real estate department of the Philadelphia law firm of Wolf, Block, Schorr and Solis-Cohen. From 1983 to 1987 Mr. Paul served in a variety of positions with The Travelers Insurance Company in their Real Estate Investment Department. Mr. Paul received a bachelor of science degree from the Wharton School of the University of Pennsylvania and a juris doctor degree from the University of Pennsylvania Law School. Officers, directors and other personnel have significant experience in mortgage finance and the operation of commercial real estate; however, none has previously managed a REIT. See "Risk Factors-- Newly Organized Corporation." THE MANAGEMENT AGREEMENT The Company will enter into the Management Agreement with the Manager for an initial term expiring on the second anniversary of the Closing Date. Thereafter, successive extensions, each for a period not to exceed one year, may be made by agreement between the Company and the Manager, subject to the affirmative vote of a majority of the Independent Directors. The Company may terminate, or decline to extend the term of, the Management Agreement without cause at any time after the first two years upon 60 days written notice by a majority vote of the Independent Directors or by a vote of the holders of a majority of the outstanding shares of Common Stock; provided, that a termination fee, equal to the sum of the base management fee and incentive management fee earned during the twelve months preceding such termination, will be due. In addition, the Company has the right to terminate the Management Agreement upon the occurrence of certain specified events, including a material breach by the Manager of any provision contained in the Management Agreement, without the payment of any termination fee. If the Management Agreement is terminated for any reason, Ocwen Financial will have registration rights with respect to its Common Stock. The Manager at all times will be subject to the supervision of the Company's Board of Directors and will have only such functions and authority as the Company may delegate to it. The Manager will be responsible for the day-to-day operations of the Company and will perform such services and activities relating to the assets and operations of the Company as may be appropriate, including (or cause to be performed): (i) serving as the Company's consultant with respect to formulation of investment criteria and preparation of policy Guidelines by the Board of Directors; (ii) representing the Company in connection with the purchase and commitment to purchase assets, the sale and commitment to sell assets, and the maintenance and administration of its portfolio of assets; (iii) furnishing reports and statistical and economic research to the Company regarding the Company's activities and the services performed for the Company by the Manager; (iv) monitoring and providing to the Board of Directors on an ongoing basis price information and other data obtained from certain nationally recognized dealers that maintain markets in assets identified by the Board of Directors from time to time, and providing data and advice to the Board of Directors in connection with the identification of such dealers; (v) providing executive and administrative personnel, office space and office services required in rendering services to the Company; (vi) administering the day-to-day operations of the Company and performing and supervising the performance of such other administrative functions necessary in the management of the Company as may be agreed upon by the Manager and the Board of Directors, including the collection of revenues and the payment of the Company's debts and obligations and maintenance of appropriate computer services to perform such administrative functions; 40 (vii) communicating on behalf of the Company with the holders of any equity or debt securities of the Company as required to satisfy the reporting and other requirements of any governmental bodies or agencies or trading markets and to maintain effective relations with such holders; (viii) to the extent not otherwise subject to an agreement executed by the Company, designating a servicer for mortgage loans sold to the Company and arranging for the monitoring and administering of such servicers; (ix) counseling the Company in connection with policy decisions to be made by the Board of Directors; (x) engaging in hedging activities on behalf of the Company, consistent with the Company's status as a REIT and with the Guidelines; (xi) upon request by and in accordance with the directions of the Board of Directors, investing or reinvesting any money of the Company; and (xii) counseling the Company regarding the maintenance of its status as a REIT and monitoring compliance with the various REIT qualification tests and other rules set out in the Code and Treasury Regulations thereunder. PORTFOLIO MANAGEMENT. The Manager will perform portfolio management services on behalf of OAIC and the Operating Partnership pursuant to the Management Agreement with respect to the Company's investments. Such services will include, but not be limited to, consulting the Company on purchase and sale opportunities, collection of information and submission of reports pertaining to the Company's assets, interest rates, and general economic conditions, periodic review and evaluation of the performance of the Company's portfolio of assets, acting as liaison between the Company and banking, mortgage banking, investment banking and other parties with respect to the purchase, financing and disposition of assets, and other customary functions related to portfolio management. The Manager may enter into subcontracts with other parties, including its affiliates, to provide any such services to the Company. MONITORING SERVICING. The Manager will perform monitoring services on behalf of the Company pursuant to the Management Agreement with respect to the Company's portfolio of Special Servicing rights. Such monitoring services will include, but not be limited to, the following activities: negotiating Special Servicing agreements; serving as the Company's consultant with respect to the Special Servicing of mortgage loans; collection of information and submission of reports pertaining to the mortgage loans and to moneys remitted to the Manager or the Company; acting as a liaison between the servicers of the mortgage loans and the Company and working with servicers to the extent necessary to improve their servicing performance; with respect to mortgage loans for which the Company is Special Servicer, periodic review and evaluation of the performance of each servicer to determine its compliance with the terms and conditions of the related servicing agreement; review of and recommendations as to fire losses, easement problems and condemnation, delinquency and foreclosure procedures with regard to mortgage loans; review of servicers' delinquency, foreclosures and other reports on mortgage loans; supervising claims filed under any mortgage insurance policies; and enforcing the obligation of any servicer to repurchase mortgage loans. The Manager may enter into subcontracts with other parties, including its affiliates, to provide any such services for the Manager. MANAGEMENT FEES The Manager will receive a quarterly base management fee equal to 1% of the Average Invested Assets of the Company for such quarter. The term "Average Invested Assets" for any period means the average of the aggregate book value of the assets of the Company, including the assets of all of its direct and indirect subsidiaries, before reserves for depreciation or bad debts or other similar noncash reserves, computed by taking the daily average of such values during such period. The Manager will not receive any management fee for the period prior to the sale of the shares of Common Stock offered hereby. The base 41 management fee is intended to compensate the Manager for its costs in providing management services to the Company. The Board of Directors of the Company may adjust the base management fee in the future if necessary to align the fee more closely with the actual costs of such services. The Manager shall be entitled to receive incentive compensation for each fiscal quarter in an amount equal to the product of (A) 25% of the dollar amount by which (1)(a) Funds from Operations (before the incentive fee) of the Company per share of Common Stock (based on the weighted average number of shares outstanding) plus (b) gains (or minus losses) from debt restructuring and sales of property per share of Common Stock (based on the weighted average number of shares outstanding), exceed (2) an amount equal to (a) the weighted average of the price per share at the initial offering and the prices per share at any secondary offerings by the Company multiplied by (b) the Ten-Year U.S. Treasury Rate plus five percent per annum multiplied by (B) the weighted average number of shares of Common Stock outstanding during such period. "Funds from Operations" as defined by the National Association of Real Estate Investment Trusts ("NAREIT") means net income (computed in accordance with GAAP) excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. Funds from Operations does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income as an indication of the Company's performance or to cash flows as a measure of liquidity or ability to make distributions. As used in calculating the Manager's compensation, the term "Ten Year U.S. Treasury Rate" means the arithmetic average of the weekly average yield to maturity for actively traded current coupon U.S. Treasury fixed interest rate securities (adjusted to constant maturities of ten years) published by the Federal Reserve Board during a quarter, or, if such rate is not published by the Federal Reserve Board, any Federal Reserve Bank or agency or department of the federal government selected by the Company. If the Company determines in good faith that the Ten Year U.S. Treasury Rate cannot be calculated as provided above, then the rate shall be the arithmetic average of the per annum average yields to maturities, based upon closing asked prices on each business day during a quarter, for each actively traded marketable U.S. Treasury fixed interest rate security with a final maturity date not less than eight nor more than twelve years from the date of the closing asked prices as chosen and quoted for each business day in each such quarter in New York City by at least three recognized dealers in U.S. government securities selected by the Company. The ability of the Company to generate Funds from Operations in excess of the Ten Year U.S. Treasury Rate, and of the Manager to earn the incentive compensation described in the preceding paragraph, is dependent upon the level and volatility of interest rates, the Company's ability to react to changes in interest rates and to utilize successfully the operating strategies described herein, and other factors, many of which are not within the Company's control. Because the Manager's employees will perform certain due diligence tasks that purchasers of real estate (including managers of REITs) typically hire outside consultants to perform, the Manager will be reimbursed for (or charge the Company directly for) the Manager's out of pocket costs in performing such due diligence on assets purchased or considered for purchase by the Company. Moreover, the Manager will track the time its employees spend in performing such due diligence tasks and will be entitled to reimbursement for the allocated portion of the salary and benefits of such employees. EXPENSES. The Company does not expect to maintain an office or to employ full-time personnel. Instead it expects to rely on the facilities and resources of the Manager to conduct its operations, and it will be required to pay out-of-pocket expenses and an allocated portion of salary and benefits of the Manager attributable to the operations of the Company. Expense reimbursement will be made quarterly. PAYMENT OF FEES AND EXPENSES. The management fees are payable in arrears. The Manager's base and incentive fees and due diligence and other expenses shall be calculated by the Manager within 45 days after the end of each quarter, and such calculation shall be promptly delivered to the Company. The Company is obligated to pay such fees and expenses within 60 days after the end of each fiscal quarter. 42 STOCK OPTIONS The Company intends to adopt a non-qualified stock option plan (the "Option Plan"), which provides for options to purchase shares of Common Stock (or, at the election of the Company, limited partnership interests ("Units") in the Operating Partnership that may be redeemed for cash, or, at the election of the General Partner, shares of Common Stock on a one-for-one basis). See "Operating Partnership-- Redemption Rights." The purpose of the Option Plan is to provide a means of performance-based compensation in order to provide incentive for the Manager to enhance the value of OAIC's stock. Before Closing, the Company will grant to the Manager all of the options under the Option Plan, representing the right to acquire 1,437,500 Units (1,625,000 assuming the Underwriters exercise their over-allotment option), at an exercise price per share equal to the initial offering price of the Common Stock. If the options could be exercised immediately, they would represent 10% of the number of shares of Common Stock outstanding after completion of this offering. However, the options cannot be exercised immediately. One quarter of the Manager's options are exercisable on each of the first four anniversaries of the Closing Date. The options terminate on the tenth anniversary of the Closing Date. The Board of Directors may amend the Option Plan any time, except that approval by OAIC's stockholders is required for any amendment that increases the aggregate number of shares of Common Stock that may be issued pursuant to the Option Plan, increases the maximum number of shares of Common Stock that may be issued to any person, changes the class of persons eligible to receive such options, modifies the period within which the options may be granted, modifies the period within which the options may be exercised or the terms upon which options may be exercised, or increases the material benefits accruing to the participants under the plan. Unless previously terminated by the Board of Directors, the Option Plan will terminate ten years from the Closing Date. LIMITS OF RESPONSIBILITY Pursuant to the Management Agreement, the Manager will not assume any responsibility other than to render the services called for thereunder and will not be responsible for any action of the Company's Board of Directors in following or declining to follow its advice or recommendations. The Manager, its directors and its officers will not be liable to the Company, any subsidiary of the Company, the Independent Directors, OAIC's stockholders or any subsidiary's stockholders for acts performed in accordance with and pursuant to the Management Agreement, except by reason of acts constituting bad faith, willful misconduct, gross negligence or reckless disregard of their duties under the Management Agreement. The Company has agreed to indemnify the Manager, its directors and its officers with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from acts of the Manager not constituting bad faith, willful misconduct, gross negligence or reckless disregard of duties, performed in good faith in accordance with and pursuant to the Management Agreement. The Management Agreement does not limit or restrict the right of the Manager or any of its officers, directors, employees or Affiliates from engaging in any business or rendering services of any kind to any other person, including the purchase of, or rendering advice to others purchasing, assets that meet the Company's policies and criteria. The Manager has agreed, however, to give the Company an exclusive right to invest in Subordinated Interests and Distressed Real Properties, subject to certain exceptions. See "Risk Factors--Potential Conflicts of Interest" and "--Certain Relationships; Conflicts of Interest." 43 CERTAIN RELATIONSHIPS; CONFLICTS OF INTEREST The Company, on the one hand, and the Manager and its affiliates, on the other, will enter into a number of relationships other than those governed by the Management Agreement, some of which may give rise to conflicts of interest. Moreover, two of the members of the Board of Directors of the Company and all of its officers are also employed by the Manager or its affiliates. The relationships between the Company, on the one hand, and the Manager and its affiliates, on the other, will be governed by policy Guidelines to be approved by a majority of the Independent Directors. The Guidelines establish certain parameters for the operations of the Company, including quantitative and qualitative limitations on the Company's assets that may be acquired. The Guidelines are to assist and instruct the Manager and to establish restrictions applicable to transactions with affiliates of the Manager. Transactions with affiliates of the Manager that fall within the provisions of the Guidelines need not be specifically approved by a majority of the Independent Directors. The Independent Directors will, however, review the Company's transactions on a quarterly basis to ensure compliance with the Guidelines. Although the Independent Directors will review the Guidelines periodically and will monitor compliance with those Guidelines, investors should be aware that, in conducting this review, the Independent Directors will rely primarily on information provided to them by the Manager. The Manager will obtain Confirming Price Evaluations concerning the price for Subordinated Interests and appraisals for Distressed Real Properties purchased from the Manager or its affiliates, but the Independent Directors are likely to rely substantially on information and analysis provided by the Manager to evaluate the Company's Guidelines, compliance therewith and other matters relating to the Company's investments. Moreover, Confirming Price Evaluations and appraisals are not always reliable indicators of the value of assets. In particular, Confirming Price Evaluations generally are obtained from the underwriter or placement agent of the MBS, who may have an incentive to overstate the value of the MBS. Moreoever, the market for unregistered MBS is illiquid, and therefore accurate prices are difficult to estimate. If the Independent Directors determine in their periodic review of transactions that a particular transaction does not comply with the Guidelines, then the Independent Directors will consider what corrective action, if any, can be taken. If the transaction is one with the Manager or an affiliate of the Manager, then the Manager will be required to repurchase the asset at the purchase price to the Company. Moreover, if transactions are consummated that deviate from the Guidelines, then the Independent Directors will institute procedures designed to reduce the chance that future deviations from the Guidelines occur. The Management Agreement does not limit or restrict the right of the Manager or any of its officers, directors, employees or affiliates from engaging in any business or rendering services of any kind to any other person, including the purchase of or rendering advice to others purchasing real estate related assets that meet the Company's policies and criteria. The Manager and Ocwen Financial have agreed, however, that if either learns of any opportunity to invest in Distressed Real Property, the Company will have an exclusive right to that investment, unless (i) the investment is not well-suited for the Company, (ii) the Company is unable financially to take advantage of the opportunity, or (iii) the Distressed Real Property is part of a pool of real estate and loans. From time to time, mortgage lenders offer for sale large pools of mortgage loans and REO Properties pursuant to a competitive bidding process. In such a case, Ocwen Financial may, but is not required to, invite the Company to submit a joint bid for such pool. In the alternative, Ocwen Financial may choose an unaffiliated entity with which to submit a joint bid for the pool, but Ocwen Financial would take title only to the mortgage loans and not the real estate. The Manager and Ocwen Financial also have agreed to give the Company an exclusive right to purchase Subordinated Interests that become available unless (i) the investment is not well-suited for the Company, (ii) the Company is unable financially to take advantage of the opportunity, or (iii) the mortgage loans collateralizing the MBS were owned by an affiliate of Ocwen Financial, in which case an affiliate of Ocwen Financial may choose to retain the Subordinated Interest. 44 Ocwen Financial has no obligation to reveal to the Company any business opportunities to invest in Distressed Mortgage Loans or other real estate related assets (other than Distressed Real Properties and Subordinated Interests). The Company will purchase the Initial Investments from Ocwen Financial for an aggregate purchase price of approximately $36.0 million plus accrued interest which will result in a gain, to Ocwen Financial of approximately $2.5 million. This transaction will not be approved by the Company's Independent Directors, but a Confirming Price Evaluation regarding the purchase price for the assets will be obtained from the placement agents of the Initial Investments. The Company may purchase additional assets from the Manager and its Affiliates in the future. Any such purchases will be in accordance with the Guidelines to be approved by a majority of the Company's Independent Directors. The terms of a particular transaction, however, will not be approved in advance by the Company's Board of Directors. The Independent Directors will review any such transactions quarterly to ensure compliance with the Guidelines, but in doing so they, by necessity, will rely primarily on information and analysis provided to them by the Manager. Ocwen Financial will purchase 1,875,000 shares of Common Stock on the Closing Date at a price equal to the public offering price, net of any underwriting discounts or commissions. This purchase will result in Ocwen Financial's ownership of approximately 13% of the total shares offered hereby, exclusive of the Underwriters' over-allotment option. The Manager also has received stock options pursuant to the Company's Option Plan. See "Management of Operations-Incentive Options." Ocwen Financial will retain its shares of the Company for at least two years after the Company's initial public offering of shares of Common Stock, but may dispose of its Shares any time thereafter in accordance with the provisions of Rule 144 of the Securities Act of 1933. Notwithstanding the foregoing, if the Company terminates the Management Agreement, Ocwen Financial may require the Company to register the Manager's shares of Common Stock with the Commission (and under applicable state law). The market in which the Company expects to purchase assets is characterized by rapid evolution of products and services and, thus, there may in the future be relationships between the Company, the Manager, and affiliates of the Manager in addition to those described herein. THE COMPANY OAIC was incorporated in the Commonwealth of Virginia in January 1997 and will elect to be taxed as a REIT under the Code. The principal executive offices of the Company are located at 1675 Palm Beach Lakes Boulevard, West Palm Beach, Florida 33401. The Company's telephone number is (561) 681-8000. DIRECTORS AND EXECUTIVE OFFICERS The following tables set forth certain information about the directors and executive officers of OAIC. DIRECTORS OF OAIC
NAME AGE POSITION(S) HELD - ----------------------------------------------------- --- ----------------------------------------------------- William C. Erbey..................................... 47 Chairman and Chief Executive Officer Christine A. Reich................................... 35 President and Chief Financial Officer Timothy J. Riddiough................................. 39 Director Robert F. Pugliese................................... 63 Director [Third Independent Director to be Added]
45 EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS John R. Erbey............................. 55 Managing Director and Secretary John R. Barnes............................ 54 Senior Vice President Joseph A. Dlutowski....................... 32 Senior Vice President Jordan C. Paul............................ 35 Senior Vice President
The principal occupation for the last five years of each Independent Director of the Company, as well as some other information, is set forth below. Mr. Riddiough holds the Edward H. and Joyce Linde Career Development Chair in Real Estate Finance at the Massachusetts Institute of Technology Center for Real Estate, where he has taught since 1994. From 1991 to 1994, Mr. Riddiough was an Assistant Professor in the Department of Finance at the University of Cincinnati. He has a background in the mortgage insurance business, having worked at Foremost Guaranty Corporation and Verex Assurance Corporation from 1984 to 1988. Mr. Riddiough's specialties include commercial mortgage and CMBS pricing as well as mortgage disposition/workout strategy. Mr. Riddiough is widely published, with other areas of interest that include capitalization of REITs, option pricing and real estate valuation. He serves on the editorial boards for the two most influential academic journals in the real estate/urban economics area and the advisory board of the Real Estate Research Institute. Mr. Riddiough has recently consulted with several large pension fund advisors/ consultants on CMBS pricing and investment strategy. Mr. Riddiough received his Ph.D. from the University of Wisconsin-Madison in 1991. Mr. Pugliese has been special counsel at the law firm of Eckert Seamans Cherin & Mellott, LLC since 1993. Previously he served as Executive Vice President, Legal and Corporate Affairs, for Westinghouse Electric Corporation where he was responsible for legal and environmental affairs, government and public relations, employee communications and corporate insurance. From 1970-1976, he served as General Tax Counsel for Westinghouse Electric Corporation. Mr. Pugliese has an extensive background in business and legal matters involving the manufacturing, energy, services and broadcast sectors, as well as the environment and international areas. Mr. Pugliese is a director of International Technology Corporation. He has lectured on business ethics at the University of Pittsburgh, Loyola University in Baltimore and at the University of Scranton, where he served as chairman of the Board of Trustees. Mr. Pugliese holds bachelor's and master's degrees from Georgetown University Law Center, and he received a bachelor's degree in accounting from the University of Scranton. [Insert Information on other Independent Director] For biographical information on Messrs. William C. Erbey, John R. Erbey, John R. Barnes, Joseph A. Dlutowski and Jordan C. Paul and Ms. Christine A. Reich, see "Management of Operations--The Manager." All directors will be elected at each annual meeting of OAIC's stockholders for a term of one year, and hold office until their successors are elected and qualified. All officers serve at the discretion of the Board of Directors. Although the Company may have salaried employees, it currently does not have employees and does not expect to employ anyone as long as the Management Agreement is in force. The Company will pay an annual director's fee to each Independent Director equal to $20,000, with no additional fee to be paid for the first four meetings of the Board of Directors. Each Independent Director will be paid a fee of $1,000 for each additional meeting of the Board of Directors attended in person by such Independent Director. All Directors will be reimbursed for their costs and expenses in attending all meetings of the Board of Directors. Affiliated directors will not be separately compensated by the Company. Directors and executive officers of OAIC will be required to devote only so much of their time to the Company's affairs as is necessary or required for the effective conduct and operation of the Company's 46 business. Because the Management Agreement provides that the Manager will assume principal responsibility for managing the affairs of the Company, the officers of the Company, in their capacities as such, are not expected to devote substantial portions of their time to the affairs of the Company. However, in their capacities as officers or employees of the Manager, or its affiliates, they will devote such portion of their time to the affairs of the Manager as is required for the performance of the duties of the Manager under the Management Agreement. The Bylaws of OAIC will provide that, except in the case of a vacancy, the majority of the members of the Board of Directors and of any committee of the Board of Directors will at all times after the issuance of the shares offered hereby be Independent Directors. Vacancies occurring on the Board of Directors among the Independent Directors will be filled by the vote of a majority of the directors, including a majority of the Independent Directors. The Articles of Incorporation of OAIC provide for the indemnification of the directors and officers of OAIC to the fullest extent permitted by Virginia law. Virginia law generally permits indemnification of directors and officers against certain costs, liabilities and expenses that any such person may incur by reason of serving in such positions as long as such person acts in good faith and in a manner reasonably believed by him (i) to be in the best interests of the Company, when acting in his official capacity, and (ii) not opposed to the best interests of the Company in all other cases. Moreover, in the case of any criminal proceedings, such person must have had no reasonable cause to believe the conduct was unlawful. Virginia law also generally permits a corporation to limit or eliminate the damages that may be assessed against a director or officer of a Virginia corporation in an action by, or in the right of, the corporation or its stockholders. OAIC has included provisions in its Articles of Incorporation that eliminate the liabilities of directors and officers in certain actions brought by or on behalf of stockholders. See "Description of Common Stock--Certain Charter Provisions." Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is therefore unenforceable. DISTRIBUTION POLICY In order to avoid corporate income taxation on the earnings that it distributes, OAIC must distribute to its stockholders an amount at least equal to (i) 95% of its REIT taxable income (determined before the deduction for dividends paid and excluding any net capital gain) plus (ii) 95% of the excess of its net income from foreclosure property over the tax imposed on such income by the Code less (iii) any excess noncash income (as determined under the Code). See "Federal Income Tax Considerations." The actual amount and timing of distributions, however, will be at the discretion of the Board of Directors and will depend upon the financial condition of OAIC in addition to the requirements of the Code. It is anticipated that the first distribution will be made after the first full fiscal quarter following the completion of this offering. Subject to the distribution requirements referred to in the immediately preceding paragraph, OAIC intends, to the extent practicable, to invest substantially all of the principal from repayments, sales and refinancings of the Company's assets in Distressed Real Property and Subordinated Interests. OAIC may, however, under certain circumstances, make a distribution of principal. Such distributions, if any, will be made at the discretion of OAIC's Board of Directors. It is anticipated that distributions generally will be taxable as ordinary income to non-exempt stockholders of OAIC, although a portion of such distributions may be designated by OAIC as long-term capital gain or may constitute a return of capital. OAIC will furnish annually to each of its stockholders a statement setting forth distributions paid during the preceding year and their federal income tax status. For a discussion of the federal income tax treatment of distributions by OAIC and certain adverse tax consequences for stockholders associated with REMIC Residual Interests held by the Company, see 47 "Federal Income Tax Considerations--Taxation of the Company" and "--Taxation of Taxable U.S. Stockholders." CAPITALIZATION The capitalization of the Company, as of February 12, 1997, and as adjusted to reflect the sale of the shares of Common Stock offered hereby, is as follows:
AS ACTUAL ADJUSTED(1) --------- ----------- Common Stock, par value $.01 $ 1 $ Authorized--200,000,000 shares......................................................... Outstanding--100 shares, 14,375,000 shares, as adjusted................................ Additional Paid-in Capital 1,599 --------- ----------- Total................................................................................ $ 1,600 $ --------- ----------- --------- -----------
- ------------------------ (1) Includes 1,875,000 shares of Common Stock to be purchased by Ocwen Financial after deducting offering and organizational expenses estimated to be $ payable by the Company, and assuming no exercise of the Underwriters' over-allotment option to purchase up to an additional 1,875,000 shares of Common Stock. MANAGEMENT'S DISCUSSION AND ANALYSIS OF LIQUIDITY AND CAPITAL RESOURCES OAIC has been organized and will elect to qualify as a REIT under the Code and, as such, anticipates distributing annually at least 95% of its taxable income, subject to certain adjustments. Cash for such distributions is expected to be generated from the Company's operations, although the Company also may borrow funds to make distributions. The Company's revenues will be derived from (i) ownership of Distressed Real Properties; (ii) ownership of Subordinated Interests; (iii) ownership of Other Real Estate Related Assets; and (iv) interest and revenues from other (generally short-term) investments. See "Distribution Policy" and "Federal Income Tax Considerations." The principal sources of the Company's funds will be the proceeds of the offering made by this Prospectus, borrowings under lines of credit to be arranged on behalf of the Company, additional bank borrowings, commercial paper borrowings, mortgage loans on the Company's real estate and future equity offerings. Management believes that the net proceeds of this offering, combined with the cash flow from operations and borrowings, will be sufficient to enable the Company to meet its anticipated liquidity and capital requirements. See "Operating Policies and Strategies" and "Use of Proceeds." DESCRIPTION OF CAPITAL STOCK GENERAL The Articles of Incorporation provide that OAIC may issue up to 225,000,000 shares of capital stock, consisting of 200,000,000 shares of Common Stock, $0.01 par value per share, and 25,000,000 shares of preferred stock, $0.01 par value per share ("Preferred Stock"). Upon completion of this offering, 14,375,000 shares of Common Stock will be issued and outstanding, 1,437,500 shares of Common Stock will be reserved for issuance upon exercise of options, and no Preferred Stock will be issued and outstanding. 48 COMMON STOCK All shares of Common Stock will be duly authorized, fully paid and nonassessable upon the Closing. Subject to the preferential rights of any other shares or series of shares of capital stock, holders of Common Stock are entitled to receive dividends if and when authorized and declared by the Board of Directors of OAIC out of assets legally available therefor and to share ratably in the assets of OAIC legally available for distribution to its stockholders in the event of its liquidation, dissolution or winding-up after payment of, or adequate provision for, all known debts and liabilities of OAIC. OAIC intends to pay quarterly dividends. Each outstanding share of Common Stock entitles the holder to one vote on all matters submitted to a vote of stockholders, including the election of directors, and, except as otherwise required by law or except as provided with respect to any other class or series of shares of capital stock, the holders Common Stock will possess the exclusive voting power. There is no cumulative voting in the election of directors, which means in all elections of directors, each holder of Common Stock has the right to cast one vote for each share of stock for each candidate. PREFERRED STOCK Preferred Stock may be issued from time to time, in one or more series, as authorized by the Board of Directors. Because the Board of Directors has the power to establish the preferences and rights of each class or series of Preferred Stock, the Board of Directors may afford the holders of any series or class of Preferred Stock preferences, powers and rights, voting or otherwise, senior to the rights of the holders of Common Stock. The Board could authorize the issuance of Preferred Stock with terms and conditions which could have the effect of discouraging a takeover or other transaction which holders of some, or a majority, of the shares of Common Stock might believe to be in their best interests or in which holders of some, or a majority, of the shares of Common Stock might receive a premium for their shares of Common Stock over the then market price of such shares of Common Stock. As of the date hereof, no shares of Preferred Stock are outstanding. RESTRICTIONS ON TRANSFER For OAIC to qualify as a REIT under the Code, it must meet certain requirements concerning the ownership of its outstanding shares of capital stock. Specifically, not more than 50% in value of OAIC's outstanding capital stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) during the last half of a taxable year, and OAIC must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months or during a proportionate part of a shorter taxable year. See "Federal Income Tax Considerations--Requirements for Qualification." Because the Board of Directors believes it is essential for OAIC to continue to qualify as a REIT, the Articles of Incorporation, subject to certain exceptions and waivers described below, provide that no person may own, or be deemed to own by virtue of the attribution provisions of the Code, more than (i) 9.1% (or, with respect to Ocwen Financial, 13%) of the number of outstanding shares of Common Stock, or (ii) 9.9% of the number of outstanding shares of any series of Preferred Stock (the "Ownership Limitation"). Subject to certain exceptions described below, any purported transfer of shares of Common Stock or Preferred Stock that would (i) result in any person owning, directly or indirectly, shares of Common Stock or Preferred Stock in excess of the Ownership Limitation, (ii) result in the shares of Common Stock and Preferred Stock, collectively, being owned by fewer than 100 persons (determined without reference to any rules of attribution), (iii) result in OAIC being "closely held" within the meaning of section 856(h) of the Code, or (iv) cause OAIC to own, actually or constructively, 10% or more of the ownership interests in a tenant of the Company's real property, within the meaning of section 856(d)(2)(B) of the Code, will be designated as "Shares-in-Trust" and transferred automatically to a trust (the "Trust") effective on the day 49 before the purported transfer of such shares of Common Stock or Preferred Stock. The record holder of the shares of Common Stock or Preferred Stock that are designated as Shares-in-Trust (the "Prohibited Owner") will be required to submit such number of shares of Common Stock or Preferred Stock to OAIC for registration in the name of the Trust. The trustee of the Trust (the "Trustee") will be designated by OAIC, but will not be affiliated with OAIC. The beneficiary of the Trust (the "Beneficiary") will be one or more charitable organizations that are named by OAIC. Shares-in-Trust will remain issued and outstanding shares of Common Stock or Preferred Stock and will be entitled to the same rights and privileges as all other shares of the same class or series. The Trustee will receive all dividends and distributions on the Shares-in-Trust and will hold such dividends or distributions in trust for the benefit of the Beneficiary. The Trustee will vote all Shares-in-Trust. The Trustee will designate a permitted transferee of the Shares-in-Trust, provided that the permitted transferee (i) purchases such Shares-in-Trust for valuable consideration and (ii) acquires such Shares-in-Trust without such acquisition resulting in a transfer to another Trust. The Prohibited Owner with respect to Shares-in-Trust will be required to repay to the Trustee the amount of any dividends or distributions received by the Prohibited Owner (i) that are attributable to any Shares-in-Trust and (ii) the record date of which was on or after the date that such shares became Shares-in-Trust. The Prohibited Owner generally will receive from the Trustee the lesser of (i) the price per share such Prohibited Owner paid for the shares of Common Stock or Preferred Stock that were designated as Shares-in-Trust (or, in the case of a gift or devise, the Market Price (as defined below) per share on the date of such transfer) or (ii) the price per share received by the Trustee from the sale of such Shares-in-Trust. Any amounts received by the Trustee in excess of the amounts to be paid to the Prohibited Owner will be distributed to the Beneficiary. The Shares-in-Trust will be deemed to have been offered for sale to OAIC, or its designee, at a price per share equal to the lesser of (i) the price per share in the transaction that created such Shares-in-Trust (or, in the case of a gift or devise, the Market Price per share on the date of such transfer) or (ii) the Market Price per share on the date that OAIC, or its designee, accepts such offer. OAIC will have the right to accept such offer for a period of ninety days after the later of (i) the date of the purported transfer which resulted in such Shares-in-Trust or (ii) the date OAIC determines in good faith that a transfer resulting in such Shares-in-Trust occurred. "Market Price" on any date shall mean the average of the Closing Price (as defined below) for the five consecutive Trading Days (as defined below) ending on such date. The "Closing Price" on any date shall mean the average of the high bid and low asked prices in the over-the-counter market, as reported by The Nasdaq Stock Market. "Trading Day" shall mean any day other than a Saturday, a Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close. Any person who acquires or attempts to acquire shares of Common Stock or Preferred Stock in violation of the foregoing restrictions, or any person who owned shares of Common Stock or Preferred Stock that were transferred to a Trust, will be required (i) to give immediately written notice to OAIC of such event and (ii) to provide to OAIC such other information as it may request in order to determine the effect, if any, of such transfer on OAIC's status as a REIT. All persons who own, directly or indirectly, more than 5% (or such lower percentages as required pursuant to regulations under the Code) of the outstanding shares of Common Stock and Preferred Stock must, within 30 days after January 1 of each year, provide to OAIC a written statement or affidavit stating the name and address of such direct or indirect owner, the number of shares of Common Stock and Preferred Stock owned directly or indirectly, and a description of how such shares are held. In addition, each direct or indirect stockholder shall provide to OAIC such additional information as OAIC may request in order to determine the effect, if any, of such ownership on OAIC's status as a REIT and to ensure compliance with the Ownership Limitation. 50 The Ownership Limitation generally will not apply to the acquisition of shares of Common Stock or Preferred Stock by an underwriter that participates in a public offering of such shares. In addition, the Board of Directors, upon receipt of a ruling from the Service or an opinion of counsel and upon such other conditions as the Board of Directors may direct, may exempt a person from the Ownership Limitation under certain circumstances. The foregoing restrictions will not be removed until (A)(i) such restrictions are no longer required in order to qualify as a REIT; and (ii) the Board of Directors determines that it is no longer in the best interest of the Company to retain such restrictions; or (B)(i) the Board of Directors determines that it is no longer in the best interests of OAIC to attempt to qualify, or to continue to qualify, as a REIT and (ii) there is an affirmative vote of two-thirds of the number of shares of Common Stock and Preferred Stock entitled to vote on such matter at a regular or special meeting of the stockholders of OAIC. All certificates representing shares of Common Stock or Preferred Stock will bear a legend referring to the restrictions described above. The Ownership Limitation could have the effect of discouraging a takeover or other transaction in which holders of some, or a majority, of shares of Common Stock might receive a premium for their shares of Common Stock over the then prevailing market price or which such holders might believe to be otherwise in their best interest. DIVIDEND REINVESTMENT PLAN OAIC may implement a dividend reinvestment plan whereby stockholders may automatically reinvest their dividends in OAIC's Common Stock. Details about any such plan would be sent to OAIC's stockholders following adoption thereof by the Board of Directors. REPORTS TO STOCKHOLDERS OAIC will furnish its stockholders with annual reports containing audited financial statements certified by independent public accountants and distribute quarterly reports containing unaudited financial information for each of the first three quarters of the year. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock will be determined by the Board of Directors. CERTAIN PROVISIONS OF VIRGINIA LAW AND OF OAIC'S ARTICLES OF INCORPORATION AND BYLAWS The following summary of certain provisions of Virginia law and of the Articles of Incorporation and Bylaws of OAIC does not purport to be complete and is subject to and qualified in its entirety by reference to Virginia law and the Articles of Incorporation and Bylaws of OAIC. Certain provisions of Virginia law and the Articles of Incorporation and Bylaws are described elsewhere in this Prospectus. BOARD OF DIRECTORS The Bylaws provide that the number of Directors of OAIC may be established by the Board of Directors but may not be fewer than three nor more than nine. Any vacancy will be filled, at any regular meeting or at any special meeting called for that purpose, by a majority of the remaining Directors, except that a vacancy resulting from an increase in the number of Directors must be filled by a majority of the entire Board of Directors. OAIC's Bylaws also provide that a Director may be removed with or without cause with the affirmative vote of at least two-thirds of the votes entitled to be cast in the election of Directors. This provision, when coupled with the provisions of the Bylaws authorizing the Board of Directors to fill vacant 51 directorships, as a practical matter precludes OAIC's stockholders from removing incumbent directors and filling the vacancies created by such removal with their own nominees. AMENDMENT The Articles of Incorporation may be amended by the affirmative vote of the holders of a majority of the outstanding shares of Common Stock (and majority of the outstanding shares of Preferred Stock, if any, to the extent that such amendment would affect the holders of the Preferred Stock), with the stockholders voting as a class with one vote per share; provided, that the Articles of Incorporation provision relating to OAIC's election to be taxed as a REIT shall not be amended, altered, changed or repealed without the affirmative vote of at least 80% of the members of the Board of Directors or the affirmative vote of holders of two-thirds of the outstanding shares of Common Stock and any other shares of capital stock entitled to vote generally in the election of directors voting as a class. OAIC's Bylaws may be amended by the Board of Directors or by vote of the holders of a majority of the outstanding shares of Common Stock, provided that provisions with respect to removal of directors, quorum requirements and approval of certain matters by a majority of the Directors, cannot be amended without the affirmative vote of 80% of the members of the entire Board of Directors, including a majority of the Independent Directors, or the holders of two-thirds of the outstanding shares of Common Stock and any other class of shares of capital stock entitled to vote generally in the election of directors. BUSINESS COMBINATIONS The Virginia Stock Corporation Act contains provisions restricting "Affiliated Transactions." These provisions, with several exceptions discussed below, require approval of material acquisition transactions between a Virginia corporation having more than 300 stockholders of record and any holder of more than 10% of any class of its outstanding voting shares (an "Interested Stockholder") by the holders of at least two-thirds of the remaining voting shares. Affiliated Transactions subject to this approval requirement include mergers, share exchanges, material dispositions of corporate assets not in the ordinary course of business, any dissolution of the corporation proposed by or on behalf of an Interested Stockholder, or any reclassification, including a reverse stock split, a recapitalization or a merger of the corporation with its subsidiaries that increases the percentage of voting shares owned beneficially by an Interested Stockholder by more than 5%. For three years following the time that an Interested Stockholder becomes an owner of 10% of the outstanding voting shares, a Virginia corporation cannot engage in an Affiliated Transaction with such Interested Stockholder without approval of two-thirds of the voting shares other than those shares beneficially owned by the Interested Stockholder, and majority approval of the "Unaffiliated Directors." An Unaffiliated Director, for this purpose, means, with respect to a particular Interested Stockholder, a member of OAIC's Board of Directors who was (i) a member on the date on which an Interested Stockholder became an Interested Stockholder and (ii) recommended for election by, or was elected to fill a vacancy and received the affirmative vote of, a majority of the Unaffiliated Directors then on the Board. At the expiration of the three year period, the statute requires approval of Affiliated Transactions by two-thirds of the voting shares other than those beneficially owned by the Interested Stockholder. The principal exceptions to the special voting requirement apply to transactions proposed after the three year period has expired and require either that the transaction be approved by a majority of the corporation's Unaffiliated Directors or that the transaction satisfy the fair-price requirements of the statute. In general, the fair-price requirement provides that in a two-step acquisition transaction, the Interested Stockholder must pay the stockholders in the second step either the same amount of cash or the same amount and type of consideration paid to acquire the Virginia corporation's shares in the first step. None of the foregoing limitations and special voting requirements applies to a transaction with an Interested Stockholder whose acquisition of shares making such person an Interested Stockholder was approved by a majority of the Virginia corporation's Unaffiliated Directors. The Company's Unaffiliated Directors have approved Ocwen Financial's acquisition of more than 10% of shares in the Common Stock. 52 These provisions were designed to deter certain takeovers of Virginia corporations. In addition, the statute provides that, by affirmative vote of a majority of the voting shares other than shares owned by any Interested Stockholder, a corporation can adopt an amendment to its Articles of Incorporation or Bylaws providing that the Affiliated Transactions provisions shall not apply to the corporation. OAIC has not "opted out" of the Affiliated Transactions provisions. CONTROL SHARE ACQUISITIONS The Virginia Stock Corporation Act also contains provisions regulating certain "Control Share Acquisitions," which are transactions causing the voting strength of any person acquiring beneficial ownership of shares of a public corporation in Virginia to meet or exceed certain threshold percentages (20%, 33 1/3% or 50%) of the total votes entitled to be cast for the election of directors. Shares acquired in a control share acquisition have no voting rights unless: (i) the voting rights are granted by a majority vote of all outstanding shares other than those held by the acquiring person or any officer or employee Director of the corporation, or (ii) the Articles of Incorporation or Bylaws of the corporation provide that these Virginia law provisions do not apply to acquisitions of its shares. The acquiring person may require that a special meeting of the stockholders be held to consider the grant of voting rights to the shares acquired in the control share acquisition. These provisions were designed to deter certain takeovers of Virginia public corporations. Under Virginia law, a corporation may "opt out" of the Control Share Acquisitions provisions in its Articles of Incorporation or Bylaws. OAIC has not "opted out" of the Control Share Acquisitions provisions. OPERATIONS The Company is generally prohibited from engaging in certain activities and acquiring or holding property or engaging in any activity that would cause the Company to fail to qualify as a REIT. ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS The Bylaws of the Company provide (a) with respect to an annual meeting of stockholders, nominations of persons for election to the Board of Directors and the proposal of business to be considered by such stockholders may be made only (i) pursuant to the Company's notice of the meeting, (ii) by the Board of Directors or (iii) by a stockholder who is entitled to vote at the meeting and has complied with the advance notice procedures set forth in the Bylaws and (b) with respect to special meetings of stockholders, nominations of persons for election to the Board of Directors may be made only (i) pursuant to the Company's notice of meeting, (ii) by the Board of Directors or (iii) provided that the Board of Directors has determined that directors shall be elected at such meeting, by a stockholder who is entitled to vote at the meeting and has complied with the advance notice provisions set forth in the Bylaws. COMMON STOCK AVAILABLE FOR FUTURE SALE Upon the closing of the Offering, OAIC will have outstanding (or reserved for issuance upon exercise of options) 15,812,500 shares of Common Stock. The Common Stock issued in the Offering will be freely tradeable by persons other than "Affiliates" of the Company without restriction under the Securities Act of 1933, as amended (the "Securities Act"), subject to certain limitations on ownership set forth in the Articles of Incorporation. See "Description of Capital Stock--Restrictions on Transfer." Shares of Common Stock issued to holders of Units upon exercise of the Redemption Rights will be "restricted" securities under the meaning of Rule 144 promulgated under the Securities Act ("Rule 144") and may not be sold in the absence of registration under the Securities Act unless an exemption from registration is available, including exemptions contained in Rule 144. See "Operating Partnership-- Redemption Rights." As described below, OAIC has granted certain holders registration rights with respect to their Common Stock. In general, under Rule 144 as currently in effect, if one year has elapsed since the later of the date of acquisition of restricted shares from the Company or any "Affiliate" of the Company, as that term is 53 defined under the Securities Act, the acquiror or subsequent holder thereof is entitled to sell within any three-month period a number of shares that does not exceed the greater of 1% of the then outstanding Common Stock or the average weekly trading volume of the Common Stock during the four calendar weeks preceding the date on which notice of the sale is filed with the Commission. Sales under Rule 144 also are subject to certain manner of sale provisions, notice requirements and the availability of current public information about the Company. If two years have elapsed since the date of acquisition of restricted shares from the Company or from any Affiliate of the Company, and the acquiror or subsequent holder thereof is deemed not to have been an Affiliate of the Company at any time during the three months preceding a sale, such person would be entitled to sell such shares in the public market under Rule 144(k) without regard to the volume limitations, manner of sale provisions, public information requirements or notice requirements. No prediction can be made as to the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the market price prevailing from time to time. Sales of substantial amounts of Common Stock, or the perception that such sales could occur, may affect adversely prevailing market prices of the Common Stock. OPERATING PARTNERSHIP AGREEMENT The Operating Partnership has been organized as a Virginia limited partnership, the general partner of which is Ocwen General, Inc., a wholly-owned subsidiary of OAIC, and the initial limited partner of which is Ocwen Limited Inc., a wholly-owned subsidiary of OAIC (the "Initial Limited Partner"). Because OAIC indirectly owns 100% of the partnership interests in the Operating Partnership, the Operating Partnership will be disregarded as a separate entity from OAIC for federal income tax purposes until a third party is admitted as a partner of the Operating Partnership. The Company organized the Operating Partnership in order to provide future sellers of assets with the opportunity to transfer those assets to the Company in a tax-deferred exchange. The Operating Partnership Agreement currently does not contain many of the provisions described below. Instead, the following summary of the Operating Partnership Agreement, and the descriptions of certain provisions thereof set forth elsewhere in this Prospectus, describe certain provisions that likely will appear in the Operating Partnership Agreement when the Manager or third-party sellers of assets who wish to achieve tax deferral are admitted as partners of the Operating Partnership. The provisions described in this summary, however, may not appear in the Operating Partnership Agreement that ultimately is executed. GENERAL Pursuant to the Operating Partnership Agreement, the General Partner, as the sole general partner of the Operating Partnership, will have full, exclusive and complete responsibility and discretion in the management and control of the Operating Partnership. The limited partners of the operating partnership (the "Limited Partners") will have no authority in their capacity as Limited Partners to transact business for, or participate in the management activities or decisions of, the Operating Partnership except as required by applicable law. Consequently, OAIC, by virtue of its ownership of the General Partner, will control the assets and business of the Operating Partnership. However, it is anticipated that any amendment to the Operating Partnership Agreement that would (i) affect the Redemption Rights (as defined below), (ii) adversely affect the Limited Partners' rights to receive cash distributions, (iii) alter the Operating Partnership's allocations of income or loss, or (iv) impose on the Limited Partners any obligations to make additional contributions to the capital of the Operating Partnership, will require the consent of Limited Partners (other than the Initial Limited Partner) holding more than two-thirds of the partnership interests ("Units") held by such partners. GENERAL PARTNER NOT TO WITHDRAW It is anticipated that the General Partner will not be able to voluntarily withdraw from the Operating Partnership or transfer or assign its interest in the Operating Partnership unless the transaction in which 54 such withdrawal or transfer occurs results in the Limited Partners receiving property in an amount equal to the amount they would have received had they exercised the Redemption Rights immediately prior to such transaction, or unless the successor to the General Partner contributes substantially all of its assets to the Operating Partnership in return for an interest in the Operating Partnership. CAPITAL CONTRIBUTION OAIC will contribute, through the General Partner and the Initial Limited Partner, all of the net proceeds of the Offering to the Operating Partnership. The General Partner will hold a 1% general partnership interest in the Operating Partnership, and the Initial Limited Partner will hold a 99% limited partnership interest in the Operating Partnership. After the completion of the Offering, OAIC will have issued a total of 14,375,000 shares of Common Stock and will own, through the General Partner and the Initial Limited Partner, 100% of the partnership interests in the Operating Partnership. Although the Operating Partnership will receive the net proceeds of the Offering, the Initial Limited Partner and the General Partner will be deemed to have made a capital contribution to the Operating Partnership in the aggregate amount of the gross proceeds of the Offering and the Operating Partnership will be deemed simultaneously to have paid the underwriter's discount and other expenses paid or incurred in connection with the Offering. It is anticipated that the Operating Partnership Agreement will provide that if the Operating Partnership requires additional funds at any time or from time to time in excess of funds available to the Operating Partnership from borrowing or capital contributions, the General Partner may borrow such funds from a financial institution or other lender and lend such funds to the Operating Partnership on the same terms and conditions as are applicable to the General Partner's borrowing of such funds. Moreover, it is anticipated that the General Partner will be authorized to cause the Operating Partnership to issue partnership interests for less than fair market value if the Company (i) has concluded in good faith that such issuance is in the best interest of the Company and the Operating Partnership and (ii) the General Partner makes a capital contribution in an amount equal to the proceeds of such issuance. Under the Operating Partnership Agreement, each of the General Partner and the Initial Limited Partner is obligated to contribute the net proceeds of any future share offering by OAIC as additional capital to the Operating Partnership in exchange for an additional partnership interest. Upon such contribution, the General Partner's and the Initial Limited Partner's percentage interests in the Operating Partnership would be increased on a proportionate basis based upon the amount of such additional capital contributions. The percentage interests of the Limited Partners (other than the Initial Limited Partner) would be decreased on a proportionate basis in the event of additional capital contributions by the General Partner and the Initial Limited Partner. In addition, if the General Partner and the Initial Limited Partner were to contribute additional capital to the Operating Partnership, the General Partner would revalue the property of the Operating Partnership to its fair market value (as determined by the General Partner) and the capital accounts of the partners would be adjusted to reflect the manner in which the unrealized gain or loss inherent in such property (that has not been reflected in the capital accounts previously) would be allocated among the partners under the terms of the Operating Partnership Agreement as if there were a taxable disposition of such property for such fair market value on the date of the revaluation. REDEMPTION RIGHTS It is anticipated that pursuant to the Operating Partnership Agreement, the Limited Partners (other than the Initial Limited Partner) will have the right (the "Redemption Rights") to cause the Operating Partnership to redeem their Units for cash or, at the election of the General Partner, shares of Common Stock on a one-for-one basis. The redemption price will be paid in cash in the discretion of the Company or in the event that the issuance of shares of Common Stock to the redeeming Limited Partner would (i) result in any person owning, directly or indirectly, shares of Common Stock in excess of the Ownership Limitation, (ii) result in shares of capital stock of the Company being owned by fewer than 100 persons (determined without reference to any rules of attribution), (iii) result in the Company being "closely held" 55 within the meaning of section 856(h) of the Code, (iv) cause the Company to own, actually or constructively, 10% or more of the ownership interests in a tenant of the Company's or the Operating Partnership's real property, within the meaning of section 856(d)(2)(B) of the Code, or (v) cause the acquisition of shares of Common Stock by such redeeming Limited Partner to be "integrated" with any other distribution of shares of Common Stock for purposes of complying with the Securities Act. The Manager holds options to acquire shares of Common Stock (or, at the option of the Company, Units), none of which is exercisable until the first anniversary of the Closing Date. Upon an acquisition of Units, the Manager may immediately exercise its Redemption Rights. If the Company decides to securitize some or all of its Mortgage Loans through the issuance of non-REMIC collaterized mortgage obligations with multiple maturities ("CMOs"), it is anticipated that the Mortgage Loans will be distributed, through the General Partner and the Initial Limited Partner, to OAIC in order to prevent the Mortgage Loans from being treated as a taxable mortgage pool for federal income tax purposes upon the issuance of the CMOs. Accordingly, it is anticipated that the General Partner and the Initial Limited Partner will have the right to redeem a portion of their partnership interests in the Operating Partnership in exchange for Mortgage Loans to the extent necessary to facilitate such a securitization transaction. The portion of the General Partner's or Initial Limited Partner's partnership interest that is redeemed will be based on the fair market value of the Mortgage Loans distributed, as determined by the General Partner, but subject to review by the Independent Directors to ensure compliance with the Guidelines. OPERATIONS The Operating Partnership Agreement requires that the Operating Partnership be operated in a manner that will enable OAIC to satisfy the requirements for being classified as a REIT for federal tax purposes, to avoid any federal income or excise tax liability imposed by the Code, and to ensure that the Operating Partnership will not be classified as a "publicly traded partnership" for purposes of section 7704 of the Code. In addition to the administrative and operating costs and expenses incurred by the Operating Partnership, it is anticipated that the Operating Partnership will pay all administrative costs and expenses of the Company and the General Partner (collectively, the "Company Expenses") and the Company Expenses will be treated as expenses of the Operating Partnership. The Company Expenses generally will include (i) all expenses relating to the formation and continuity of existence of the Company and the General Partner, (ii) all expenses relating to the public offering and registration of securities by the Company, (iii) all expenses associated with the preparation and filing of any periodic reports by the Company under federal, state or local laws or regulations, (iv) all expenses associated with compliance by the Company and the General Partner with laws, rules and regulations promulgated by any regulatory body and (v) all other operating or administrative costs of the General Partner incurred in the ordinary course of its business on behalf of the Operating Partnership. DISTRIBUTIONS It is anticipated that the Operating Partnership Agreement will provide that the Operating Partnership shall distribute cash from operations (including net sale or refinancing proceeds, but excluding net proceeds from the sale of the Operating Partnership's property in connection with the liquidation of the Operating Partnership) on a quarterly (or, at the election of the General Partner, more frequent) basis, in amounts determined by the General Partner in its sole discretion, to the partners in accordance with their respective percentage interests in the Operating Partnership. Upon liquidation of the Operating Partnership, after payment of, or adequate provision for, debts and obligations of the Operating Partnership, including any partner loans, it is anticipated that any remaining assets of the Operating Partnership will be distributed to all partners with positive capital accounts in accordance with their respective positive capital account balances. If the General Partner has a negative balance in its capital account following a liquidation of the Operating Partnership, it will be obligated to contribute cash to the Operating Partnership equal to the negative balance in its capital account. 56 ALLOCATIONS It is anticipated that income, gain and loss of the Operating Partnership for each fiscal year generally will be allocated among the partners in accordance with their respective interests in the Operating Partnership, subject to compliance with the provisions of Code sections 704(b) and 704(c) and Treasury regulations ("Treasury Regulations") promulgated thereunder. TERM The Operating Partnership shall continue until December 31, 2050, or until sooner terminated as provided in the partnership agreement or by operation of law. TAX MATTERS Pursuant to the Operating Partnership Agreement, the General Partner is the tax matters partner of the Operating Partnership and, as such, has authority to handle tax audits and to make tax elections under the Code on behalf of the Operating Partnership. FEDERAL INCOME TAX CONSIDERATIONS The following is a summary of material federal income tax considerations that may be relevant to a prospective holder of Common Stock in OAIC. Hunton & Williams has acted as counsel to OAIC and has reviewed this summary and has rendered an opinion that the descriptions of the law and the legal conclusions contained herein are correct in all material respects, and the discussions hereunder fairly summarize the federal income tax considerations that are likely to be material to a holder of the Common Stock. The discussion contained herein does not address all aspects of taxation that may be relevant to particular stockholders in light of their personal investment or tax circumstances, or to certain types of stockholders (including insurance companies, tax-exempt organizations, financial institutions or broker-dealers, foreign corporations, and persons who are not citizens or residents of the United States) subject to special treatment under the federal income tax laws. The statements in this discussion and the opinion of Hunton & Williams are based on current provisions of the Code, existing, temporary, and currently proposed Treasury Regulations promulgated under the Code, the legislative history of the Code, existing administrative rulings and practices of the Service, and judicial decisions. No assurance can be given that future legislative, judicial, or administrative actions or decisions, which may be retroactive in effect, will not affect the accuracy of any statements in this Prospectus with respect to the transactions entered into or contemplated prior to the effective date of such changes. EACH PROSPECTIVE PURCHASER SHOULD CONSULT HIS OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP, AND SALE OF THE COMMON STOCK AND OF OAIC'S ELECTION TO BE TAXED AS A REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE, AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS. TAXATION OF THE COMPANY OAIC currently has in effect an election to be taxed as a pass-through entity under subchapter S of the Code, but intends to revoke its S election on the day prior to the completion of the Offering. OAIC plans to make an election to be taxed as a REIT under sections 856 through 860 of the Code, commencing with its short taxable year beginning on the day prior to the Closing and ending on December 31, 1997. OAIC believes that, commencing with such taxable year, it will be organized and will operate in such a manner as to qualify for taxation as a REIT under the Code, and OAIC intends to continue to operate in such a manner, but no assurance can be given that OAIC will operate in a manner so as to qualify or remain qualified as a REIT. 57 The sections of the Code relating to qualification and operation as a REIT are highly technical and complex. The following discussion sets forth the material aspects of the Code sections that govern the federal income tax treatment of a REIT and its stockholders. The discussion is qualified in its entirety by the applicable Code provisions, Treasury Regulations promulgated thereunder, and administrative and judicial interpretations thereof, all of which are subject to change prospectively or retroactively. Hunton & Williams has acted as counsel to OAIC in connection with the Offering and OAIC's election to be taxed as a REIT. In the opinion of Hunton & Williams, assuming that the elections and other procedural steps described in this discussion of "Federal Income Tax Considerations" are completed by OAIC in a timely fashion, commencing with OAIC's short taxable year beginning the day prior to the closing of the Offering and ending December 31, 1997, OAIC will qualify to be taxed as a REIT pursuant to sections 856 through 860 of the Code, and OAIC's organization and proposed method of operation will enable it to continue to meet the requirements for qualification and taxation as a REIT under the Code. Investors should be aware, however, that opinions of counsel are not binding upon the Service or any court. It must be emphasized that Hunton & Williams' opinion is based on various assumptions and is conditioned upon certain representations made by OAIC as to factual matters, including representations regarding the nature of OAIC's properties and the future conduct of its business. Such factual assumptions and representations are described below in this discussion of "Federal Income Tax Considerations" and are set out in the federal income tax opinion that will be delivered by Hunton & Williams at the closing of the Offering. Moreover, such qualification and taxation as a REIT depends upon OAIC's ability to meet on a continuing basis, through actual annual operating results, distribution levels, and stock ownership, the various qualification tests imposed under the Code discussed below. Hunton & Williams will not review OAIC's compliance with those tests on a continuing basis. Accordingly, no assurance can be given that the actual results of OAIC's operations for any particular taxable year will satisfy such requirements. For a discussion of the tax consequences of failure to qualify as a REIT, see "Federal Income Tax Considerations--Failure to Qualify." If OAIC qualifies for taxation as a REIT, it generally will not be subject to federal corporate income tax on its net income that is distributed currently to its stockholders. That treatment substantially eliminates the "double taxation" (i.e., taxation at both the corporate and stockholder levels) that generally results from an investment in a corporation. However, OAIC will be subject to federal income tax in the following circumstances. First, OAIC will be taxed at regular corporate rates on any undistributed REIT taxable income, including undistributed net capital gains. Second, under certain circumstances, OAIC may be subject to the "alternative minimum tax" on its undistributed items of tax preference, if any. Third, if OAIC has (i) net income from the sale or other disposition of "foreclosure property" that is held primarily for sale to customers in the ordinary course of business or (ii) other nonqualifying income from foreclosure property, it will be subject to tax at the highest corporate rate on such income. Fourth, if OAIC has net income from prohibited transactions (which are, in general, certain sales or other dispositions of property (other than foreclosure property) held primarily for sale to customers in the ordinary course of business), such income will be subject to a 100% tax. Fifth, if OAIC should fail to satisfy the 75% gross income test or the 95% gross income test (as discussed below), and nonetheless has maintained its qualification as a REIT because certain other requirements have been met, it will be subject to a 100% tax on the net income attributable to the greater of the amount by which OAIC fails the 75% or 95% gross income test. Sixth, if OAIC should fail to distribute during each calendar year at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain net income for such year, and (iii) any undistributed taxable income from prior periods, OAIC would be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed. Seventh, if OAIC acquires any asset from a C corporation (i.e., a corporation generally subject to full corporate-level tax) in a transaction in which the basis of the asset in OAIC's hands is determined by reference to the basis of the asset (or any other asset) in the hands of the C corporation and OAIC recognizes gain on the disposition of such asset during the 10-year period beginning on the date on which such asset was acquired by OAIC, then to the extent of such asset's "built-in-gain" (i.e., the excess of the fair market value of such asset at the time of 58 acquisition by OAIC over the adjusted basis in such asset at such time), such gain will be subject to tax at the highest regular corporate rate applicable (as provided in Treasury Regulations that have not yet been promulgated). The results described above with respect to the recognition of "built-in-gain" assume that OAIC will make an election pursuant to IRS Notice 88-19 if it were to make any such acquisition. Finally, OAIC will be subject to tax at the highest marginal corporate rate on the portion of any Excess Inclusion derived by OAIC from REMIC Residual Interests that is allocable to stock of OAIC held by the United States, any state or political subdivision thereof, any foreign government, any international organization, any agency or instrumentality of any of the foregoing, any other tax-exempt organization (other than a farmer's cooperative described in section 521 of the Code) that is exempt from taxation under the unrelated business taxable income provisions of the Code, or any rural electrical or telephone cooperative (each, a "Disqualified Organization"). Any such tax on the portion of any Excess Inclusion allocable to stock of OAIC held by a Disqualified Organization will reduce the cash available for distribution from OAIC to all stockholders. REQUIREMENTS FOR QUALIFICATION The Code defines a REIT as a corporation, trust, or association (i) that is managed by one or more trustees or directors; (ii) the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest; (iii) that would be taxable as a domestic corporation, but for sections 856 through 860 of the Code; (iv) that is neither a financial institution nor an insurance company subject to certain provisions of the Code; (v) the beneficial ownership of which is held by 100 or more persons; (vi) not more than 50% in value of the outstanding shares of which is owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) during the last half of each taxable year (the "5/50 Rule"); (vii) that makes an election to be a REIT (or has made such election for a previous taxable year) and satisfies all relevant filing and other administrative requirements established by the Service that must be met in order to elect and maintain REIT status; (viii) that uses a calendar year for federal income tax purposes and complies with the recordkeeping requirements of the Code and Treasury Regulations promulgated thereunder; and (ix) that meets certain other tests, described below, regarding the nature of its income and assets. The Code provides that conditions (i) to (iv), inclusive, must be met during the entire taxable year and that condition (v) must be met during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months. Conditions (v) and (vi) will not apply until after the first taxable year for which an election is made by OAIC to be taxed as a REIT. For purposes of determining stock ownership under the 5/50 Rule, a supplemental unemployment compensation benefits plan, a private foundation, or a portion of a trust permanently set aside or used exclusively for charitable purposes generally is considered an individual. A trust that is a qualified trust under Code section 401(a), however, generally is not considered an individual and beneficiaries of such trust are treated as holding shares of a REIT in proportion to their actuarial interests in such trust for purposes of the 5/50 Rule. Prior to the consummation of the Offering, OAIC did not satisfy conditions (v) and (vi) in the preceding paragraph. OAIC anticipates issuing sufficient Common Stock with sufficient diversity of ownership pursuant to the Offering to allow it to satisfy requirements (v) and (vi). In addition, OAIC's Articles of Incorporation provide for restrictions regarding the transfer of the Common Stock that are intended to assist OAIC in continuing to satisfy the share ownership requirements described in clauses (v) and (vi) above. Such transfer restrictions are described in "Description of Common Stock--Restrictions on Transfer." OAIC currently has two subsidiaries, the General Partner and the Limited Partner, and may have additional subsidiaries in the future. Code section 856(i) provides that a corporation that is a "qualified REIT subsidiary" shall not be treated as a separate corporation, and all assets, liabilities, and items of income, deduction, and credit of a "qualified REIT subsidiary" shall be treated as assets, liabilities, and items of income, deduction, and credit of the REIT. A "qualified REIT subsidiary" is a corporation, all of the capital stock of which has been held by the REIT at all times during the period such corporation was in 59 existence. Thus, in applying the requirements described herein, any "qualified REIT subsidiaries" of OAIC will be ignored, and all assets, liabilities, and items of income, deduction, and credit of such subsidiaries will be treated as assets, liabilities, and items of income, deduction, and credit of OAIC. The General Partner and the Limited Partner are "qualified REIT subsidiaries." Accordingly, neither the General Partner nor the Limited Partner will be subject to federal corporate income taxation, although each may be subject to state and local taxation. Pursuant to Treasury Regulations effective January 1, 1997 relating to entity classification (the "Check-the-Box Regulations"), an unincorporated entity that has a single owner is disregarded as an entity separate from its owner for federal income tax purposes. Because OAIC is deemed to own 100% of the partnership interests in the Operating Partnership for federal income tax purposes, the Operating Partnership will be disregarded as an entity separate from OAIC under the Check-the-Box Regulations. In the case of a REIT that is a partner in a partnership, Treasury Regulations provide that the REIT will be deemed to own its proportionate share of the assets of the partnership and will be deemed to be entitled to the gross income of the partnership attributable to such share. In addition, the assets and gross income of the partnership will retain the same character in the hands of the REIT for purposes of section 856 of the Code, including satisfying the gross income and asset tests described below. When the Operating Partnership admits a partner other than OAIC or a qualified REIT subsidiary of OAIC, OAIC's proportionate share of the assets and gross income of the Operating Partnership will be treated as assets and gross income of OAIC for purposes of applying the requirements described herein. INCOME TESTS In order for OAIC to qualify and to maintain its qualification as a REIT, three requirements relating to OAIC's gross income must be satisfied annually. First, at least 75% of OAIC's gross income (excluding gross income from prohibited transactions) for each taxable year must consist of defined types of income derived directly or indirectly from investments relating to real property or mortgages on real property (including "rents from real property" and interest on obligations secured by mortgages on real property or on interests in real property) or temporary investment income. Second, at least 95% of OAIC's gross income (excluding gross income from prohibited transactions) for each taxable year must be derived from such real property, mortgages on real property, or temporary investments, and from dividends, other types of interest, and gain from the sale or disposition of stock or securities, or from any combination of the foregoing. Third, not more than 30% of OAIC's gross income (including gross income from prohibited transactions) for each taxable year may be gain from the sale or other disposition of (i) stock or securities held for less than one year, (ii) dealer property that is not foreclosure property, and (iii) certain real property held for less than four years (apart from involuntary conversions and sales of foreclosure property). The specific application of these tests to OAIC is discussed below. The term "interest," as defined for purposes of the 75% and 95% gross income tests, generally does not include any amount received or accrued (directly or indirectly) if the determination of such amount depends in whole or in part on the income or profits of any person. However, an amount received or accrued generally will not be excluded from the term "interest" solely by reason of being based on a fixed percentage or percentages of receipts or sales. In addition, an amount received or accrued generally will not be excluded from the term "interest" solely by reason of being based on the income or profits of a debtor if the debtor derives substantially all of its gross income from the related property through the leasing of substantially all of its interests in the property, to the extent the amounts received by the debtor would be characterized as rents from real property if received by a REIT. Furthermore, to the extent that interest from a loan that is based on the cash proceeds from the sale of the property securing the loan constitutes a "shared appreciation provision" (as defined in the Code), income attributable to such participation feature will be treated as gain from the sale of the secured property, which generally is qualifying income for purposes of the 75% and 95% gross income tests. 60 Interest on obligations secured by mortgages on real property or on interests in real property is qualifying income for purposes of the 75% gross income test. Any amount includible in gross income with respect to a regular or residual interest in a REMIC generally is treated as interest on an obligation secured by a mortgage on real property. If, however, less than 95% of the assets of a REMIC consists of real estate assets (determined as if OAIC held such assets), OAIC will be treated as receiving directly its proportionate share of the income of the REMIC. In addition, if OAIC receives interest income with respect to a mortgage loan that is secured by both real property and other property and the highest principal amount of the loan outstanding during a taxable year exceeds the fair market value of the real property on the date OAIC purchased the mortgage loan, the interest income will be apportioned between the real property and the other property, which apportionment may cause OAIC to recognize income that is not qualifying income for purposes of the 75% gross income test. OAIC anticipates that the interest, original issue discount, and market discount income that it derives from its investments in Subordinated Interests, IOs, and Inverse IOs generally will be qualifying interest income for purposes of both the 75% and the 95% gross income tests, except to the extent that less than 95% of the assets of a REMIC in which OAIC holds an interest consists of real estate assets (determined as if OAIC held such assets), and OAIC's proportionate share of the income of the REMIC includes income that is not qualifying income for purposes of the 75% and 95% gross income tests. OAIC also expects that most of the income that it recognizes with respect to its investments in Distressed Mortgage Loans and Performing Mortgage Loans will be qualifying income for purposes of both gross income tests. In some cases, however, the loan amount of a Distressed Mortgage Loan or Performing Mortgage Loan may exceed the value of the real property securing the loan, which will result in a portion of the income from the loan being classified as qualifying income for purposes of the 95% gross income test, but not for purposes of the 75% gross income test. It is also possible that, in some instances, the interest income from a Distressed Mortgage Loan may be based in part on the borrower's profits or net income, which generally will disqualify the income from the loan for purposes of both the 75% and the 95% gross income tests. Finally, OAIC may originate or acquire Construction or Mezzanine Loans that have shared appreciation provisions. If income under a shared appreciation provision is triggered by the borrower, OAIC may recognize nonqualifying income for purposes of the 30% gross income test. In addition, OAIC may be required to recognize income from a shared appreciation provision over the term of the related loan using the constant yield method pursuant to certain Treasury Regulations. OAIC may receive income not described above that is not qualifying income for purposes of the 75% and 95% gross income tests. For example, certain fees for services rendered by the Operating Partnership will not be qualifying income for purposes of the gross income tests. It is not anticipated that the Operating Partnership will receive a significant amount of such fees. In addition, OAIC will monitor the amount of nonqualifying income produced by its assets and has represented that it will manage its portfolio in order to comply at all times with the three gross income tests. The rent received by OAIC from the tenants of its Real Property ("Rent") will qualify as "rents from real property" in satisfying the gross income tests for a REIT described above only if several conditions are met. First, the amount of Rent must not be based, in whole or in part, on the income or profits of any person. However, an amount received or accrued generally will not be excluded from the term "rents from real property" solely by reason of being based on a fixed percentage or percentages of receipts or sales. Second, the Code provides that the Rent received from a tenant will not qualify as "rents from real property" in satisfying the gross income tests if OAIC, or a direct or indirect owner of 10% or more of OAIC, owns 10% or more of such tenant, taking into account both direct and constructive ownership (a "Related Party Tenant"). Third, if Rent attributable to personal property, leased in connection with a lease of Real Property, is greater than 15% of the total Rent received under the lease, then the portion of Rent attributable to such personal property will not qualify as "rents from real property." Finally, for the Rent to qualify as "rents from real property," OAIC generally must not operate or manage the Real Property or furnish or render services to the tenants of such Real Property, other than through an "independent 61 contractor" who is adequately compensated and from whom OAIC derives no revenue. The "independent contractor" requirement, however, does not apply to the extent the services provided by OAIC are "usually or customarily rendered" in connection with the rental of space for occupancy only and are not otherwise considered "rendered to the occupant." OAIC has represented that it will not charge Rent for any portion of any Real Property that is based, in whole or in part, on the income or profits of any person (except by reason of being based on a fixed percentage or percentages of receipts of sales, as described above) to the extent that the receipt of such Rent would jeopardize OAIC's status as a REIT. In addition, OAIC has represented that, to the extent that it receives Rent from a Related Party Tenant, such Rent will not cause OAIC to fail to satisfy either the 75% or 95% gross income test. OAIC also has represented that it will not allow the Rent attributable to personal property leased in connection with any lease of Real Property to exceed 15% of the total Rent received under the lease, if the receipt of such Rent would cause OAIC to fail to satisfy either the 75% or 95% gross income test. Finally, OAIC has represented that it will not operate or manage its Real Property or furnish or render noncustomary services to the tenants of its Real Property other than through an "independent contractor," to the extent that such operation or the provision of such services would jeopardize OAIC's status as a REIT. REITs generally are subject to tax at the maximum corporate rate on any income from foreclosure property (other than income that would be qualifying income for purposes of the 75% gross income test), less expenses directly connected with the production of such income. "Foreclosure property" is defined as any real property (including interests in real property) and any personal property incident to such real property (i) that is acquired by a REIT as the result of such REIT having bid in such property at foreclosure, or having otherwise reduced such property to ownership or possession by agreement or process of law, after there was a default (or default was imminent) on a lease of such property or on an indebtedness owed to the REIT that such property secured, (ii) for which the related loan was acquired by the REIT at a time when default was not imminent or anticipated, and (iii) for which such REIT makes a proper election to treat such property as foreclosure property. OAIC does not anticipate that it will receive any income from foreclosure property that is not qualifying income for purposes of the 75% gross income test, but, if OAIC does receive any such income, OAIC will make an election to treat the related property as foreclosure property. If property is not eligible for the election to be treated as foreclosure property ("Ineligible Property") because the related loan was acquired by the REIT at a time when default was imminent or anticipated, income received with respect to such Ineligible Property may not be qualifying income for purposes of the 75% or 95% gross income test. In addition, if a REIT disposes of Ineligible Property at a gain within four years of acquiring such property, such gain will be nonqualifying income for purposes of the 30% income test. OAIC anticipates that any income it receives with respect to Ineligible Property will be qualifying income for purposes of the 75% and 95% gross income tests and that any disposition of Ineligible Property within four years of acquiring such property will not cause OAIC to fail to satisfy the 30% income test. OAIC has represented that it will manage its assets so that it does not violate the 30% income test in any taxable year. Any gross income derived from a prohibited transaction is not taken into account in applying the 30% income test necessary to qualify as a REIT (but the net income from such a transaction is subject to a 100% tax). The term "prohibited transaction" generally includes a sale or other disposition of property (other than foreclosure property) that is held primarily for sale to customers in the ordinary course of a trade or business. The Company believes that no asset owned by OAIC or the Operating Partnership will be held for sale to customers and that a sale of any such asset will not be in the ordinary course of OAIC's or the Operating Partnership's business. Whether property is held "primarily for sale to customers in the ordinary course of a trade or business" depends, however, on the facts and circumstances in effect from time to time, including those related to a particular property. Nevertheless, OAIC will attempt to comply with the terms of safe-harbor provisions in the Code prescribing when asset sales will not be characterized as prohibited transactions. Complete assurance cannot be given, however, that OAIC 62 can comply with the safe-harbor provisions of the Code or avoid owning property that may be characterized as property held "primarily for sale to customers in the ordinary course of a trade or business." It is possible that, from time to time, OAIC will enter into hedging transactions with respect to one or more of its assets or liabilities. Any such hedging transactions could take a variety of forms, including interest rate swap contracts, interest rate cap or floor contracts, futures or forward contracts, and options. To the extent that OAIC enters into an interest rate swap or cap contract to hedge any variable rate indebtedness incurred to acquire or carry real estate assets, any periodic income or gain from the disposition of such contract should be qualifying income for purposes of the 95% gross income test, but not the 75% gross income test. Furthermore, any such contract would be considered a "security" for purposes of applying the 30% gross income test. To the extent that OAIC hedges with other types of financial instruments or in other situations, it may not be entirely clear how the income from those transactions will be treated for purposes of the various income tests that apply to REITs under the Code. OAIC intends to structure any hedging transactions in a manner that does not jeopardize its status as a REIT. Accordingly, OAIC may conduct some or all of its hedging activities through a corporate subsidiary that is fully subject to federal corporate income tax. If OAIC fails to satisfy one or both of the 75% and 95% gross income tests for any taxable year, it nevertheless may qualify as a REIT for such year if it is entitled to relief under certain provisions of the Code. Those relief provisions generally will be available if OAIC's failure to meet such tests is due to reasonable cause and not due to willful neglect, OAIC attaches a schedule of the sources of its income to its return, and any incorrect information on the schedule was not due to fraud with intent to evade tax. It is not possible, however, to state whether in all circumstances OAIC would be entitled to the benefit of those relief provisions. As discussed above in "Federal Income Tax Considerations--Taxation of the Company," even if those relief provisions apply, a 100% tax would be imposed on the net income attributable to the greater of the amount by which OAIC fails the 75% or 95% gross income test. No such relief is available for violations of the 30% income test. ASSET TESTS OAIC, at the close of each quarter of each taxable year, also must satisfy two tests relating to the nature of its assets. First, at least 75% of the value of OAIC's total assets must be represented by cash or cash items (including certain receivables), government securities, "real estate assets," or, in cases where OAIC raises new capital through stock or long-term (at least five-year) debt offerings, temporary investments in stock or debt instruments during the one-year period following OAIC's receipt of such capital. The term "real estate assets" includes interests in real property, interests in mortgages on real property to the extent the principal balance of a mortgage does not exceed the fair market value of the associated real property, regular or residual interests in a REMIC (except that, if less than 95% of the assets of a REMIC consists of "real estate assets" (determined as if OAIC held such assets), OAIC will be treated as holding directly its proportionate share of the assets of such REMIC), and shares of other REITs. For purposes of the 75% asset test, the term "interest in real property" includes an interest in mortgage loans or land and improvements thereon, such as buildings or other inherently permanent structures (including items that are structural components of such buildings or structures), a leasehold of real property, and an option to acquire real property (or a leasehold of real property). An "interest" in real property also generally includes an interest in mortgage loans secured by controlling equity interests in entities treated as partnerships for federal income tax purposes that own real property, to the extent that the principal balance of the mortgage does not exceed the fair market value of the real property that is allocable to the equity interest. Second, of the investments not included in the 75% asset class, the value of any one issuer's securities owned by OAIC may not exceed 5% of the value of OAIC's total assets, and OAIC may not own more than 10% of any one issuer's outstanding voting securities (except for its interests in the Operating Partnership, the General Partner, the Limited Partner, and any other qualified REIT subsidiary). 63 OAIC expects that any Distressed Real Properties, Subordinated Interests, IOs, Inverse IOs, and temporary investments that it acquires generally will be qualifying assets for purposes of the 75% asset test, except to the extent that less than 95% of the assets of a REMIC in which OAIC owns an interest consists of "real estate assets" and OAIC's proportionate share of those assets includes assets that are nonqualifying assets for purposes of the 75% asset test. Distressed Mortgage Loans, Performing Mortgage Loans, Construction Loans and Mezzanine Loans also will be qualifying assets for purposes of the 75% asset test to the extent that the principal balance of each mortgage loan does not exceed the value of the associated real property. OAIC will monitor the status of the assets that it acquires for purposes of the various asset tests and has represented that it will manage its portfolio in order to comply at all times with such tests. If OAIC should fail to satisfy the asset tests at the end of a calendar quarter, such a failure would not cause it to lose its REIT status if (i) it satisfied the asset tests at the close of the preceding calendar quarter and (ii) the discrepancy between the value of OAIC's assets and the asset test requirements arose from changes in the market values of its assets and was not wholly or partly caused by the acquisition of one or more non-qualifying assets. If the condition described in clause (ii) of the preceding sentence were not satisfied, OAIC still could avoid disqualification by eliminating any discrepancy within 30 days after the close of the calendar quarter in which it arose. DISTRIBUTION REQUIREMENTS OAIC, in order to avoid corporate income taxation of the earnings that it distributes, is required to distribute with respect to each taxable year dividends (other than capital gain dividends) to its stockholders in an aggregate amount at least equal to (i) the sum of (A) 95% of its "REIT taxable income" (computed without regard to the dividends paid deduction and its net capital gain) and (B) 95% of the net income (after tax), if any, from foreclosure property, minus (ii) the sum of certain items of noncash income. Such distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before OAIC timely files its federal income tax return for such year and if paid on or before the first regular dividend payment date after such declaration. To the extent that OAIC does not distribute all of its net capital gain or distributes at least 95%, but less than 100%, of its "REIT taxable income," as adjusted, it will be subject to tax thereon at regular ordinary and capital gains corporate tax rates. Furthermore, if OAIC should fail to distribute during each calendar year (or, in the case of distributions with declaration and record dates falling in the last three months of the calendar year, by the end of the January immediately following such year) at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain income for such year, and (iii) any undistributed taxable income from prior periods, OAIC would be subject to a 4% nondeductible excise tax on the excess of such required distribution over the amounts actually distributed. OAIC intends to make timely distributions sufficient to satisfy the annual distribution requirements. It is possible that, from time to time, OAIC may experience timing differences between (i) the actual receipt of income and actual payment of deductible expenses and (ii) the inclusion of that income and deduction of such expenses in arriving at its REIT taxable income. For example, OAIC will recognize taxable income in excess of its cash receipts when, as generally happens, OID accrues with respect to its Subordinated Interests. Furthermore, some Distressed Mortgage Loans, IOs and Inverse IOs may be deemed to have OID, in which case OAIC will be required to recognize taxable income in advance of the related cash flow. OID generally will be accrued using a methodology that does not allow credit losses to be reflected until they are actually incurred. In addition, OAIC may recognize taxable market discount income upon the receipt of proceeds from the disposition of, or principal payments on, Subordinated Interests and Distressed Mortgage Loans that are "market discount bonds" (i.e., obligations with a stated redemption price at maturity that is greater than OAIC's tax basis in such obligations), although such proceeds often will be used to make non-deductible principal payments on related borrowings. OAIC also may recognize Excess Inclusion or other "phantom" taxable income from REMIC Residual Interests. It also is possible that, from time to time, OAIC may recognize net capital gain attributable to the sale of 64 depreciated property that exceeds its cash receipts from the sale. In addition, pursuant to certain Treasury Regulations, OAIC may be required to recognize the amount of any payment to be made pursuant to a shared appreciation provision over the term of the related loan using the constant yield method. Finally, OAIC may recognize taxable income without receiving a corresponding cash distribution if it forecloses on or makes a "significant modification" (as defined in Regulations section 1.1001-3(e)) to a loan, to the extent that the fair market value of the underlying property or the principal amount of the modified loan, as applicable, exceeds OAIC's basis in the original loan. Therefore, OAIC may have less cash than is necessary to meet its annual 95% distribution requirement or to avoid corporate income tax or the excise tax imposed on certain undistributed income. In such a situation, OAIC may find it necessary to arrange for short-term (or possibly long-term) borrowings or to raise funds through the issuance of Preferred Stock or additional Common Stock. Under certain circumstances, OAIC may be able to rectify a failure to meet the distribution requirements for a year by paying "deficiency dividends" to its stockholders in a later year, which may be included in OAIC's deduction for dividends paid for the earlier year. Although OAIC may be able to avoid being taxed on amounts distributed as deficiency dividends, it will be required to pay to the Service interest based upon the amount of any deduction taken for deficiency dividends. RECORDKEEPING REQUIREMENTS Pursuant to applicable Treasury Regulations, in order to be able to elect to be taxed as a REIT, OAIC must maintain certain records and request on an annual basis certain information from its stockholders designed to disclose the actual ownership of its outstanding stock. OAIC intends to comply with such requirements. FAILURE TO QUALIFY If OAIC fails to qualify for taxation as a REIT in any taxable year, and the relief provisions do not apply, OAIC will be subject to tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. Distributions to OAIC's stockholders in any year in which OAIC fails to qualify will not be deductible by OAIC nor will they be required to be made. In such event, to the extent of OAIC's current and accumulated earnings and profits, all distributions to stockholders will be taxable as ordinary income and, subject to certain limitations of the Code, corporate distributees may be eligible for the dividends received deduction. Unless entitled to relief under specific statutory provisions, OAIC also will be disqualified from taxation as a REIT for the four taxable years following the year during which OAIC ceased to qualify as a REIT. It is not possible to state whether in all circumstances OAIC would be entitled to such statutory relief. TAXATION OF TAXABLE U.S. STOCKHOLDERS As long as OAIC qualifies as a REIT, distributions made to OAIC's taxable U.S. stockholders out of current or accumulated earnings and profits (and not designated as capital gain dividends) will be taken into account by such U.S. stockholders as ordinary income and will not be eligible for the dividends received deduction generally available to corporations. As used herein, the term "U.S. stockholder" means a holder of Common Stock that for U.S. federal income tax purposes is (i) a citizen or resident of the U.S., (ii) a corporation, partnership, or other entity created or organized in or under the laws of the U.S. or of any political subdivision thereof, (iii) an estate whose income from sources without the United States is includible in gross income for U.S. federal income tax purposes regardless of its connection with the conduct of a trade or business within the United States, or (iv) any trust with respect to which (A) a U.S. court is able to exercise primary supervision over the administration of such trust and (B) one or more U.S. fiduciaries have the authority to control all substantial decisions of the trust. Distributions that are designated as capital gain dividends will be taxed as long-term capital gains (to the extent they do not exceed OAIC's actual net capital gain for the taxable year) without regard to the period for which the 65 stockholder has held his Common Stock. However, corporate stockholders may be required to treat up to 20% of certain capital gain dividends as ordinary income. Distributions in excess of current and accumulated earnings and profits will not be taxable to a stockholder to the extent that they do not exceed the adjusted basis of the stockholder's Common Stock, but rather will reduce the adjusted basis of such stock. To the extent that such distributions in excess of current and accumulated earnings and profits exceed the adjusted basis of a stockholder's Common Stock, such distributions will be included in income as long-term capital gain (or short-term capital gain if the Common Stock had been held for one year or less), assuming the Common Stock is a capital asset in the hands of the stockholder. In addition, any distribution declared by OAIC in October, November, or December of any year and payable to a stockholder of record on a specified date in any such month shall be treated as both paid by OAIC and received by the stockholder on December 31 of such year, provided that the distribution is actually paid by OAIC during January of the following calendar year. Stockholders may not include in their individual income tax returns any net operating losses or capital losses of OAIC. Instead, such losses would be carried over by OAIC for potential offset against its future income (subject to certain limitations). Taxable distributions from OAIC and gain from the disposition of the Common Stock will not be treated as passive activity income and, therefore, stockholders generally will not be able to apply any "passive activity losses" (such as losses from certain types of limited partnerships in which a stockholder is a limited partner) against such income. In addition, taxable distributions from OAIC generally will be treated as investment income for purposes of the investment interest limitations. Capital gains from the disposition of Common Stock (or distributions treated as such), however, will be treated as investment income only if the stockholder so elects, in which case such capital gains will be taxed at ordinary income rates. OAIC will notify stockholders after the close of OAIC's taxable year as to the portions of the distributions attributable to that year that constitute ordinary income or capital gain dividends. OAIC's investment in Subordinated Interests and certain types of MBS may cause it under certain circumstances to recognize taxable income in excess of its economic income ("phantom income") and to experience an offsetting excess of economic income over its taxable income in later years. As a result, stockholders may from time to time be required to pay federal income tax on distributions that economically represent a return of capital, rather than a dividend. Such distributions would be offset in later years by distributions representing economic income that would be treated as returns of capital for federal income tax purposes. Accordingly, if OAIC receives phantom income, its stockholders may be required to pay federal income tax with respect to such income on an accelerated basis, i.e., before such income is realized by the stockholders in an economic sense. Taking into account the time value of money, such an acceleration of federal income tax liabilities would cause stockholders to receive an after-tax rate of return on an investment in OAIC that would be less than the after-tax rate of return on an investment with an identical before-tax rate of return that did not generate phantom income. For example, if an investor subject to an effective income tax rate of 30% purchased a bond (other than a tax-exempt bond) with an annual interest rate of 10% for its face value, his before-tax return on his investment would be 10%, and his after-tax return would be 7%. However, if the same investor purchased stock of OAIC at a time when the before-tax rate of return was 10%, his after-tax rate of return on his stock might be somewhat less than 7% as a result of OAIC's phantom income. In general, as the ratio of OAIC's phantom income to its total income increases, the after-tax rate of return received by a taxable stockholder of OAIC will decrease. OAIC will consider the potential effects of phantom income on its taxable stockholders in managing its investments. Because OAIC expects to own at least some REMIC Residual Interests, it is likely that stockholders (other than certain thrift institutions) will not be permitted to offset certain portions of the dividend income they derive from OAIC with their current deductions or net operating loss carryovers or carrybacks. The portion of a stockholder's dividends that will be subject to this limitation will equal his allocable share of any Excess Inclusion income derived by OAIC with respect to the REMIC Residual 66 Interests. OAIC's Excess Inclusion income for any calendar quarter will equal the excess of its income from REMIC Residual Interests over its "daily accruals" with respect to such REMIC Residual Interests for the calendar quarter. Daily accruals for a calendar quarter are computed by allocating to each day on which a REMIC Residual Interest is owned a ratable portion of the product of (i) the "adjusted issue price" of the REMIC Residual Interest at the beginning of the quarter and (ii) 120% of the long-term federal interest rate (adjusted for quarterly compounding) on the date of issuance of the REMIC Residual Interest. The adjusted issue price of a REMIC Residual Interest at the beginning of a calendar quarter equals the original issue price of the REMIC Residual Interest, increased by the amount of daily accruals for prior quarters and decreased by all prior distributions to OAIC with respect to the REMIC Residual Interest. To the extent provided in future Treasury regulations, the Excess Inclusion income with respect to any REMIC Residual Interests owned by OAIC that do not have significant value will equal the entire amount of the income derived from such REMIC Residual Interests. Furthermore, to the extent that OAIC (or a qualified REIT subsidiary) acquires or originates mortgage loans and uses those loans to collateralize one or more multiple-class offerings of MBS for which no REMIC election is made ("Non-REMIC Transactions"), it is possible that, to the extent provided in future Treasury regulations, stockholders (other than certain thrift institutions) will not be permitted to offset certain portions of the dividend income that they derive from OAIC that are attributable to Non-REMIC Transactions with current deductions or net operating loss carryovers or carrybacks. Although no applicable Treasury regulations have yet been issued, no assurance can be provided that such regulations will not be issued in the future or that, if issued, such regulations will not prevent OAIC's stockholders from offsetting some portion of their dividend income with deductions or losses from other sources. TAXATION OF STOCKHOLDERS ON THE DISPOSITION OF THE COMMON STOCK In general, any gain or loss realized upon a taxable disposition of the Common Stock by a stockholder who is not a dealer in securities will be treated as long-term capital gain or loss if the Common Stock has been held for more than one year and otherwise as short-term capital gain or loss. However, any loss upon a sale or exchange of Common Stock by a stockholder who has held such shares for six months or less (after applying certain holding period rules) will be treated as a long-term capital loss to the extent of distributions from OAIC required to be treated by such stockholder as long-term capital gain. All or a portion of any loss realized upon a taxable disposition of the Common Stock may be disallowed if other shares of Common Stock are purchased within 30 days before or after the disposition. CAPITAL GAINS AND LOSSES A capital asset generally must be held for more than one year in order for gain or loss derived from its sale or exchange to be treated as long-term capital gain or loss. The highest marginal individual income tax rate is 39.6%, and the tax rate on long-term capital gains applicable to individuals is 28%. Thus, the tax rate differential between capital gain and ordinary income for individuals may be significant. In addition, the characterization of income as capital gain or ordinary income may affect the deductibility of capital losses. Capital losses not offset by capital gains may be deducted against an individual's ordinary income only up to a maximum annual amount of $3,000. Unused capital losses may be carried forward indefinitely by individuals. All net capital gain of a corporate taxpayer is subject to tax at ordinary corporate rates. A corporate taxpayer can deduct capital losses only to the extent of capital gains, with unused losses being carried back three years and forward five years. INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING OAIC will report to its U.S. stockholders and to the Service 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 31% with respect to distributions paid unless such holder (i) is a corporation or comes within certain other exempt categories and, when required, 67 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 OAIC with his correct taxpayer identification number also may be subject to penalties imposed by the Service. Any amount paid as backup withholding will be creditable against the stockholder's income tax liability. In addition, OAIC may be required to withhold a portion of capital gain distributions to any stockholders who fail to certify their nonforeign status to OAIC. The Treasury Department issued proposed regulations in April 1996 regarding the backup withholding rules as applied to Non-U.S. Stockholders. The proposed regulations would alter the current system of backup withholding compliance and are proposed to be effective for distributions made after December 31, 1997. See "--Taxation of Non-U.S. Stockholders." TAXATION OF TAX-EXEMPT STOCKHOLDERS Tax-exempt entities, including qualified employee pension and profit sharing trusts and individual retirement accounts ("Exempt Organizations"), generally are exempt from federal income taxation. However, they are subject to taxation on their unrelated business taxable income ("UBTI"). While many investments in real estate generate UBTI, the Service has issued a published ruling that dividend distributions from a REIT to an exempt employee pension trust do not constitute UBTI, provided that the shares of the REIT are not otherwise used in an unrelated trade or business of the exempt employee pension trust. Based on that ruling, amounts distributed by OAIC to Exempt Organizations generally should not constitute UBTI. However, if an Exempt Organization finances its acquisition of the Common Stock with debt, a portion of its income from OAIC will constitute UBTI pursuant to the "debt-financed property" rules. Furthermore, social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts, and qualified group legal services plans that are exempt from taxation under paragraphs (7), (9), (17), and (20), respectively, of Code section 501(c) are subject to different UBTI rules, which generally will require them to characterize distributions from OAIC as UBTI. In addition, in certain circumstances, a pension trust that owns more than 10% of OAIC's stock is required to treat a percentage of the dividends from OAIC as UBTI (the "UBTI Percentage"). The UBTI Percentage is the gross income derived by OAIC from an unrelated trade or business (determined as if OAIC were a pension trust) divided by the gross income of OAIC for the year in which the dividends are paid. The UBTI rule applies to a pension trust holding more than 10% of OAIC's stock only if (i) the UBTI Percentage is at least 5%, (ii) OAIC qualifies as a REIT by reason of the modification of the 5/50 Rule that allows the beneficiaries of the pension trust to be treated as holding shares of OAIC in proportion to their actuarial interests in the pension trust, and (iii) either (A) one pension trust owns more than 25% of the value of OAIC's stock or (B) a group of pension trusts individually holding more than 10% of the value of OAIC's stock collectively owns more than 50% of the value of OAIC's stock. Any dividends received by an Exempt Organization that are allocable to Excess Inclusion will be treated as UBTI. In addition, OAIC will be subject to tax at the highest marginal corporate rate on the portion of any Excess Inclusion income derived by OAIC from REMIC Residual Interests that is allocable to stock of OAIC held by Disqualified Organizations. Any such tax would be deductible by OAIC against its income that is not Excess Inclusion income. If OAIC derives Excess Inclusion income from REMIC Residual Interests, a tax similar to the tax on OAIC described in the preceding paragraph may be imposed on stockholders who are (i) pass-through entities (i.e., partnerships, estates, trusts, regulated investment companies, REITs, common trust funds, and certain types of cooperatives (including farmers' cooperatives described in section 521 of the Code)) in which a Disqualified Organization is a record holder of shares or interests and (ii) nominees who hold Common Stock on behalf of Disqualified Organizations. Consequently, a brokerage firm that holds shares of Common Stock in a "street name" account for a Disqualified Organization may be subject to federal income tax on the Excess Inclusion income derived from those shares. 68 The Treasury Department has been authorized to issue regulations regarding issuances by a REIT of multiple-class mortgage-backed securities for which no REMIC election is made. If such Treasury regulations are issued in the future preventing taxable stockholders from offsetting some percentage of the dividends paid by OAIC with deductions or losses from other sources, that same percentage of OAIC's dividends would be treated as UBTI for stockholders that are Exempt Organizations. See "Federal Income Tax Considerations--Taxation of Taxable U.S. Stockholders." TAXATION OF NON-U.S. STOCKHOLDERS The rules governing U.S. federal income taxation of nonresident alien individuals, foreign corporations, foreign partnerships, and other foreign stockholders (collectively, "Non-U.S. Stockholders") are complex and no attempt will be made herein to provide more than a summary of such rules. PROSPECTIVE NON-U.S. STOCKHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE THE IMPACT OF FEDERAL, STATE, AND LOCAL INCOME TAX LAWS WITH REGARD TO AN INVESTMENT IN THE COMMON STOCK, INCLUDING ANY REPORTING REQUIREMENTS. Distributions to Non-U.S. Stockholders that are not attributable to gain from sales or exchanges by OAIC of U.S. real property interests and are not designated by OAIC as capital gains dividends will be treated as dividends of ordinary income to the extent that they are made out of current or accumulated earnings and profits of OAIC. Such distributions ordinarily will be subject to a withholding tax equal to 30% of the gross amount of the distribution unless an applicable tax treaty reduces or eliminates that tax. However, if income from the investment in the Common Stock is treated as effectively connected with the Non-U.S. Stockholder's conduct of a U.S. trade or business, the Non-U.S. Stockholder generally will be subject to federal income tax at graduated rates, in the same manner as U.S. stockholders are taxed with respect to such distributions (and also may be subject to the 30% branch profits tax in the case of a Non-U.S. Stockholder that is a non-U.S. corporation). OAIC expects to withhold U.S. income tax at the rate of 30% on the gross amount of any such distributions made to a Non-U.S. Stockholder unless (i) a lower treaty rate applies and any required form evidencing eligibility for that reduced rate is filed with OAIC or (ii) the Non-U.S. Stockholder files an IRS Form 4224 with OAIC claiming that the distribution is effectively connected income. The Treasury Department issued proposed regulations in April 1996 that would modify the manner in which OAIC complies with the withholding requirements. If OAIC derives Excess Inclusion income from REMIC Residual Interests, the portion of the dividends paid to Non-U.S. Stockholders that is treated as Excess Inclusion income will not be eligible for exemption from the 30% withholding tax or a reduced treaty rate. In addition, if Treasury regulations are issued in the future preventing taxable stockholders from offsetting some percentage of the dividends paid by OAIC with deductions or losses from other sources, that same percentage of OAIC's dividends would not be eligible for a reduced withholding tax rate under an otherwise applicable tax treaty. See "--Taxation of Taxable U.S. Stockholders." Distributions in excess of current and accumulated earnings and profits of OAIC will not be taxable to a stockholder to the extent that such distributions do not exceed the adjusted basis of the stockholder's Common Stock, but rather will reduce the adjusted basis of such shares. To the extent that distributions in excess of current and accumulated earnings and profits exceed the adjusted basis of a Non-U.S. Stockholder's Common Stock, such distributions will give rise to tax liability if the Non-U.S. Stockholder would otherwise be subject to tax on any gain from the sale or disposition of his Common Stock, as described below. Because it generally cannot be determined at the time a distribution is made whether or not such distribution will be in excess of current and accumulated earnings and profits, the entire amount of any distribution normally will be subject to withholding at the same rate as a dividend. However, amounts so withheld are refundable to the extent it is determined subsequently that such distribution was, in fact, in excess of current and accumulated earnings and profits of OAIC. In August 1996, the U.S. Congress passed the Small Business Job Protection Act of 1996, which requires OAIC to withhold 10% of any distribution 69 in excess of OAIC's current and accumulated earnings and profits. Consequently, although OAIC intends to withhold at a rate of 30% on the entire amount of any distribution, to the extent that OAIC does not do so, any portion of a distribution not subject to withholding at a rate of 30% will be subject to withholding at a rate of 10%. For any year in which OAIC qualifies as a REIT, distributions that are attributable to gain from sales or exchanges by OAIC of U.S. real property interests will be taxed to a Non-U.S. Stockholder under the provisions of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under FIRPTA, distributions attributable to gain from sales of U.S. real property interests are taxed to a Non-U.S. Stockholder as if such gain were effectively connected with a U.S. business. Non-U.S. Stockholders thus would be taxed at the normal capital gain rates applicable to U.S. stockholders (subject to applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals). Distributions subject to FIRPTA also may be subject to the 30% branch profits tax in the hands of a non-U.S. corporate stockholder not entitled to treaty relief or exemption. OAIC is required to withhold 35% of any distribution that is designated by OAIC as a capital gains dividend. The amount withheld is creditable against the Non-U.S. Stockholder's FIRPTA tax liability. Gain recognized by a Non-U.S. Stockholder upon a sale of his Common Stock generally will not be taxed under FIRPTA if OAIC is a "domestically controlled REIT," defined generally as a REIT in which at all times during a specified testing period less than 50% in value of the stock was held directly or indirectly by non-U.S. persons. It is currently anticipated that OAIC will be a "domestically controlled REIT" and, therefore, the sale of the Common Stock will not be subject to taxation under FIRPTA. However, because the Common Stock will be publicly traded, no assurance can be given that OAIC will be a "domestically controlled REIT." Furthermore, gain not subject to FIRPTA will be taxable to a Non-U.S. Stockholder if (i) investment in the Common Stock is effectively connected with the Non-U.S. Stockholder's U.S. trade or business, in which case the Non-U.S. Stockholder will be subject to the same treatment as U.S. stockholders with respect to such gain, or (ii) the Non-U.S. Stockholder is a nonresident alien individual who was present in the U.S. for 183 days or more during the taxable year and certain other conditions apply, in which case the nonresident alien individual will be subject to a 30% tax on the individual's capital gains. If the gain on the sale of the Common Stock were to be subject to taxation under FIRPTA, the Non-U.S. Stockholder would be subject to the same treatment as U.S. stockholders with respect to such gain (subject to applicable alternative minimum tax, a special alternative minimum tax in the case of nonresident alien individuals, and the possible application of the 30% branch profits tax in the case of non-U.S. corporations). STATE AND LOCAL TAXES OAIC, the General Partner, the Limited Partner, the Operating Partnership or OAIC's 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, prospective stockholders should consult their own tax advisors regarding the effect of state and local tax laws upon an investment in the Common Stock. SALE OF THE COMPANY'S PROPERTY Any gain realized by OAIC on the sale of any property held as inventory or other property held primarily for sale to customers in the ordinary course of its trade or business will be treated as income from a prohibited transaction that is subject to a 100% penalty tax. Such prohibited transaction income also may have an adverse effect upon OAIC's ability to satisfy the income tests for REIT status. See "Federal Income Tax Considerations--Requirements For Qualification--Income Tests" above. OAIC, however, does not presently intend to acquire or hold a material amount of property that represents inventory or other property held primarily for sale to customers in the ordinary course of OAIC's trade or business. 70 ERISA CONSIDERATIONS The following is a summary of material considerations arising under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the prohibited transaction provisions of section 4975 of the Code that may be relevant to a prospective purchaser (including, with respect to the discussion contained in "--Status of the Company and the Operating Partnership under ERISA," to a prospective purchaser that is not an employee benefit plan, another tax-qualified retirement plan, or an individual retirement account ("IRA")). The discussion does not purport to deal with all aspects of ERISA or section 4975 of the Code that may be relevant to particular stockholders (including plans subject to Title I of ERISA, other retirement plans and IRAs subject to the prohibited transaction provisions of section 4975 of the Code, and governmental plans or church plans that are exempt from ERISA and section 4975 of the Code but that may be subject to state law requirements) in light of their particular circumstances. The discussion is based on current provisions of ERISA and the Code, existing and currently proposed regulations under ERISA and the Code, the legislative history of ERISA and the Code, existing administrative rulings of the Department of Labor ("DOL") and reported judicial decisions. No assurance can be given that legislative, judicial, or administrative changes will not affect the accuracy of any statements herein with respect to transactions entered into or contemplated prior to the effective date of such changes. A FIDUCIARY MAKING THE DECISION TO INVEST IN THE COMMON STOCK ON BEHALF OF A PROSPECTIVE PURCHASER THAT IS AN EMPLOYEE BENEFIT PLAN, A TAX-QUALIFIED RETIREMENT PLAN, OR AN IRA SHOULD CONSULT ITS OWN LEGAL ADVISOR REGARDING THE SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975 OF THE CODE, AND STATE LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP, OR SALE OF THE COMMON STOCK BY SUCH PLAN OR IRA. EMPLOYEE BENEFIT PLANS, TAX-QUALIFIED RETIREMENT PLANS, AND IRAS Each fiduciary of a pension, profit-sharing, or other employee benefit plan (a "Plan") subject to Title I of ERISA should consider carefully whether an investment in the Common Stock is consistent with his fiduciary responsibilities under ERISA. In particular, the fiduciary requirements of Part 4 of Title I of ERISA require an Plan's investment to be (i) prudent and in the best interests of the Plan, its participants, and its beneficiaries, (ii) diversified in order to minimize the risk of large losses, unless it is clearly prudent not to do so, and (iii) authorized under the terms of the Plan's governing documents (provided the documents are consistent with ERISA). In determining whether an investment in the Common Stock is prudent for purposes of ERISA, the appropriate fiduciary of a Plan should consider all of the facts and circumstances, including whether the investment is reasonably designed, as a part of the Plan's portfolio for which the fiduciary has investment responsibility, to meet the objectives of the Plan, taking into consideration the risk of loss and opportunity for gain (or other return) from the investment, the diversification, cash flow, and funding requirements of the Plan's portfolio. A fiduciary also should take into account the nature of the Company's business, the management of the Company, the length of the Company's operating history, the fact that certain investment assets may not have been identified yet, and the possibility of the recognition of UBTI. The fiduciary of an IRA or of a qualified retirement plan not subject to Title I of ERISA because it is a governmental or church plan or because it does not cover common law employees (a "Non-ERISA Plan") should consider that such an IRA or Non-ERISA Plan may only make investments that are authorized by the appropriate governing documents and under applicable state law. Fiduciaries of Plans and persons making the investment decision for an IRA or other Non-ERISA Plan should consider the application of the prohibited transaction provisions of ERISA and the Code in making their investment decision. A "party in interest" or "disqualified person" with respect to an Plan or with respect to a Plan or IRA subject to Code section 4975 is subject to (i) an initial 5% excise tax on the 71 amount involved in any prohibited transaction involving the assets of the plan or IRA and (ii) an excise tax equal to 100% of the amount involved if any prohibited transaction is not corrected. If the disqualified person who engages in the transaction is the individual on behalf of whom an IRA is maintained (or his beneficiary), the IRA will lose its tax-exempt status and its assets will be deemed to have been distributed to such individual in a taxable distribution (and no excise tax will be imposed) on account of the prohibited transaction. In addition, a fiduciary who permits a Plan to engage in a transaction that the fiduciary knows or should know is a prohibited transaction may be liable to the Plan for any loss the Plan incurs as a result of the transaction or for any profits earned by the fiduciary in the transaction. STATUS OF OAIC UNDER ERISA The following section discusses certain principles that apply in determining whether the fiduciary requirements of ERISA and the prohibited transaction provisions of ERISA and the Code apply to an entity because one or more investors in the equity interests in the entity is a Plan or is a Non-ERISA Plan or IRA subject to section 4975 of the Code. A Plan fiduciary also should consider the relevance of those principles to ERISA's prohibition on improper delegation of control over or responsibility for "plan assets" and ERISA's imposition of co-fiduciary liability on a fiduciary who participates in, permits (by action or inaction) the occurrence of, or fails to remedy a known breach by another fiduciary. If the assets of the Company are deemed to be "plan assets" under ERISA, (i) the prudence standards and other provisions of Part 4 of Title I of ERISA would be applicable to any transactions involving the Company's assets, (ii) persons who exercise any authority over the Company's assets, or who provide investment advice to the Company, would (for purposes of the fiduciary responsibility provisions of ERISA) be fiduciaries of each Plan that acquires Common Stock, and transactions involving the Company's assets undertaken at their direction or pursuant to their advice might violate their fiduciary responsibilities under ERISA, especially with regard to conflicts of interest, (iii) a fiduciary exercising his investment discretion over the assets of a Plan to cause it to acquire or hold the Common Stock could be liable under Part 4 of Title I of ERISA for transactions entered into by the Company that do not conform to ERISA standards of prudence and fiduciary responsibility, and (iv) certain transactions that the Company might enter into in the ordinary course of its business and operations might constitute "prohibited transactions" under ERISA and the Code. Regulations of the DOL defining "plan assets" (the "Plan Asset Regulations") generally provide that when a Plan or Non-ERISA Plan or IRA acquires a security that is an equity interest in an entity and the security is neither a "publicly-offered security" nor a security issued by an investment company registered under the Investment Company Act of 1940, the Plan's or Non-ERISA Plan's or IRA's assets include both the equity interest and an undivided interest in each of the underlying assets of the issuer of such equity interest, unless one or more exceptions specified in the Plan Asset Regulations are satisfied. The Plan Asset Regulations define a publicly-offered security as a security that is "widely-held," "freely transferable," and either part of a class of securities registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or sold pursuant to an effective registration statement under the Securities Act (provided the securities are registered under the Exchange Act within 120 days after the end of the fiscal year of the issuer during which the offering occurred). The Common Stock is being sold in an offering registered under the Securities Act and will be registered under the Exchange Act. The Plan Asset Regulations provide that a security is "widely held" only if it is part of a class of securities that is owned by 100 or more investors independent of the issuer and of one another. A security will not fail to be widely held because the number of independent investors falls below 100 subsequent to the initial public offering as a result of events beyond the issuer's control. The Company anticipates that upon completion of this offering, the Common Stock will be "widely held." The Plan Asset Regulations provide that whether a security is "freely transferable" is a factual question to be determined on the basis of all relevant facts and circumstances. The Plan Asset Regulations 72 further provide that where a security is part of an offering in which the minimum investment is $10,000 or less (as is the case with this offering), certain restrictions ordinarily will not, alone or in combination, affect a finding that such securities are freely transferable. The restrictions on transfer enumerated in the Plan Asset Regulations as not affecting that finding include: (i) any restriction on or prohibition against any transfer or assignment that would result in the termination or reclassification of an entity for federal or state tax purposes, or that otherwise would violate any federal or state law or court order, (ii) any requirement that advance notice of a transfer or assignment be given to the issuer, (iii) any administrative procedure that establishes an effective date, or an event (such as completion of an offering), prior to which a transfer or assignment will not be effective, and (iv) any limitation or restriction on transfer or assignment that is not imposed by the issuer or a person acting on behalf of the issuer. The Company believes that the restrictions imposed under the Articles of Incorporation on the transfer of the Company's stock will not result in the failure of the Common Stock to be "freely transferable." The Company also is not aware of any other facts or circumstances limiting the transferability of the Common Stock that are not enumerated in the Plan Asset Regulations as those not affecting free transferability, and no assurance can be given that the DOL or the Treasury Department will not reach a contrary conclusion. Assuming that the Common Stock will be "widely held" and that no other facts and circumstances other than those referred to in the preceding paragraph exist that restrict transferability of the Common Stock, the shares of Common Stock should be publicly offered securities and the assets of the Company should not be deemed to be "plan assets" of any Plan, IRA, or Non-ERISA Plan that invests in the Common Stock. CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND REAL PROPERTY INVESTMENTS The following discussion provides general summaries of certain legal aspects of loans secured by real property and the acquisition of real property. Because such legal aspects are governed by applicable state law (which laws vary from state to state), the summaries do not purport to be complete, to reflect the laws of any particular state, or to encompass the laws of all states. Accordingly, the summaries are qualified in their entirety by reference to the applicable laws of the states where the property is located. GENERAL Each mortgage loan will be evidenced by a note or bond and secured by an instrument granting a security interest in real property, which may be a mortgage, deed of trust or a deed to secure debt, depending upon the prevailing practice and law in the state in which the related Mortgaged Property is located. Mortgages, deeds of trust and deeds to secure debt are herein collectively referred to as "mortgages." A mortgage creates a lien upon, or grants a title interest in, the real property covered thereby, and represents the security for the repayment of the indebtedness customarily evidenced by a promissory note. The priority of the lien created or interest granted will depend on the terms of the mortgage and, in some cases, on the terms of separate subordination agreements or intercreditor agreements with others that hold interests in the real property, the knowledge of the parties to the mortgage and, generally, the order of recordation of the mortgage in the appropriate public recording office. However, the lien of a recorded mortgage will generally be subordinate to later-arising liens for real estate taxes and assessments and other charges imposed under governmental police powers. TYPES OF MORTGAGE INSTRUMENTS There are two parties to a mortgage: a mortgagor (the borrower and usually the owner of the subject property) and a mortgagee (the lender). In contrast, a deed of trust is a three-party instrument, among a trustor (the equivalent of a borrower), a trustee to whom the real property is conveyed, and a beneficiary (the lender) for whose benefit the conveyance is made. Under a deed of trust, the trustor grants the property, irrevocably until the debt is paid, in trust and generally with a power of sale, to the trustee to 73 secure repayment of the indebtedness evidenced by the related note. A deed to secure debt typically has two parties. The grantor (the borrower) conveys title to the real property to the grantee (the lender), generally with a power of sale, until such time as the debt is repaid. The mortgagee's authority under a mortgage, the trustee's authority under a deed of trust and the grantee's authority under a deed to secure debt are governed by the express provisions of the related instrument, the law of the state in which the real property is located, certain federal laws and, in some deed of trust transactions, the directions of the beneficiary. LEASES AND RENTS Mortgages that encumber income-producing property often contain an assignment of rents and leases, pursuant to which the borrower assigns to the lender the borrower's right, title and interest as landlord under each lease and the income derived therefrom, while (unless rents are to be paid directly to the lender) retaining a revocable license to collect the rents for so long as there is no default. If the borrower defaults, the license terminates and the lender is entitled to collect the rents. Local law may require that the lender take possession of the property and/or obtain a court-appointed receiver before becoming entitled to collect the rents. The potential payments from a property may be less than the periodic payments due under the mortgage. For example, the net income that would otherwise be generated from the property may be less than the amount that would be needed to service the debt if the leases on the property are at below-market rents, the market rents have fallen since the original financing, vacancies have increased, or as a result of excessive or increased maintenance, repair or other obligations to which a lender succeeds as landlord. CONDEMNATION AND INSURANCE The form of the mortgage or deed of trust used by many lenders confers on the mortgagee or beneficiary the right both to receive all proceeds collected under any hazard insurance policy and all awards made in connection with any condemnation proceedings, and to apply such proceeds and awards to any indebtedness secured by the mortgage or deed of trust, in such order as the mortgage or beneficiary may determine. Thus, in the event improvements on the property are damaged or destroyed by fire or other casualty, or in the event the property is taken by condemnation, the mortgagee or beneficiary under the senior mortgage or deed of trust will have the prior right to collect any insurance proceeds payable under a hazard insurance policy and any award of damages in connection with the condemnation and to apply the same to the indebtedness secured by the senior mortgage or deed of trust. Proceeds in excess of the amount of senior mortgage indebtedness will, in most cases, be applied to the indebtedness of a junior mortgage or trust deed to the extent the junior mortgage or deed of trust so provides. The laws of certain states may limit the ability of mortgagees or beneficiaries to apply the proceeds of hazard insurance and partial condemnation awards to the secured indebtedness. In such states, the mortgagor or trustor must be allowed to use the proceeds of hazard insurance to repair the damage unless the security of the mortgagee or beneficiary has been impaired. Similarly, in certain states, the mortgagee or beneficiary is entitled to the award for a partial condemnation of the real property security only to the extent that its security is impaired. FORECLOSURE GENERAL. Foreclosure is a legal procedure that allows the lender to recover its mortgage debt by enforcing its rights and available legal remedies under the mortgage. If the borrower defaults in payment or performance of its obligations under the note or mortgage, the lender has the right to institute foreclosure proceedings to sell the real property at public auction to satisfy the indebtedness. Foreclosure procedures vary from state to state. Two primary methods of foreclosing a mortgage are judicial foreclosure, involving court proceedings, and non-judicial foreclosure pursuant to a power of sale 74 granted in the mortgage instrument. Other foreclosure procedures are available in some states, such as strict foreclosure, but they are either infrequently used or available only in limited circumstances. JUDICIAL FORECLOSURE. A judicial foreclosure proceeding is conducted in a court having jurisdiction over the mortgaged property. Generally, the action is initiated by the service of legal pleadings upon all parties having a subordinate interest of record in the real property and all parties in possession of the property, under leases or otherwise, whose interests are subordinate to the mortgage. A foreclosure action is subject to most of the delays and expenses of other lawsuits if defenses are raised or counterclaims are interposed, and sometimes requires several years to complete. When the lender's right to foreclose is contested, the legal proceedings can be time-consuming. Upon successful completion of a judicial foreclosure proceeding, the court generally issues a judgment of foreclosure and appoints a referee or other officer to conduct a public sale of the mortgaged property, the proceeds of which are used to satisfy the judgment. Such sales are made in accordance with procedures that vary from state to state. NON-JUDICIAL FORECLOSURE/POWER OF SALE. Foreclosure of a deed of trust is generally accomplished by a non-judicial trustee's sale pursuant to a power of sale typically granted in the deed of trust. A power of sale may also be contained in any other type of mortgage instrument if applicable law so permits. A power of sale under a deed of trust allows a non-judicial public sale to be conducted generally following a request from the beneficiary/lender to the trustee to sell the property upon default by the borrower and after notice of sale is given in accordance with the terms of the mortgage and applicable state law. The borrower or junior lienholder may then have the right, during a reinstatement period required in some states, to cure the default by paying the entire actual amount in arrears (without regard to the acceleration of the indebtedness), plus the lender's expenses incurred in enforcing the obligation. In other states, the borrower or the junior lienholder is not provided a period to reinstate the loan, but has only the right to pay off the entire debt to prevent the foreclosure sale. Generally, state law governs the procedure for public sale, the parties entitled to notice, the method of giving notice and the applicable time periods. EQUITABLE LIMITATIONS ON ENFORCEABILITY OF CERTAIN PROVISIONS. United States courts have traditionally imposed general equitable principles to limit the remedies available to lenders in foreclosure actions. These principles are generally designed to relieve borrowers from the effects of mortgage defaults perceived as harsh or unfair. Relying on such principles, a court may alter the specific terms of a loan to the extent it considers necessary to prevent or remedy an injustice, undue oppression or overreaching, or may require the lender to undertake affirmative actions to determine the cause of the borrower's default and the likelihood that the borrower will be able to reinstate the loan. In some cases, courts have substituted their judgment for the lender's and have required that lenders reinstate loans or recast payment schedules in order to accommodate borrowers who are suffering from a temporary financial disability. In other cases, courts have limited the right of the lender to foreclose in the case of a non-monetary default, such as a failure to adequately maintain the mortgaged property or an impermissible further encumbrance of the mortgaged property. Even if the lender is successful in the foreclosure action and is able to take possession of the property, the costs of operating and maintaining a commercial or multifamily property may be significant and may be greater than the income derived from that property. The costs of management and operation of those mortgaged properties which are hotels, motels, restaurants, nursing homes, convalescent homes or hospitals may be particularly significant because of the expertise, knowledge and with respect to nursing or convalescent homes, regulatory compliance, required to run such operations and the effect which foreclosure and a change in ownership may have with respect to consent requirements and on the public's and the industry's (including franchisors') perception of the quality of such operations. The lender also will commonly obtain the services of a real estate broker and pay the broker's commission in connection with the sale or lease of the property. Depending upon market conditions, the ultimate proceeds of the sale of the property may not equal the lender's investment in the property. Moreover, because of the expenses associated with acquiring, owning and selling a mortgaged property, a lender could realize an overall loss 75 on a mortgage loan even if the mortgaged property is sold at foreclosure, or resold after it is acquired through foreclosure, for an amount equal to the full outstanding principal amount of the loan plus accrued interest. The holder of a junior mortgage that forecloses on a mortgaged property does so subject to senior mortgages and any other prior liens, and may be obliged to keep senior mortgage loans current in order to avoid foreclosure of its interest in the property. In addition, if the foreclosure of a junior mortgage triggers the enforcement of a "due-on-sale" clause contained in a senior mortgage, the junior mortgagee could be required to pay the full amount of the senior mortgage indebtedness or face foreclosure. POST-SALE REDEMPTION. In a majority of states, after sale pursuant to a deed of trust or foreclosure of a mortgage, the borrower and foreclosed junior lienors are given a statutory period in which to redeem the property. In some states, statutory redemption may occur only upon payment of the foreclosure sale price. In other states, redemption may be permitted if the former borrower pays only a portion of the sums due. In some states, the borrower retains possession of the property during the statutory redemption period. The effect of a statutory right of redemption is to diminish the ability of the lender to sell the foreclosed property because the exercise of a right of redemption would defeat the title of any purchaser through a foreclosure. Consequently, the practical effect of the redemption right is to force the lender to maintain the property and pay the expenses of ownership until the redemption period has expired. In some states, a post-sale statutory right of redemption may exist following a judicial foreclosure, but not following a trustee's sale under a deed of trust. ANTI-DEFICIENCY LEGISLATION. Any commercial or multi-family residential mortgage loans acquired by the Company are likely to be nonrecourse loans, as to which recourse in the case of default will be limited to the property and such other assets, if any, that were pledged to secure the mortgage loan. However, even if a mortgage loan by its terms provides for recourse to the borrower's other assets, a lender's ability to realize upon those assets may be limited by state law. For example, in some states a lender cannot obtain a deficiency judgment against the borrower following foreclosure or sale under a deed of trust or by non-judicial means. Other statutes may require the lender to exhaust the security afforded under a mortgage before bringing a personal action against the borrower. In certain other states, the lender has the option of bringing a personal action against the borrower on the debt without first exhausting such security; however, in some of those states, the lender, following judgment on such personal action, may be deemed to have elected a remedy and thus may be precluded from foreclosing upon the security. Consequently, lenders in those states where such an election of remedy provision exists may choose to proceed first against the security. Finally, other statutory provisions, designed to protect borrowers from exposure to large deficiency judgments that might result from bidding at below-market values at the foreclosure sale, limit any deficiency judgment to the excess of the outstanding debt over the fair market value of the property at the time of the sale. COOPERATIVES. Mortgage loans may be secured by a security interest on the borrower's ownership interest in shares, and the proprietary leases appurtenant thereto (or cooperative contract rights), allocable to cooperative dwelling units that may be vacant or occupied by non-owner tenants. Such loans are subject to certain risks not associated with mortgage loans secured by a lien on the fee estate of a borrower in real property. Such a loan typically is subordinate to the mortgage, if any, on the cooperative's building which, if foreclosed, could extinguish the equity in the building and the proprietary leases of the dwelling units derived from ownership of the shares of the cooperative. Further, transfer of shares in a cooperative are subject to various regulations as well as to restrictions (including transfer restrictions) under the governing documents of the cooperative, and the shares may be canceled in the event that associated maintenance charges due under the related proprietary leases are not paid. Typically, a recognition agreement between the lender and the cooperative provides, among other things, the lender with an opportunity to cure a default under a proprietary lease but such recognition agreements may not have been obtained in the case of all the mortgage loans secured by cooperative shares (or contract rights). 76 Under the laws applicable in many states, "foreclosure" on cooperative shares is accomplished by a sale in accordance with the provisions of Article 9 of the UCC and the security agreement relating to the shares. Article 9 of the UCC requires that a sale be conducted in a "commercially reasonable" manner, which may be dependent upon, among other things, the notice given to the debtor and the method, manner, time, place and terms of the sale. Article 9 of the UCC provides that the proceeds of the sale will be applied first to pay the costs and expenses of the sale and then to satisfy the indebtedness secured by the lender's security interest. A recognition agreement, however, generally provides that the lender's right to reimbursement is subject to the right of the cooperative to receive sums due under the proprietary leases. BANKRUPTCY LAWS Operation of the Bankruptcy Code and related state laws may interfere with or affect the ability of a lender to realize upon collateral and/or to enforce a deficiency judgment. For example, under the Bankruptcy Code, virtually all actions (including foreclosure actions and deficiency judgment proceedings) to collect a debt are automatically stayed upon the filing of the bankruptcy petition and, often, no interest or principal payments are made during the course of the bankruptcy case. The delay and the consequences thereof caused by such automatic stay can be significant. Also, under the Bankruptcy Code, the filing of a petition in bankruptcy by or on behalf of a junior lien or may stay the senior lender from taking action to foreclose out such junior lien. Under the Bankruptcy Code, provided certain substantive and procedural safeguards protective of the lender are met, the amount and terms of a mortgage loan secured by a lien on property of the debtor may be modified under certain circumstances. For example, the outstanding amount of the loan may be reduced to the then-current value of the property (with a corresponding partial reduction of the amount of lender's security interest) pursuant to a confirmed plan or lien avoidance proceeding, thus leaving the lender a general unsecured creditor for the difference between such value and the outstanding balance of the loan. Other modifications may include the reduction in the amount of each scheduled payment, by means of a reduction in the rate of interest and/or an alteration of the repayment schedule (with or without affecting the unpaid principal balance of the loan), and/or by an extension (or shortening) of the term to maturity. Federal bankruptcy law may also have the effect of interfering with or affecting the ability of the secured lender to enforce the borrower's assignment of rents and leases related to the mortgaged property. Under section 362 of the Bankruptcy Code, the lender will be stayed from enforcing the assignment, and the legal proceedings necessary to resolve the issue could be time-consuming, with resulting delays in the lender's receipt of the rents. In addition, the Bankruptcy Code has been amended to provide that a lender's perfected pre-petition security interest in leases, rents and hotel revenues continues in the post-petition leases, rents and hotel revenues, unless a bankruptcy court orders to the contrary "based on the equities of the case." In a bankruptcy or similar proceeding, action may be taken seeking the recovery as a preferential transfer of any payments made by the mortgagor under the related mortgage loan to the owner of such mortgage loan. Payments on long-term debt may be protected from recovery as preferences if they are payments in the ordinary course of business made on debts incurred in the ordinary course of business. Whether any particular payment would be protected depends upon the facts specific to a particular transaction. A trustee in bankruptcy, in some cases, may be entitled to collect its costs and expenses in preserving or selling the mortgaged property ahead of payment to the lender. In certain circumstances, a debtor in bankruptcy may have the power to grant liens senior to the lien of a mortgage, and analogous state statutes and general principles of equity may also provide a mortgagor with means to halt a foreclosure proceeding or sale and to force a restructuring of a mortgage loan on terms a lender would not otherwise accept. Moreover, the laws of certain states also give priority to certain tax liens over the lien of a mortgage or 77 deed of trust. Under the Bankruptcy Code, if the court finds that actions of the mortgagee have been unreasonable, the lien of the related mortgage may be subordinated to the claims of unsecured creditors. The Company's acquisition of real property, particularly REO Property, may be affected by many of the considerations applicable to mortgage loan lending. For example, the Company's acquisition of certain property at foreclosure sale could be affected by a borrower's post-sale right of redemption. In addition, the Company's ability to derive income from real property will generally be dependent on its receipt of rent payments under leases of the related property. The ability to collect rents may be impaired by the commencement of a bankruptcy proceeding relating to a lessee under such lease. Under the Bankruptcy Code, the filing of a petition in bankruptcy by or on behalf of a lessee results in a stay in bankruptcy against the commencement or continuation of any state court proceeding for past due rent, for accelerated rent, for damages or for a summary eviction order with respect to a default under the lease that occurred prior to the filing of the lessee's petition. In addition, the Bankruptcy Code generally provides that a trustee or debtor-in-possession may, subject to approval of the court, (i) assume the lease and retain it or assign it to a third party or (ii) reject the lease. If the lease is assumed, the trustee or debtor-in-possession (or assignee, if applicable) must cure any defaults under the lease, compensate the lessor for its losses and provide the lessor with "adequate assurance" of future performance. Such remedies may be insufficient, and any assurances provided to the lessor may, in fact, be inadequate. If the lease is rejected, the lessor will be treated as an unsecured creditor with respect to its claim for damages for termination of the lease. The Bankruptcy Code also limits a lessor's damages for lease rejection to the rent reserved by the lease (without regard to acceleration) for the greater of one year, or 15%, not to exceed three years, of the remaining term of the lease. DEFAULT INTEREST AND LIMITATIONS ON PREPAYMENTS Notes and mortgages may contain provisions that obligate the borrower to pay a late charge or additional interest if payments are not timely made, and in some circumstances, may prohibit prepayments for a specified period and/or condition prepayments upon the borrower's payment of prepayment fees or yield maintenance penalties. In certain states, there are or may be specific limitations upon the late charges that a lender may collect from a borrower for delinquent payments. Certain states also limit the amounts that a lender may collect from a borrower as an additional charge if the loan is prepaid. In addition, the enforceability of provisions that provide for prepayment fees or penalties upon an involuntary prepayment is unclear under the laws of many states. FORFEITURES IN DRUG AND RICO PROCEEDINGS Federal law provides that property owned by persons convicted of drug-related crimes or of criminal violations of the Racketeer Influenced and Corrupt Organizations ("RICO") statute can be seized by the government if the property was used in, or purchased with the proceeds of, such crimes. Under procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime Control Act"), the government may seize the property even before conviction. The government must publish notice of the forfeiture proceeding and may give notice to all parties "known to have an alleged interest in the property," including the holders of mortgage loans. A lender may avoid forfeiture of its interest in the property if it establishes that: (i) its mortgage was executed and recorded before commission of the crime upon which the forfeiture is based, or (ii) the lender was, at the time of execution of the mortgage, "reasonably without cause to believe" that the property was used in, or purchased with the proceeds of, illegal drug or RICO activities. ENVIRONMENTAL RISKS GENERAL. The Company will be subject to environmental risks when taking a security interest in real property, as well as when it acquires any real property. Of particular concern may be properties that are or 78 have been used for industrial, manufacturing, military or disposal activity. Such environmental risks include the risk of the diminution of the value of a contaminated property or, as discussed below, liability for the costs of compliance with environmental regulatory requirements or the costs of clean-up or other remedial actions. These compliance or clean-up costs could exceed the value of the property or the amount of the lender's loan. In certain circumstances, a lender could determine to abandon a contaminated mortgaged property as collateral for its loan rather than foreclose and risk liability for compliance or clean-up costs. CERCLA. The federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), imposes strict liability on present and past "owners" and "operators" of contaminated real property for the costs of clean-up. A secured lender may be liable as an "owner" or "operator" of a contaminated mortgaged property if agents or employees of the lender have become sufficiently involved in the management of such mortgaged property or the operations of the borrower. Such liability may exist even if the lender did not cause or contribute to the contamination and regardless of whether the lender has actually taken possession of a mortgaged property through foreclosure, deed in lieu of foreclosure or otherwise. The magnitude of the CERCLA liability at any given contaminated site is a function of the actions required to address adequately the risks to human health and the environment posed by the particular conditions at the site. As a result, such liability is not constrained by the value of the property or the amount of the original or unamortized principal balance of any loans secured by the property. Moreover, under certain circumstances, liability under CERCLA may be joint and several--i.e., any liable party may be obligated to pay the entire cleanup costs regardless of its relative contribution to the contamination. The Asset Conservation, Lender Liability and Deposit Insurance Act of 1996 (the "1996 Lender Liability Act") provides for a safe harbor for secured lenders from CERCLA liability even though the lender forecloses and sells the real estate securing the loan, provided the secured lender sells "at the earliest practicable, commercially reasonable time, at commercially reasonable terms, taking into account market conditions and legal and regulatory requirements." Although the 1996 Lender Liability Act provides significant protection to secured lenders, it has not been construed by the courts and there are circumstances in which actions taken could expose a secured lender to CERCLA liability. And, the transferee from the secured lender is not entitled to the protections enjoyed by a secured lender. Hence, the marketability of any contaminated real estate continues to be suspect. CERTAIN OTHER FEDERAL AND STATE LAWS. Many states have environmental clean-up statutes similar to CERCLA, and not all those statutes provide for a secured creditor exemption. In addition, underground storage tanks are commonly found on a wide variety of commercial and industrial properties. Federal and state laws impose liability on the owners and operators of underground storage tanks for any cleanup that may be required as a result of releases from such tanks. These laws also impose certain compliance obligations on the tank owners and operators, such as regular monitoring for leaks and upgrading of older tanks. The Company may become a tank owner or operator and subject to compliance obligations and potential cleanup liabilities, either as a result of becoming involved in the management of a site at which a tank is located or, more commonly, by taking title to such a property. Federal and state laws also obligate property owners and operators to maintain and, under some circumstances, to remove asbestos-containing building materials and lead-based paint. As a result, the presence of these materials can increase the cost of operating a property and thus diminish its value. In a few states, transfers of some types of properties are conditioned upon cleanup of contamination prior to transfer. In these cases, a lender that becomes the owner of a property through foreclosure, deed in lieu of foreclosure or otherwise, may be required to clean up the contamination before selling or otherwise transferring the property. Beyond statute-based environmental liability, there exist common law causes of action (for example, actions based on nuisance or on toxic tort resulting in death, personal injury or damage to property) related to hazardous environmental conditions on a property. 79 SUPERLIEN LAWS. Under the laws of many states, contamination of a property may give rise to a lien on the property for clean-up costs. In several states, such a lien has priority over all existing liens, including those of existing mortgages. In these states, the lien of a mortgage may lose its priority to such a "superlien." ADDITIONAL CONSIDERATIONS. The cost of remediating environmental contamination at a property can be substantial. To reduce the likelihood of exposure to such losses, the Company will not acquire title to a Mortgaged Property or take over its operation unless, based on an environmental site assessment prepared by a qualified environmental consultant, it has made the determination that it is appropriate to do so. The Company expects that it will organize a special purpose subsidiary to acquire any environmentally contaminated real property. ENVIRONMENTAL SITE ASSESSMENTS. In addition to possibly allowing a lender to qualify for the innocent landowner defense (see discussion under "--Environmental Risks--CERCLA" above), environmental site assessments can be a valuable tool in anticipating, managing and minimizing environmental risk. They are commonly performed in many commercial real estate transactions. Environmental site assessments vary considerably in their content and quality. Even when adhering to good professional practices, environmental consultants will sometimes not detect significant environmental problems because an exhaustive environmental assessment would be far too costly and time-consuming to be practical. Nevertheless, it is generally helpful in assessing and addressing environmental risks in connection with commercial real estate (including multifamily properties) to have an environmental site assessment of a property because it enables anticipation of environmental problems and, if agreements are structured appropriately, can allow a party to decline to go forward with a transaction. APPLICABILITY OF USURY LAWS Title V of the Depository Institutions Deregulation and Monetary Control Act of 1980 ("Title V") provides that state usury limitations shall not apply to certain types of residential (including multifamily) first mortgage loans originated by certain lenders after March 31, 1980. Title V authorized any state to reimpose interest rate limits by adopting, before April 1, 1983, a law or constitutional provision that expressly rejects application of the federal law. In addition, even where Title V is not so rejected, any state is authorized by the law to adopt a provision limiting discount points or other charges on mortgage loans covered by Title V. Certain states have taken action to reimpose interest rate limits and/or to limit discount points or other charges. AMERICANS WITH DISABILITIES ACT Under Title III of the Americans with Disabilities Act of 1990 and rules promulgated thereunder (collectively, the "ADA"), in order to protect individuals with disabilities, public accommodations (such as hotels, restaurants, shopping centers, hospitals, schools and social service center establishments) must remove architectural and communication barriers that are structural in nature from existing places of public accommodation to the extent "readily achievable." In addition, under the ADA, alterations to a place of public accommodation or a commercial facility are to be made so that, to the maximum extent feasible, such altered portions are readily accessible to and usable by disabled individuals. The "readily achievable" standard takes into account, among other factors, the financial resources of the affected site, owner, landlord or other applicable person. In addition to imposing a possible financial burden on the borrower in its capacity as owner or landlord, the ADA may also impose such requirements on a foreclosing lender who succeeds to the interest of the borrower as owner or landlord. Furthermore, since the "readily achievable" standard may vary depending on the financial condition of the owner or landlord, a foreclosing lender who is financially more capable than the borrower of complying with the requirements of the ADA may be subject to more stringent requirements than those to which the borrower is subject. 80 USE OF PROCEEDS All of the expected net proceeds of this Offering will be used to purchase Units in the Operating Partnership. Thereupon, the Operating Partnership will use approximately $36.0 million plus accrued interest to purchase the Initial Investments and $10 million to purchase the Supplemental Initial Investment. The purchase price for the Initial Investments and the Supplemental Initial Investment was based on certain assumptions made with respect to the potential net cash flows to be generated by the Initial Investments and the Supplemental Initial Investment. See "Initial Investments," "Yield Considerations Regarding the Initial Investments" and "Risk Factor--Other Risks--Conflicts of Interest in the Business of the Company." Pending investment, the balance of the net proceeds (approximately $ million) will be invested in short-term, interest-bearing securities and held by the Operating Partnership until used to originate or acquire Subordinated Interests, Distressed Real Properties and Other Real Estate Related Assets as provided herein. See "Operating Policies and Strategies." The Company intends to supplement the proceeds of this offering through bank borrowings, commercial paper borrowings and the issuance of debt securities and additional equity securities. UNDERWRITING Subject to the terms and conditions set forth in the Underwriting Agreement, the Company has agreed to sell to each of the underwriters named below (the "Underwriters") and each of the Underwriters, for whom Friedman, Billings, Ramsey & Co., Inc. and EVEREN Securities, Inc., are acting as representatives, has severally agreed to purchase, the number of shares of Common Stock offered hereby set forth below opposite its name.
UNDERWRITER NUMBER OF SHARES - --------------------------------------------------------------------------- ----------------- Friedman, Billings, Ramsey & Co., Inc...................................... [ ] EVEREN Securities, Inc..................................................... [ ] Total...................................................................... 12,500,000 ----------------- -----------------
Under the terms and conditions of the Underwriting Agreement, the Underwriters are committed to purchase all the shares of Common Stock offered hereby if any are purchased. The Underwriters propose initially to offer the shares of Common Stock directly to the public at the public offering price set forth on the cover page of this Prospectus and to certain dealers at such offering price less a concession not to exceed $ per share of Common Stock. The Underwriters may allow and such dealers may reallow a concession not to exceed $ per share of Common Stock to certain other dealers. After the shares of Common Stock are released for sale to the public, the offering price and other selling terms may be changed by the Underwriters. The Company has granted to the Underwriters an option exercisable during a 30-day period after the date hereof to purchase, at the initial offering price less underwriting discounts and commissions, up to an additional 1,875,000 shares of Common Stock for the sole purpose of covering over-allotments, if any. To the extent that the Underwriters exercise such option, each Underwriter will be committed, subject to certain conditions, to purchase a number of the additional shares of Common Stock proportionate to such Underwriter's initial commitment. The Company has agreed to indemnify the several Underwriters against certain civil liabilities under the Securities Act of 1933, or to contribute to payments the Underwriters may be required to make in respect thereof. Prior to this Offering, there has been no public market for the shares of Common Stock. The initial public offering price has been determined by negotiation between the Company and the representatives of the Underwriters. Among the factors considered in making such determination were the history of, and the 81 prospects for, the industry in which the Company will compete, an assessment of the skills of the Manager and the Company's prospects for future earnings, the general conditions of the economy and the securities market and the prices of offerings by similar issuers. There can, however, be no assurance that the price at which the shares of Common Stock will sell in the public market after this offering will not be lower than the price at which they are sold by the Underwriters. The representatives of the Underwriters have informed the Company that the Underwriters do not intend to confirm sales of the shares offered hereby to any accounts over which they exercise discretionary authority. Until the distribution of the Common Stock is completed, rules of the Commission may limit the ability of the Underwriters and certain selling group members to bid for or purchase the Common Stock. As an exception to these rules, the representatives are permitted to engage in certain transactions that stabilize the price of the Common Stock. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Common Stock. If the Underwriters create a short position in the Common Stock in connection with the Offering, I.E., if they sell more Common Stock than are set forth on the cover page of this Prospectus, the representatives may reduce that short position by purchasing Common Stock in the open market. The representatives may also elect to reduce any short position by exercising all or part of the over-allotment option described above. The representatives may also impose a penalty bid on certain Underwriters and selling group members. This means that if the representatives purchase Common Stock in the open market to reduce the Underwriters' short position or to stabilize the price of the Common Stock, they may reclaim the amount of the selling concession from the Underwriters and selling group members who sold those Common Stock as part of the Offering. In general, purchases of securities for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. The imposition of a penalty bid might also have an effect on the price of a security to the extent that it were to discourage resales of the security. Neither the Company nor any of the Underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Common Stock. In addition, neither the Company nor any of the Underwriters makes any representation that the Representatives will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. Ocwen Financial has agreed not to offer, sell or contract to sell or otherwise dispose of any Common Stock without the prior consent of the representative, for a period of two years from the date of Closing, provided that the Manager continues to serve as the manager during such period. OAIC does not intend to apply to have the Common Stock listed on any stock exchange, but has applied for quotation of the Common Stock on The Nasdaq Stock Market. LEGAL MATTERS Certain legal matters will be passed upon for the Company by Hunton & Williams, Richmond, Virginia, and for the Underwriters by Simpson Thacher & Bartlett (a partnership which includes professional corporations), New York, New York. Simpson Thacher & Bartlett may rely as to matters of Virginia law on the opinion of Hunton & Williams. 82 EXPERTS The financial statement of Ocwen Asset Investment Corp. as of February 12, 1997 included in this Prospectus has been so included in reliance on the report of Price Waterhouse LLP, independent certified public accountants, given on the authority of said firm as experts in auditing and accounting. ADDITIONAL INFORMATION THE COMPANY The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement (of which this Prospectus forms a part) under the Securities Act of 1933, as amended, with respect to the Common Stock offered pursuant to the Prospectus. This Prospectus contains summaries of the material terms of the documents referred to herein and therein, but does not contain all of the information set forth in the Registration Statement pursuant to the rules and regulations of the Commission. For further information, reference is made to such Registration Statement and the exhibits thereto. Such Registration Statement and exhibits as well as reports and other information filed by OAIC can be inspected without charge and copied at prescribed rates at the public reference facilities maintained by the Commission at the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its Regional Offices located as follows: Chicago Regional Office, Citicorp Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661-2511; and New York Regional Office, Seven World Trade Center, Suite 1300, New York, New York 10048. The Commission maintains a Web site that contains reports, proxy, and information statements and other information regarding registrants that file electronically with the Commission. The Web site is located at http://www.sec.gov. Statements contained in this Prospectus as to the contents of any contract or other document that is filed as an exhibit to the Registration Statement are not necessarily complete, and each such statement is qualified in its entirety by reference to the full text of such contract or document. The Company will be required to file reports and other information with the Commission pursuant to the Securities Exchange Act of 1934. In addition to applicable legal requirements, if any, holders of Common Stock will receive annual reports containing audited financial statements with a report thereon by the Company's independent certified public accounts, and quarterly reports containing unaudited financial information for each of the first three quarters of each fiscal year. OCWEN FINANCIAL Ocwen Financial files reports and other information with the Commission pursuant to the Securities Exchange Act of 1934. Additional information about Ocwen Financial, therefore, may be inspected or copied at the public reference facilities maintained by the Commission at the locations mentioned above. 83 GLOSSARY OF TERMS Except as otherwise specified or as the context may otherwise require, the following terms used herein shall have the meanings assigned to them below. All terms in the singular shall have the same meanings when used in the plural and vice-versa. "1996 Lender Liability Act" shall mean the Asset Conservation, Lender Liability and Deposit Insurance Act of 1996. "ADA" shall mean the Americans with Disabilities Act of 1990, as amended. "Affiliate" shall mean (i) any person directly or indirectly owning, controlling, or holding, with power to vote ten percent or more of the outstanding voting securities of such other person, (ii) any person ten percent or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held, with power to vote, by such other person, (iii) any person directly or indirectly controlling, controlled by, or under common control with such other person, (iv) any executive officer, director, trustee or general partner of such other person, and (v) any legal entity for which such person acts as an executive officer, director, trustee or general partner. The term "person" means and includes any natural person, corporation, partnership, association, limited liability company or any other legal entity. An indirect relationship shall include circumstances in which a person's spouse, children, parents, siblings or mothers-, fathers-, sisters- or brothers-in-law is or has been associated with a person. "Affiliated Transaction" shall mean any material acquisition transaction between the Company and any Interested Stockholder. "Articles of Incorporation" shall mean the Articles of Incorporation of the Company. "Average Invested Assets" shall mean the average of the aggregate book value of the assets of the Company (including all of OAIC's direct and indirect subsidiaries), before reserves for depreciation or bad debts or other similar noncash reserves, computed by taking the daily average of such values during such period. "Bank" shall mean Ocwen Federal Bank FSB. "Bankruptcy Code" shall mean Title 11 of the United States Code, as amended. "Beneficiary" shall mean the beneficiary of the Trust. "Board of Directors" shall mean the Board of Directors of the Company. "Bylaws" shall mean the Bylaws of the Company. "CERCLA" shall mean the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended. "Closing" shall mean the closing of the Offering. "Closing Date" shall mean on or about , 1997. "Closing Price" shall mean the average of the high bid and low asked prices in the over-the-counter market, as reported by The Nasdaq Stock Market. "CMBS" shall mean commercial or multi-family MBS. "CMO or CMO Bonds" shall mean collateralized mortgage obligations. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Commission" shall mean the Securities and Exchange Commission. "Common Stock" shall mean the Common Stock, par value $0.01 per share, of OAIC. 84 "Company" shall mean Ocwen Asset Investment Corp., a Virginia corporation, together with its subsidiaries, unless the context indicates otherwise. "Company Expenses" shall mean all administrative costs and expenses of the Company and the General Partner. "Confirming Price Evaluation" shall mean an estimate of the price of an MBS obtained from a broker, usually the underwriter or placement agent of such MBS. "Control Share Acquisitions" means transactions causing the voting strength of any person acquiring beneficial ownership of shares of a public corporation in Virginia to meet or exceed certain threshold percentages (20%, 33 1/3% or 50%) of the total votes entitled to be cast for the election of directors. "Crime Control Act" shall mean the Comprehensive Crime Control Act of 1984. "Directors" means the members of the Company's Board of Directors. "Distressed Mortgage Loans" shall mean Sub-Performing Mortgage Loans and Nonperforming Mortgage Loans. "Distressed Real Properties" shall mean REO Properties and other distressed real estate. "DLJ IOs" shall mean the DLJ Mortgage Acceptance Corporation, Multi-family Mortgage Pass-Through Certificates, Series 1993-MF17, Class S-1 and Class S-2. "DLJ Investments" shall mean the DLJ IOs and the DLJ Subordinated Interests. "DLJ Mortgage Loans" shall mean the mortgage loans underlying the DLJ Investments. "DLJ Subordinated Interests" shall mean the DLJ Mortgage Acceptance Corporation, Multi-family Mortgage Pass-Through Certificates, Series 1993-MF17, Class B-2, Class B-3 and Class C-1. "DOL" shall mean the Department of Labor. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "Excess Inclusion" shall have the meaning specified in section 860E(c) of the Code. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Exempt Organizations" shall mean tax-exempt entities, including, but not limited to, charitable organizations, qualified employee pension and profit sharing trusts and individual retirement accounts. "FHLB" shall mean the Federal Home Loan Bank. "FIRPTA" shall mean the Foreign Investment in Real Property Tax Act of 1980. "FLHMC" shall mean the Federal Loan Home Mortgage Corporation, a corporate instrumentality of the United States created and existing under Title III of the Emergency Home Finance Act of 1970, as amended, or any successor thereto. "FNMA" shall mean the Federal National Mortgage Association, a federally chartered and privately owned corporation organized and existing under the Federal National Mortgage Association Charter Act, or any successor thereto. "Formation Transactions" shall mean transactions relating to the formation of the Company. "Funds From Operations" shall mean net income (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring or sales of property, plus depreciation, and after adjustments for unconsolidated partnerships and joint ventures. "GAAP" shall mean generally accepted accounting principles applied on a consistent basis. 85 "Garn Act" shall mean the Garn-St Germain Depository Institutions Act of 1982. "General Partner" shall mean Ocwen General, Inc., as the sole general partner of the Operating Partnership. "Guidelines" shall mean guidelines that set forth general parameters for the Company's investments, borrowings and operations. "HUD" shall mean the Department of Housing and Urban Development. "Independent Director" shall mean a director who within the last two years, has not (i) owned an interest in the Manager or any of the Manager's Affiliates, (ii) been employed by the Manager or any of its Affiliates, (iii) been an officer or director of the Manager or any of its Affiliates, (iv) performed services for the Manager, (iv) had any material business or professional relationship with the Manager or any of its Affiliates. "Initial Investments" shall mean the DLJ Investments and the MLMC Subordinated Interests, described under "Initial Investments," which are to be acquired on or soon after the Closing Date. "Initial Limited Partner" shall mean Ocwen Limited, Inc., as limited partner of the Operating Partnership. "Interested Stockholder" shall mean any holder of more than 10% of any class of outstanding voting shares of the Company. "Inverse IO" shall mean a class of MBS that is entitled to no (or only nominal) distributions of principal, but is entitled to interest at a floating rate that varies inversely with a specified index. "IO" shall mean a class of MBS that is entitled to no (or only nominal) distributions of principal. "IRA" shall mean an individual retirement account. "Lease" shall mean, with respect to each Mortgaged Property or Real Property, the agreement pursuant to which the Borrower rents and leases to the Lessee and the Lessee rents and leases from the Borrower, such Mortgaged Property or Real Property. "Limited Partners" shall mean the Initial Limited Partner and any additional persons admitted as limited partners of the Operating Partnership. "Management Agreement" shall mean an agreement or agreements between the Company and the Manager pursuant to which the Manager performs various services for the Company. "Manager" shall mean Ocwen Capital Corporation "Market Price" shall mean the average of the Closing Price for the five consecutive Trading Days ending on such date. "MBS" shall mean mortgage-backed securities or collateralized mortgage obligations. "MLMC Mortgage Loans" shall mean the mortgage loans underlying the Merrill Subordinated Interests. "MLMC Subordinated Interests" shall mean the Merrill Lynch Mortgage Capital Inc. multifamily Mortgage Pass-Through Certificates, Series 1993-M1, Class B and Class C. "Mortgage Collateral" shall mean mortgage pass-through securities or pools of whole loans securing or backing a series of MBS. "Mortgage Loan" shall mean a mortgage loan underlying a series of MBS or a Mortgage Loan held by the Company, as the context indicates. 86 "Mortgaged Property" shall mean the real property securing a mortgage loan. "NAREIT" shall mean the National Association of Real Estate Investment Trusts, Inc. "Net Income" shall mean the income of the Company as reported for federal income tax purposes before the Manager's incentive compensation, net operating loss deductions arising from losses in prior periods and the deduction for dividends paid, plus the effects of adjustments, if any, necessary to record hedging and interest transactions in accordance with generally accepted accounting principles. "Non-ERISA Plan" shall mean a plan that does not cover common law employees. "Nonperforming Mortgage Loans" shall mean commercial and residential mortgage loans for which the payment of principal and interest is more than 90 days delinquent. "OAIC" shall mean Ocwen Asset Investment Corp. "Ocwen Financial" shall mean Ocwen Financial Corporation. "Offering" shall mean the offering of Common Stock hereby. "Offering Price" shall mean the offering price of $16 per Common Share offered hereby. "OID" shall mean original issue discount. "Operating Partnership" shall mean Ocwen Partnership, L.P. "Operating Partnership Agreement" shall mean the partnership agreement of the Operating Partnership, as amended from time to time. "Option Plan" shall mean a plan which provides for options to purchase Units. "Other Real Estate Related Assets" shall mean real estate related assets other than Subordinated Interests and Distressed Real Property, including, without limitation, Mortgage Loans, other classes of MBS and other interests in real estate. "OTS" shall mean the Office of Thrift Supervision. "Ownership Limitation" shall mean the restriction on ownership (or deemed ownership by virtue of the attribution provisions of the Code) of (a) more than 9.1% of the outstanding shares of Common Stock by any stockholder other than Ocwen Financial, (b) more than 13% of the outstanding shares of Common Stock by Ocwen Financial, or (c) more than 9.9% of the shares of any series of Preferred Stock by any stockholder. "Pass-Through Certificates" shall mean interests in trusts, the assets of which are primarily mortgage loans. "Plan" shall mean certain pension, profit-sharing, employee benefit, or retirement plans or individual retirement accounts. "Plan Asset Regulations" shall mean regulations of the Department of Labor that define "plan assets." "Preferred Stock" shall mean the preferred stock of the Company. "Prohibited Owner" shall mean the record holder of the shares of Common Stock or Preferred Stock that are designated as Shares-in-Trust. "Qualifying Interests" shall mean mortgages and other liens on and interests in real estate. "Real Estate Related Assets" shall mean Subordinated Interests and other classes of CMBS and RMBS, Distressed Mortgage Loans, Performing Mortgage Loans, Distressed Real Property and other real estate related assets. 87 "Real Property" shall mean real property owned by the Company. "Realized Losses" shall mean, generally, the aggregate amount of losses realized on loans that are liquidated and losses on loans due to fraud, mortgagor bankruptcy or special hazards. "Redemption Rights" shall mean the rights that it is anticipated the Limited Partners (other than the Initial Limited Partner) will have pursuant to the Operating Partnership Agreement to redeem all or a portion of their interests in the Operating Partnership for Common Stock on a one-for-one basis or, at the option of the Company, an equivalent amount of cash. "REIT" shall mean real estate investment trust, as defined in section 856 of the Code. "Related Party Tenant" shall mean a tenant of OAIC or the Operating Partnership in which OAIC owns 10% or more of the ownership interests, taking into account both direct ownership and constructive ownership. "REMIC" shall mean real estate mortgage investment conduit, as defined in section 860D of the Code. "REMIC Residual Interest" shall mean a class of MBS that is designated as the residual interest in one or more REMICs. "Rent" shall mean rent received by the Company from tenants of Real Property owned by the Company. "REO Property" shall mean real property acquired by a mortgage lender at foreclosure (or by deed in lieu of foreclosure). "RICO" shall mean the Racketeer Influenced and Corrupt Organizations. "RMBS" shall mean a series of one- to four-family residential MBS. "Rule 144" shall mean the rule promulgated under the Securities Act that permits holders of restricted securities as well as affiliates of an issuer of the securities, pursuant to certain conditions and subject to certain restrictions, to sell their securities publicly without registration under the Securities Act. "SAIF" shall mean the Savings Association Insurance Fund. "Securities Act" shall mean the Securities Act of 1933, as amended. "Service" shall mean the Internal Revenue Service. "Shares-in-Trust" shall mean shares of Common Stock or Preferred Stock the purported transfer of which would result in a violation of the Ownership Limitation, result in the stock of OAIC being held by fewer than 100 persons, result in OAIC being "closely held," or cause OAIC to own 10% or more of the ownership interests in a tenant of the Company's Real Property. "Special Servicing" shall mean servicing of defaulted mortgage loans, including oversight and management of the resolution of such mortgage loans by modification, foreclosure, deed in lieu of foreclosure or otherwise. "Sub IO" shall mean an IO with characteristics of a Subordinated Interest. "Subordinated Interests" shall mean classes of MBS that are subordinated in right of payments of principal and interest to more senior classes. "Sub-Performing Mortgage Loans" shall mean loans for which default is likely or imminent. "Supplemental Initial Investment" shall mean Subordinated Interests the Company has contracted to purchase from a third party, which is expected to be issued in April 1997, at a purchase price of approximately $10 million. 88 "Ten-Year U.S. Treasury Rate" shall mean the arithmetic average of the weekly average yield to maturity for actively traded current coupon U.S. Treasury fixed interest rate securities (adjusted to constant maturities of ten years) published by the Federal Reserve Board during a quarter, or, if such rate is not published by the Federal Reserve Board, any Federal Reserve Bank or agency or department of the federal government selected by the Company. "Title V" shall mean Title V of the Depository Institutions Deregulation and Monetary Control Act of 1980. "Trading Day" shall mean any day other than a Saturday, a Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close. "Treasury Regulations" shall mean the income tax regulations promulgated under the Code. "Trust" shall mean a trust created in the event of an impermissible transfer of shares of Common Stock. "Trustee" shall mean a trustee of the Trust. "UBTI" shall mean unrelated business taxable income. "UBTI Percentage" shall mean the gross income derived by the Company from an unrelated trade or business divided by the gross income of the Company for the year in which the dividends are paid. "UCC" shall mean the Uniform Commercial Code. "Unaffiliated Director" shall mean, with respect to a particular Interested Stockholder, a member of OAIC's Board of Directors who was (i) a member on the date on which an Interested Stockholder became an Interested Stockholder and (ii) recommended for election by, or was elected to fill a vacancy and received the affirmative vote of, a majority of the Unaffiliated Directors then on the Board. "Underwriters" shall mean Friedman, Billings, Ramsey & Co., Inc. and EVEREN Securities, Inc. and each of the underwriters for whom Friedman, Billings, Ramsey & Co., Inc. and EVEREN Securities, Inc. are acting as representatives. "Underwriting Agreement" shall mean the agreement pursuant to which the Underwriters will underwrite the Common Stock. "Units" shall mean units of limited partnership interest in the Operating Partnership. 89 APPENDIX A DESCRIPTION OF INITIAL INVESTMENTS This Appendix contains summary descriptions of the terms of the MLMC Series 1993-M1 and the DLJ, Series 1993-MF17 securities, taken from the prospectus and prospectus supplement for each such transaction (the "Underlying Prospectuses"), the servicing reports provided to the Company by the trustees of such series (the "Reports"), and other information peculiarly within the control of the trustee, servicers and issuers of such securities. None of the Company, Ocwen Financial, the Underwriters nor any of their affiliates prepared or verified the accuracy of the Underlying Prospectuses or the Reports, and none of the Company, Ocwen Financial, the Underwriters nor any of their affiliates has made or will make any representation or warranty as to the accuracy or completeness of the information contained therein. MLMC, SERIES 1993-M1 CLASSES B AND C
PRINCIPAL BALANCE INITIAL AS OF PASS-THROUGH PRINCIPAL MARCH 1, DESIGNATION RATE BALANCE 1997 - ------------------------------------------------------ --------------- ----------- ----------- Class A(1) (2) $230,300,000 $95,571,534 MLMC SUBORDINATED INTERESTS: Class B (2) 23,288,000 23,288,000 Class C (2) 5,176,596 5,176,596 Class R(1) (3) (3) (3)
- ------------------------ (1) The Class A and Class R Securities are not being sold to the Company. (2) The Class A, Class B and Class C Securities accrue interest at a per annum rate equal to the weighted average of the Net Mortgage Rates on the related mortgage loans (the ("MLMC Mortgage Loans"). With respect to each MLMC Mortgage Loan, the "Net Mortgage Rate" is the interest rate on such MLMC Mortgage Loan minus 0.192% per annum, which is used to pay servicing and trustee fees. As of February 1, 1997, the weighted average of the Net Mortgage Rate on the MLMC Mortgage Loans was equal to 8.3764%. (3) The Class R Securities have no principal balance and bear no interest. STRUCTURE AND SUBORDINATION. Each of the MLMC Subordinated Interests is subordinated in right of payments of principal and interest and protects the Class A Securities from losses on the MLMC Mortgage Loans. In general, on any distribution date, all principal will be distributed to the Class A Securities, and not to the MLMC Subordinated Interests, as long as the Class A Securities represent at least 67% of the scheduled principal balance of the MLMC Mortgage Loans, and at any time thereafter when the principal balance of the Class A Securities rises above 70%, until it is reduced again to 67%. On distribution dates other than those described in the previous sentence, the Class A Securities generally will receive only a percentage of available principal. The percentage generally equals a fraction, the numerator of which is the principal balance of the Class A Securities, and the denominator of which is the scheduled principal balance of the MLMC Mortgage Loans. The MLMC Subordinated Interests receive principal only to the extent it is not required to be distributed to the Class A Securities. To date, no principal has been distributed to the MLMC Subordinated Interests. Moreover, on any distribution date, no interest is distributed to the MLMC Subordinated Interests until principal and interest allocable to Class A for that distribution date has been distributed. Thus, if there are any losses on the MLMC Mortgage Loans, interest otherwise distributable on the MLMC Subordinated Interests will be reduced by the amount of such losses, and that cash will be used to make principal and interest payments to Class A. In addition, as losses are incurred on the MLMC Mortgage Loans, the principal balance of Class C, and then Class B, will be reduced, until the outstanding principal balance of each such class has been reduced to zero. A-1 As of February 1, 1997, there have been no reported realized losses on the MLMC Mortgage Loans. However, the servicer has reported that two MLMC Mortgage Loans, representing approximately 3.73% by principal balance of the MLMC Mortgage Loans, currently are in foreclosure. Any losses that result from these foreclosures (or any others) will be allocated to the MLMC Subordinated Interests in reduction of their aggregate principal balance, and thus will adversely affect the yield on the MLMC Subordinated Interests. MLMC MORTGAGE LOANS. The MLMC Mortgage Loans had an aggregate principal balance as of September 1, 1993 of $258,764,596 and an aggregate principal balance as of February 1, 1997 of $124,036,129. At origination, most of the MLMC Mortgage Loans had ten year terms and bore interest at a fixed interest rate that was subject to a one-time adjustment at year five. As of February 1, 1997, the interest rates on most of these loans have been adjusted, so that such loans currently bear interest at a rate that is fixed until maturity. However, one MLMC Mortgage Loan is still subject to a one-time adjustment, and three MLMC Mortgage Loans are adjustable rate loans subject to periodic interest rate adjustments. Forty-three of the MLMC Mortgage Loans, representing 98.07% by principal balance, are balloon loans, which provide for little or no amortization prior to stated maturity. Only nine MLMC Mortgage Loans fully amortize over their respective terms. The following table sets forth the range of interest rates on the MLMC Loans (the "Mortgage Rates") as of February 1, 1997. MORTGAGE RATES AS OF FEBRUARY 1, 1997
AGGREGATE FEBRUARY 1, PERCENT OF RANGE OF NUMBER OF 1997 CURRENT MORTGAGE RATES (%) MORTGAGE LOANS BALANCE POOL BALANCE - ----------------------------------------------------------------- ------------------- --------------- ------------- 7.00 ..................................................... 1 6,052,382 4.88% 7.01 to 8.00................................................... 9 27,295,803 22.01% 8.01 to 9.00................................................... 25 48,458,340 39.07% 9.01 to 10.00................................................... 12 38,551,661 31.08% 10.01 to 11.00................................................... 5 3,677,942 2.97% -- --------------- ------ Total...................................................... 52 124,036,129 100.0% -- -- --------------- ------ --------------- ------
Weighted Average Mortgage Rate: 8.5684% The following table sets forth the range of years in which the MLMC Mortgage Loans are scheduled to mature: YEARS OF SCHEDULED MATURITY
AGGREGATE FEBRUARY 1, PERCENT OF NUMBER OF 1997 CURRENT RANGE OF YEARS MORTGAGE LOANS BALANCE POOL BALANCE - ----------------------------------------------------------------- ------------------- --------------- ------------- 1996*............................................................ 2 7,673,851 6.19% 1997............................................................. 19 46,406,639 37.41% 1998............................................................. 17 55,646,466 44.86% 1999............................................................. 7 9,545,239 7.70% 2000 to 2004..................................................... 3 2,647,963 2.13% 2005 to 2009..................................................... 2 448,238 0.36% 2018............................................................. 1 690,696 0.56% 2020............................................................. 1 977,039 0.79% -- --------------- ------ Total...................................................... 52 124,036,129 100.00% -- -- --------------- ------ --------------- ------
- ------------------------ * With respect to two MLMC Mortgage Loans, with an aggregate principal balance as of February 1, 1997 of $7,673,851, representing approximately 6.19% by principal balance of the MLMC Mortgage Loans, the scheduled maturity date (on which date a balloon payment was due) has passed without payments in full. The borrowers have continued to make monthly payments as though the servicer has extended the maturity date, although no formal extension agreement has been executed. Weighted Average months to scheduled maturity: 18 months. A-2 The MLMC Mortgage Loans are secured by first liens on multifamily residential properties (the "MLMC Mortgaged Properties"). When the MLMC Subordinated Interests were originally issued, they were secured by 103 MLMC Mortgage Loans. However, one MLMC Mortgage Loan was repurchased and 50 MLMC Mortgage Loans have prepaid in full, leaving only 52 MLMC Mortgage Loans in the pool. Forty-four of these remaining MLMC Mortgage Loans, representing 75.26% by principal balance, are secured by Mortgaged Properties located in New York State. Two Mortgage Loans, representing 13.05% by principal balance, are located in California, and the remaining Mortgaged Properties are located in Florida, Georgia, Kansas, Missouri and New Jersey. Twenty-one of the MLMC Mortgage Properties, representing security for 32.2% of the MLMC Mortgaged Loans by principal balance, are cooperatively owned. The following table sets forth certain information, obtained from the servicer of the MLMC Mortgage Loans, about the MLMC Properties, as of February 1, 1997, except as otherwise indicated.
MORTGAGE LOAN LOAN COOPERATIVELY PRINCIPAL 1995 1995 NUMBER OWNED LOCATION BALANCE NOI(3) DSCR(4) -------- ----------------- ----------------- ----------- --------- ------------- 7773.......................................... No Queens, NY 469,516 94,992(5) 1.95(5) 7906.......................................... No Queens, NY 448,527 N/A N/A 18663......................................... Yes Brooklyn, NY 407,269 N/A N/A 22624......................................... Yes Manhattan, NY 2,042,366 N/A N/A 23010......................................... Yes Manhattan, NY 1,386,357 146,346 1.01 24505......................................... No Manhattan, NY 25,505 268,288 4.88 24539......................................... No Manhattan, NY 4,516,920 932,642 2.03 25486......................................... No Queens, NY 14,437 N/A N/A 418988........................................ No Manhattan, NY 18,423 N/A N/A 469734........................................ No Miami Beach, FL 144,347 196,607 2.03 478073........................................ No Manhattan, NY 963,133 N/A N/A 479535........................................ Yes Queens, NY 915,717 130,830 1.45 482018........................................ No Brooklyn, NY 1,016,351 N/A N/A 482893........................................ No Manhattan, NY 551,799 65,541 1.00 485243........................................ No Brooklyn, NY 213,068 N/A N/A 487538........................................ Yes Manhattan, NY 2,745,005 N/A N/A 489815........................................ No Salina, KS 977,039 148,640 1.68 493239........................................ No Manhattan, NY 744,567 146,151 2.30 494971........................................ Yes Weehawken, NJ 1,621,469 178,424 0.96 495986........................................ No Ferguson, MO 6,052,382 884,298 1.77 496364........................................ No Bronx, NY 902,895 144,453 1.49 497156........................................ No Miami, FL 3,085,956 N/A N/A 497750(1)..................................... Yes Brooklyn, NY 2,721,260 N/A N/A 497875........................................ No Manorville, NY 11,312,597 1,550,751 1.24 498238........................................ No Wateryliet, NY 6,736,857 1,180,278 1.49 499327........................................ Yes Yonkers, NY 1,623,270 N/A N/A 499426........................................ No Brighton, NY 4,094,764 724,625 1.68 499822........................................ Yes Queens, NY 1,319,424 N/A N/A Port Jefferson, 501577........................................ No NY 2,915,943 291,697 0.92 502732........................................ Yes Queens, NY 2,422,152 N/A N/A 505990........................................ No Manorville, NY 10,024,177 1,550,751 1.44 506006........................................ Yes Bronx, NY 1,098,382 N/A N/A 508879........................................ No Manhattan, NY 690,696 N/A N/A 508960........................................ Yes Queens, NY 1,216,738 N/A N/A 510180........................................ Yes Queens, NY 945,111 N/A N/A 510602........................................ No Queens, NY 4,155,877 N/A N/A 510636........................................ Yes Manhattan, NY 1,232,190 N/A N/A 511782........................................ No San Diego, CA 16,105,506 2,699,389(6) 1.75(6) 512061........................................ Yes Queens, NY 668,040 89,426 1.40 512681........................................ No Manhattan, NY 1,382,912 250,548(5) 1.92(5) 513937........................................ Yes Bronx, NY 10,510,726 1,586,380 1.54 514265........................................ Yes Brooklyn, NY 3,487,650 444,840(5) 1.30(5) 516161........................................ No Monroe, NY 782,840 N/A N/A 524397........................................ No Bronx, NY 875,783 140,495 1.37 524447(2)..................................... Yes Brooklyn, NY 1,802,122 N/A N/A 531608........................................ No Norcross, GA 2,615,102 639,465 1.69 12767109...................................... No Manhattan, NY 1,284,347 N/A N/A Port Jefferson, 30000343...................................... No NY 235,170 41,542 1.49 5030024177.................................... No Hempstead, NY 745,325 N/A N/A 5030082571.................................... Yes Yonkers, NY 679,733 60,881(5) 0.86(5) 5030082969.................................... Yes Bronx, NY 1,007,634 126,365 1.27 5430081041.................................... Yes Castro Valley, CA 80,754 303,745 1.75
A-3 - ------------------------ * N/A means not available. (1) Foreclosure proceedings were instituted on February 11, 1995. Principal balance shown reflects a reduction of approximately $92,559 in principal advanced by the servicer. Total advances made by the servicer on this Mortgage Loan equal approximately $904,863. (2) Foreclosure proceedings were instituted on December 12, 1996. Principal balance shown reflects a reduction of approximately $6,184 in principal advanced by the servicer. Total advances made by the servicer on this Mortgage Loan equal approximately $75,157. (3) "Net Operating Income" or "NOI" is the revenue derived from the use and operation of a Mortgaged Property (consisting primarily of, in the case of a Mortgaged Property that is a multifamily rental property, rental income, deposit forfeitures and fees derived from the use of parking areas and laundry facilities, if any) less operating expenses (such as utilities, general administrative expenses, management fees, advertising, repairs and maintenance) and less fixed expenses (such as insurance and real estate taxes). Net Operating Income does not include interest expense, depreciation, amortization, partnership fees and other non-cash items, and generally does not reflect capital expenditures. The figures shown are those provided by the borrower to the servicer. (4) "Debt Service Coverage Ratio (DSCR)" shall mean the NOI for the related Mortgaged Property divided by the Annual Debt Service. "Annual Debt Service" shall mean the annualized principal and interest payable with respect to such Mortgage Loan as of December 31, 1995. (5) Annual figure for year ended December 1994. (6) Annual figure for March 1995 to March 1996. Forty-one of the MLMC Mortgage Loans (representing 93.36% by principal balance) have substantially the same prepayment provisions. Generally, their ten year terms were divided into two five year periods, separated by an interest rate reset date and a prepayment window. Most have passed the reset date and prepayment window and have fewer than five years until stated maturity. During the first three years of this five-year period, the loans cannot be prepaid. In the remaining two years, the loan may be prepaid, subject to a prepayment premium of 4%, which decreases by 1% each six months. Of these forty-one loans, two have scheduled maturity dates that have passed. The borrowers have the right (and indeed, the obligation) to pay these loans in full without paying any prepayment penalty, but to date have not done so. Instead, the borrowers have continued to make regular monthly payments. One additional of the foregoing MLMC Mortgage Loans are currently prepayable without penalty. Eight of the additional MLMC Mortgage Loans, representing 4.44% by principal balance, may be prepaid at any time without payment of any prepayment penalty, and two loans, representing .20% by principal balance, require that prepayment penalties accompany any prepayments. Any prepayment premiums will be distributed as excess interest to the Class A Securities, and not to the MLMC Subordinated Interests. The MLMC Mortgage Loans are being serviced by NationsBanc Mortgage Corp., and the trustee for the series is State Street Bank & Trust Company. RESTRICTIONS ON TRANSFER OF MLMC SUBORDINATED INTERESTS. The MLMC Subordinated Interests have not been registered under the Securities Act or any state securities laws, and, accordingly, transfer of the MLMC Subordinated Interests is restricted. Moreover, the MLMC Subordinated Interests cannot be transferred to a Plan or Plan Investor except in certain limited circumstances. As a result, there is no liquid market for the MLMC Subordinated Interests. NO RATINGS. The MLMC Subordinated Interests are not rated by any rating agency. A-4 DLJMAC, SERIES 1993-MF17 CLASSES B-2, B-3 AND C-1
PRINCIPAL BALANCE INITIAL AS OF PASS-THROUGH PRINCIPAL MARCH 1, DESIGNATION RATE BALANCE 1997 - ------------------------------------------------ --------------- ---------- ------------ Class AF-1 Securities(1).................... (2) $64,476,000 $55,292,545 Class AN-1 Securities(1).................... (3) 29,924,000 25,661,860 Class A-2 Securities(1)..................... 7.35% 19,700,000 19,700,000 Class B-1 Securities(1)..................... 8.0% 5,600,000 5,600,000 DLJ IOS: Class S-1 Securities........................ (4) (4) (4) Class S-2 Securities........................ (5) (5) (5) DLJ SUBORDINATED INTERESTS: Class B-2 Securities........................ 8.0% 13,100,000(6) 13,100,000 (6) Class B-3 Securities........................ 8.0% 4,600,000 4,600,000 Class C-1 Securities........................ 8.0% 1,783,000 1,783,000 Class R Securities(1)....................... 0 0 0 Class R-L Securities(1)..................... 0 0 0
- ------------------------ (1) The Class AF-1, Class AN-1, Class A-2, Class B-1, Class R and Class R-L Securities are not being sold to the Company. (2) The Class AF-1 Securities accrue interest at a floating rate that is based on LIBOR. (3) The Class AN-1 Securities accrue interest at a floating rate that varies inversely with changes in LIBOR. (4) The Class S-1 Securities accrue interest at 0.34% per annum on the notional balance of such class, which is equal to the sum of outstanding the principal balances of the Class A-1 and the Class AN-1 Securities. As of March 1, 1997, the notional balance of the Class S-1 Securities is $80,954,405. (5) The Class S-2 Securities accrue interest at 0.65% per annum on the notional balance of such class, which is equal to the outstanding principal balance of the Class A-2 Securities. As of March 1, 1997, the notional balance of the Class S-2 Securities is $19,700,000. (6) The Company is acquiring a Class B-2 Security with an original principal balance and a principal balance as of March 1, 1997 of $8,500,000, representing approximately 64.9% by principal balance of such class. STRUCTURE AND SUBORDINATION. Each of the DLJ Subordinated Interests is subordinated in right of payments of principal and interest and protects the more senior classes from losses on the related mortgage loans (the "DLJ Mortgage Loans"). Principal distributions on the securities are applied sequentially, with no principal paid to a class until the outstanding principal balance of the more senior classes are reduced to zero. Thus, to date, no principal has been distributed to any of the DLJ Subordinated Interests. Moreover, the DLJ Subordinated Interests provide credit support to the more senior classes. On any distribution date, no interest is distributed to the DLJ Subordinated Interests until principal and interest allocable to Classes A-2 and B-1 and interest allocable to the DLJ IOs and Classes AF-1 and AN-1 for that distribution date has been distributed. Thus, if there are any losses on the DLJ Mortgage Loans, interest otherwise distributable on the DLJ Subordinated Interests will be reduced by the amount of such losses, and that cash will be used to make principal and interest payments to the more senior classes. In addition, as losses are incurred on the DLJ Mortgage Loans, the principal balance of Class C-1, then Class B-3, then A-5 Class B-2 will be reduced, until the outstanding principal balance of each such class has been reduced to zero. As of March 1, 1997, there have been no reported realized losses on the DLJ Mortgage Loans, and no DLJ Mortgage Loans have been reported to Ocwen Financial as being in default. DLJ MORTGAGE LOANS. The Mortgage Loans underlying the DLJ 1993-MF17 Subordinated Interests are monthly-pay, fixed rate, balloon mortgage loans with an initial aggregate principal balance of $139,183,000 and an aggregate principal balance as of February 1, 1997, of $125,737,405. The Mortgage Loans are secured by first liens on 40 multifamily rental properties (the "DLJ Mortgaged Properties"). When the DLJ Investments were originally issued, they were secured by 42 DLJ Mortgage Loans. However, two DLJ Mortgage Loans have prepaid in full, leaving only 40 DLJ Mortgage Loans in the Pool. The following table sets forth certain information, obtained from the servicer of the DLJ Mortgage Loans, about the DLJ Mortgaged Properties, as of February 1, 1997, except as otherwise indicated.
MORTGAGE LOAN PROPERTY PRINCIPAL 1995 1995 NAME LOCATION BALANCE NOI(1)(2) DSCR(1)(3) - ----------------------------------------------------- -------------------- --------- ----------- ----------------- Harbor Ridge......................................... Maineville, OH 2,775,306 26,260 0.39 Oakwood.............................................. Toledo, OH 3,779,729 142,600 1.54 Stoneridge........................................... Dayton, OH 4,063,568 147,110 1.50 University Woods..................................... Fairborn, OH 3,201,541 205,521 0.65 The Glen............................................. Temple, TX 3,249,325 523,208 1.64 Wood River........................................... Corpus Christi, TX 3,488,246 547,401 1.60 Alhambra Village..................................... DePere, WI 1,696,339 97,168 1.17 Hazen Court.......................................... Fon du Lac, WI 2,006,936 156,366 1.59 Virginia Village..................................... Appleton, WI 2,307,976 268,080 1.18 Worthington Meadows.................................. Columbus, OH 12,328,321 589,209 1.95 Alexander............................................ Panama City, FL 634,574 103,030 1.65 Berkshire Manor...................................... Tallahassee, FL 2,774,350 492,243 1.81 Chateau de Ville..................................... Tallahassee, FL 1,815,799 312,576 1.75 Colony Club.......................................... Tallahassee, FL 3,564,701 599,750 1.71 Four Seasons......................................... Tallahassee, FL 984,354 171,539 1.78 Greehouse Patio...................................... Houston, TX 5,304,045 443.756 0.85 Heritage............................................. Panama City, FL 1,438,304 268,275 1.90 High Point........................................... Tallahassee, FL 1,870,273 346,627 1.89 Monticello on Greenbriar............................. Houston, TX 2,373,918 177,515 1.31 Saddlebrook.......................................... San Antonio, TX 4,587,282 742,755 1.65 Southfirst Manor..................................... Champaign, IL 2,245,857 251,555 1.14 Mapleview Seven...................................... Fairborn, OH 2,764,793 382,985 1.41 Brady Station........................................ Odessa, TX 4,032,985 162,152 0.41 College Square One................................... Cedar Falls, IN 1,975,398 234,979 1.21 Indian Trails........................................ Amarillo, TX 1,726,921 277,923 1.64 Pebblebend........................................... Odessa, TX 2,428,393 374,433 1.57 Persimmon............................................ Edmond, OK 1,146,821 121,359 1.08 The Park at Caldera.................................. Midland, TX 2,962,620 N/A N/A River Ranch.......................................... Forth Worth, TX 5,689,185 623,430 1.12 Stonecreek........................................... Tulsa, OK 2,484,778 436,798 1.79 Westland Village..................................... West Burlington, IA 716,763 102,502 1.46 Willow Glen.......................................... Amarillo, TX 6,211,945 996,742 1.63 Brookhollow.......................................... Tulsa, OK 1,314,065 2,003 0.02 Candlewood........................................... Phenix City, AL 2,740,901 294,791 1.10 Country Square....................................... Carrollton, TX 9,539,636 1,355,795 1.45 Lake O' the Woods.................................... Arlington, TX 3,583,814 470,013 1.34 Las Brisas........................................... Abilene, TX 3,105,973 483,560 1.59 Maryland............................................. Harlingen, TX 1,142,998 137,804 1.23 Monterey............................................. Tallahassee, FL 2,620,485 378,036 1.47 Wildwood............................................. Temple, TX 3,058,188 668,649 2.23
A-6 - ------------------------ (1) Numbers shown for 1995 are for the 12 months ended December 31, 1995, except Harbor Ridge, Oakwood, Stoneridge and Worthington Meadows (three months ending March 1996), Alhambra Village and Hazen Court (six months ending June 1996) and Monticello on Greenbriar (seven months ending July 1996). (2) "Net Operating Income" or "NOI" is the revenue derived from the use and operation of a Mortgaged Property (consisting primarily of, in the case of a Mortgaged Property that is a multifamily rental property, rental income, deposit forfeitures and fees derived from the use of parking areas and laundry facilities, if any) less operating expenses (such as utilities, general administrative expenses, management fees, advertising, repairs and maintenance) and less fixed expenses (such as insurance and real estate taxes). Net Operating Income does not include interest expense, depreciation, amortization, partnership fees and other non-cash items, and generally does not reflect capital expenditures. The figures shown are those provided by the borrower to the servicer. (3) "Debt Service Coverage Ratio (DSCR)" shall mean the NOI for the related Mortgaged Property divided by the Annual Debt Service. "Annual Debt Service" shall mean the annualized principal and interest payable with respect to such Mortgage Loan as of December 31, 1995. Each DLJ Mortgage Loan provides for monthly payments of principal and interest based upon a projected amortization schedule of 300 months, beginning in January 1994, with a final balloon payment of remaining principal due in December 2003. The terms of the DLJ Mortgage Loans prohibit voluntary prepayment during the first five years after origination. Thereafter, the DLJ Mortgage Loans can be prepaid in whole or in part, provided that prepayments during the sixth and seventh years must be accompanied by a yield maintenance premium. Yield maintenance premiums are paid as excess interest on the more senior classes of securities (and not to the DLJ Subordinated Interests). After the seventh year following origination, the DLJ Mortgage Loans can be prepaid in whole or in part without any penalty or prepayment premium. The DLJ Mortgage Loans are being serviced by EQ Services, Inc., and the trustee for the series is State Street Bank & Trust Company. RESTRICTIONS ON TRANSFER OF DLJ SUBORDINATED INTERESTS. Although the DLJ IOs have been registered with the Commission, the DLJ Subordinated Interests have not been registered under the Securities Act or any state securities laws, and, accordingly, transfer of the DLJ Subordinated Interests is restricted. Moreover, the DLJ Subordinated Interests cannot be transferred to a Plan or Plan investor except in certain limited circumstances. As a result, there is no liquid market for the DLJ Subordinated Interests. RATINGS. The Class S-1 Securities are rated "Aaa" by Moody's Investors Service, Inc. ("Moody's") and "AAA") by Duff & Phelps Credit Rating Co. ("Duff"). The Class S-2 Securities are rated "A2" by Moody's and "A") by Duff. The Class B-2 Securities are rated "BB" by Duff, and the Class B-3 Securities are rated "B" by Duff. Neither the Class B-2 Securities nor the Class B-3 Securities are rated by Moody's. The Class C-1 Securities are unrated. The ratings of the Rating Agencies on mortgage pass-through certificates address the likelihood of the receipt of all distributions to which such Holders are entitled. The ratings do not represent any assessment of (i) the likelihood or frequency of principal prepayments on the Mortgage Loans, (ii) the degree to which such prepayments might differ from those originally anticipated or (iii) whether and to what extent yield maintenance premiums will be received. Also, a security rating does not represent any assessment of the yield to maturity that investors may experience on any Class of DLJ Investments nor does it assess any possibility that the holders of the DLJ IOs might not fully recover their investment in the event of rapid prepayments of the Mortgage Loans (including both voluntary and involuntary prepayments). A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by assigning the rating agency. The ratings assigned to the DLJ IOs should be evaluated independently of similar ratings assigned to securities that have a principal balance. A-7 APPENDIX B YIELD CONSIDERATIONS RELATED TO THE INITIAL INVESTMENTS GENERAL The actual yield to maturity on the Initial Investments will depend upon, among other things, the interest rate for each class of Initial Investments and the timing and aggregate amount of distributions on the securities of such class, which in turn will depend primarily on losses and prepayments on the related mortgage loans. See "Yield Considerations Related to the Company's Investments." INITIAL SUBORDINATED INTERESTS The yield to maturity on the MLMC Subordinated Interests and the DLJ Subordinated Interests (collectively, the "Initial Subordinated Interests") will be extremely sensitive to the default and loss experience of the underlying mortgage loans and the timing of any such defaults or losses. See "Risk Factors--Investment Activity Risks" and "Yield Considerations Related to the Company's Investments." The significance of the effect of potential Realized Losses on the Mortgage Loans is illustrated in the following tables. This information is presented for analytical purposes only, and is not intended as an accurate indicator or prediction of the actual defaults and losses that may occur in the future with respect to the Mortgage Loans. Actual defaults, liquidations and losses are likely to differ in timing and amount from those assumed (and may differ significantly). Investors in the Company are urged to consider their own estimates as to possible levels and timing of defaults and losses. The Company will purchase each class of Initial Subordinated Interests at a discount from its principal amount. Accordingly, if the Company calculates the anticipated yield to maturity of any such class based on an assumed rate of payment that is faster than that actually experienced on the Mortgage Loans, the actual yield may be lower than that so calculated. The tables on the following pages that show yields for the Initial Subordinated Interests assume that no prepayments are made on the underlying Mortgage Loans. MODELING ASSUMPTIONS YIELD TABLE FOR THE MLMC SUBORDINATED INTERESTS The following table, regarding the MLMC Subordinated Interests, indicates the pre-tax yield to maturity and the weighted average lives that would be produced by the various assumed annual default rates, assuming the indicated purchase price and the following additional assumptions. There can be no assurance that these assumptions are reasonable or that additional or different assumptions should not be made to determine potential yields on these investments. (i) No prepayments of principal are assumed to occur; (ii) For loans that are to be liquidated, no other payment is received prior to liquidation; (iii) Upon liquidation, 50% of the scheduled principal balance of the liquidated loan as of February 1, 1997 is recovered. Such liquidations are assumed to occur concurrently with defaults on the Mortgage Loans; (iv) at such time that the principal balance of a class is reduced to zero, such class shall no longer be entitled to any future distributions of principal and interest; (v) the aggregate principal amount of each class is as indicated in Appendix A; (vi) the aggregate principal amount of the MLMC Mortgage Loans as of February 1, 1997 is $124,036,129, and the weighted average interest rate is 8.5684%; B-1 (vii) the weighted average number of months to scheduled maturity is 18 months, and with respect to each balloon loan, the scheduled maturity date is not extended; provided that with respect to loan numbers 494971 and 49586, the scheduled maturity date has been extended for 12 months; (viii) for each MLMC Mortgage Loan not in default, scheduled monthly payments (including balloons) are timely received on the first day of each month, and no borrower is the subject of bankruptcy proceedings; (ix) all servicing fees and other administration fees are deducted from the interest received on the Mortgage Loans; (x) beginning in 1997, the Company receives cash distributions on the MLMC Subordinated Interests by the Company on the 25th day of each month; (xi) there will be no optional termination of the trust related to the MLMC Subordinated Interests, and no Mortgage Loan is purchased pursuant to any obligation under the related trust agreement; (xii) prepayment premiums are assumed not to be distributed to the Company as holder of the MLMC Subordinated Interests; (xiii) none of the MLMC Mortgage Loans are simple interest loans; and (xiv) all of the MLMC Mortgage Loans require monthly payments, accrual of interest on a 360-day year consisting of twelve 30-day months and payment of interest in arrears. MLMC 1993-M1 SUBORDINATED INTERESTS PURCHASE PRICE OF 83.0191% OF PRINCIPAL AMOUNT)
ANNUAL DEFAULT RATE --------------------------------------------------------------------------- 0% 2% 4% 8% 10% 12% 16% --------- --------- --------- --------- --------- --------- --------- TOTAL ASSUMED DEFAULTS............... 0.0% 2.7% 5.2% 10.1% 12.4% 14.6% 19.0% PRE-TAX YIELD TO MATURITY............ 21.55% 17.74% 13.34% 5.32% 1.61% -2.59% -10.27% WEIGHTED AVERAGE LIFE WITHOUT TERMINATION (YEARS)................. 1.79 1.67 1.79 1.54 1.68 1.62 1.68
YIELD TABLE FOR THE DLJ SUBORDINATED INTERESTS The Pre-Tax Yields and Total Cash Flows for the DLJ Subordinated Interests, set forth in the following table were calculated assuming the indicated purchase price and the following additional assumptions. There can be no assurance that these assumptions are reasonable or that additional or different assumptions should not be made to determine potential yields on these investments. (i) No prepayments of principal are assumed to occur; (ii) Liquidations occur on the indicated payment date for the Mortgage Loans in an amount equal to the indicated Liquidation Percentage multiplied by the aggregate Scheduled Principal Balance of the Mortgage Loans as of February 1, 1997. Such liquidations are assumed to occur concurrently with defaults on the Mortgage Loans for loans that are to be liquidated, no other payment is received prior to liquidation; (iii) Realized Losses on liquidations of defaulted Mortgage Loans reflect net recoveries in amounts equal to (a) 1 minus the indicated Loss Severity indicated in the table, multiplied by (b) the amount of liquidated Mortgage Loans as calculated in (ii) above; (iv) at such time that the principal balance of a class is reduced to zero, such class shall no longer be entitled to any future distributions of principal and interest; B-2 (v) the aggregate principal amount of each class is as indicated in Appendix A; (vi) the aggregate principal amount of the DLJ Mortgage Loans as of February 1, 1997 is $125,737,405, the principal is being amortized over a term of 262 months, and the interest rate is 8.15%; (vii) for each DLJ Mortgage Loan not in default, scheduled monthly payments are timely received on the first day of each month, including balloon amounts at stated maturity, and no borrower is the subject of bankruptcy proceedings; (viii) all servicing fees and other administration fees are deducted from the interest received on the Mortgage Loans; (ix) beginning in 1997, the Company receives cash distributions on the DLJ Initial Investments on the 18th day of each month; (x) there will be no optional termination of the trust related to either series of Initial Investments, and no Mortgage Loan is repurchased pursuant to any obligation under the related trust agreement; and (xi) prepayment premiums and yield maintenance premiums are assumed not to be distributed to the Company as holder of the Initial Investments. DLJ 1993-MF17 DLJ SUBORDINATED INTERESTS* (PURCHASE PRICE OF 72.455% OF PRINCIPAL AMOUNT)
DATE OF ASSUMED LIQUIDATION/REALIZED LOSS OCCURS ----------------------------------------------------------------------- PRINCIPAL BALANCE OF DECEMBER MORTGAGE LOANS LIQUIDATED DECEMBER 1999 DECEMBER 2001 2003 AS A PERCENTAGE OF THE LOSS ---------------------------- ---------------------------- ----------- SCHEDULED PRINCIPAL BALANCE SEVERITY PRE-TAX TOTAL PRE-TAX TOTAL PRE-TAX AS OF FEBRUARY 1, 1997 PERCENTAGE YIELD CASH FLOW** YIELD CASH FLOW** YIELD - --------------------------------- --------------- ----------- --------------- ----------- --------------- ----------- No Liquidations.................. 0% 14.7% 155% 14.7% 155% 14.7% 5.0%........................... 20% 13.6% 146% 13.8% 147% 13.9% 50% 11.9% 133% 12.4% 136% 12.7% 10.0%.......................... 20% 12.5% 138% 12.9% 140% 13.1% 50% 8.5% 112% 9.6% 117% 10.5% 20.0%.......................... 20% 9.9% 121% 10.8% 125% 11.4% 50% -1.1% 69% 1.9% 80% 4.6% PRINCIPAL BALANCE OF MORTGAGE LOANS LIQUIDATED AS A PERCENTAGE OF THE SCHEDULED PRINCIPAL BALANCE TOTAL AS OF FEBRUARY 1, 1997 CASH FLOW** - --------------------------------- --------------- No Liquidations.................. 155% 5.0%........................... 148% 139% 10.0%.......................... 142% 122% 20.0%.......................... 129% 90%
- ------------------------ * Note: This table relates to the DLJ Subordinated Interests only, and not the DLJ IOs. ** Total Cash Flow as a Percentage of Principal Amount. The pre-tax yields set forth in the preceding tables were calculated by determining the monthly discount rates that, when applied to the assumed stream of cash flows to be paid on the DLJ Subordinated Interests, would cause the present value of such assumed stream of cash flows to equal the assumed aggregate purchase prices of such securities and converting such monthly rates to semi-annual corporate bond equivalent rates. Such calculations do not take into account variations that may occur in the interest rates at which investors may be able to reinvest funds received by them as distributions on such classes and consequently do not purport to reflect the return on any investment in such classes when such reinvestment rates are considered. B-3 There can be no assurance that the assumptions used in preparing these tables are accurate or that defaults and losses on the Mortgage Loans will not exceed those shown herein. Moreover, other Subordinated Interests purchased by the Company in the future are likely to have different characteristics. YIELD ON THE DLJ IOS The yield to investors on the DLJ IOs will be highly sensitive to the rate and timing of principal payments (including prepayments and liquidations) on the Mortgage loans. Investors should fully consider the associated risks to the Company, including the risk that a rapid rate of principal prepayments of the Mortgage Loans could result in the failure of the Company to recoup fully its investment in the DLJ IOs. The following tables reflect the pre-tax yield to maturity of each of the IOs at the purchase price indicated and the assumptions listed in clauses (iv), (viii), (ix), (x) and (xi) on pages B-2 and B-3 above. There can be no assurance that the assumptions are reasonable or that additional or different assumptions should not be made to determine potential yields on these investments. (i) scheduled monthly payments on the Mortgage Loans are timely received on the first day of each month; (ii) there are no defaults on the Mortgage Loans; (iii) the Mortgage Loans do not prepay during the lock-out period and thereafter prepay in full on the 1st day of the month and year indicated; (iv) the DLJ IOs have initial notional amounts as set forth in Appendix A: (xi) the DLJ IOs are paid in full on the distribution dates indicated. DLJ 1993-MF17 SENSITIVITY OF DLJ IOS TO PRINCIPAL PREPAYMENTS PRE-TAX YIELDS TO ASSUMED MATURITY
ASSUMED PAYMENT IN FULL DATE PURCHASE PRICE ---------------------------------------------------------------------------- (% OF NOTIONAL BALANCE) DECEMBER 2000 DECEMBER 2001 DECEMBER 2002 DECEMBER 2003 - ----------------------------- ----------------- ------------------- ----------------- ----------------- 1.5497....................... -3.4% 6.8% 12.7% 16.3%
The pre-tax yields set forth in the preceding tables were calculated by determining the monthly discount rates that, when applied to the assumed stream of cash flows to be paid on the DLJ IOs, would cause the discounted present value of such assumed stream of cash flows to equal the aggregate purchase prices of such securities and converting such monthly rates to semi-annual corporate bond equivalent rates. Such calculations do not take into account variations that may occur in the interest rates at which investors may be able to reinvest funds received by them as distributions on such classes and consequently do not purport to reflect the return on any investment in such classes when such reinvestment rates are considered. It is not likely that the Mortgage Loans will prepay in accordance with the assumptions. In addition, there can be no assurance that the Mortgage Loans will not prepay (including in connection with a casualty or condemnation or by reason of default and consequent liquidation) prior to the end of the lock-out period or that the pre-tax yields on the DLJ IOs will correspond to any of the pre-tax yields shown herein. Investors must make their own decisions as to the appropriate prepayment assumptions and model to be used in evaluating the Company's investment in the DLJ IOs. Moreover, other IOs purchased by the Company in the future may have substantially different characteristics and yields to maturity than the DLJ IOs. B-4 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors of Ocwen Asset Investment Corp. In our opinion, the accompanying balance sheet presents fairly, in all material respects, the financial position of Ocwen Asset Investment Corp. (the "Company") at February 12, 1997, in conformity with generally accepted accounting principles. This financial statement is the responsibility of the Company's management; our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Fort Lauderdale, Florida February 12, 1997 F-1 OCWEN ASSET INVESTMENT CORP. BALANCE SHEET FEBRUARY 12, 1997 ASSETS Cash................................................................................ $ 1,600 --------- --------- LIABILITIES AND STOCKHOLDER'S EQUITY Stockholder's Equity Preferred Stock, par value $0.01 per share; 25,000,000 shares authorized Common Stock, par value $0.01 per share; 200,000,000 shares authorized; 100 shares issued and outstanding.......................................................... $ 1 Additional paid-in-capital........................................................ 1,599 --------- Total Stockholder's Equity...................................................... $ 1,600 --------- ---------
See accompanying notes to balance sheet. F-2 OCWEN ASSET INVESTMENT CORP. NOTES TO BALANCE SHEET FEBRUARY 12, 1997 NOTE 1--THE COMPANY Ocwen Asset Investment Corp. (the "Company") was incorporated in Virginia on January 22, 1997 and was initially capitalized on February 12, 1997 through the sale of 100 shares of Common Stock for $1,600. The Company seeks to generate income primarily through the acquisition of mortgage loans and mortgage certificates and the acquisition of interests in or from entities which own and finance mortgage loans and mortgage certificates. The Company's sole activity through February 12, 1997, consisted of the organization and start-up of the Company. Accordingly, no statement of operations is presented. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FEDERAL INCOME TAXES The Company will elect to be taxed as a real estate investment trust under the Internal Revenue Code. As a result, for such taxable years the Company will not be subject to federal income taxation at the corporate level to the extent it distributes annually its predistribution taxable income of at least 95% of its real estate investment trust taxable income is so distributable. INCOME RECOGNITION Income and expenses are to be recorded on the accrual basis of accounting. NOTE 3--TRANSACTIONS WITH AFFILIATES The Company intends to enter into a Management Agreement (the "Management Agreement") with Ocwen Capital Corporation (the "Manager"), a wholly-owned subsidiary of Ocwen Financial Corporation, under which the Manager will advise the Company on various facets of its business and manage its day-to-day operations, subject to the supervision of the Company's Board of Directors. The Manager will receive an annual base management fee of 1% of Average Invested Assets, plus incentive compensation in an amount equal to the product of (A) 25% of the dollar amount by which (1)(a) Funds from Operations (before the incentive fee) of the Company per share of Common Stock (based on the weighted average number of shares outstanding) plus (b) gains (or minus losses) from debt restructuring and sales of property per share of Common Stock (based on the weighted average number of shares outstanding), exceed (2) an amount equal to (a) the weighted average of the price per share at the initial offering and the prices per share at any secondary offerings multiplied by (b) the Ten-Year U.S. Treasury Rate plus five percent multiplied by (B) the weighted average number of shares of Common Stock outstanding during such period. The Company intends to adopt a non-qualified stock option plan to provide a means of incentive compensation for the Manager, whereby the Manager will be granted an option to purchase shares of Common Stock in the Company (or, at the Company's election, Units in Ocwen Partnership, L.P.), in an amount equal to 10% of the shares outstanding following the Company's initial public offering, exercisable at the initial public offering price. One quarter of the Manager's options will be exercisable on each of the first four anniversaries of the Closing Date of the initial public offering. The Company further intends to issue Common Stock to Ocwen Financial Corporation, concurrent with the closing of the initial public offering, at the initial public offering price net of any underwriting F-3 OCWEN ASSET INVESTMENT CORP. NOTES TO BALANCE SHEET FEBRUARY 12, 1997 NOTE 3--TRANSACTIONS WITH AFFILIATES (CONTINUED) discounts and commissions. Moreover, with a portion of the net proceeds of the initial public offering, the Company intends to purchase certain securities with an approximate market value of $36.3 million from Ocwen Federal Bank FSB, a wholly-owned subsidiary of Ocwen Financial Corporation. NOTE 4--PUBLIC OFFERING OF COMMON STOCK The Company is in the process of filing a Registration Statement for sale of its common stock. Contingent upon the consummation of the public offering, the Company will be liable for organization and offering expenses in connection with the sale of the shares offered. F-4 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------------ SUMMARY TABLE OF CONTENTS Prospectus Summary........................................................ 1 Organization and Relationships............................................ 9 Risk Factors.............................................................. 10 Operating Policies and Objectives......................................... 21 Yield Considerations Related to the Company's Investments................. 32 Initial Investments....................................................... 35 Management of Operations.................................................. 38 The Company............................................................... 45 Distribution Policy....................................................... 47 Capitalization............................................................ 48 Management's Discussion and Analysis of Liquidity and Capital Resources... 48 Description of Capital Stock.............................................. 48 Certain Provisions of Virginia Law and of OAIC's Articles of Incorporation and Bylaws.............................................................. 51 Common Stock Available for Future Sale.................................... 53 Operating Partnership Agreement........................................... 54 Federal Income Tax Considerations......................................... 57 ERISA Considerations...................................................... 71 Certain Legal Aspects of Mortgage Loans and Real Property Investments..... 73 Use of Proceeds........................................................... 81 Underwriting.............................................................. 81 Legal Matters............................................................. 82 Experts................................................................... 83 Additional Information.................................................... 83 Description of Initial Investments........................................ A-1 Yield Considerations Related to the Initial Investments................... B-1 Financial Statements and Exhibits......................................... F-1
------------------------ UNTIL , 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 12,500,000 SHARES OCWEN ASSET INVESTMENT CORP. COMMON STOCK --------------------- PROSPECTUS --------------------- FRIEDMAN, BILLINGS, RAMSEY & CO., INC. EVEREN SECURITIES, INC. , 1997 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Set forth below is an estimate of the approximate amount of the fees and expenses (other than sales commissions) payable by the Registrant in connection with the issuance and distribution of the Common Shares. SEC Registration Fee............................................... $ 69,697 Blue Sky Fees and Expenses......................................... * NASD Filing Fee.................................................... * Printing and Mailing Fees.......................................... * Counsel Fees and Expenses.......................................... * Accountant's Fees and Expenses..................................... * Miscellaneous...................................................... * --------- Total.......................................................... $ * --------- ---------
ITEM 31. SALES TO SPECIAL PARTIES Not Applicable. ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES Not Applicable. ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS Not Applicable. ITEM 34. TREATMENT OF PROCEEDS FROM SHARES BEING REGISTERED Not Applicable. ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS (a) Index to Financial Statements. Report of Independent Certified Public Accountants............................. F-1 Balance Sheet as of February 12, 1997.......................................... F-2 Notes to Balance Sheet......................................................... F-3
(b) Exhibits. 1.1* Form of Underwriting Agreement. 3.1 Amended and Restated Articles of Incorporation of the Registrant. 3.2** Bylaws of the Registrant. 4.1* Form of Common Stock Certificate. 5.1 Form of Opinion of Hunton & Williams 8.1 Form of Opinion of Hunton & Williams as to Tax Matters. 10.1 Form of Management Agreement. 10.2 Form of Registration Rights Agreement between the Company and the persons named therein. 10.3 Partnership Agreement of Ocwen Partnership, L.P. 10.4* Form of Stock Option Plan
II-1 21* List of Subsidiaries of Registrant 23.1 Consent of Hunton & Williams (included in Exhibits 5.1 and 8.1). 23.2 Consent of Price Waterhouse L.L.P. 24.1 Powers of Attorney (included on Signature Page)
- ------------------------ * To be filed by Amendment. ** Previously Filed. ITEM 36. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Act") may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in th successful defense of any action, suit or proceeding) is asserted against the Registrant by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issues. The undersigned Registrant hereby undertakes to provide to the Underwriters as the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purposes of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-2 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-11 and has duly caused this Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of West Palm Beach, State of Florida, on the day of , 1997. OCWEN ASSET INVESTMENT CORP., a Virginia corporation (Registrant) By /s/ CHRISTINE A. REICH ----------------------------------------- Christine A. Reich PRESIDENT POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints Christine A. Reich his true and lawful attorney-in-fact and agent, with full powers of substitution, for him and in his name, place and stead, in any and all capacities, to sign and to file any and all amendments, including post-effective amendments and any registration statements filed pursuant to Rule 462(b), to this Amendment No. 1 to the Registration Statement with the Securities and Exchange Commission, granting to said attorney-in-fact power and authority to perform any other act on behalf of the undersigned required to be done in connection therewith. Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to the Registration Statement has been signed by the following persons on the 28th day of March, 1997, in the capacities indicated. SIGNATURE TITLE - ------------------------------ -------------------------- /s/ WILLIAM C. ERBEY* Chairman of the Board of - ------------------------------ Directors and Chief William C. Erbey Executive Officer /s/ CHRISTINE A. REICH - ------------------------------ Director, President and Christine A. Reich Chief Financial Officer /s/ TIMOTHY J. RIDDIOUGH - ------------------------------ Director Timothy J. Riddiough /s/ ROBERT F. PUGLIESE - ------------------------------ Director Robert F. Pugliese *By /s/ CHRISTINE A. REICH -------------------------------------- Christine A. Reich AS ATTORNEY IN FACT
II-3 EX-3.1 2 EX-3.1 EXHIBIT 3.1 RESTATED AND AMENDED ARTICLES OF INCORPORATION OF OCWEN ASSET INVESTMENT CORP. (A Stock Corporation) I. The name of the corporation (which is hereinafter called the "Corporation") is Ocwen Asset Investment Corp. II. The purpose for which this Corporation is formed is to transact any and all lawful business, not required to be specifically stated in these Articles, for which corporations may be incorporated under the Virginia Stock Corporation Act, as amended from time to time. III. The total number of shares of stock that the Corporation has authority to issue is two hundred million (200,000,000) shares of Common Stock, $.01 par value per share, and twenty-five million (25,000,000) shares of Preferred Stock, $.01 par value per share. No holder of shares of capital stock of the Corporation shall have any preemptive or preferential right to subscribe to or purchase (i) any shares of any class of the Corporation, whether now or hereafter authorized; (ii) any warrants, rights, or options to purchase any such shares; or (iii) any securities or obligations convertible into any such shares or into warrants, rights, or options to purchase any such shares. The Preferred Stock may be issued from time to time by the Board of Directors of the Corporation, in such series and with such preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications or other provisions as may be fixed by the Board of Directors. IV. The address of the Corporation's initial registered office is Riverfront Plaza, East Tower, 951 E. Byrd Street, which is in the City of Richmond. The name and address of the initial Registered Agent is Jack A. Molenkamp, who is a resident of Virginia and a member of the Virginia State Bar, and whose business address is Riverfront Plaza, East Tower, 951 East Byrd Street, Richmond, Virginia 23219-4074, which is in the City of Richmond. V. A. The Corporation shall have a Board of Directors consisting of not less than three (3) nor more than nine (9) members unless otherwise determined from time to time by resolution adopted by the affirmative vote of at least 80% of the members of the Board of Directors. A director need not be a shareholder. At each annual meeting of the shareholders, the shareholders shall elect directors to serve a one-year term and until their successors are elected and qualify. B. The following Persons are the initial directors of the Corporation, to serve until their successors are elected at the 1998 annual meeting of the shareholders and qualified: Name Address ---- ------- William C. Erbey The Forum, Suite 1002 1675 Palm Beach Lakes Boulevard West Palm Beach, FL 33401 Christine A. Reich The Forum, Suite 1002 1675 Palm Beach Lakes Boulevard West Palm Beach, FL 33401 Timothy I. Riddiough MIT Center for Real Estate Building W31-310 Cambridge, MASS 02139 Robert F. Pugliese Eckert Seamans Cherin & Mellott 600 Grant Street Pittsburgh, PA 15219 C. 1. Notwithstanding anything herein to the contrary, at all times (except during a period not to exceed sixty (60) days following the death, resignation, incapacity or removal from office of a director prior to expiration of the director's term of office), a majority of the Board of Directors shall be "Independent Directors." "Independent Director" shall mean any director who within the last two years has not directly or indirectly (i) owned an interest in the "Manager" or any of its "Affiliates," (ii) been employed by the "Manager" or any of its "Affiliates," (iii) been an officer or director of the "Manager" or any of its "Affiliates," (iv) performed services for the "Manager" or (v) had any "material business or professional relationship" with the "Manager" or any of its "Affiliates." 2. For the purposes of this Section C, the term "Manager" means the Person responsible for directing day-to-day business affairs of the Company, including any Person to which the "Manager" subcontracts substantially all such functions. 3. For purposes of this Section C, "Affiliate" of a Person shall mean (i) any Person directly or indirectly owning, controlling, or holding, with power to vote ten percent or more of the outstanding voting securities of such other Person, (ii) any Person ten percent or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held, with power to vote, by such other Person, (iii) any Person directly or indirectly controlling, controlled by, or under common control with such other Person, (iv) any executive officer, -2- director, trustee or general partner of such other Person, and (v) any legal entity for which such Person acts as an executive officer, director, trustee or general partner. 4. For the purposes of this Section C, an indirect relationship shall include circumstances in which a director's spouse, children, parents, siblings or mothers-, fathers-, sisters- or brothers-in-law is or has been associated with the "Manager" or any of its "Affiliates." 5. For the purposes of this Section C, a business relationship is material per se if the gross revenue derived by the potential director from the "Manager" and its "Affiliates" exceeds 5% of his or her (i) annual gross revenue from all sources in either of the last two years and (ii) net worth, on a fair market value basis. 6. "Person" means and includes any natural person, corporation, partnership, association, trust, limited liability company or any other legal entity. D. Notwithstanding any other provisions of these Articles of Incorporation or the Bylaws of the Corporation (and notwithstanding that some lesser percentage may be specified by law, these Articles of Incorporation or the Bylaws of the Corporation), the provisions of this Article V shall not be amended, altered, changed or repealed without the affirmative vote of at least 80% of the members of the Board of Directors or the affirmative vote of the holders of not less than two-thirds (2/3) of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting separately as a class. VI. A. In this Article: "Applicant" means the Person seeking indemnification pursuant to this Article. "Expenses" includes counsel fees. "Liability" means the obligation to pay a judgment, settlement, penalty, fine, including any excise tax assessed with respect to an employee benefit plan, or reasonable expenses incurred with respect to a proceeding. "Party" includes an individual who was, is, or is threatened to be made a named defendant or respondent in a proceeding. "Proceeding" means any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal. -3- B. In any proceeding brought by or in the right of the Corporation or brought by or on behalf of shareholders of the Corporation, no director or officer of the Corporation shall be liable to the Corporation or its shareholders for monetary damages with respect to any transaction, occurrence or course of conduct, whether prior or subsequent to the effective date of this Article, except for liability resulting from such Person's having engaged in willful misconduct or a knowing violation of the criminal law or any federal or state securities law or in the case of the Directors, other than the Independent Directors, such director engaging in misconduct or negligent conduct. C. The Corporation shall indemnify (i) any Person who was or is a party to any proceeding, including a proceeding brought by a shareholder in the right of the Corporation or brought by or on behalf of shareholders of the Corporation, by reason of the fact that he is or was a director or officer of the Corporation, or (ii) any director or officer who is or was serving at the request of the Corporation as a director, trustee, partner, member or officer of another corporation, partnership, joint venture, limited liability company, trust, employee benefit plan or other enterprise, against any liability incurred by him in connection with such proceeding if his conduct in question was in the best interest of the Company and he was acting on behalf of the Corporation or performing services for the Corporation unless he engaged in gross negligence, willful misconduct or a knowing violation of the criminal law or in the case of the Directors, other than the Independent Directors, such director engaged in misconduct or negligent conduct. A Person is considered to be serving an employee benefit plan at the Corporation's request if his duties to the Corporation also impose duties on, or otherwise involve services by, him to the plan or to participants in or beneficiaries of the plan. The Board of Directors is hereby empowered, by a majority vote of a quorum of disinterested directors, to enter into a contract to indemnify any director or officer in respect of any proceedings arising from any act or omission, whether occurring before or after the execution of such contract. D. The provisions of this Article shall be applicable to all proceedings commenced after the adoption hereof by the Corporation, arising from any act or omission, whether occurring before or after such adoption. No amendment or repeal of this Article shall have any effect on the rights provided under this Article with respect to any act or omission occurring prior to such amendment or repeal. The Corporation shall promptly take all such actions, and make all such determinations, as shall be necessary or appropriate to comply with its obligation to make any indemnity under this Article and shall promptly pay or reimburse all reasonable expenses, including attorneys' fees, incurred by any such indemnified Person in connection with such actions and determinations or proceedings of any kind arising therefrom. E. The termination of any proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not of itself create a presumption that the applicant did not meet the standard of conduct described in Section B or C of this Article. F. Any indemnification under Section C of this Article (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the applicant is proper in the circumstances because he has met the applicable standard of conduct set forth in Section C. -4- The determination shall be made: 1. By the Board of Directors by a majority vote of a quorum consisting of directors not at the time parties to the proceeding; 2. If a quorum cannot be obtained under subsection 1 of this Section, by majority vote of a committee duly designated by the Board of Directors (in which designation directors who are parties may participate), consisting solely of two or more directors not at the time parties to the proceeding; 3. By special legal counsel: a. Selected by the Board of Directors or its committee in the manner prescribed in subsection 1 or 2 of this Section; or b. If a quorum of the Board of Directors cannot be obtained under subsection 1 of this Section and a committee cannot be designated under subsection 2 of this Section, selected by majority vote of the full Board of Directors, in which selection directors who are parties may participate; or 4. By the shareholders, but shares owned by or voted under the control of directors who are at the time parties to the proceeding may not be voted on the determination. Any evaluation as to reasonableness of expenses shall be made in the same manner as the determination that indemnification is appropriate, except that if the determination is made by special legal counsel, such evaluation as to reasonableness of expenses shall be made by those entitled under subsection 3 of this Section F to select counsel. Notwithstanding the foregoing, in the event there has been a change in the composition of a majority of the Board of Directors after the date of the alleged act or omission with respect to which indemnification is claimed, any determination as to indemnification and advancement of expenses with respect to any claim for indemnification made pursuant to this Article shall be made by special legal counsel agreed upon by the Board of Directors and the applicant. If the Board of Directors and the applicant are unable to agree upon such special legal counsel the Board of Directors and the applicant each shall select a nominee, and the nominees shall select such special legal counsel. G. 1. The Corporation shall pay for or reimburse the reasonable expenses incurred by any applicant who is a party to a proceeding in advance of final disposition of the proceeding or the making of any determination under section C if the applicant furnishes the Corporation: -5- a. a written statement of his good faith belief that he has met the standard of conduct described in Section C; and b. a written undertaking, executed personally or on his behalf, to repay the advance if it is ultimately determined that he did not meet such standard of conduct. Provided, however, that this Section G shall apply only if the action was initiated by a third party who is not a shareholder of the Company or if the action was initiated by a shareholder and such advance is approved by a court of competent jurisdiction. 2. The undertaking required by paragraph (b) of subsection 1 of this Section shall be an unlimited general obligation of the applicant but need not be secured and may be accepted without reference to financial ability to make repayment. 3. Authorizations of payments under this Section shall be made by the Persons specified in Section F. H. The Board of Directors is hereby empowered, by majority vote of a quorum consisting of disinterested directors, to cause the Corporation to indemnify or contract to indemnify any Person not specified in Section B or C of this Article who was, is or may become a party to any proceeding, by reason of the fact that he is or was an employee or agent of the Corporation, or is or was serving at the request of the Corporation as director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, to the same extent as if such Person were specified as one to whom indemnification is granted in Section C. The provisions of Sections D through G of this Article shall be applicable to any indemnification provided hereafter pursuant to this Section H. I. The Corporation may purchase and maintain insurance to indemnify it against the whole or any portion of the liability assumed by it in accordance with this Article and may also procure insurance, in such amounts as the Board of Directors may determine, on behalf of any Person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against any liability asserted against or incurred by him in any such capacity or arising from his status as such, whether or not the Corporation would have power to indemnify him against such liability under the provisions of this Article. J. Every reference herein to directors, officers, employees or agents shall include former directors, officers, employees and agents and their respective heirs, executors and administrators. The indemnification hereby provided and provided hereafter pursuant to the power hereby conferred by this Article on the Board of Directors shall not be exclusive of any other rights to which any Person may be entitled, including any right under policies of insurance that may be purchased and maintained by the Corporation or others, with respect to claims, issues or matters in relation to which the Corporation would not have the power to indemnify -6- such Person under the provisions of this Article. Such rights shall not prevent or restrict the power of the Corporation to make or provide for any further indemnity, or provisions for determining entitlement to indemnity, pursuant to one or more indemnification agreements, bylaws, or other arrangements (including, without limitation, creation of trust funds or security interests funded by letters of credit or other means) approved by the Board of Directors (whether or not any of the directors of the Corporation shall be a party to or beneficiary of any such agreements, bylaws or arrangements); provided, however, that any provision of such agreements, bylaws or other arrangements shall not be effective if and to the extent that it is determined to be contrary to this Article or applicable laws of the Commonwealth of Virginia. K. Each provision of this Article shall be severable, and an adverse determination as to any such provision shall in no way affect the validity of any other provision. VII. The Corporation shall seek to elect and maintain status as a REIT under the Code. It shall be the duty of the Board of Directors to ensure that the Corporation satisfies the requirements for qualification as a REIT under the Code, including, but not limited to, the ownership of its outstanding stock, the nature of its assets, the sources of its income, and the amount and timing of its distributions to its shareholders. The Board of Directors shall take no action to disqualify the Corporation as a REIT or to otherwise revoke the Corporation's election to be taxed as a REIT without the affirmative vote of two-thirds (2/3) of the number of shares of Common Stock entitled to vote on such matter at a special meeting of the shareholders. VIII. A. Restrictions on Transfer. 1. Definitions. The following terms shall have the following meanings: "Beneficial Ownership" shall mean ownership of shares of Equity Stock by a Person who would be treated as an owner of such shares of Equity Stock either directly or indirectly through the application of Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code. The terms "Beneficial Owner," "Beneficially Owns," and "Beneficially Owned" shall have correlative meanings. "Beneficiary" shall mean, with respect to any Trust, one or more organizations described in each of Section 170(b)(1)(A) (other than clauses (vii) or (viii) thereof) and Section 170(c)(2) of the Code that are named by the Corporation as the beneficiary or beneficiaries of such Trust, in accordance with the provisions of Section (B)(1) of Article VIII hereof. "Board of Directors" shall mean the Board of Directors of the Corporation. -7- "Constructive Ownership" shall mean ownership of shares of Equity Stock by a Person who would be treated as an owner of such shares of Equity Stock either directly or indirectly through the application of Section 318 of the Code, as modified by Section 856(d)(5) of the Code. The terms "Constructive Owner," "Constructively Owns," and "Constructively Owned" shall have correlative meanings. "Equity Stock" shall mean Preferred Stock and Common Stock of the Corporation. The term "Equity Stock" shall include all shares of Preferred Stock and Common Stock of the Corporation that are held as Shares-in-Trust in accordance with the provisions of Section (B) of Article VIII hereof. "Initial Public Offering" means the sale of shares of Common Stock pursuant to the Corporation's first effective registration statement for such shares of Common Stock filed under the Securities Act of 1933, as amended. "Market Price" on any date shall mean the average of the Closing Price for the five consecutive Trading Days ending on such date. The "Closing Price" on any date shall mean the average of the high bid and low asked prices in the over-the-counter market, as reported by The Nasdaq Stock Market, or, if such system is no longer in use, the principal other automated quotations system that may then be in use or, if the shares of Equity Stock are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the shares of Equity Stock selected by the Board of Directors. "Non-Transfer Event" shall mean an event other than a purported Transfer that would cause any Person to Beneficially Own or Constructively Own shares of Equity Stock in excess of the Ownership Limit, including, but not limited to, the granting of any option or entering into any agreement for the sale, transfer or other disposition of shares of Equity Stock or the sale, transfer, assignment or other disposition of any securities or rights convertible into or exchangeable for shares of Equity Stock. "Owner Financial" shall mean Ocwen Financial Corporation and its affiliates. "Operating Partnership Agreement" shall mean the agreement of limited partnership governing Ocwen Partnership, L.P., a Virginia limited partnership, as may be amended from time to time. "Ownership Limit" shall mean the restriction on ownership (or deemed ownership by virtue of the attribution provisions of the Code) of (a) more than 8.7% of the outstanding shares of Common Stock by any stockholder other than Ocwen Financial, (b) more than 15% of the outstanding shares of Common Stock by Ocwen Financial, or (c) more than 9.9% of the shares of any series of Preferred Stock by any stockholder. "Permitted Transferee" shall mean any Person designated as a Permitted Transferee in accordance with the provisions of Section (B)(5) of Article VIII hereof. "Person" shall mean an individual, corporation, partnership, estate, trust, a portion of a trust permanently set aside for or to be used exclusively for the purposes described -8- in Section 642(c) of the Code, association, private foundation within the meaning of Section 509(a) of the Code, joint stock company or other entity and also includes a "group" as that term is used for purposes of Section 12(d)(3) of the Securities Exchange Act of 1934, as amended. "Prohibited Owner" shall mean, with respect to any purported Transfer or Non-Transfer Event, any Person who, but for the provisions of Section (A)(3) of Article VIII hereof, would own record title to shares of Equity Stock. "Redemption Rights" shall mean the rights granted under the Operating Partnership Agreement to the limited partners to redeem, under certain circumstances, their limited partnership interests for shares of Common Stock (or cash at the option of the Corporation). "Restriction Termination Date" shall mean the first day after the date of the Initial Public Offering on which (i) the Board of Directors determines that it is no longer in the best interests of the Corporation to attempt to, or continue to, qualify as a REIT and (ii) there is an affirmative vote of two-thirds of the number of shares of Common Stock entitled to vote on such matter at a special meeting of the shareholders of the Corporation. "Shares-in-Trust" shall mean any shares of Equity Stock designated Shares-in-Trust pursuant to Section (A)(3) of Article VIII hereof. "Trading Day" shall mean any day other than a Saturday, a Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close. "Transfer" (as a noun) shall mean any sale, transfer, gift, assignment, devise or other disposition of shares of Equity Stock, whether voluntary or involuntary, whether of record, constructively or beneficially and whether by operation of law or otherwise. "Transfer" (as a verb) shall not have the correlative meaning. "Trust" shall mean any separate trust created pursuant to Section (A)(3) of Article VIII hereof and administered in accordance with the terms of Section (B) of Article VIII hereof, for the exclusive benefit of any Beneficiary. "Trustee" shall mean any Person or entity unaffiliated with both the Corporation and any Prohibited Owner, such Trustee to be designated by the Corporation to act as trustee of any Trust, or any successor trustee thereof. 2. Restriction on Transfers. a. Except as provided in Section (A)(7) of Article VIII hereof, from the date of the Initial Public Offering and prior to the Restriction Termination Date, (i) no Person shall Beneficially Own or Constructively Own outstanding shares of Equity Stock in -9- excess of the Ownership Limit and (ii) any Transfer that, if effective, would result in any Person Beneficially Owning or Constructively Owning shares of Equity Stock in excess of the Ownership Limit shall be void ab initio as to the Transfer of that number of shares of Equity Stock which would be otherwise Beneficially Owned or Constructively Owned by such Person in excess of the Ownership Limit, and the intended transferee shall acquire no rights in such excess shares of Equity Stock. b. Except as provided in Section (A)(7) of Article VIII hereof, from the date of the Initial Public Offering and prior to the Restriction Termination Date, any Transfer that, if effective, would result in shares of Equity Stock being beneficially owned by fewer than 100 Persons (determined without reference to any rules of attribution) shall be void ab initio as to the Transfer of that number of shares which would be otherwise beneficially owned (determined without reference to any rules of attribution) by the transferee, and the intended transferee shall acquire no rights in such shares of Equity Stock. c. From the date of the Initial Public Offering and prior to the Restriction Termination Date, any Transfer of shares of Equity Stock that, if effective, would result in the Corporation being "closely held" within the meaning of Section 856(h) of the Code shall be void ab initio as to the Transfer of that number of shares of Equity Stock which would cause the Corporation to be "closely held" within the meaning of Section 856(h) of the Code, and the intended transferee shall acquire no rights in such shares of Equity Stock. d. From the date of the Initial Public Offering and prior to the Restriction Termination Date, any Transfer of shares of Equity Stock that, if effective, would cause the Corporation to Constructively Own 10% or more of the ownership interests in a tenant of the Corporation's real property, within the meaning of Section 856(d)(2)(B) of the Code, shall be void ab initio as to the Transfer of that number of shares of Equity Stock which would cause the Corporation to Constructively Own 10% or more of the ownership interests in a tenant of the Corporation's real property, within the meaning of Section 856(d)(2)(B) of the Code, and the intended transferee shall acquire no rights in such excess shares of Equity Stock. 3. Transfer to Trust. a. If, notwithstanding the other provisions contained in this Section (A) of Article VIII, at any time after the Initial Public Offering and prior to the Restriction Termination Date, there is a purported Transfer or Non-Transfer Event such that any Person would either Beneficially Own or Constructively Own shares of Equity Stock in excess of the Ownership Limit, then, (i) except as otherwise provided in Section (A)(7) of Article VIII hereof, the purported transferee shall acquire no right or interest (or, in the case of a Non-Transfer Event, the Person holding record title to the shares of Equity Stock Beneficially Owned or Constructively Owned by such Beneficial Owner or Constructive Owner, shall cease to own any right or interest) in such number of shares of Equity Stock which would cause such Beneficial Owner or Constructive Owner to Beneficially Own or Constructively Own shares of Equity Stock in excess of the Ownership Limit, (ii) such number of shares of Equity Stock in excess -10- of the Ownership Limit (rounded up to the nearest whole share) shall be designated Shares-in-Trust and, in accordance with the provisions of Section (B) of Article VIII hereof, transferred automatically and by operation of law to the Trust to be held in accordance with that Section (B) of Article VIII, and (iii) the Prohibited Owner shall submit such number of shares of Equity Stock to the Corporation for registration in the name of the Trustee. Such transfer to a Trust and the designation of shares as Shares-in-Trust shall be effective as of the close of business on the business day prior to the date of the Transfer or Non-Transfer Event, as the case may be. b. If, notwithstanding the other provisions contained in this Section (A) of Article VIII, at any time after the Initial Public Offering and prior to the Restriction Termination Date, there is a purported Transfer or Non-Transfer Event that, if effective, would (i) result in the shares of Equity Stock being beneficially owned by fewer than 100 Persons (determined without reference to any rules of attribution), (ii) result in the Corporation being "closely held" within the meaning of Section 856(h) of the Code, or (iii) cause the Corporation to Constructively Own 10% or more of the ownership interests in a tenant of the Corporation's real property, within the meaning of Section 856(d)(2)(B) of the Code, then (x) the purported transferee shall not acquire any right or interest (or, in the case of a Non-Transfer Event, the Person holding record title of the shares of Equity Stock with respect to which such Non-Transfer Event occurred, shall cease to own any right or interest) in such number of shares of Equity Stock, the ownership of which by such purported transferee or record holder would (A) result in the shares of Equity Stock being beneficially owned by fewer than 100 Persons (determined without reference to any rules of attribution), (B) result in the Corporation being "closely held" within the meaning of Section 856(h) of the Code, or (C) cause the Corporation to Constructively Own 10% or more of the ownership interests in a tenant of the Corporation's real property, within the meaning of Section 856(d)(2)(B) of the Code, (y) such number of shares of Equity Stock (rounded up to the nearest whole share) shall be designated Shares-in-Trust and, in accordance with the provisions of Section (B) of Article VIII hereof, transferred automatically and by operation of law to the Trust to be held in accordance with that Section (B) of Article VIII, and (z) the Prohibited Owner shall submit such number of shares of Equity Stock to the Corporation for registration in the name of the Trustee. Such transfer to a Trust and the designation of shares as Shares-in-Trust shall be effective as of the close of business on the business day prior to the date of the Transfer or Non-Transfer Event, as the case may be. 4. Remedies For Breach. If the Corporation, or its designees, shall at any time determine in good faith that a Transfer has taken place in violation of Section (A)(2) of Article VIII hereof or that a Person intends to acquire or has attempted to acquire Beneficial Ownership or Constructive Ownership of any shares of Equity Stock in violation of Section (A)(2) of Article VIII hereof, the Corporation shall take such action as it deems advisable to refuse to give effect to or to prevent such Transfer or acquisition, including, but not limited to, refusing to give effect to such Transfer on the books of the Corporation or instituting proceedings to enjoin such Transfer or acquisition. 5. Notice of Restricted Transfer. Any Person who acquires or attempts to acquire shares of Equity Stock in violation of Section (A)(2) of Article VIII hereof, or any -11- Person who owned shares of Equity Stock that were transferred to the Trust pursuant to the provisions of Section (A)(3) of Article VIII hereof, shall immediately give written notice to the Corporation of such event and shall provide to the Corporation such other information as the Corporation may request in order to determine the effect, if any, of such Transfer or Non-Transfer Event, as the case may be, on the Corporation's status as a REIT. 6. Owners Required To Provide Information. From the date of the Initial Public Offering and prior to the Restriction Termination Date: a. Every Beneficial Owner or Constructive Owner of more than 5%, or such lower percentages as required pursuant to regulations under the Code, of the outstanding shares of all classes of capital stock of the Corporation shall, within 30 days after January 1 of each year, provide to the Corporation a written statement or affidavit stating the name and address of such Beneficial Owner or Constructive Owner, the number of shares of Equity Stock Beneficially Owned or Constructively Owned, and a description of how such shares are held. Each such Beneficial Owner or Constructive Owner shall provide to the Corporation such additional information as the Corporation may request in order to determine the effect, if any, of such Beneficial Ownership or Constructive Ownership on the Corporation's status as a REIT and to ensure compliance with the Ownership Limit. b. Each Person who is a Beneficial Owner or Constructive Owner of shares of Equity Stock and each Person (including the stockholder of record) who is holding shares of Equity Stock for a Beneficial Owner or Constructive Owner shall provide to the Corporation a written statement or affidavit stating such information as the Corporation may request in order to determine the Corporation's status as a REIT and to ensure compliance with the Ownership Limit. 7. Exception. The Ownership Limit shall not apply to the acquisition of shares of Equity Stock by an underwriter that participates in a public offering of such shares for a period of 90 days following the purchase by such underwriter of such shares provided that the restrictions contained in Section (A)(2) of Article VIII hereof will not be violated following the distribution by such underwriter of such shares. In addition, the Board of Directors, upon receipt of a ruling from the Internal Revenue Service or an opinion of counsel in each case to the effect that the restrictions contained in Section (A)(2)(B), Section (A)(2)(C), and/or Section (A)(2)(D) of Article VIII hereof will not be violated, may exempt a Person from the Ownership Limit provided that (i) the Board of Directors obtains such representations and undertakings from such Person as are reasonably necessary to ascertain that no individual's Beneficial Ownership or Constructive Ownership of shares of Equity Stock will violate the Ownership Limit and (ii) such Person agrees in writing that any violation or attempted violation will result in such transfer to the Trust of shares of Equity Stock pursuant to Section (A)(3) of Article VIII hereof. -12- B. Shares-in-Trust. 1. Trust. Any shares of Equity Stock transferred to a Trust and designated Shares-in-Trust pursuant to Section (A)(3) of Article VIII hereof shall be held for the exclusive benefit of the Beneficiary. The Corporation shall name a Beneficiary for each Trust within five days after discovery of the existence thereof. Any transfer to a Trust, and subsequent designation of shares of Equity Stock as Shares-in-Trust, pursuant to Section (A)(3) of Article VIII hereof shall be effective as of the close of business on the business day prior to the date of the Transfer or Non-Transfer Event that results in the transfer to the Trust. Shares-in-Trust shall remain issued and outstanding shares of Equity Stock of the Corporation and shall be entitled to the same rights and privileges on identical terms and conditions as are all other issued and outstanding shares of Equity Stock of the same class and series. When transferred to a Permitted Transferee in accordance with the provisions of Section (B)(5) of Article VIII hereof, such Shares-in-Trust shall cease to be designated as Shares-in-Trust. 2. Dividend Rights. The Trust, as record holder of Shares-in-Trust, shall be entitled to receive all dividends and distributions as may be declared by the Board of Directors on such shares of Equity Stock and shall hold such dividends or distributions in trust for the benefit of the Beneficiary. The Prohibited Owner with respect to Shares-in-Trust shall repay to the Trust the amount of any dividends or distributions received by it that (i) are attributable to any shares of Equity Stock designated Shares-in-Trust and (ii) the record date of which was on or after the date that such shares became Shares-in-Trust. The Corporation shall take all measures that it determines reasonably necessary to recover the amount of any such dividend or distribution paid to a Prohibited Owner, including, if necessary, withholding any portion of future dividends or distributions payable on shares of Equity Stock Beneficially Owned or Constructively Owned by the Person who, but for the provisions of Section (A)(3) of Article VIII hereof, would Constructively Own or Beneficially Own the Shares-in-Trust; and, as soon as reasonably practicable following the Corporation's receipt or withholding thereof, shall pay over to the Trust for the benefit of the Beneficiary the dividends so received or withheld, as the case may be. 3. Rights Upon Liquidation. In the event of any voluntary or involuntary liquidation, dissolution or winding up of, or any distribution of the assets of, the Corporation, each holder of Shares-in-Trust shall be entitled to receive, ratably with each other holder of shares of Equity Stock of the same class or series, that portion of the assets of the Corporation which is available for distribution to the holders of such class and series of shares of Equity Stock. The Trust shall distribute to the Prohibited Owner the amounts received upon such liquidation, dissolution, or winding up, or distribution; provided, however, that the Prohibited Owner shall not be entitled to receive amounts pursuant to this Section (B)(3) of Article VIII in excess of, in the case of a purported Transfer in which the Prohibited Owner gave value for shares of Equity Stock and which Transfer resulted in the transfer of the shares to the Trust, the price per share, if any, such Prohibited Owner paid for the shares of Equity Stock and, in the case of a Non-Transfer Event or Transfer in which the Prohibited Owner did not give value for such shares (e.g., if the shares were received through a gift or devise) and which Non-Transfer -13- Event or Transfer, as the case may be, resulted in the transfer of shares to the Trust, the price per share equal to the Market Price on the date of such Non-Transfer Event or Transfer. Any remaining amount in such Trust shall be distributed to the Beneficiary. 4. Voting Rights. The Trustee shall be entitled to vote all Shares-in-Trust. Any vote by a Prohibited Owner as a holder of shares of Equity Stock prior to the discovery by the Corporation that the shares of Equity Stock are Shares-in-Trust shall, subject to applicable law, be rescinded and shall be void ab initio with respect to such Shares-in-Trust and the Prohibited Owner shall be deemed to have given, as of the close of business on the business day prior to the date of the purported Transfer or Non-Transfer Event that results in the transfer to the Trust of shares of Equity Stock under Section (A)(3) of Article VIII hereof, an irrevocable proxy to the Trustee to vote the Shares-in-Trust in the manner in which the Trustee, in its sole and absolute discretion, desires. 5. Designation of Permitted Transferee. The Trustee shall have the exclusive and absolute right to designate a Permitted Transferee of any and all Shares-in-Trust. In an orderly fashion so as not to materially adversely affect the Market Price of the Shares-in-Trust, the Trustee shall designate any Person as Permitted Transferee, provided, however, that (i) the Permitted Transferee so designated purchases for valuable consideration (whether in a public or private sale) the Shares-in-Trust and (ii) the Permitted Transferee so designated may acquire such Shares-in-Trust without such acquisition resulting in a transfer to a Trust and the redesignation of such shares of Equity Stock so acquired as Shares-in-Trust under Section (A)(3) of Article VIII hereof. Upon the designation by the Trustee of a Permitted Transferee in accordance with the provisions of this Section (B)(5) of Article VIII, the Trustee shall (i) cause to be transferred to the Permitted Transferee that number of Shares-in-Trust acquired by the Permitted Transferee, (ii) cause to be recorded on the books of the Corporation that the Permitted Transferee is the holder of record of such number of shares of Equity Stock, (iii) cause the Shares-in-Trust to be canceled, and (iv) distribute to the Beneficiary any and all amounts held with respect to the Shares-in-Trust after making that payment to the Prohibited Owner pursuant to Section (B)(6) of Article VIII hereof. 6. Compensation to Record Holder of Shares of Equity Stock that Become Shares-in-Trust. Any Prohibited Owner shall be entitled (following discovery of the Shares-in-Trust and subsequent designation of the Permitted Transferee in accordance with Section (B)(5) of Article VIII hereof or following the acceptance of the offer to purchase such shares in accordance with Section (B)(7) of Article VIII hereof) to receive from the Trustee following the sale or other disposition of such Shares-in-Trust the lesser of (i) in the case of (a) a purported Transfer in which the Prohibited Owner gave value for shares of Equity Stock and which Transfer resulted in the transfer of the shares to the Trust, the price per share, if any, such Prohibited Owner paid for the shares of Equity Stock, or (b) a Non-Transfer Event or Transfer in which the Prohibited Owner did not give value for such shares (e.g., if the shares were received through a gift or devise) and which Non-Transfer Event or Transfer, as the case may be, resulted in the transfer of shares to the Trust, the price per share equal to the Market Price on the date of such Non-Transfer Event or Transfer, and (ii) the price per share received by the -14- Trustee from the sale or other disposition of such Shares-in-Trust in accordance with Section (B)(5) of Article VIII hereof. Any amounts received by the Trustee in respect of such Shares-in-Trust and in excess of such amounts to be paid the Prohibited Owner pursuant to this Section (B)(6) shall be distributed to the Beneficiary in accordance with the provisions of Section (B)(5) of Article VIII hereof. Each Beneficiary and Prohibited Owner waive any and all claims that they may have against the Trustee and the Trust arising out of the disposition of Shares-in-Trust, except for claims arising out of the gross negligence or willful misconduct of, or any failure to make payments in accordance with this Section (B), by such Trustee or the Corporation. 7. Purchase Right in Shares-in-Trust. Shares-in-Trust shall be deemed to have been offered for sale to the Corporation, or its designee, at a price per share equal to the lesser of (i) the price per share in the transaction that created such Shares-in-Trust (or, in the case of devise, gift or Non-Transfer Event, the Market Price at the time of such devise, gift or Non-Transfer Event) and (ii) the Market Price on the date the Corporation, or its designee, accepts such offer. The Corporation shall have the right to accept such offer for a period of ninety days after the later of (i) the date of the Non-Transfer Event or purported Transfer which resulted in such Shares-in-Trust and (ii) the date the Corporation determines in good faith that a Transfer or Non-Transfer Event resulting in Shares-in-Trust has occurred, if the Corporation does not receive a notice of such Transfer or Non-Transfer Event pursuant to Section (A)(5) of Article VIII hereof. C. Remedies Not Limited. Nothing contained in this Article VIII shall limit the authority of the Corporation to take such other action as it deems necessary or advisable to protect the Corporation and the interests of its shareholders by preservation of the Corporation's status as a REIT and to ensure compliance with the Ownership Limit. D. Ambiguity. In the case of an ambiguity in the application of any of the provisions of this Article VIII, including any definition contained in Section (A)(1) of Article VIII hereof, the Board of Directors shall have the power to determine the application of the provisions of this Article VIII with respect to any situation based on the facts known to it. E. Legend. Each certificate for shares of Equity Stock shall bear the following legend: "The shares of [Common or Preferred] Stock represented by this certificate are subject to restrictions on transfer for the purpose of the Corporation's maintenance of its status as a real estate investment trust under the Internal Revenue Code of 1986, as amended (the "Code"). No Person may (i) Beneficially Own or Constructively Own shares of Common Stock in excess of 9.9% of the number of outstanding shares of Common Stock, (ii) Beneficially Own or Constructively Own shares of any class or series of Preferred Stock in excess of 9.9% of the number of outstanding shares of such class or series of Preferred Stock, (iii) beneficially own shares of Equity Stock that would result in the shares of Equity Stock being beneficially owned by fewer than 100 Persons (determined -15- without reference to any rules of attribution), (iv) Beneficially Own shares of Equity Stock that would result in the Corporation being "closely held" under Section 856(h) of the Code, or (v) Constructively Own shares of Equity Stock that would cause the Corporation to Constructively Own 10% or more of the ownership interests in a tenant of the Corporation's real property, within the meaning of Section 856(d)(2)(B) of the Code. Any Person who attempts to Beneficially Own or Constructively Own shares of Equity Stock in excess of the above limitations must immediately notify the Corporation in writing. If the restrictions above are violated, the shares of Equity Stock represented hereby will be transferred automatically and by operation of law to a Trust and shall be designated Shares-in-Trust. All capitalized terms in this legend have the meanings defined in the Corporation's Amended and Restated Articles of Incorporation, as the same may be further amended from time to time, a copy of which, including the restrictions on transfer, will be sent without charge to each shareholder who so requests." F. Severability. If any provision of this Article VIII or any application of any such provision is determined to be invalid by any federal or state court having jurisdiction over the issues, the validity of the remaining provisions shall not be affected and other applications of such provision shall be affected only to the extent necessary to comply with the determination of such court. Dated: April __, 1997 -16- EX-5.1 3 EXHIBIT 5.1 Exhibit 5.1 HUNTON & WILLIAMS RIVERFRONT PLAZA, EAST TOWER 951 EAST BYRD STREET RICHMOND, VIRGINIA 23219-4074 TELEPHONE (804) 788-8200 FACSIMILE (804) 788-8218 FILE NO.: 52058.2 DIRECT DIAL: (804) 788-8200 February 18, 1997 Ocwen Asset Investment Corp. 1675 Palm Beach Lakes Boulevard West Palm Beach, Florida 33401 Ocwen Asset Investment Corp. Registration Statement on Form S-11 ----------------------------------- Ladies and Gentlemen: We have acted as counsel to Ocwen Asset Investment Corp., a Virginia corporation (the "Company"), in connection with the Company's registration statement on Form S-11 (the "Registration Statement") filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, with respect to the proposed sale by the Company of up to 14,375,000 shares of common stock, $.01 par value (the "Common Stock"). In this capacity, we have examined the Registration Statement, the Company's Articles of Incorporation (as amended), Bylaws, other records, and certificates of its officers and of public officials as we have deemed necessary. Based upon the foregoing and having regard for such legal considerations as we have deemed relevant, we are of the opinion that the issuance of the Common Stock as described in the Registration Statement has been validly authorized and, when issued and sold as described in the Registration Statement, the Common Stock will be legally issued, fully paid and non-assessable. We hereby consent to the filing of this opinion with the Securities and Exchange Commission as an exhibit to the Registration Statement and to the statement made in reference to this firm under the caption "Legal Matters" in the Registration Statement. In giving this consent, we do not admit that we are within the category of persons whose consent is required by Section 7 of the Securities Act of 1933, as amended, or the rules and regulations promulgated thereunder by the Securities and Exchange Commission. VERY TRULY YOURS, HUNTON & WILLIAMS 02151/07938 EX-10.1 4 EXHIBIT 10.1 Exhibit 10.1 FORM OF MANAGEMENT AGREEMENT THIS AGREEMENT, dated as of April , 1997 by and between OCWEN ASSET INVESTMENT CORP., a Virginia corporation (the "REIT" and together with its subsidiaries, the "Company"), and OCWEN CAPITAL CORPORATION, a Florida corporation (the "Manager"); WITNESSETH: ---------- WHEREAS, the Company intends to invest in Subordinated Interests, Distressed Real Property, MBS and other real estate related assets ("REIT Investments") and expects to qualify for the tax benefits accorded by Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"); and WHEREAS, the Company desires to retain the Manager to acquire, sell and otherwise manage the investments of the Company and to perform administrative services for the Company in the manner and on the terms set forth herein; NOW THEREFORE, in consideration of the mutual agreements herein set forth, the parties hereto agree as follows: SECTION 1. Definitions. Capitalized terms used but not defined herein shall have the respective meanings assigned them in the Prospectus of the REIT dated April , 1997. In addition, the following terms have the meanings assigned them. (a) "Agreement" means this Management Agreement, as amended from time to time. (b) "Closing Date" means the date of closing of the Company's initial public offering of common stock. (c) "Governing Instruments" means the articles of incorporation and bylaws in the case of a corporation, or the partnership agreement in the case of a partnership. (d) "Subsidiary" means any subsidiary of the Company and any partnership, the general partner of which is the Company or any subsidiary of the Company. SECTION 2. Duties of the Manager. (a) The Manager at all times will be subject to the supervision of the Company's Board of Directors and will have only such functions and authority as the Company may delegate to it. The Manager will be responsible for the day-to-day operations of the Company and will perform (or cause to be performed) such services and activities relating to the assets and operations of the Company as may be appropriate, including: (i) serving as the Company's consultant with respect to formulation of investment criteria and preparation of policy Guidelines by the Board of Directors; (ii) representing the Company in connection with the purchase and commitment to purchase assets, the sale and commitment to sell assets, and the maintenance and administration of its portfolio of assets; (iii) furnishing reports and statistical and economic research to the Company regarding the Company's activities and the services performed for the Company by the Manager; (iv) monitoring and providing to the Board of Directors on an ongoing basis price information and other data, obtained from certain nationally recognized dealers that maintain markets in assets identified by the Board of Directors from time to time, and providing data and advice to the Board of Directors in connection with the identification of such dealers; 2 (v) providing the executive and administrative personnel and office space and office services required in rendering services to the Company; (vi) administering the day-to-day operations of the Company and performing and supervising the performance of such other administrative functions necessary in the management of the Company as may be agreed upon by the Manager and the Board of Directors, including the collection of revenues and the payment of the Company's debts and obligations and maintenance of appropriate computer services to perform such administrative functions; (vii) communicating on behalf of the Company with the holders of any equity or debt securities of the Company as required to satisfy the reporting and other requirements of any governmental bodies or agencies and to maintain effective relations with such holders; (viii) to the extent not otherwise subject to an agreement executed by the Company, designating a servicer for mortgage loans sold to the Company by originators that have elected not to service such loans and arranging for the monitoring and administering of such servicers; (ix) counseling the Company in connection with policy decisions to be made by the Board of Directors; (x) counseling the Company regarding the maintenance of its status as a REIT and monitoring compliance with the various REIT qualification tests and other rules set out in the Code and regulations thereunder; (xi) engaging in hedging activities on behalf of the Company, consistent with the Company's status as a REIT and with the Guidelines; and (xii) upon request by and in accordance with the directions of the Board of Directors, investing or reinvesting any money of the Company. (b) Real Estate Asset Portfolio Management. The Manager will perform portfolio management services on behalf of OAIC and the Operating Partnership with respect to the Company's REIT Investments. Such services will include, but not be limited to, consulting the Company on purchase and sale opportunities, collection of information and submission of reports pertaining to the Company's assets, interest rates, and general economic conditions, periodic review and evaluation of the performance of the Company's portfolio of assets, acting as liaison between the Company and banking, mortgage banking, investment banking and other parties with respect to the purchase, financing and disposition of assets, and other customary functions related to real estate portfolio management. The Manager may enter into subcontracts with other parties, including its Affiliates, to provide any such services to the Company. (c) Monitoring Special Servicing. The Manager will perform monitoring services on behalf of the Company with respect to the Company's portfolio of special servicing rights. Such monitoring services will include, but not be limited to, the following activities: negotiating special servicing agreements; serving as the Company's consultant with respect to the special servicing of mortgage loans; collection of information and submission of reports pertaining to the mortgage loans and to moneys remitted to the Manager or the Company; acting as a liaison between the servicers of the mortgage loans and the Company and working with servicers to the extent necessary to improve their servicing performance; with respect to mortgage loans for which the Company is special servicer, periodic review and evaluation of the performance of each servicer to determine its compliance with the terms and conditions of the related servicing agreement; review of and recommendations as to fire losses, easement problems and condemnation, delinquency and foreclosure procedures with regard to mortgage loans; review of servicers' delinquency, foreclosures and other reports on mortgage loans; supervising claims filed under any mortgage insurance policies; and enforcing the obligation of any servicer to repurchase mortgage loans. The Manager may enter into subcontracts with other parties, including its Affiliates, to provide any such services for the Manager. 3 (d) Monitoring Servicing. The Manager will monitor and administer the servicing of the Company's Mortgage Loans, other than loans pooled to back MBS or pledged to secure MBS. Such monitoring and administrative services will include, but not be limited to, the following activities: serving as the Company's consultant with respect to the servicing of loans; collection of information and submission of reports pertaining to the mortgage loans and to moneys remitted to the Manager or the Company by servicers; periodic review and evaluation of the performance of each servicer to determine its compliance with the terms and conditions of the servicing agreement and, if deemed appropriate, recommending to the Company the termination of such servicing agreement; acting as a liaison between servicers and the Company and working with servicers to the extent necessary to improve their servicing performance; review of and recommendations as to fire losses, easement problems and condemnation, delinquency and foreclosure procedures with regard to the Mortgage Loans; review of servicers' delinquency, foreclosing and other reports on Mortgage Loans; supervising claims filed under any mortgage insurance policies; and enforcing the obligation of any servicer to repurchase Mortgage Loans from the Company. (e) Best Efforts. The Manager agrees to use its reasonable best efforts at all times in performing services for the Company hereunder. SECTION 3. Additional Activities of Manager. Nothing herein shall prevent the Manager or any of its Affiliates from engaging in other businesses or from rendering services of any kind to any other person or entity, including investment in, or advisory service to others investing in, any type of real estate investment, including investments which meet the principal investment objectives of the Company. Notwithstanding the foregoing, the Manager will not and will not permit any Affiliate of the Manager to invest in Distressed Real Property unless (a) the Manager has determined in good faith that the Company should not make the investment because (i) the investment is not well-suited for the Company or (ii) the Company is unable financially to make the investment or (b) the Distressed Real Property is offered for investment only as part of a pool of both real estate and mortgage loans. The foregoing restriction does not apply to the purchase of Distressed Real Property in connection with foreclosure (or deed in lieu of foreclosure) on property securing a Mortgage Loan owned by the Manager or an Affiliate of the Manager. Moreover, the Manager will not and will not permit any Affiliate of the Manager to invest in Subordinated Interests unless (a) the Manager has determined in good faith that the Company should not make the investment because (i) the investment is not well-suited for the Company or (ii) the Company is unable financially to make the investment or (b) the mortgage loans collateralizing the Subordinated Interests were owned by the Manager or an Affiliate of the Manager. Directors, officers, employees and agents of the Manager or Affiliates of the Manager may serve as directors, officers, employees, agents, nominees or signatories for the REIT or any Subsidiary, to the extent permitted by their Governing Instruments, as from time to time amended, or by any resolutions duly adopted by the Board of Directors pursuant to the REIT's Governing Instruments. When executing documents or otherwise acting in such capacities for the Company, such persons shall use their respective titles in the Company. SECTION A. Commitments. In order to meet the investment requirements of the Company, as determined by the Board of Directors from time to time, the Manager agrees at the direction of the Board of Directors to issue on behalf of the Company commitments on such terms as are established by the Board of Directors, including a majority of the Unaffiliated Directors, for the purchase of REIT Investments. SECTION B. Bank Accounts. At the direction of the Board of Directors, the Manager may establish and maintain one or more bank accounts in the name of the REIT or any Subsidiary, and may collect and deposit into any such account or accounts, and disburse funds from any such account or accounts, under such terms and conditions as the Board of Directors may approve; and the Manager shall from time to 4 time render appropriate accountings of such collections and payments to the Board of Directors and, upon request, to the auditors of the REIT or any Subsidiary. SECTION C. Records; Confidentiality. The Manager shall maintain appropriate books of accounts and records relating to services performed hereunder, and such books of account and records shall be accessible for inspection by representatives of the REIT or any Subsidiary at any time during normal business hours. The Manager shall keep confidential any and all information obtained in connection with the services rendered hereunder and shall not disclose any such information to nonaffiliated third parties except with the prior written consent of the Board of Directors. SECTION D. Obligations of Manager. (a) The Manager shall require each seller or transferor of REIT Investments to the Company to make such representations and warranties regarding such REIT Investments as may, in the judgment of the Manager, be necessary and appropriate. In addition, the Manager shall take such other action as it deems necessary or appropriate with regard to the protection of the Company's investments. (b) The Manager shall refrain from any action that, in its sole judgment made in good faith, would adversely affect the status of the REIT as a REIT or that, in its sole judgment made in good faith, would violate any law, rule or regulation of any governmental body or agency having jurisdiction over the REIT or any Subsidiary or that would otherwise not be permitted by the REIT's or Subsidiary's Governing Instruments. If the Manager is ordered to take any such action by the Board of Directors, the Manager shall promptly notify the Board of Directors of the Manager's judgment that such action would adversely affect such status or violate any such law, rule or regulation or the Governing Instruments. Notwithstanding the foregoing, the Manager, its directors, officers, stockholders and employees shall not be liable to the REIT, any Subsidiary, the Unaffiliated Directors, or the REIT's or a Subsidiary's stockholders or partners for any act or omission by the Manager, its directors, officers, stockholders or employees except as provided in Section 11 of this Agreement. SECTION E. Compensation. (a) The REIT shall pay to the Manager, for services rendered under this Agreement, a quarterly base management fee in an amount equal to 1/4 of 1% of the Average Invested Assets of the Company during each fiscal quarter (PRO RATA amount based on the number of days elapsed during any partial fiscal quarter), commencing with the first fiscal quarter after the Closing Date. (b) The Manager shall be entitled to receive incentive compensation for each fiscal quarter in an amount equal to the product of (A) 25% of the dollar amount by which (1)(a) Funds from Operations (before the incentive fee but after the base management fee) of the Company per share of Common Stock (based on the weighted average number of shares) (b) plus gains (or minus losses) from debt restructuring and sales of property per share of Common Stock (based on the weighted average number of shares), exceed (2) an amount equal to (a) the weighted average of the price per share at the initial offering and the prices per share at any secondary offerings by the Company multiplied by (b) the Ten-Year U.S. Treasury Rate plus five percent per annum multiplied by (B) the weighted average number of shares of Common Stock outstanding during such period. "Funds from Operations" shall be computed in accordance with the definition thereof adopted by the National Association of Real Estate Investment Trusts ("NAREIT") and shall mean net income (computed in accordance with GAAP) excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. As used in calculating the Manager's compensation, the term "Ten Year U.S. Treasury Rate" means the arithmetic average of the weekly average yield to maturity for actively traded current coupon U.S. Treasury fixed interest rate securities (adjusted to constant maturities of ten years) published by the Federal Reserve Board during a quarter, or, if such rate is not published by the Federal Reserve Board, any Federal Reserve Bank or agency or department of the federal government selected by the Company. If the Company determines in good faith 5 that the Ten Year U.S. Treasury Rate cannot be calculated as provided above, then the rate shall be the arithmetic average of the per annum average yields to maturities, based upon closing asked prices on each business day during a quarter, for each actively traded marketable U.S. Treasury fixed interest rate security with a final maturity date not less than eight nor more than twelve years from the date of the closing asked prices as chosen and quoted for each business day in each such quarter in New York City by at least three recognized dealers in U.S. government securities selected by the Company. (c) The Manager shall compute the compensation payable under Sections 8(a) and 8(b) of this Agreement within 45 days after the end of each fiscal quarter. A copy of the computations made by the Manager to calculate its compensation shall thereafter promptly be delivered to the Board of Directors and, upon such delivery, payment of the compensation earned under Sections 8(a) and 8(b) of this Agreement shown therein shall be due and payable within 60 days after the end of such fiscal quarter. (d) The Manager may charge the Company for any out of pocket expenses that the Manager incurs in connection with any due diligence on assets considered for purchase by the Company. Moreover, the Manager shall document the time spent by the Manager's employees in performing such due diligence and shall be entitled to reimbursement for the allocable portion of such employees' salaries and benefits. SECTION F. Expenses of the Company. The Company or any Subsidiary shall pay all of its expenses and shall reimburse the Manager for documented expenses of the Manager incurred on its behalf. SECTION G. Calculations of Expenses. Expenses incurred by the Manager on behalf of the Company shall be reimbursed quarterly to the Manager within 60 days after the end of each quarter. The Manager shall prepare a statement documenting the expenses of the Company and those incurred by the Manager on behalf of the Company during each quarter, and shall deliver such statement to the Company within 45 days after the end of each quarter. SECTION H. Limits of Manager Responsibility. The Manager assumes no responsibility under this Agreement other than to render the services called for hereunder in good faith and shall not be responsible for any action of the Board of Directors in following or declining to follow any advice or recommendations of the Manager, including as set forth in Section 7(b) of this Agreement. The Manager, its directors, officers, stockholders and employees will not be liable to the Company, any Subsidiary, the Unaffiliated Directors or the Company's or any Subsidiary's stockholders or partners for any acts or omissions by the Manager, its directors, officers, stockholders or employees under or in connection with this Agreement, except by reason of acts constituting bad faith, willful misconduct, gross negligence or reckless disregard of their duties. The Company or a Subsidiary shall reimburse, indemnify and hold harmless the Manager, its stockholders, directors, officers and employees of and from any and all expenses, losses, damages, liabilities, demands, charges and claims of any nature whatsoever, (including attorneys' fees) in respect of or arising from any acts or omissions of the Manager, its stockholders, directors, officers and employees made in good faith in the performance of the Manager's duties under this Agreement and not constituting bad faith, willful misconduct, gross negligence or reckless disregard of its duties. SECTION I. No Joint Venture. The Company and the Manager are not partners or joint venturers with each other and nothing herein shall be construed to make them such partners or joint venturers or impose any liability as such on either of them. SECTION 1. Term; Termination. This Agreement shall commence on the Closing Date and shall continue in force until the second anniversary of the Closing Date, and thereafter, it may be extended only with the consent of the Manager and by the affirmative vote of a majority of the Board of Directors, including a majority of the Unaffiliated Directors. Each extension shall be executed in writing by the parties hereto before the expiration of this Agreement or any extension thereof. Each such extension shall be effective for a period corresponding to the fiscal year of the Company, but in no case exceeding twelve months. 6 Notwithstanding any other provision to the contrary, this Agreement, or any extension hereof, may be terminated by the Company, upon 60 days' written notice, by majority vote of the Unaffiliated Directors or by majority vote of the Stockholders; provided that a termination fee, equal to the sum of the base management fee and incentive management fee earned during the twelve months preceding such termination, will be due. If this Agreement is terminated pursuant to this Section 13, such termination shall be without any further liability or obligation of either party to the other, except as provided in Section 16 of this Agreement. SECTION 2. Assignments. (a) Except as set forth in Section 14(b) of this Agreement, this Agreement shall terminate automatically in the event of its assignment, in whole or in part, by the Manager, unless such assignment is consented to in writing by the REIT with the consent of a majority of the Unaffiliated Directors. Any such assignment shall bind the assignee hereunder in the same manner as the Manager is bound. In addition, the assignee shall execute and deliver to the REIT a counterpart of this Agreement naming such assignee as Manager. This Agreement shall not be assigned by the REIT without the prior written consent of the Manager, except in the case of assignment by the REIT to another REIT or other organization which is a successor (by merger, consolidation or purchase of assets) to the REIT, in which case such successor organization shall be bound hereunder and by the terms of such assignment in the same manner as the REIT is bound hereunder. (b) Notwithstanding any provision of this Agreement, the Manager may subcontract and assign any or all of its responsibilities under Sections 2(b), 2(c) and 2(d) of this Agreement to any of its Affiliates, and the REIT hereby consents to any such assignment and subcontracting. SECTION 3. Termination by REIT for Cause. At the option of the REIT, this Agreement shall be and become terminated upon 60 days' written notice of termination from the Board of Directors to the Manager, without payment of any termination fee, if any of the following events shall occur: (a) if the Manager shall violate any provision of this Agreement and, after notice of such violation, shall not cure such violation within 30 days; or (b) there is entered an order for relief or similar decree or order with respect to the Manager by a court having competent jurisdiction in an involuntary case under the federal bankruptcy laws as now or hereafter constituted or under any applicable federal or state bankruptcy, insolvency or other similar laws; or the Manager (i) ceases, or admits in writing its inability to pay its debts as they become due and payable, or makes a general assignment for the benefit of, or enters into any composition or arrangement with, creditors; (ii) applies for, or consents (by admission of material allegations of a petition or otherwise) to the appointment of a receiver, trustee, assignee, custodian, liquidator or sequestrator (or other similar official) of the Manager or of any substantial part of its properties or assets, or authorizes such an application or consent, or proceedings seeking such appointment are commenced without such authorization, consent or application against the Manager and continue undismissed for 30 days; (iii) authorizes or files a voluntary petition in bankruptcy, or applies for or consents (by admission of material allegations of a petition or otherwise) to the application of any bankruptcy, reorganization, arrangement, readjustment of debt, insolvency, dissolution, liquidation or other similar law of any jurisdiction, or authorizes such application or consent, or proceedings to such end are instituted against the Manager without such authorization, application or consent and are approved as properly instituted and remain undismissed for 30 days or result in adjudication of bankruptcy or insolvency; or (iv) permits or suffers all or any substantial part of its properties or assets to be sequestered or attached by court order and the order remains undismissed for 30 days. (c) If any of the events specified in Section 15(b) of this Agreement shall occur, the Manager shall give prompt written notice thereof to the Board of Directors upon the happening of such event. 7 SECTION 4. Action Upon Termination. From and after the effective date of termination of this Agreement, pursuant to Sections 13, 14, or 15 of this Agreement, the Manager shall not be entitled to compensation for further services hereunder, but shall be paid all compensation accruing to the date of termination and, if terminated pursuant to Section 13, the applicable termination fee. Upon such termination, the Manager shall forthwith: (a) after deducting any accrued compensation and reimbursement for its expenses to which it is then entitled, pay over to the Company or a Subsidiary all money collected and held for the account of the Company or a Subsidiary pursuant to this Agreement; (b) deliver to the Board of Directors a full accounting, including a statement showing all payments collected by it and a statement of all money held by it, covering the period following the date of the last accounting furnished to the Board of Directors with respect to the Company or a Subsidiary; and (c) deliver to the Board of Directors all property and documents of the Company or any Subsidiary then in the custody of the Manager. SECTION 5. Release of Money or Other Property Upon Written Request. The Manager agrees that any money or other property of the Company or Subsidiary held by the Manager under this Agreement shall be held by the Manager as custodian for the Company or Subsidiary, and the Manager's records shall be appropriately marked clearly to reflect the ownership of such money or other property by the Company or such Subsidiary. Upon the receipt by the Manager of a written request signed by a duly authorized officer of the Company requesting the Manager to release to the Company or any Subsidiary any money or other property then held by the Manager for the account of the Company or any Subsidiary under this Agreement, the Manager shall release such money or other property to the Company or any Subsidiary within a reasonable period of time, but in no event later than 60 days following such request. The Manager shall not be liable to the Company, any Subsidiary, the Unaffiliated Directors, or the Company's or a Subsidiary's stockholders or partners for any acts performed or omissions to act by the Company or any Subsidiary in connection with the money or other property released to the Company or any Subsidiary in accordance with this Section. The Company and any Subsidiary shall indemnify the Manager, its directors, officers, stockholders and employees against any and all expenses, losses, damages, liabilities, demands, charges and claims of any nature whatsoever, which arise in connection with the Manager's release of such money or other property to the Company or any Subsidiary in accordance with the terms of this Section 19 of this Agreement. Indemnification pursuant to this provision shall be in addition to any right of the Manager to indemnification under Section 11 of this Agreement. SECTION 6. Representations and Warranties. (a) The Company hereby represents and warrants to the Manager as follows: (i) The REIT is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, has the corporate power to own its assets and to transact the business in which it is now engaged and is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification, except for failures to be so qualified, authorized or licensed that could not in the aggregate have a material adverse effect on the business operations, assets or financial condition of the REIT and its subsidiaries, taken as a whole. The REIT does not do business under any fictitious business name. (ii) The REIT has the corporate power and authority to execute, deliver and perform this Agreement and all obligations required hereunder and has taken all necessary corporate action to authorize this Agreement on the terms and conditions hereof and the execution, delivery and performance of this Agreement and all obligations required hereunder. No consent of any other person including, without limitation, stockholders and creditors of the REIT, and no license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority is 8 required by the REIT in connection with this Agreement or the execution, delivery, performance, validity or enforceability of this Agreement and all obligations required hereunder. This Agreement has been, and each instrument or document required hereunder will be, executed and delivered by a duly authorized officer of the REIT, and this Agreement constitutes, and each instrument or document required hereunder when executed and delivered hereunder will constitute, the legally valid and binding obligation of the REIT enforceable against the REIT in accordance with its terms. (iii) The execution, delivery and performance of this Agreement and the documents or instruments required hereunder will not violate any provision of any existing law or regulation binding on the REIT, or any order, judgment, award or decree of any court, arbitrator or governmental authority binding on the REIT, or the Governing Instruments of, or any securities issued by the REIT or of any mortgage, indenture, lease, contract or other agreement, instrument or undertaking to which the REIT is a party or by which the REIT or any of its assets may be bound, the violation of which would have a material adverse effect on the business operations, assets or financial condition of the REIT and its subsidiaries, taken as a whole, and will not result in, or require, the creation or imposition of any lien on any of its property, assets or revenues pursuant to the provisions of any such mortgage, indenture, lease, contract or other agreement, instrument or undertaking. (b) The Manager hereby represents and warrants to the REIT as follows: (i) the Manager is duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation, has the corporate power to own its assets and to transact the business in which it is now engaged and is duly qualified to do business and is in good standing under the laws of each jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification, except for failures to be so qualified, authorized or licensed that could not in the aggregate have a material adverse effect on the business operations, assets or financial condition of the Manager and its subsidiaries, taken as a whole. The Manager does not do business under any fictitious business name. (ii) The Manager has the corporate power and authority to execute, deliver and perform this Agreement and all obligations required hereunder and has taken all necessary partnership action to authorize this Agreement on the terms and conditions hereof and the execution, delivery and performance of this Agreement and all obligations required hereunder. No consent of any other person including, without limitation, partners and creditors of the Manager, and no license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority is required by the Manager in connection with this Agreement or the execution, delivery, performance, validity or enforceability of this Agreement and all obligations required hereunder. This Agreement has been, and each instrument or document required hereunder will be, executed and delivered by a duly authorized agent of the Manager, and this Agreement constitutes, and each instrument or document required hereunder when executed and delivered hereunder will constitute, the legally valid and binding obligation of the Manager enforceable against the Manager in accordance with its terms. (iii) The execution, delivery and performance of this Agreement and the documents or instruments required hereunder, will not violate any provision of any existing law or regulation binding on the Manager, or any order, judgment, award or decree of any court, arbitrator or governmental authority binding on the Manager, or the partnership agreement of, or any securities issued by the Manager or of any mortgage, indenture, lease, contract or other agreement, instrument or undertaking to which the Manager is a party or by which the Manager or any of its assets may be bound, the violation of which would have a material adverse effect on the business operations, assets or financial condition of the Manager and its subsidiaries, taken as a whole, and will not result in, or require, the creation or imposition of any lien on any of its property, assets or revenues pursuant to the provisions of any such mortgage, indenture, lease, contract or other agreement, instrument or undertaking. SECTION 7. Notices. Unless expressly provided otherwise herein, all notices, requests, demands and other communications required or permitted under this Agreement shall be in writing and shall be deemed 9 to have been duly given, made and received when delivered against receipt or upon actual receipt of registered or certified mail, postage prepaid, return receipt requested, addressed as set forth below: (a) If to the REIT: Ocwen Asset Investment Corp. 1675 Palm Beach Lakes Blvd. West Palm Beach, FL 33401 Attention: President with a copy given in the manner prescribed above, to: George C. Howell, III, Esquire Hunton & Williams 951 East Byrd Street Richmond, Virginia 23219-4074 (b) If to the Manager: Ocwen Capital Corporation 1675 Palm Beach Lakes Blvd. West Palm Beach, FL 33401 Attention: President with a copy given in the manner prescribed above, to: George C. Howell, III, Esquire Hunton & Williams 951 East Byrd Street Richmond, Virginia 23219-4074 Either party may alter the address to which communications or copies are to be sent by giving notice of such change of address in conformity with the provisions of this Section 21 for the giving of notice. SECTION 8. Binding Nature of Agreement; Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns as provided herein. SECTION 9. Entire Agreement. This Agreement contains the entire agreement and understanding among the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements, understandings, inducements and conditions, express or implied, oral or written, of any nature whatsoever with respect to the subject matter hereof. The express terms hereof control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms hereof. This Agreement may not be modified or amended other than by an agreement in writing. SECTION 10. Controlling Law. This Agreement and all questions relating to its validity, interpretation, performance and enforcement shall be governed by and construed, interpreted and enforced in accordance with the laws of the Commonwealth of Virginia, notwithstanding any Virginia or other conflict-of-law provisions to the contrary. SECTION 11. Schedules and Exhibits. All Schedules and Exhibits referred to herein or attached hereto are hereby incorporated by reference into, and made a part of, this Agreement. SECTION 12. Indulgences, Not Waivers. Neither the failure nor any delay on the part of a party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. No waiver shall be effective unless it is in writing and is signed by the party asserted to have granted such waiver. SECTION 13. Costs and Expenses. Each party hereto shall bear its own costs and expenses (including the fees and disbursements of counsel and accountants) incurred in connection with the negotiations and preparation of and the closing under this Agreement, and all matters incident thereto. SECTION 14. Titles Not to Affect Interpretation. The titles of paragraphs and subparagraphs contained in this Agreement are for convenience only, and they neither form a part of this Agreement nor are they to be used in the construction or interpretation hereof. 10 SECTION 15. Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all of the parties reflected hereon as the signatories. SECTION 16. Provisions Separable. The provisions of this Agreement are independent of and separable from each other, and no provision shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other or others of them may be invalid or unenforceable in whole or in part. SECTION 17. Gender. Words used herein regardless of the number and gender specifically used, shall be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine or neuter, as the context requires. SECTION J. Computation of Interest. Interest will be computed on the basis of a 360-day year consisting of twelve months of thirty days each. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. OCWEN ASSET INVESTMENT CORP. By: ------------------------ Its: ----------------------- OCWEN CAPITAL CORPORATION By: ------------------------ Its: ----------------------- 11 EX-10.2 5 EXHIBIT 10.2 d Exhibit 10.2 FORM OF REGISTRATION RIGHTS AGREEMENT This REGISTRATION RIGHTS AGREEMENT ("Agreement") is entered into as of the day of , 1997 by and among Ocwen Asset Investment Corp. (the "Company"), Ocwen Financial Corporation ("OFC") and Ocwen Capital Corporation (the "Manager"). RECITALS WHEREAS, the Company and OFC have entered into an agreement (the "Purchase Agreement") pursuant to which the Company has agreed to sell to OFC, and OFC has agreed to purchase, 1,875,000 shares of common stock in the Company ("Common Stock"); WHEREAS, the Company and the Manager have entered into an agreement (the "Management Agreement") pursuant to which the Manager will perform managerial services for the Company and its subsidiaries; WHEREAS, the Company has established a stock option plan (the "Plan") pursuant to which options to acquire shares of Common Stock may be granted, and, pursuant to an agreement (the "Stock Option Agreement") the Company has granted all of the options available under the Plan (the "Options") to the Manager, which will entitle the Manager to acquire 1,437,500 shares (1,625,000 assuming the Underwriters exercise their overallotment option) of Common Stock (or, at the election of the Company, units of limited partnership interest in Ocwen Partnership, L.P., which units will be redeemable for shares of Common Stock) over a four-year vesting period. WHEREAS, neither the shares of Common Stock to be acquired by OFC nor the shares of Common Stock subject to the Options have been registered under the Securities Act of 1933, as amended (the "Securities Act"); WHEREAS, from time to time, OFC or the Manager may acquire additional shares of Common Stock; WHEREAS, the parties hereto desire to set forth certain rights of OFC and the Manager as holders of Common Stock; NOW, THEREFORE, for and in consideration of the mutual promises and agreements contained in this Agreement, the parties hereto mutually agree as follows: AGREEMENT ARTICLE I DEFINITIONS "Affiliate" means (i) any Person that, directly or indirectly, controls or is controlled by or is under common control with such Person, (ii) any other Person that beneficially owns, directly or indirectly, 5% or more of the outstanding capital stock, shares or equity interests of such Person, or (iii) any officer, director, employee, partner or trustee of such Person or any Person controlling, controlled by or under common control with such Person (excluding trustees and persons serving in similar capacities who are not otherwise Affiliates of such Person). For the purposes of this definition, "control" (including the correlative meanings of the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, through the ownership of voting securities, partnership interests or other equity interests. 2 "Agreement" means this Registration Rights Agreement, as the same shall be amended, modified, or supplemented from time to time. "Closing" means the date on which the Company's registration statement on Form S-11, pursuant to which the Company's initial public offering of Common Stock will be made, is declared effective. "Closing Date" means the date on which the Closing occurs. "Closing Price" means the average of the high bid and low asked prices in the over-the-counter market, as reported by The Nasdaq Stock Market. "Code" means the Internal Revenue Code of 1986, as amended, and as hereafter amended from time to time. Reference to any particular provision of the Code shall mean that provision of the Code as of the date hereof and any succeeding provision of the Code. "Market Price" means, as of any determination date, the average of the Closing Prices for the five consecutive Trading Days ending on such date. "Person" means a natural person, a corporation, a partnership, a trust, a joint venture, any regulatory authority, or any other entity or organization. "SEC" means the United States Securities and Exchange Commission. "Securities Act" shall mean the Securities Act of 1933, as amended. "Shelf Registration" shall mean the registration of the shares owned by OFC and the Manager by the Company effected pursuant to Section 2.01 hereof. "Shelf Registration Period" shall mean the period of time the Company is required to make and maintain the Shelf Registration as defined in Section 2.01 hereof. "Trading Day" means any day other than a Saturday, a Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close. ARTICLE II SHELF REGISTRATION SECTION 2.01. Shelf Registration. If the Manager ceases to act as manager for the Company, then, upon the request of OFC or the Manager, the Company agrees to file with the SEC, no later than thirty days after the request, a shelf registration statement under Rule 415 of the Securities Act, or similar rule that may be adopted by the SEC (a "Shelf Registration") with respect to all shares of Common Stock held by OFC and the Manager (or, if so requested by OFC or the Manager, a specified portion of such shares). The Company will use its best efforts to have such Shelf Registration declared effective under the Securities Act as soon as possible. OFC and the Manager shall notify the Company of the method or methods of disposition that may be utilized by them in disposing of such shares and such information shall be included in the prospectus included in such Shelf Registration to the extent such methods are permitted by applicable law. The Company will use its best efforts to keep the Shelf Registration continuously effective until the date when all of the shares of Common Stock covered thereby are sold thereunder (the "Shelf Registration Period"). The Company agrees to furnish OFC and the Manager such number of copies of the relevant prospectuses, and supplements or amendments thereto, and such other documents as OFC or the Manager reasonably requests, during the Shelf Registration Period. The Company further agrees to supplement or make amendments to any Shelf Registration, if required by the rules, regulations or instructions applicable to the registration form utilized by the Company or by the Securities Act or rules and regulations thereunder for the Shelf Registration. The Company shall keep OFC and the Manager advised as to the initiation and progress of the registration of the shares pursuant to the Shelf Registration. 3 Moreover, upon request of OFC or the Manager, the Company shall register or qualify the shares covered by the Shelf Registration under the securities or blue sky laws of such jurisdictions within the United States as OFC or the Manager shall reasonably request, and do such other reasonable acts and things as may be required to enable OFC and the Manager to consummate the sale or other disposition in such jurisdiction of the shares of Common Stock. SECTION 2.02. Allocation of Expenses. The Company shall pay all expenses in connection with the Shelf Registration, including, without limitation (a) all expenses incident to filing with the National Association of Securities Dealers, Inc., (b) registration fees, (c) printing expenses, (d) accounting and legal fees and expenses, except to the extent OFC or the Manager elects to engage accountants or attorneys in addition to the accountants and attorneys engaged by the Company, (e) accounting expenses incident to or required by any such registration or qualification, and (f) expenses of complying with the securities or blue sky laws of any jurisdictions in connection with such registration or qualifications; provided, however, the Company shall not be liable for (i) any underwriting discounts or commissions to any broker attributable to the sale of OFC's or the Manager's shares, or (ii) any fees or expenses incurred by OFC or the Manager in connection with such registration which, according to the written instructions of any regulatory authority, the Company is not permitted to pay. SECTION 2.03. Indemnification. In connection with the Shelf Registration, the Company agrees to indemnify OFC and the Manager in accordance with the provisions of Sections 4.05 through 4.08 hereof. SECTION 2.04. Listing on Securities Exchange. If the Company shall list or maintain the listing of any Common Stock on any securities exchange or national market system, it will at its expense and as necessary to permit the registration and sale of OFC's and the Manager's shares of Common Stock hereunder, list and maintain such shares thereon. ARTICLE III OTHER REGISTRATIONS SECTION 3.01. Participation in Other Registrations. (a) If at any time on or after the date that is two (2) years after the Closing the Company shall propose the registration under the Securities Act of a public offering of Common Stock, the Company shall give written notice of such proposed registration as promptly as practicable to OFC and the Manager, and if, within fifteen (15) days after the giving of such notice, OFC or the Manager request the Company in writing to include any shares of Common Stock that are owned by OFC or the Manager and that have not previously registered under a Shelf Registration declared effective by the SEC, the Company shall include in the registration such amount of such shares of Common Stock as OFC or the Manager shall request; provided, however, that the Company shall not be required to give notice or include such shares in any such registration if the proposed registration relates solely to (i) securities to be offered to employees pursuant to a stock option, stock savings, or other employee benefit plan, (ii) securities proposed to be issued in exchange for securities or assets of, or in connection with a merger of consolidation with, another entity, (iii) securities to be offered by the Company generally to any class or series of its then existing security holders, (iv) securities issuable upon the conversion of securities which are the subject of an underwritten redemption, or (v) securities to be offered or issued pursuant to a combination of transactions referred to in clauses (i) through (iv). (b) If the proposed public offering is to be made pursuant to a firm commitment underwriting, at the option of either the Company or the proposed managing underwriter, the shares requested to be included by OFC and the Manager shall be included in such underwriting, on the same terms and conditions as to underwriting discounts and commissions. 4 SECTION 3.02. Obligations of the Company. The Company shall undertake the following obligations to OFC and the Manager in connection with the registration of the shares of OFC and the Manager pursuant to Section 3.01 hereof: (a) The Company shall furnish to OFC and the Manager or their managing underwriter such number of copies of each preliminary prospectus and final prospectus and amendment or supplement thereto as OFC or the Manager may reasonably request in order to effect the sale of the shares to be offered and sold by OFC and the Manager pursuant to Section 3.01 hereof, but only while the Company is required to cause the registration statement to remain current. (b) The Company shall use its best efforts to qualify the offering under applicable blue sky or other securities laws of such jurisdictions as may be specified by OFC or the Manager. (c) If necessary, the Company shall furnish to OFC and the Manager certificates representing ownership of the shares being offered which contain no restrictive legends, in such numbers and denominations as OFC and the Manager shall reasonably request. (d) The Company shall use its best efforts (including, without limitation, preparation of necessary post-effective amendments and supplements) to cause the registration statement to remain current for ninety (90) calendar days following its effective date or such lesser period as OFC, the Manager and their managing underwriter may accept. (e) The Company shall afford OFC and the Manager and their representatives the opportunity to make such reasonable examination and inquiry into the financial condition and business of the Company and its Affiliates as OFC's and the Manager's counsel may deem necessary or prudent in connection with the preparation of the registration statement or any other materials to be used in connection with OFC's and the Manager's offering. SECTION 3.03. Conditions to Obligations of the Company. The obligations of the Company to use its best efforts to cause the shares owned by OFC and the Manager to be registered under the Securities Act are subject to the following conditions: (a) In no event will the Company's obligations or duties under Article IV hereof apply or extend to any shares previously registered under a Shelf Registration pursuant to Article II hereof that was declared by the SEC to be, and that remains, effective. (b) Any request by OFC or the Manager for registration shall specify the amount of shares intended to be sold, contain the undertaking of OFC or the Manager, as the case may be, to provide all such information as may be reasonably required in order to permit the Company to comply with all applicable requirements of the SEC and to obtain acceleration of the effective date of the registration statement, identify any proposed underwriters, and specify the proposed method of offering and sale. (c) The Company may require, as a condition to fulfilling its obligations hereunder, the indemnification agreements described in Section 3.06 from OFC or the Manager, as the case may be, and their underwriters. (d) The Company shall not be required to register shares pursuant to Section 3.01 if, within ten (10) calendar days following receipt of the request for registration, the Company shall commit itself to repurchase the shares at the Market Price of such shares as of the date the Company receives such request. SECTION 3.04. Expenses of Registration. All underwriting discounts and commissions attributable to shares being sold by OFC or the Manager shall be borne by the OFC or the Manager, as applicable. As to the other expenses of registration: (a) In connection with any registration pursuant to Section 2.01, OFC or the Manager shall pay or reimburse the Company for the SEC registration fee, printing expenses, and the reasonable 5 expenses of qualifying the offering under applicable blue sky or other securities laws; provided, however, that such fees and expenses shall be borne by the Company with respect to the first two (2) registrations requested by OFC or the Manager under Section 2.01; and provided, further, that if the Company shall include any other securities of its issue in any registration pursuant to Section 2.01, such fees and expenses shall be apportioned among OFC, the Manager and the other offerors in accordance with the amount of securities being offered. (b) In connection with the first two (2) registrations requested by OFC or the Manager under Section 3.01, the Company shall pay the fees and expenses referred to in Section 3.04(a); provided, however, that as to any fees and expenses required to be paid by other security holders of the Company, such fees and expense shall be apportioned among OFC, the Manager and other security holders in accordance with the amount of securities being offered. (c) Any other fees or expenses incurred by one of the parties to a registration, including, without limitation, fees and expenses of attorneys and accountants, shall be borne by such party. SECTION 3.05. Indemnification by the Company. In the case of each registration pursuant to Article II or III hereof, the Company agrees to indemnify and hold harmless OFC and the Manager, the directors and officers of OFC and the Manager, each underwriter of the shares of OFC and the Manager so registered, and each person (if any) who controls OFC or the Manager or any such underwriter within the meaning of Section 15 of the Securities Act, against any and all losses, claims, damages, or liabilities to which they or any of them may become subject under the Securities Act or any other statute or common law, including any amount paid in settlement of any litigation, commenced or threatened, if such settlement is effected with the written consent of the Company, and to reimburse them for any legal or other expenses incurred by them in connection with investigating any claims and defending any actions, insofar as any such losses, claims, damages, liabilities, or actions arise out of or are based upon (a) any untrue statement or alleged untrue statement of a material fact contained in the registration statement filed to register the sale of such shares or any post-effective amendment thereto or in any filing made in connection with the qualification of the offering under blue sky or other securities laws of jurisdictions in which the shares are offered (a "Blue Sky Filing"), or the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, or (b) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, if used prior to the effective date of such registration statement, or contained in the final prospectus (as amended or supplemented if the Company shall have filed with the SEC any amendment thereof or supplement thereto) if used within the period during which the Company is required to keep the registration statement to which such prospectus relates current, or the omission or alleged omission to state therein (if so used) a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the indemnification agreement contained in this Section 3.05 shall not (i) apply to such losses, claims, damages, liabilities, or actions arising out of, or based upon, any such untrue statement or alleged untrue statement, or any such omission or alleged omission, if such statement or omission was made in reliance upon and in conformity with written information furnished to the Company by OFC or the Manager or such underwriter specifically for use in connection with preparation of the registration statement, any preliminary prospectus or final prospectus contained in the registration statement, any such amendment or supplement thereto or any Blue Sky Filing, or (ii) inure to the benefit of any underwriter or any person controlling such underwriter, if such underwriter failed to send or give a copy of the final prospectus to the person asserting the claim at or prior to the written confirmation of the sale of such shares to such person and if the untrue statement or omission concerned has been corrected in such final prospectus. SECTION 3.06. Indemnification by OFC and the Manager. In the case of each registration pursuant hereto, OFC and the Manager and each underwriter of the shares of OFC or the Manager so registered shall agree in the same manner and to the same extent as set forth in Section 3.05 hereof to indemnify and 6 hold harmless the Company, each person (if any) who controls the Company within the meaning of Section 15 of the Securities Act, the directors of the Company, and those officers of the Company who shall have signed any such registration statement, with respect to any untrue statement or alleged untrue statement in, or omission or alleged omission from, such registration statement or any post-effective amendment thereto or any preliminary prospectus or final prospectus (as amended or supplemented if amended or supplemented as aforesaid) contained in such registration statement or any Blue Sky Filing, if such statement or omission was made in reliance upon and in conformity with written information furnished to the Company by such indemnifying party specifically for use in accordance with the preparation of the registration statement, any preliminary prospectus or final prospectus contained in the registration statement, any such amendment or supplement thereto, or any Blue Sky Filing. SECTION 3.07. Indemnification Procedures. (a) Each indemnified party shall, with reasonable promptness after its receipt of written notice of the commencement of any action against such indemnified party in respect of which indemnity may be sought from an indemnifying party on account of an indemnity agreement contained herein, notify the indemnifying party in writing of the commencement thereof. (b) The omission to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party unless the failure to give notice materially adversely affects the ability of the indemnifying party to defend a claim which is the subject of indemnification hereunder (in which case the indemnifying party shall be relieved of its obligation only to the extent of offsetting any loss, damage, or liability it suffers as a consequence of the failure against its monetary obligation to the indemnified party). (c) In case any such action shall be brought against any indemnified party and the indemnified party shall so notify an indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and to the extent it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party hereunder for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation, except as provided below. (d) The indemnified party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel (other than reasonable costs of investigation) shall be paid by the indemnified party unless (i) the indemnifying party agrees to pay the same, (ii) the indemnifying party fails to assume the defense of such action with counsel reasonably satisfactory to the indemnified party, or (iii) the named parties to any such action (including any impleaded parties) have been advised by such counsel that representation of such indemnified party and the indemnifying party by the same counsel would be inappropriate under applicable standards of professional conduct (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of such indemnified party). No indemnifying party shall be liable for any settlement entered into without its consent. (e) The indemnity agreements contained herein shall be in addition to any liabilities which the indemnifying party may have pursuant to law. SECTION 3.08. Contribution. (a) If for any reason the indemnification provisions contemplated herein are either unavailable or insufficient to hold harmless an indemnified party in respect of any losses, claims, damages, or liabilities referred to therein, then the party that otherwise would be required to provide indemnification or the indemnifying party (in either case, for purposes of this section, the "Indemnifying Party") in respect of such losses, claims, damages, or liabilities, shall contribute to the amount paid or payable by the party that would otherwise be entitled to indemnification or the indemnified party (in either case, for purposes of this 7 section, the "Indemnified Party") as a result of such losses, claims, damages, liabilities, or expense, in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and the Indemnified Party, as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact related to information supplied by the Indemnifying Party or Indemnified Party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities, and expenses referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such party. In no event shall any holder of shares covered by the registration be required to contribute an amount greater than the dollar amount of the proceeds received by such holder from the sale of shares pursuant to the registration giving rise to the liability. (b) The parties hereto agree that it would not be just and equitable if contribution pursuant to this section were determined by PRO RATA allocation (even if the holders or any underwriters or all of them were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. No person or entity determined to have committed a fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation. ARTICLE IV GENERAL SECTION 4.01. Notices. All communications required or permitted under this Agreement shall be in writing and shall be deemed to have been given when delivered personally or upon deposit in the United States mail, registered, postage prepaid return receipt requested, to OFC and the Manager at 1675 Palm Beach Lakes Boulevard, West Palm Beach, Florida 33401; provided, however, that OFC or the Manager may specify a different address by notifying the Company in writing of such different address. Notices to the Company shall be delivered at or mailed to 1675 Palm Beach Lakes Boulevard, West Palm Beach, Florida 33401, or such different address as the Company may notify OFC and the Manager in writing. SECTION 4.02. Entire Agreement. This Agreement and exhibits attached hereto constitute the entire agreement of the parties and supersede all prior written agreements and prior and contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof. SECTION 4.03. Pronouns and Plurals. When the context in which words are used in this Agreement indicates that such is the intent, words in the singular number shall include the plural and the masculine gender shall include the neuter or female gender as the context may require. SECTION 4.04. Headings. The article headings or sections in this Agreement are for convenience only and shall not be used in construing the scope of this Agreement or any particular article. SECTION 4.05. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original copy and all of which together shall constitute one and the same instrument binding on all parties hereto, notwithstanding that all parties shall not have signed the same counterpart. SECTION 4.06. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia. 8 IN WITNESS WHEREOF, each party hereto, through its officer thereunto duly authorized, has duly executed this Agreement as of the day and year first above written. OCWEN ASSET INVESTMENT CORP. By: ------------------------ Name: ---------------------- Its: ----------------------- OCWEN FINANCIAL CORPORATION By: ------------------------ Name: ---------------------- Its: ----------------------- OCWEN CAPITAL CORPORATION By: ------------------------ Name: ---------------------- Its: ----------------------- 9 EX-10.3 6 EX-10.3 EXHIBIT 10.3 LIMITED PARTNERSHIP AGREEMENT OF OCWEN PARTNERSHIP, L.P. THIS LIMITED PARTNERSHIP AGREEMENT (this "Agreement") OF OCWEN PARTNERSHIP, L.P. (the "Partnership"), is made and entered into as of the ____ day of February, 1997, by and between OCWEN GENERAL, INC., a Virginia corporation (the "General Partner"), and OCWEN LIMITED, INC., a Virginia corporation (the "Limited Partner") (collectively, the "Partners" and individually, a "Partner"). NOW, THEREFORE, in consideration of the promises and mutual covenants and agreements between the parties hereto, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: ARTICLE I FORMATION OF PARTNERSHIP 1.1 Name. The name of the Partnership shall be Ocwen Partnership, L.P. 1.2 Term. The Partnership shall continue until December 31, 2050, unless sooner terminated as hereinafter provided or by operation of law. 1.3 Purpose. The purposes of the Partnership are to (a) own, hold, sell, lease, transfer, exchange, and operate real estate-related assets and (b) transact any and all other lawful business for which the Partnership may be organized under Virginia law that is incident, necessary, and appropriate to accomplish the foregoing. 1.4 Specified Office. The specified office and place of business of the Partnership, and where the records of the Partnership shall be kept, shall be 1675 Palm Beach Lakes Boulevard, Suite 532, West Palm Beach, Florida 33401. 1.5 Registered Agent. The initial registered agent shall be George C. Howell, III, who is a resident of Virginia and a member of the Virginia State Bar, and whose business address is the Riverfront Plaza, East Tower, 951 East Byrd Street in the City of Richmond. ARTICLE II PERCENTAGE INTERESTS AND CAPITAL CONTRIBUTIONS 2.1 Percentage Interests and Initial Capital Contributions. Each Partner's address and percentage interest in the Partnership ("Percentage Interest") are as follows: Percentage Partner Interest ------- ---------- General Partner: 1% Ocwen General, Inc. 1675 Palm Beach Lakes Boulevard, Suite 532 West Palm Beach, Florida 33401 Limited Partner: 99% Ocwen Limited, Inc. 1675 Palm Beach Lakes Boulevard, Suite 532 West Palm Beach, Florida 33401 The General Partner's initial contribution to the capital of the Partnership shall be $1. The Limited Partner's initial contribution to the capital of the Partnership shall be $99. 2.2 Additional Contributions. As and when the Partnership shall require funds to meet the costs and expenses of all business activities with respect to the Partnership, the General Partner shall contribute to the Partnership such required funds as may be determined by the General Partner. The Limited Partner shall have no obligation to contribute any funds pursuant to this Section 2.2. ARTICLE III MANAGEMENT 3.1 Authority of the General Partner; Indemnification. The overall management and control of the business and affairs of the Partnership shall be vested in the General Partner. Except as otherwise provided in this Agreement, all decisions concerning the management of the business and affairs of the Partnership and its assets shall be made exclusively by the General Partner, all in accordance with the objects and purposes of the Partnership set forth in Section 1.3. The General Partner shall be authorized to execute documents and take actions on behalf of the Partnership, which shall be binding on the Partnership and on which third parties shall be entitled to rely. The Partnership shall indemnify each Partner for any costs and/or expenses incurred in connection with actions taken in good faith on behalf of the Partnership. 2 ARTICLE IV DISTRIBUTIONS 4.1 Definition of Net Cash Flow. As used herein, the term "Net Cash Flow" for any period shall mean the excess, if any, of (i) the cash receipts of the Partnership (other than from the sale of the Partnership's assets upon liquidation) and amounts withdrawn from reserves, over (ii) disbursements of cash by the Partnership (other than distributions to Partners and amounts paid pursuant to Section 4.3 hereof), including the payment of operating expenses, debt-service on any mortgage or deed of trust encumbering the Partnership's property, capital expenditures, and such amounts as may be required by the Partnership (as reasonably determined by the General Partner) to pay Partnership expenses and to maintain reserves and working capital. 4.2 Distribution of Net Cash Flow. Net Cash Flow shall be distributed on a quarterly basis (or, at the election of the General Partner, on a more frequent basis) among the Partners at such time or times as shall be determined by the General Partner in accordance with their respective Percentage Interests. 4.3 Distributions upon Liquidation. (a) Upon liquidation of the Partnership, after payment of, or adequate provision for, debts and obligations of the Partnership, including any Partner loans, any remaining assets of the Partnership shall be distributed to all Partners with positive Capital Accounts (as defined in Section 5.1 hereof) in accordance with their respective positive Capital Account balances. For purposes of this Section 4.3(a), the Capital Account of each Partner shall be determined (i) after all adjustments made in accordance with Article V and Section 4.2 hereof resulting from Partnership operations and from all sales and dispositions of all or any part of the Partnership's assets. Any distributions pursuant to this Section 4.3 shall be made by the end of the Partnership's taxable year in which the liquidation occurs (or, if later, within 90 days after the date of the liquidation). To the extent deemed advisable by the General Partner, appropriate arrangements (including the use of a liquidating trust) may be made to assure that adequate funds are available to pay any contingent debts or obligations of the Partnership. (b) If the General Partner has a negative balance in its Capital Account following a liquidation of the Partnership, as determined after taking into account all Capital Account adjustments in accordance with Article V and Section 4.2 hereof resulting from Partnership operations and from all sales and dispositions of all or any part of the Partnership's assets, the General Partner shall contribute to the Partnership an amount of cash equal to the negative balance in its Capital Account and such cash shall be distributed by the Partnership to creditors, if any, and then to the Limited Partner in accordance with Section 4.3(a). Such contribution by the General Partner shall be made by the end of the Partnership's taxable year in which the liquidation occurs (or, if later, within 90 days after the date of the liquidation). 3 ARTICLE V CAPITAL ACCOUNTS; PROFITS AND LOSSES 5.1 Capital Accounts. The General Partner, on behalf of the Partnership, shall establish and maintain, or cause to be established and maintained, a capital account ("Capital Account") for each Partner in accordance with the rules described in section 1.704-1(b)(2)(iv) of the Treasury regulations (the "Regulations") promulgated under the Internal Revenue Code of 1986, as amended (the "Code"). 5.2 Definition of Profit and Loss. "Profit" and "Loss" and any items of income, gain, expense, or loss referred to in this Agreement shall be determined in accordance with federal income tax accounting principles, as modified by Regulations section 1.704-1(b)(2)(iv), except that Profit and Loss shall not include items allocable pursuant to Section 5.4, 5.5, or 5.6 hereof. All allocations of income, Profit, gain, Loss, and expense (and all items contained therein) for federal income tax purposes shall be identical to all allocations of such items set forth in this Article V, except as otherwise required by section 704(c) of the Code and Regulations section 1.704-1(b)(4). 5.3 Allocation of Profit and Loss. Except as otherwise provided in this Article V, Profit and Loss of the Partnership shall be allocated among the Partners in accordance with their respective Percentage Interests. 5.4 Minimum Gain Chargeback. Notwithstanding any provision to the contrary, (i) any expense of the Partnership that is a "nonrecourse deduction" within the meaning of Regulations section 1.704-2(b)(1) shall be allocated in accordance with the Partners' respective Percentage Interests, (ii) any expense of the Partnership that is a "partner nonrecourse deduction" within the meaning of Regulations section 1.704-2(i)(2) shall be allocated in accordance with Regulations section 1.704-2(i)(1), (iii) if there is a net decrease in Partnership Minimum Gain (as hereinafter defined) within the meaning of Regulations section 1.704-2(f)(1) for any Partnership taxable year, items of gain and income shall be allocated among the Partners in accordance with Regulations section 1.704-2(f) and the ordering rules contained in Regulations section 1.704-2(j), and (iv) if there is a net decrease in Partner Nonrecourse Debt Minimum Gain (as hereinafter defined) within the meaning of Regulations section 1.704-2(i)(4) for any Partnership taxable year, items of gain and income shall be allocated among the Partners in accordance with Regulations section 1.704-2(i)(4) and the ordering rules contained in Regulations section 1.704-2(j). A Partner's "interest in partnership profits" for purposes of determining its share of the nonrecourse liabilities of the Partnership within the meaning of Regulations section 1.752-3(a)(3) shall be such Partner's Percentage Interest. "Partnership Minimum Gain" shall have the meaning set forth in Regulations section 1.704-2(d). A Partner's share of Partnership Minimum Gain shall be determined in accordance with Regulations section 1.704-2(g)(1). "Partner Nonrecourse Debt Minimum Gain" shall have the meaning set forth in Regulations section 1.704-2(i). A Partner's share of Partner Nonrecourse Debt Minimum Gain shall be determined in accordance with Regulations section 1.704-2(i)(5). 4 5.5 Qualified Income Offset. If the Limited Partner receives in any taxable year an adjustment, allocation, or distribution described in subparagraph (4), (5), or (6) of Regulations section 1.704-1(b)(2)(ii)(d) that causes or increases a negative balance in such Partner's Capital Account that exceeds the sum of such Partner's shares of Partnership Minimum Gain and Partner Nonrecourse Debt Minimum Gain, as determined in accordance with Regulations sections 1.704-2(g) and 1.704-2(i), such Partner shall be allocated specially for such taxable year (and, if necessary, later taxable years) items of income and gain in an amount and manner sufficient to eliminate such negative Capital Account balance as quickly as possible as provided in Regulations section 1.704-1(b)(2)(ii)(d). After the occurrence of an allocation of income or gain to the Limited Partner in accordance with this Section 5.5, to the extent permitted by Regulations section 1.704-1(b) and Section 5.6 hereof, items of expense or loss shall be allocated to such Partner in an amount necessary to offset the income or gain previously allocated to such Partner under this Section 5.5. 5.6 Capital Account Deficits. Loss shall not be allocated to the Limited Partner to the extent that such allocation would cause a deficit in such Partner's Capital Account (after reduction to reflect items described in Regulations sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6)) to exceed the sum of such Partner's shares of Partnership Minimum Gain and Partner Nonrecourse Debt Minimum Gain. Any Loss in excess of that limitation shall be allocated to the General Partner. After the occurrence of an allocation of Loss to the General Partner in accordance with this Section 5.6, to the extent permitted by Regulations section 1.704-1(b), Profit shall be allocated to such Partner in an amount necessary to offset the Loss previously allocated to such Partner under this Section 5.6. ARTICLE VI TRANSFERS; TERMINATION 6.1 Transfers. Interests in the Partnership ("Partnership Interests") may not be assigned in whole or in part. 5 Any transfer of a Partnership Interest shall be void AB INITIO. 6.2 Termination. (a) The Partnership shall terminate upon the first to occur of any of the following events or dates: (i) in accordance with Section 1.2 above; (ii) by written agreement of the Partners; (iii) by the sale or other disposition of all or substantially all of the assets of the Partnership; (iv) the withdrawal, removal, bankruptcy, or termination of the General Partner unless, within 90 days after such event, the Partners agree in writing to continue the business of the Partnership and to appoint another general partner; (v) the entry of a decree of judicial dissolution; or (vi) the automatic cancellation of the Partnership's certificate of limited partnership due to nonpayment of the annual registration fee. 6 (b) Upon termination of the Partnership under Section 6.2(a), the Partnership shall discharge the obligations and pay the indebtedness of the Partnership, or provide therefor, and distribute the balance, if any, of the assets of the Partnership to the Partners as set forth in Section 4.3. After the foregoing has been accomplished, it shall be deemed that the Partnership has been liquidated and this Agreement shall terminate and no Partner shall have any further rights or obligations hereunder. The liquidation of the Partnership and the termination of the business and affairs of the Partnership shall be conducted by the General Partner. During such period, the business and affairs of the Partnership shall be conducted so as to maintain and preserve the assets of the Partnership in a manner consistent with the liquidation of the Partnership. ARTICLE VII BOOKS, RECORDS, AND ACCOUNTING 7.1 Fiscal and Taxable Year. The fiscal and taxable year of the Partnership shall be the calendar year. 7.2 Method of Accounting. The General Partner shall keep, or cause to be kept, full and accurate records of all transactions of the Partnership in accordance with a method of accounting that is (i) permissible under the Code and (ii) agreed to by the Partners. 7.3 Books and Records. All books and records of the Partnership shall, at all times be maintained at the principal office of the Partnership or at such other place as shall be determined by the General Partner. 7.4 Federal Tax Returns. The General Partner shall prepare, or cause to be prepared, at the expense of the Partnership, a federal information tax return in compliance with the provisions of the Code, and any required state and local tax returns for the Partnership for each taxable year of the Partnership. 7.5 Tax Return Information. The General Partner shall cause to be delivered to the Limited Partner such information as shall be necessary for the preparation by the Limited Partner of its federal, state and local income and other tax returns. 7.6 Tax Matters Partner. The General Partner shall be the Tax Matters Partner of the Partnership within the meaning of section 6231 of the Code. All elections required or permitted to be made by the Partnership under the Code shall be made by the General Partner in its sole discretion. 7 ARTICLE VIII GENERAL 8.1 Notice. All notices, instructions, requests, demands or other communications that are required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given when delivered by hand or when deposited in the United States Mail, by registered or certified mail, return receipt requested, postage prepaid to the addresses set forth in Article II or at such different address as shall be specified by notice given in the manner described herein. 8.2 Applicable Law. This Agreement and the obligations of the parties hereunder shall be interpreted, construed, and enforced in accordance with the laws of the Commonwealth of Virginia. 8.3 Entire Agreement; Amendments. This Agreement contains the entire agreement among the parties hereto relative to the operation of the Partnership. No variations, modifications, or changes to or of this Agreement shall be binding upon a party unless set forth in a document duly executed by or on behalf of such party. Section 6.1 hereof shall not be amended unless and until persons other than the General Partner and the Limited Partner are admitted as partners of the Partnership. 8.4 Severability. If any provision of this Agreement or the application thereof to any person or circumstance shall be invalid or unenforceable to any extent, the remainder of this Agreement and the application of such provisions to other persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law. 8.5 Counterparts. This Agreement may be executed in counterparts and as so executed shall constitute one Agreement. 8.6 Captions. Captions and headings contained in this Agreement are inserted only as a matter of convenience and in no way define, limit, extend or describe the scope of this Agreement or the intent of any provisions hereof. 8.7 Attorney's Fees. In the event of any litigation between the Partners arising out of this Agreement or relating to the Partnership, the prevailing party shall be entitled to recover from the nonprevailing party its reasonable attorney's fees and costs at the trial and all appellate levels. 8.8 Binding Effect. Except as otherwise provided in this Agreement, every covenant, term and provision of this Agreement shall be binding upon and inure to the benefit of the Partners and their respective heirs, legatees, legal representatives, and permitted successors, transferees, and assigns. 8 IN WITNESS WHEREOF, each of Ocwen General, Inc. and Ocwen Limited, Inc. has caused this Agreement to be executed by its duly authorized officer or representative as of the date first above written. GENERAL PARTNER: OCWEN GENERAL, INC., a Virginia corporation By:_____________________________________ Name: Title: LIMITED PARTNER: OCWEN LIMITED, INC., a Virginia corporation By:______________________________________ Name: Title: 9 EX-23.2 7 EX-23.2 Exhibit 23.2 Consent of Independent Certified Public Accountants We hereby consent to the use in the Prospectus constituting part of Amendment No. 1 to the Registration Statement on Form S-11 of our report dated February 12, 1997 relating to the financial statement of Ocwen Asset Investment Corp., which appears in such Prospectus. We also consent to the reference to us under the heading "Experts" in such Prospectus. PRICE WATERHOUSE LLP Fort Lauderdale, Florida March 28, 1997 -----END PRIVACY-ENHANCED MESSAGE-----