UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
þ QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended September 30, 2006
¨ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the transition period from __________ to ___________
Commission
File Number: 001-32171
Opteum
Inc.
(Exact
name of registrant as specified in its charter)
|
Maryland
|
72-1571637
|
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
3305
Flamingo Drive, Vero Beach, Florida 32963
(Address
of principal executive offices) (Zip Code)
(772)
231-1400
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. YES
þ
NO
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
|
Large
accelerated filer ¨
|
Accelerated
filer þ
|
Non-accelerated
filer ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES ¨
NO
þ
As
of
December
18, 2006,
the
number of shares outstanding of the registrant’s Class A Common Stock, $0.001
par value, was 24,513,512;
the
number of shares outstanding of the registrant’s Class B Common Stock, $0.001
par value, was 319,388; and the number of shares outstanding of the registrant’s
Class C Common Stock, $0.001 par value, was 319,388.
EXPLANATORY
NOTE
As
disclosed in Form 12b-25 filed November 13, 2006, and Form 8-K/A filed
November 21, 2006, Opteum Inc. (“Opteum”, “the Company”, “OPX”) is filling Form
10-Q for the period ended September 30, 2006 after the required filling deadline
of November 9, 2006.
OPTEUM INC.
INDEX
|
PART
I. FINANCIAL INFORMATION
|
3
|
|
ITEM
1. FINANCIAL
STATEMENTS.
|
3
|
|
Consolidated
Balance Sheets as of September 30, 2006 (unaudited) and December
31,
2005
|
3
|
|
Consolidated
Statements of Operations for the nine and three months ended September
30,
2006 and 2005
(unaudited)
|
4
|
|
Consolidated
Statement of Stockholders’ Equity for the nine months ended September 30,
2006 (unaudited)
|
5
|
|
Consolidated
Statements of Cash Flows for the nine months ended September 30,
2006 and
2005 (unaudited)
|
6
|
|
Notes
to Consolidated Financial Statements (unaudited)
|
8
|
|
ITEM
2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS.
|
33
|
|
ITEM
3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|
47
|
|
ITEM
4. CONTROLS
AND PROCEDURES.
|
47
|
|
PART
II. OTHER INFORMATION
|
|
|
ITEM
1. LEGAL
PROCEEDINGS.
|
48
|
|
ITEM
1A. RISK
FACTORS
|
48
|
|
ITEM
6. EXHIBITS.
|
48
|
PART
I. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS.
|
OPTEUM
INC.
|
||||
|
CONSOLIDATED
BALANCE SHEETS
|
||||
|
(Unaudited)
|
||||
|
September
30,
|
December
31,
|
|||
|
ASSETS
|
2006
|
2005
|
||
|
MORTGAGE
BACKED SECURITIES:
|
||||
|
Pledged
to counterparties, at fair value
|
$
|
3,069,748,803
|
$
|
3,493,490,046
|
|
Unpledged,
at fair value
|
10,311,319
|
539,313
|
||
|
TOTAL
MORTGAGE BACKED SECURITIES
|
3,080,060,122
|
3,494,029,359
|
||
|
Cash
and cash equivalents
|
65,122,207
|
130,510,948
|
||
|
Restricted
cash
|
830,000
|
2,310,000
|
||
|
Securities
held for sale
|
1,041,513
|
2,782,548
|
||
|
Mortgage
loans held for sale, net
|
875,290,345
|
894,237,630
|
||
|
Retained
interests, trading
|
109,829,818
|
98,010,592
|
||
|
Mortgage
servicing rights, net
|
101,250,557
|
86,081,594
|
||
|
Principal
payments receivable
|
16,514,742
|
21,497,365
|
||
|
Accrued
interest receivable
|
15,021,433
|
15,740,475
|
||
|
Other
receivables, net
|
9,467,153
|
24,512,118
|
||
|
Property
and equipment, net
|
16,584,553
|
16,067,170
|
||
|
Prepaid
and other assets
|
18,233,018
|
19,321,766
|
||
|
TOTAL
ASSETS
|
$
|
4,309,245,461
|
$
|
4,805,101,565
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||
|
LIABILITIES:
|
||||
|
Repurchase
agreements
|
$
|
2,996,739,729
|
$
|
3,337,598,362
|
|
Warehouse
lines of credit and drafts payable
|
852,676,646
|
873,741,429
|
||
|
Other
secured borrowings
|
104,039,052
|
104,886,339
|
||
|
Junior
subordinated notes due to Bimini Capital Trust I & II
|
103,097,000
|
103,097,000
|
||
|
Accrued
interest payable
|
20,075,738
|
30,232,719
|
||
|
Unsettled
security purchases
|
-
|
58,278,701
|
||
|
Dividends
payable
|
1,267,736
|
-
|
||
|
Compensation
and related benefits payable
|
801,667
|
-
|
||
|
Deferred
tax liability
|
4,324,397
|
18,360,679
|
||
|
Accounts
payable, accrued expenses and other
|
20,480,890
|
26,417,996
|
||
|
TOTAL
LIABILITIES
|
4,103,502,855
|
4,552,613,225
|
||
|
STOCKHOLDERS'
EQUITY:
|
||||
|
Preferred
Stock, $0.001 par value; 10,000,000 shares authorized; designated
1,800,000 Class A Redeemable and 2,000,000 Class B Redeemable;
no shares
issued and outstanding as of September 30, 2006, and 1,223,208
shares of
Class A Redeemable and no shares as Class B Redeemable issued
and
outstanding at December 31, 2005
|
-
|
1,223
|
||
|
Class
A Common Stock, $0.001 par value; 98,000,000 shares designated:
24,473,315
shares issued and outstanding as of September 30, 2006 and 24,129,042
shares issued and 23,567,242 shares outstanding as of December
31,
2005
|
24,474
|
24,129
|
||
|
Less
Treasury Stock; 561,800 shares of Class A Common Stock, at cost,
as of
December 31, 2005
|
-
|
(5,236,354)
|
||
|
Class
B Common Stock, $0.001 par value; 1,000,000 shares designated,
319,388
shares issued and outstanding as of September 30, 2006 and December
31,
2005
|
319
|
319
|
||
|
Class
C Common Stock, $0.001 par value; 1,000,000 shares designated,
319,388
shares issued and outstanding as of September 30, 2006 and December
31,
2005
|
319
|
319
|
||
|
Additional
paid-in capital
|
335,021,514
|
342,230,342
|
||
|
Accumulated
other comprehensive loss
|
(98,030,783)
|
(76,494,378)
|
||
|
Accumulated
deficit
|
(31,273,237)
|
(8,037,260)
|
||
|
|
||||
|
TOTAL
STOCKHOLDERS' EQUITY
|
205,742,606
|
252,488,340
|
||
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$
|
4,309,245,461
|
$
|
4,805,101,565
|
|
See
notes to consolidated financial
statements.
|
||||
|
OPTEUM
INC.
|
||||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||
|
(Unaudited)
|
||||||||
|
Nine
Months Ended
|
Three
Months Ended
|
|||||||
|
September
30, 2006
|
September
30, 2005
|
September
30, 2006
|
September
30, 2005
|
|||||
|
INTEREST
INCOME:
|
||||||||
|
Interest
income, net of amortization of premium and discount
|
$
|
204,251,214
|
$
|
111,392,882
|
$
|
68,381,064
|
$
|
43,574,308
|
|
Interest
expense
|
(183,808,775)
|
(80,053,678)
|
(67,101,711)
|
(33,508,546)
|
||||
|
NET
INTEREST INCOME
|
20,442,439
|
31,339,204
|
1,279,353
|
10,065,762
|
||||
|
NON-INTEREST
INCOME:
|
||||||||
|
GAINS
ON MORTGAGE BANKING ACTIVITIES
|
17,430,207
|
-
|
20,311,868
|
-
|
||||
|
GAINS
ON SALES OF MORTGAGE BACKED SECURITIES
|
-
|
1,993,457
|
-
|
11,075
|
||||
|
SERVICING
INCOME (LOSS):
|
||||||||
|
Servicing
fee income
|
18,895,459
|
-
|
6,221,185
|
-
|
||||
|
Fair
value adjustments to mortgage servicing rights
|
(24,135,886)
|
-
|
(13,305,807)
|
-
|
||||
|
NET
SERVICING (LOSS)
|
(5,240,427)
|
-
|
(7,084,622)
|
-
|
||||
|
OTHER
NON-INTEREST INCOME
|
5,141,989
|
-
|
1,864,610
|
-
|
||||
|
TOTAL
NON-INTEREST INCOME
|
17,331,769
|
1,993,457
|
15,091,856
|
11,075
|
||||
|
TOTAL
NET REVENUES
|
37,774,208
|
33,332,661
|
16,371,209
|
10,076,837
|
||||
|
|
|
|||||||
|
DIRECT
REIT
OPERATING EXPENSES
|
742,376
|
923,205
|
196,552
|
299,287
|
||||
|
GENERAL
AND ADMINISTRATIVE EXPENSES:
|
||||||||
|
Compensation
and related benefits
|
27,521,255
|
3,925,044
|
9,897,316
|
1,402,435
|
||||
|
Directors’
fees and liability insurance
|
630,069
|
469,811
|
210,035
|
162,838
|
||||
|
Audit,
legal and other professional fees
|
4,229,703
|
570,594
|
1,614,806
|
209,994
|
||||
|
Other
interest
|
5,624,244
|
-
|
1,943,386
|
-
|
||||
|
Valuation
allowance
|
6,022,081
|
-
|
3,185,287
|
-
|
||||
|
Occupancy
and related
|
5,094,869
|
-
|
1,762,774
|
-
|
||||
|
Advertising
and marketing
|
3,845,655
|
-
|
1,409,454
|
-
|
||||
|
Other
administrative
|
15,399,407
|
442,498
|
5,469,941
|
127,026
|
||||
|
TOTAL
GENERAL AND ADMINISTRATIVE EXPENSES
|
68,367,283
|
5,407,947
|
25,492,999
|
1,902,293
|
||||
|
TOTAL
EXPENSES
|
69,109,659
|
6,331,152
|
25,689,551
|
2,201,580
|
||||
|
(LOSS)
INCOME BEFORE INCOME TAXES
|
(31,335,451)
|
27,001,509
|
(9,318,342)
|
7,875,257
|
||||
|
INCOME
TAX BENEFIT
|
15,712,589
|
-
|
3,062,647
|
-
|
||||
|
NET
(LOSS) INCOME
|
$
|
(15,622,862)
|
$
|
27,001,509
|
$
|
(6,255,695)
|
$
|
7,875,257
|
|
See
notes to consolidated financial
statements.
|
||||||||
|
OPTEUM
INC.
|
||||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS - CONT’D
|
||||||||
|
(Unaudited)
|
||||||||
|
Nine
Months Ended
|
Three
Months Ended
|
|||||||
|
September
30, 2006
|
September
30, 2005
|
September
30, 2006
|
September
30, 2005
|
|||||
|
BASIC
AND DILUTED NET (LOSS) INCOME PER SHARE OF:
|
||||||||
|
CLASS
A COMMON STOCK
|
$
|
(0.64)
|
$
|
1.27
|
$
|
(0.25)
|
$
|
0.37
|
|
CLASS
B COMMON STOCK
|
$
|
(0.63)
|
$
|
1.27
|
$
|
(0.25)
|
$
|
0.37
|
|
WEIGHTED
AVERAGE NUMBER OF SHARES OUTSTANDING USED IN COMPUTING BASIC AND
DILUTED
PER SHARE AMOUNTS:
|
||||||||
|
CLASS
A COMMON STOCK
|
23,931,190
|
20,864,842
|
24,376,375
|
20,900,703
|
||||
|
CLASS
B COMMON STOCK
|
319,388
|
319,388
|
319,388
|
319,388
|
||||
|
CASH
DIVIDENDS DECLARED PER SHARE OF:
|
||||||||
|
CLASS
A COMMON STOCK
|
$
|
0.41
|
$
|
1.31
|
$
|
0.05
|
$
|
0.38
|
|
CLASS
B COMMON STOCK
|
$
|
0.41
|
$
|
1.31
|
$
|
0.05
|
$
|
0.38
|
|
See
notes to consolidated financial
statements.
|
||||||||
|
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
|
||||||||||||
|
Nine
Months Ended September 30, 2006
|
||||||||||||
|
Common
Stock,
Amounts
at par value
|
Class
A Redeemable Preferred
|
Treasury
|
Additional
Paid-in
|
Accumulated
Other Comprehensive
|
Accumulated
|
|||||||
|
Class
A
|
Class
B
|
Class
C
|
Stock
|
Stock
|
Capital
|
Loss
|
Deficit
|
Total
|
||||
|
Balances,
December 31, 2005
|
$
24,129
|
$
319
|
$
319
|
$
1,223
|
$(5,236,354)
|
$342,230,342
|
$
(76,494,378)
|
$(8,037,260)
|
$
252,488,340
|
|||
|
Fair
value adjustment upon adoption of SFAS No. 156 (see Note
5)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
2,621,918
|
2,621,918
|
|||
|
Issuance
of Class A Common Stock for board compensation and equity plan,
net
|
211
|
-
|
-
|
-
|
-
|
941,872
|
-
|
|
942,083
|
|||
|
Conversion
of Class A Redeemable Preferred Stock into Class A Common
Stock
|
1,223
|
-
|
-
|
(1,223)
|
-
|
-
|
-
|
-
|
-
|
|||
|
Treasury
Stock purchases
|
-
|
-
|
-
|
-
|
(4,500,326)
|
-
|
-
|
-
|
(4,500,326)
|
|||
|
Retirement
of Treasury Stock
|
(1,089)
|
-
|
-
|
-
|
9,736,680
|
(9,735,591)
|
-
|
-
|
-
|
|||
|
Cash
dividends declared, March 2006
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(2,645,853)
|
(2,645,853)
|
|||
|
Cash
dividends declared, June 2006
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(6,321,444)
|
(6,321,444)
|
|||
|
Cash
dividends declared, September 2006
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,267,736)
|
(1,267,736)
|
|||
|
Phantom
shares vested and amortization of equity plan compensation,
net
|
-
|
-
|
-
|
-
|
-
|
1,713,275
|
-
|
-
|
1,713,275
|
|||
|
Stock
issuance costs, and other adjustments
|
-
|
-
|
-
|
-
|
-
|
(128,384)
|
-
|
-
|
(128,384)
|
|||
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(15,622,862)
|
(15,622,862)
|
|||
|
Unrealized
loss on available-for-sale securities, net
|
-
|
-
|
-
|
-
|
-
|
-
|
(21,536,405)
|
-
|
(21,536,405)
|
|||
|
Comprehensive
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(37,159,267)
|
|||
|
|
|
|
|
|
|
|
|
|
||||
|
Balances,
September 30, 2006
|
$24,474
|
$
319
|
$
319
|
$
-
|
$
-
|
$335,021,514
|
$(98,030,783)
|
$(31,273,237)
|
$
205,742,606
|
|||
|
See
notes to consolidated financial
statements.
|
||||||||||||
|
OPTEUM
INC.
|
|||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|||||
|
(Unaudited)
|
|||||
|
Nine
Months Ended September 30,
|
|||||
|
2006
|
2005
|
||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|||||
|
Net
(loss) income
|
$
|
(15,622,862)
|
$
|
27,001,509
|
|
|
Adjustments
to reconcile net (loss) income to net cash provided by (used in)
operating
activities:
|
|||||
|
(Gains)
on mortgage banking activities
|
(17,430,207)
|
-
|
|||
|
Amortization
of premium and discount on mortgage backed securities
|
(8,939,798)
|
16,657,961
|
|||
|
Increase
in residual interest in asset backed securities
|
(11,819,226)
|
-
|
|||
|
Decrease
in securities held for sale
|
1,741,035
|
-
|
|||
|
Increase
in mortgage servicing rights, net
|
(10,870,738)
|
-
|
|||
|
Deferred
income tax benefit
|
(15,712,589)
|
-
|
|||
|
(Gain)
on sales of mortgage backed securities
|
-
|
(1,993,457)
|
|||
|
Stock
compensation
|
2,655,358
|
1,834,718
|
|||
|
Depreciation
and amortization
|
3,229,317
|
172,869
|
|||
|
Changes
in operating assets and liabilities:
|
|||||
|
Decrease
in mortgage loans held for sale
|
36,377,492
|
-
|
|||
|
Decrease
in other receivables, net
|
15,044,965
|
-
|
|||
|
(Increase)/decrease
in accrued interest receivable
|
719,042
|
(5,318,794)
|
|||
|
(Increase)/decrease
in prepaids and other assets
|
617,765
|
(3,435,994)
|
|||
|
(Decrease)/increase
in accrued interest payable
|
(10,156,981)
|
12,123,551
|
|||
|
(Decrease)/increase
in accounts payable, accrued expenses and other
|
(5,882,913)
|
175,434
|
|||
|
NET
CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
|
(36,050,340)
|
47,217,794
|
|||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|||||
|
From
available-for-sale securities:
|
|||||
|
Purchases
|
(706,141,131)
|
(2,307,378,255)
|
|||
|
Sales
|
-
|
240,735,761
|
|||
|
Principal
repayments
|
1,054,217,682
|
1,024,037,076
|
|||
|
Purchases
of property equipment, and other
|
(3,275,717)
|
(624,319)
|
|||
|
NET
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
|
344,800,834
|
(1,043,229,737)
|
|||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|||||
|
Decrease
in restricted cash
|
1,480,000
|
8,662,000
|
|||
|
Proceeds
from repurchase agreements
|
18,264,624,674
|
14,230,714,396
|
|||
|
Principal
payments on repurchase agreements
|
(18,605,483,307)
|
(13,272,503,711)
|
|||
|
Net
proceeds from trust preferred securities offering
|
-
|
50,101,571
|
|||
|
Decrease
in warehouse lines of credit, drafts payable and other secured
borrowings
|
(21,164,599)
|
-
|
|||
|
Stock
issuance and other costs
|
(128,384)
|
(86,036)
|
|||
|
Purchases
of treasury stock
|
(4,500,326)
|
-
|
|||
|
Cash
dividends paid
|
(8,967,293)
|
(19,728,911)
|
|||
|
NET
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
|
(374,139,235)
|
997,159,309
|
|||
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
(65,388,741)
|
1,147,366
|
|||
|
CASH
AND CASH EQUIVALENTS, Beginning of the period
|
130,510,948
|
128,942,436
|
|||
|
CASH
AND CASH EQUIVALENTS, End of the period
|
$
|
65,122,207
|
$
|
130,089,802
|
|
|
OPTEUM
INC.
|
||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONT’D)
|
||||
|
(Unaudited)
|
||||
|
Nine
Months Ended September 30,
|
||||
|
2006
|
2005
|
|||
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
||||
|
Cash
paid during the period for interest
|
$
|
199,590,000
|
$
|
84,195,289
|
|
SUPPLEMENTAL
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
|
||||
|
Cash
dividends declared and payable, not yet paid
|
$
|
1,267,736
|
$
|
8,064,084
|
|
See
notes to consolidated financial
statements.
|
||||
OPTEUM INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September
30, 2006
NOTE
1. ORGANIZATION
AND SIGNIFICANT ACCOUNTING POLICIES
Organization
and Business Description
Opteum
Inc. (“Opteum”) was incorporated in Maryland on September 24, 2003, and
commenced its planned business activities on December 19, 2003, the date of
the initial closing of a private issuance of its common stock.
On
February 6, 2006, Opteum announced that its Board of Directors voted unanimously
to change its name from Bimini Mortgage Management, Inc. to Opteum Inc. On
February 10, 2006, the corporate name change was effective and its New York
Stock Exchange ticker symbol was changed from “BMM” to “OPX.”
Opteum
was formed to invest primarily in, but not limited to, residential mortgage
related securities issued by the Federal National Mortgage Association (more
commonly known as Fannie Mae), the Federal Home Loan Mortgage Corporation
(more
commonly known as Freddie Mac) and the Government National Mortgage Association
(more commonly known as Ginnie Mae). Opteum funds investments in its portfolio
of mortgage backed securities (“MBS”) through borrowings under repurchase
agreements. Opteum attempts to earn a net interest spread between the yield
on
the investments in MBS and its borrowing costs.
Opteum
has elected to be taxed as a real estate investment trust ("REIT") under
the
Internal Revenue Code of 1986, as amended (the “Code”). In order to maintain its
REIT qualification, Opteum must comply with a number of requirements under
federal tax law, including that it must distribute at least 90% of its annual
REIT taxable income to its stockholders, subject to certain adjustments.
The
portfolio management activity mentioned above comprises the REIT qualifying
operations of the Company.
On
September 29, 2005, Opteum executed a definitive merger agreement with Opteum
Financial Services, LLC (“OFS”), a privately held home mortgage lender
headquartered in Paramus, New Jersey. The transaction, in which OFS became
a
wholly-owned taxable REIT subsidiary (“TRS”) of Opteum, closed on November 3,
2005 (see Note 2). As more fully described below, OFS acquires and originates
mortgages that are either sold to third parties or securitized by Opteum
Mortgage Acceptance Corporation (“OMAC”). OFS services the mortgages securitized
by OMAC.
As
used
in this document, terms such as the parent company, the registrant, “Opteum” and
discussions related to REIT qualifying activities or the general management
of
Opteum’s portfolio of MBS refers to “Opteum Inc.” Further, terms used in this
document such as, OFS, the TRS or non-REIT eligible assets refer to Opteum
Financial Services, LLC and its consolidated subsidiaries. Discussions relating
to the “Company” refer to the consolidated entity (the combination of Opteum and
OFS). The assets and activities that are not REIT eligible, such as mortgage
origination, acquisition and servicing activities, are conducted by
OFS.
The
Company presently believes that its equity and junior subordinated debt capital,
combined with the cash flow from operations and the utilization of borrowings,
will be sufficient to enable the Company to meet its anticipated liquidity
requirements. Various changes in market conditions could, however, adversely
affect the Company’s liquidity, including increases in interest rates, increases
in prepayment rates substantially above expectations or the reduction of
fee
income generated through mortgage originations at OFS. If cash resources
are, at
any time, insufficient to satisfy the Company’s liquidity requirements, such as
when cash flow from operations were materially negative, the Company may
be
required to pledge additional assets to meet margin calls, liquidate assets,
sell additional debt or equity securities or pursue other financing
alternatives. Any sale of mortgage-related securities or originated mortgage
loans held for sale by OFS at prices lower than the carrying value of such
assets would reduce our income.
Interim
Financial Statements
The
accompanying interim financial statements reflect all adjustments, consisting
of
normal recurring items that, in the opinion of management, are necessary
for a
fair presentation of the Company’s financial position, results of operations,
statement of stockholders’ equity and cash flows for the periods presented.
These interim financial statements have been prepared in accordance with
disclosure requirements for interim financial information and accordingly,
they
may not include all of the information and footnotes required by U.S. generally
accepted accounting principles (“GAAP”) for annual financial statements. The
operating results for the interim period ended September
30, 2006,
are not
necessarily indicative of results that can be expected for the year ended
December 31, 2006. The operating results of the interim period ended September
30, 2005, do not include the results of OFS, as the merger closed in November
2005. Certain
September 30, 2005 amounts were reclassified to conform to the 2006
presentation.
The
financial statements included as part of this Form 10-Q should be read in
conjunction with the financial statements and notes thereto included in the
Company’s Annual Report on Form 10-K (as amended) for the year ended December
31, 2005.
Basis
of Presentation and Use of Estimates
The
accompanying consolidated financial statements are prepared on the accrual
basis
of accounting in accordance with GAAP. The preparation of financial statements
in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of
contingent assets and liabilities at the date of the financial statements
and
the reported amounts of revenues and expenses during the reporting period.
Significant estimates affecting the accompanying financial statements include
the fair values of MBS, the prepayment speeds used to calculate amortization
and
accretion of premiums and discounts on MBS, the deferred tax liability
valuation, the valuation allowance on mortgage loans held for sale, the
valuation of retained interests, trading and the fair value of mortgage
servicing rights.
The
accompanying September 30, 2006, consolidated financial statements include
the
accounts of Opteum and its wholly-owned subsidiary, OFS, as well the
wholly-owned and majority-owned subsidiaries of OFS. All inter-company accounts
and transactions have been eliminated from the consolidated financial
statements. The financial statements for September 30, 2005, do not include
the
results of OFS, as the merger was finalized in November 2005.
As
further described in Note 11, Opteum has a common share investment in two
trusts
used in connection with the issuance of Opteum’s junior subordinated notes.
Pursuant to the accounting guidance provided in Financial Accounting Standards
Board (“FASB”) Interpretation (“FIN”) No. 46, Consolidation
of Variable Interest Entities,
Opteum’s common share investment in the trusts are not consolidated in the
financial statements of Opteum, and accordingly, these investments are accounted
for using the equity method.
Cash
and Cash Equivalents
Cash
and
cash equivalents include cash on hand and highly liquid investments with
original maturities of three months or less. The carrying amount of cash
equivalents approximates its fair value as of September 30, 2006 and December
31, 2005.
Restricted
cash represents cash held on deposit as collateral with certain repurchase
agreement counterparties. Such amounts may be used to make principal and
interest payments on the related repurchase agreements.
Valuation
of Mortgage Backed Securities
The
valuation of the Company’s investments in MBS is governed by
Statement of Financial Accounting Standards (“SFAS”) No. 107,
Disclosures about Fair Value of Financial Instruments.
SFAS
No. 107 defines the fair value of a financial instrument as the amount at
which
the instrument could be exchanged in a current transaction between willing
parties. All REIT securities are reflected in the Company’s financial statements
at their estimated fair value as of September 30, 2006, and December 31,
2005. Estimated fair values for MBS are based on the average of third-party
broker quotes received and/or independent pricing sources when available.
However, the fair values reported reflect estimates and may not necessarily
be
indicative of the amounts the Company could realize in
a
current market exchange.
In
accordance with GAAP, the Company classifies its investments in MBS as either
trading investments, available-for-sale investments or held-to-maturity
investments. Management determines the appropriate classification of the
securities at the time they are acquired and evaluates the appropriateness
of
such classifications at each balance sheet date. Although the Company intends
to
hold its MBS until maturity, it may, from time to time, sell any of its MBS
as
part of the overall management of the business. The Company classifies all
of
its securities as available-for-sale and assets so classified are carried
on the
balance sheet at fair value and unrealized gains or losses arising from changes
in fair value are reported as other comprehensive income or loss as a component
of stockholders' equity.
When
the
fair value of an available-for-sale security is less than amortized cost,
management considers whether there is an other-than-temporary impairment
in the
value of the security. The decision is based on the credit quality
of the issue (agency versus non-agency and for non-agency, the credit
performance of the underlying collateral), the security prepayment speeds,
the
length of time the security has been in an unrealized loss position and the
Company’s ability and intent to hold securities. As of September 30, 2006,
the
Company
did not
hold any non-agency securities in its portfolio. If, in management's judgment,
an other-than-temporary impairment exists, the cost basis of the security
is
written down in the period to fair value and the unrealized loss is recognized
in current period earnings.
Mortgage
Loans Held for Sale
Mortgage
loans held for sale represent mortgage loans originated and held by the
Company
pending
sale to investors. The mortgages are carried at the lower of cost or market
as
determined by outstanding commitments from investors or current investor
yield
requirements calculated on the aggregate loan basis. Deferred net fees or
costs
are not amortized during the period the loans are held for sale, but are
recorded when the loan is sold. The
Company
generally, but not always, sells or securitizes loans with servicing rights
retained. These transfers of financial assets are accounted for as sales
for
financial reporting purposes when control over the assets has been surrendered.
Control over transferred assets is surrendered when (i) the assets have been
isolated from the
Company;
(ii)
the purchaser
obtains the right, free of conditions that constrain such purchaser from
taking
advantage of that right, to pledge or exchange the transferred assets and
(iii)
the
Company
does not
maintain effective control over the transferred assets through an agreement
to
repurchase them before their maturity. These transactions are treated as
sales
in accordance with SFAS No. 140 Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities.
Gains
or losses
on such
sales are recognized at the time legal title transfers to the purchaser and
are
based upon the difference between the sales proceeds from the purchaser and
the
allocated basis of the loan sold, adjusted for net deferred loan fees and
certain direct costs and selling costs. A valuation allowance is recorded
to
adjust mortgage loans held for sale to the lower of cost or market.
Retained
Interest, Trading
The
Company
uses
warehouse loan arrangements to finance the origination and purchase of pools
of
fixed and adjustable-rate residential mortgage loans (the “Mortgage Loans”).
Subsequent to their origination or purchase, OFS either sells these Mortgage
Loans to third-party institutional investors through bulk sale arrangements
or
through securitization transactions. The
Company
generally makes several representations and warranties regarding the performance
of the Mortgage Loans in connection with each sale or securitization.
In
a
securitization, the
Company
accumulates the desired amount of Mortgage Loans and securitizes them in
order
to create marketable securities. First, pursuant to a Mortgage Loan Purchase
Agreement (“MLPA”), the
Company
sells
Mortgage Loans to OMAC, the Company’s wholly-owned special purpose entity
created for the execution of these securitizations. Under this MLPA,
the
Company
makes
general representations and warranties for the Mortgage Loans sold by
the
Company to OMAC.
OMAC
then
deposits the Mortgage Loans purchased from the Company into a Real Estate
Mortgage Investment Conduit (“REMIC”) trust where, pursuant to a Pooling and
Servicing Agreement (“P&S Agreement”), the rights to the cash flows
associated with such Mortgage Loans are sold to investors in the form of
marketable debt securities. These securities, issued by the REMIC trust,
are
divided into different classes of certificates (the “Certificates”) with varying
claims to payments received on the Mortgage Loans.
Certain
of these Certificates are offered to the public (the “Public Certificates”)
pursuant to a prospectus. These Public Certificates are sold to underwriters
on
the closing date pursuant to an underwriting agreement. The proceeds from
the
sale of the Public Certificates to the underwriters (less an underwriting
discount) are ultimately transferred to the
Company
as
partial consideration for the Mortgage Loans sold to OMAC pursuant to the
MLPA.
Finally,
subsequent to a securitization transaction as described above, the
Company
typically executes an additional net interest margin (“NIM”) securitization, or
“resecuritization” of the non-publicly offered Certificates, representing
prepayment penalties and over-collateralization fundings (the “Underlying
Certificates”). This NIM securitization is typically transacted as follows:
OMAC
first deposits the Underlying Certificates into a trust (the “NIM Trust”)
pursuant to a deposit trust agreement. The NIM Trust, pursuant to an indenture,
then issues (i) notes (the “NIM Notes”) representing interests in the Underlying
Certificates and (ii) an owner trust certificate (the “Owner Trust Certificate”)
representing the residual interest in the NIM Trust. The NIM Notes are sold
to
third parties via private placement transactions. The net proceeds from the
sale
of the NIM Notes and the Owner Trust Certificate are then transferred from
OMAC
to the
Company.
The
Owner Trust Certificates from the
Company’s
various
securitizations represent the retained interest, trading on the consolidated
balance sheet and are carried at fair value with changes in fair value reflected
in earnings.
Mortgage
Servicing Rights
The
Company
recognizes mortgage servicing rights (“MSRs”) as an asset when separated from
the underlying mortgage loans in connection with the sale of such loans.
Upon
sale of a loan, the
Company
measures
the retained MSRs by allocating the total cost of originating a mortgage
loan
between the loan and the servicing right based on their relative fair values.
The estimated fair value of MSRs is determined by obtaining a market valuation
from a specialist who brokers MSRs. To determine the market valuation, the
broker uses a valuation model that incorporates assumptions relating to the
estimate of the cost of servicing the loan, a discount rate, a float value,
an
inflation rate, ancillary income of the loan, prepayment speeds and default
rates that market participants use for acquiring similar servicing rights.
Gains
or losses on the sale of MSRs are recognized when title and all risks and
rewards have irrevocably passed to the purchaser of such MSRs and there are
no
significant unresolved contingencies.
In
March
2006, the FASB issued SFAS No. 156, Accounting
for Servicing of Financial Assets.
SFAS
156 amends SFAS 140 with respect to the accounting for separately-recognized
servicing assets and liabilities. SFAS 156 requires all separately-recognized
servicing assets and liabilities to be initially measured at fair value and
permits companies to elect, on a class-by-class basis, to account for servicing
assets and liabilities on either a lower of cost or market value basis or
a fair
value measurement basis. The
Company
elected
to early adopt SFAS 156 as of January 1, 2006, and to measure all mortgage
servicing assets at fair value (and as one class). Servicing assets and
liabilities at December 31, 2005 were accounted for at the lower of amortized
cost or market value. As a result of adopting SFAS 156, the
Company
recognized a $2.6 million after-tax ($4.3 million pre-tax) increase in retained
earnings as of January 1, 2006, representing the cumulative effect adjustment
of
re-measuring all servicing assets and liabilities that existed at December
31,
2005, from a lower of amortized cost or market basis to a fair value basis.
Property
and Equipment, net
Property
and equipment, net, consisting primarily of computer equipment, office
furniture, leasehold improvements, land and building, is recorded at acquisition
cost and depreciated using the straight-line method over the estimated useful
lives of the assets. Asset
lives range from three years to thirty years depending on the type of asset.
Property and equipment as of September 30, 2006, and December 31, 2005, is
net
of accumulated depreciation of $3.4 million and $0.6 million, respectively.
Depreciation expense for the nine and three months ended September 30,
2006, was $2.8 million and $0.9 million, respectively, and was $55,255 and
$19,101 for the nine and three months ended September 30, 2005,
respectively.
Goodwill
and Other Intangible Assets
Goodwill
represents the excess of the purchase price over the fair value of net assets
acquired in a business combination. The
Company’s
goodwill
all arose from the OFS merger. Contingent consideration paid in subsequent
periods under the terms of the OFS merger agreement, if any, would be considered
acquisition costs and classified as goodwill.
In
accordance with SFAS No. 142, Goodwill
and Other Intangible Assets, the
Company
will
subject its goodwill to at least an annual assessment for impairment by applying
a fair value-based test. If the carrying value exceeds the fair value, goodwill
is impaired. To date, there has been no impairment charge recorded for the
Company’s goodwill.
Derivative
Assets and Derivative Liabilities
The
Company’s mortgage committed pipeline includes interest rate lock commitments
(“IRLCs”) that have been extended to borrowers who have applied for loan funding
and meet certain defined credit and underwriting criteria. Effective with
the
adoption of SFAS No. 133,
Accounting
for Derivative Instruments and Hedging Activities,
as
amended, the Company classifies and accounts for the IRLCs as derivatives.
Accordingly, IRLCs are recorded at their fair value with changes in fair
value recorded
to current earnings.
Changes
in fair value of IRLCs are determined based on changes in value of similar
loans
observed over the period in question. The
Company uses other derivative instruments to economically hedge the IRLCs,
which
are also classified and accounted for as derivatives.
The
Company’s risk management objective for its mortgage loans held for sale
includes use of mortgage forward delivery contracts designed as fair value
derivative instruments to protect earnings from an unexpected change due
to a
decline in value. Effective with the adoption of SFAS No. 133, the Company’s
mortgage forward delivery contracts are recorded at their fair value with
changes in fair value recorded to current earnings. The Company also evaluates
its contractual arrangements, assets and liabilities for the existence of
embedded derivatives.
IRLCs
and
derivative assets or liabilities arising from the Company’s derivative
activities are reported net and included in “Mortgage
loans held for sale, net” in
the
accompanying consolidated financial statements.
Fluctuations in the fair market value of IRLCs and other derivatives employed
are reflected in the consolidated statement of operations under the caption
“Gains on mortgage banking activities.”
Repurchase
Agreements
The
Company finances the acquisition of its MBS through the use of repurchase
agreements. Under these repurchase agreements, the Company sells securities
to a
repurchase counterparty and agrees to repurchase the same securities in the
future for a price that is higher than the original sales price. The difference
between the sales price that the Company receives and the repurchase price
that
the Company pays represents interest paid to the repurchase counterparty.
Although structured as a sale and repurchase obligation, a repurchase agreement
operates as a financing under which the Company pledges its securities as
collateral to secure a loan which is equal in value to a specified percentage
of
the estimated fair value of the pledged collateral. The Company retains
beneficial ownership of the pledged collateral. At the maturity of a repurchase
agreement, the Company is required to repurchase the underlying MBS and
concurrently receives back its pledged collateral from the repurchase
counterparty or, with the consent of the repurchase counterparty, the Company
may renew such agreement at
the
then prevailing rate. These repurchase agreements may require the Company
to
pledge additional assets to the repurchase counterparty in the event the
estimated fair value of the existing pledged collateral declines. As of
September 30, 2006, and December 31, 2005, the Company
did not
have any margin calls on its repurchase agreements that it was not able to
satisfy with either cash or additional pledged collateral.
Original
terms to maturity of the Company’s repurchase agreements generally, but not
always, range from one month to twelve months; however, the Company is not
precluded from entering into repurchase agreements with shorter or longer
maturities. Repurchase agreement transactions are reflected in the financial
statements at their cost, which approximates their fair value because of
the
short-term nature of these instruments. Should a counterparty decide not
to
renew a repurchase agreement at maturity, the Company must either refinance
elsewhere or be in a position to satisfy this obligation. If, during the
term of
a repurchase agreement, a counterparty files for bankruptcy, the Company
could
experience difficulty recovering its pledged assets and may have an unsecured
claim against the counterparty's assets for the difference between the amount
received by the Company and the estimated fair value of the collateral pledged
to such counterparty.
Interest
Income Recognition on MBS
MBS
are
recorded at cost on the date the MBS are purchased or sold, which is generally
the trade date. Realized gains or losses from MBS transactions are determined
based on the specific identified cost of the MBS. Interest income is accrued
based on the outstanding principal amount of the MBS and their stated
contractual terms. Premiums and discounts associated with the purchase of
the
MBS are amortized or accreted into interest income over the estimated lives
of
the MBS adjusted for estimated prepayments using the effective interest method.
Adjustments are made using the retrospective method to the effective interest
computation each reporting period. The adjustment is based on the actual
prepayment experiences to date and the present expectation of future prepayments
of the underlying mortgages and/or the current value of the indices underlying
adjustable rate mortgage securities versus index values in effect at the
time of
purchase or the last adjustment period.
Gain
on Sale of Loans
Gains
or
losses on the sale of mortgage loans are recognized at the time legal title
transfers to the purchaser of such loans based upon the difference between
the
sales proceeds from the purchaser and the allocated basis of the loan sold,
adjusted for net deferred loan fees and certain direct costs and selling
costs.
The
Company
defers
net loan origination costs and fees as a component of the loan balance on
the
balance sheet. Such costs are not amortized and are recognized into income
as a
component of the gain or loss upon sale. Accordingly, salaries, commissions,
benefits and other operating expenses of $45.1 million and $14.9 million,
respectively, were capitalized as direct loan origination costs during the
nine
and three months ended September 30, 2006. Loan fees related to the origination
and funding of mortgage loans held for sale were $5.1 million and $2.0 million
during the nine and three months ended September 30, 2006. The net gain on
sale
of loans for the nine and three months ended September 30, 2006, was
$18.7
million
and $20.7
million,
respectively. The
net
gain on sale of loans is included with changes in fair market value of IRLCs
and
mortgage loans held for sale and reported as “Gains on mortgage banking
activities” on the consolidated statement of operations.
Servicing
Fee Income
Servicing
fee income is generally a fee based on a percentage of the outstanding principal
balances of the mortgage loans serviced by the
Company
(or by a
subservicer where the
Company
is the
master servicer) and is recorded as income as the installment payments on
the
mortgages are received by the
Company
or the
subservicer.
Comprehensive
Income (Loss)
In
accordance with SFAS No. 130, Reporting
Comprehensive Income,
the
Company is required to separately report its comprehensive income (loss)
each
reporting period. Other comprehensive income refers to revenue, expenses,
gains
and losses that, under GAAP, are included in comprehensive income but are
excluded from net income, as these amounts are recorded directly as an
adjustment to stockholders’ equity. Other comprehensive income (loss) arises
from unrealized gains or losses generated from changes in market values of
securities classified as available-for-sale.
Comprehensive
(loss)/income is as follows:
|
Nine
Months Ended September 30,
|
Three
Months Ended September 30,
|
||||||
|
2006
|
2005
|
2006
|
2005
|
||||
|
Net
(loss) income
|
$
|
(15,622,862)
|
$
|
27,001,509
|
$(6,255,695)
|
$
|
7,875,257
|
|
Less
realized gain on available-for-sale securities, net
|
-
|
(1,993,457)
|
-
|
(11,075)
|
|||
|
Plus
unrealized gain/(loss) on available-for-sale securities, net
|
(21,536,405)
|
(49,321,271)
|
12,359,938
|
(29,327,409)
|
|||
|
Comprehensive
(loss) income
|
$
|
(37,159,267)
|
$
|
(24,313,219)
|
$
6,104,243
|
$
|
(21,463,227)
|
Stock-Based
Compensation
The
Company adopted SFAS No. 123(R), Share-Based
Payment,
on
January 1, 2006, and this adoption did not have an impact on the Company,
as the
Company had previously accounted for stock-based compensation using the fair
value based method prescribed by SFAS No. 123, Accounting
for Stock-Based Compensation.
For
stock and stock-based awards issued to employees, a compensation charge is
recorded against earnings based on the fair value of the award. For transactions
with non-employees in which services are performed in exchange for the Company’s
common stock or other equity instruments, the transactions are recorded on
the
basis of the fair value of the service received or the fair value of the
equity
instruments issued, whichever is more readily measurable at the date of
issuance.
Earnings
Per Share
The
Company follows the provisions of SFAS No. 128, Earnings
per Share,
and the
guidance provided in the FASB’s Emerging Issues Task Force (“EITF”) Issue No.
03-6, Participating
Securities and the Two-Class Method under FASB Statement No. 128, Earnings
Per Share,
which
requires companies with complex capital structures, common stock equivalents
or
two (or more) classes of securities that participate in the declared dividends
to present both basic and diluted earnings per share (“EPS”) on the face of the
consolidated statement of operations. Basic EPS is calculated as income
available to common stockholders divided by the weighted average number of
common shares outstanding during the period. Diluted EPS is calculated using
the
“if converted” method for common stock equivalents. However, the common stock
equivalents are not included in computing diluted EPS if the result is
anti-dilutive.
Outstanding
shares of Class B Common Stock, participating and convertible into Class
A
Common Stock, are entitled to receive dividends in an amount equal to the
dividends declared on each share of Class A Common Stock if, as and when
authorized and declared by the Board of Directors. Following the provisions
of
EITF 03-6, shares of the Class B Common Stock are included in the computation
of
basic EPS using the two-class method and, consequently, are presented separately
from Class A Common Stock.
The
shares of Class C Common Stock are not included in the basic EPS
computation as these shares do not have participation rights. The outstanding
shares of Class C Common Stock, totaling 319,388 shares, are not included
in the computation of diluted EPS for the Class A Common Stock as the conditions
for conversion into shares of Class A Common Stock were not met.
Income
Taxes
Opteum
has elected to be taxed as a REIT under the Code. As further described below,
Opteum’s TRS, OFS, is a taxpaying entity for income tax purposes and is taxed
separately from Opteum. Opteum will generally not be subject to federal income
tax on its REIT taxable income to the extent that Opteum distributes its
REIT
taxable income to its stockholders and satisfies the ongoing REIT requirements,
including meeting certain asset, income and stock ownership tests. A REIT
must
generally distribute at least 90% of its REIT taxable income to its
stockholders, of which 85% generally must be distributed within the taxable
year, in order to avoid the imposition of an excise tax. The remaining balance
may be distributed up to the end of the following taxable year, provided
the
REIT elects to treat such amount as a prior year distribution and meets certain
other requirements.
OFS
and
its activities are subject to corporate income taxes and the applicable
provisions of SFAS No. 109, Accounting
for Income Taxes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax
basis. Deferred tax assets and liabilities are measured using enacted tax
rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax
assets and liabilities of a change in tax rates is recognized in income in
the
period that includes the enactment date.
Recent
Accounting Pronouncements
In
February 2006, the FASB issued SFAS No. 155, Accounting
for Certain Hybrid Financial Instruments — an amendment of FASB Statements
No. 133 and 140.
SFAS
155 (i) permits an entity to measure at fair value any financial instrument
that
contains an embedded derivative that otherwise would require bifurcation;
(ii)
establishes a requirement to evaluate interests in securitized financial
assets
to identify interests that are freestanding derivatives or that are hybrid
financial instruments that contain an embedded derivative requiring bifurcation;
and (iii) contains other provisions that are not germane to the Company.
SFAS is
effective for all financial instruments acquired or issued after the beginning
of an entity’s first fiscal year beginning after September 15, 2006. In late
September 2006, the FASB proposed a scope exception under SFAS 155 for
securitized interests that only contain an embedded derivative that is tied
to
the prepayment risk of the underlying prepayable financial asset, and for
which
the investor does not control the right to accelerate the settlement. The
FASB
has opted to hold the proposed guidance open for a 30 day comment period
and
re-deliberate the issue in December 2006 upon the expiration of the comment
period. The FASB should issue their final guidance in early 2007. The MBS
securities owned in the REIT portfolio currently would fall under this scope
exception. However, in the future, the Company may own securities that may
not
fall under the exception or the FASB may repeal the exception, in which case
Company would be subject to the provisions of SFAS 155. Should securities
owned
by the Company fall under the provisions of SFAS 155 in the future, the
Company’s results of operations may exhibit volatility as certain of its future
investments may be marked to market through the income statement. Currently
changes in the value of the Company’s MBS securities are recognized through
other comprehensive income, a component of stockholder’s equity.
See
Mortgage Servicing Rights above for a description of the adoption of SFAS
No.
156, Accounting
for Servicing of Financial Assets.
In
July
2006, the FASB issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an
interpretation of FASB Statement No. 109
(FIN 48), which clarifies the accounting for uncertainty in tax positions.
This Interpretation requires that the Company recognize in its financial
statements, the impact of a tax position, if that position is more likely
than
not of being sustained on audit, based on the technical merits of the position.
The provisions of FIN 48 are effective as of the beginning of the 2007
fiscal year, with the cumulative effect, if any, of the change in accounting
principle recorded as an adjustment to opening retained earnings. The Company
is
currently evaluating the impact, if any, of adopting FIN 48 on the financial
statements.
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements, to
eliminate the diversity in practice that exists due to the different definitions
of fair value and the limited guidance for applying those definitions in
GAAP
that are dispersed among the many accounting pronouncements that require
fair
value measurements. SFAS No. 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. The Company is currently evaluating the impact, if any,
of
adopting SFAS 157 on the financial statements.
In
September 2006, Staff Accounting Bulletin No. 108, Considering
the Effects of Prior Year Misstatements When Quantifying Misstatements in
Current Year Financial Statements,
(SAB
108) was issued. SAB 108 addresses quantifying the financial statement
effects of misstatements, specifically, how the effects of prior year
uncorrected errors must be considered in quantifying misstatements in the
current year financial statements. SAB 108 is effective for fiscal years
ending after November 15, 2006, and does not change the SEC staff's previous
positions in SAB 99 regarding qualitative considerations in assessing the
materiality of misstatements. SAB 108 is not expected to have a material
impact on the Company.
NOTE
2. ACQUISITION
OF OPTEUM FINANCIAL SERVICES, LLC
On
November 3, 2005, Opteum acquired 100% of the equity interests of OFS
through a merger with a wholly-owned subsidiary of Opteum. OFS is a mortgage
lender that originates loans nationwide. The results of operations of OFS
have
been included in the Company’s consolidated financial statements since November
3, 2005. During the nine months ended September 30, 2006, the Company has
increased the aggregate purchase price by $1.1 million for additional legal
and
accounting fees incurred directly related to the merger and it has made
insignificant modifications to the allocation of the purchase price
to
the net
assets acquired, based on final valuations and completion of analysis. See
Note
2 to the financial statements included in the Company’s Form 10-K for 2005 for a
complete description.
NOTE
3. MORTGAGE
LOANS HELD FOR SALE, NET
Upon
the
closing of a residential mortgage loan or shortly thereafter, OFS will either
securitize or sell as whole loans its mortgage assets. OFS also sells mortgage
loans insured or guaranteed by various government-sponsored entities and
private
insurance agencies in an effort to maximize profits. The insurance or guaranty
is provided primarily on a nonrecourse basis to OFS, except where limited
by the
Federal Housing Administration and Veterans Administration and their respective
loan programs. As of September 30, 2006, OFS serviced approximately $9.1
billion
of mortgage loans sold into the secondary market. All of OFS’ loans held for
sale are pledged as collateral under the various financing arrangements
described in Note
8.
Mortgage
loans held for sale consist of the following as of September 30, 2006:
|
Mortgage
loans held for sale
|
$
|
861,830,222
|
|
Deferred
loan origination costs—and other
|
14,130,041
|
|
|
Valuation
allowance
|
(669,918)
|
|
|
$
|
875,290,345
|
Included
in mortgage loans held for sale above are IRLCs and various derivative assets
or
liabilities arising from OFS’ economic hedging activities of IRLCs and mortgage
loans held for sale. Such assets or liabilities are reported net in the
accompanying consolidated financial statements. Fluctuations in the fair
market value of IRLCs and other derivatives employed are reflected in the
consolidated statement of operations under the caption “Gains on mortgage
banking activities.”
NOTE
4. RETAINED
INTEREST, TRADING
Retained
interest, trading is the subordinated interests retained by OFS from OFS’
various securitizations and includes the over-collateralization and residual
net
interest spread remaining after payments to the Public Certificates and NIM
Notes. Retained interest, trading represents the present value of estimated
cash
flows to be received from these subordinated interests in the future. The
subordinated interests retained are classified as “trading securities” and are
reported at fair value with unrealized gains or losses reported in
earnings.
All
of
OFS’ securitizations were structured and are accounted for as sales in
accordance with SFAS No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities.
Generally, to meet the sale treatment requirements of SFAS No. 140, the REMIC
trust is structured as a “qualifying special purpose entity” or QSPE, which
specifically limits the REMIC trust’s activities, and OFS surrenders control
over the mortgage loans upon their transfer to the REMIC trust.
Valuation
of Investments. OFS
classifies its retained interests as trading securities and therefore records
these securities at their estimated fair value. In order to value these unrated
and unquoted retained interests, OFS utilizes either pricing available directly
from dealers or calculates their present value by projecting their future
cash
flows on a publicly-available analytical system. When a publicly-available
analytical system is employed, OFS uses the following variable factors in
estimating the fair value of these assets:
Interest
Rate Forecast.
The
forward London Interbank Offered Rate (“LIBOR”) interest rate curve.
Discount
Rate.
The
present value of all future cash flows utilizing a discount rate assumption
established at the discretion of OFS to represent market conditions and value.
Prepayment
Forecast.
The
prepayment forecast may be expressed by OFS in accordance with one of the
following standard market conventions: Constant Prepayment Rate (“CPR”) or
Percentage of a Prepayment Vector. Prepayment forecasts may be changed as
OFS
observes trends in the underlying collateral as delineated in the Statement
to
Certificate Holders generated by the REMIC
trust’s Trustee
for each
underlying security.
Credit
Performance Forecast.
A
forecast of future credit performance of the underlying collateral pool will
include an assumption of default frequency, loss severity and a recovery
lag. In
general, OFS will utilize the combination of default frequency and loss severity
in conjunction with a collateral prepayment assumption to arrive at a target
cumulative loss to the collateral pool over the life of the pool based on
historical performance of similar collateral by the originator. The target
cumulative loss forecast will be developed and noted at the pricing date
of the
individual security but may be updated by OFS consistent with observations
of
the actual collateral pool performance.
Default
frequency may be expressed by OFS in accordance with any of three standard
market conventions: Constant Default Rate (“CDR”), Percentage of a Standard
Default Assumption (“SDA”) curve or a vector or curve established to meet
forecasted performance for specific collateral pools.
Loss
severity will be expressed by OFS in accordance with historical performance
of
similar collateral and the standard market conventions of a percentage of
the
unpaid principal balance of the forecasted defaults lost during the foreclosure
and liquidation process.
During
the first year of a new issue, OFS may balance positive or adverse effects
of
the prepayment forecast and the credit performance forecast, thereby allowing
for deviation between actual and forecasted performance of the collateral
pool.
After the first year, OFS will generally adjust the Prepayment and Credit
Performance Forecasts to replicate actual performance trends without balancing
adverse and positive effects.
The
following table summarizes OFS’ retained interests
as of September 30, 2006, and December 31, 2005:
|
Series
|
Issue
Date
|
September
30, 2006
|
December
31, 2005
|
|||
|
HMAC
2004-1
|
March
4, 2004
|
$
|
3,059,271
|
$
|
5,096,056
|
|
|
HMAC
2004-2
|
May
10, 2004
|
2,285,837
|
3,240,431
|
|||
|
HMAC
2004-3
|
June
30, 2004
|
505,261
|
1,055,651
|
|||
|
HMAC
2004-4
|
August
16, 2004
|
1,981,778
|
3,749,261
|
|||
|
HMAC
2004-5
|
September
28, 2004
|
5,739,610
|
6,177,669
|
|||
|
HMAC
2004-6
|
November
17, 2004
|
12,935,106
|
14,321,046
|
|||
|
OMAC
2005-1
|
January
31, 2005
|
14,869,734
|
14,720,910
|
|||
|
OMAC
2005-2
|
April
5, 2005
|
14,128,414
|
11,301,619
|
|||
|
OMAC
2005-3
|
June
17, 2005
|
15,946,275
|
14,656,477
|
|||
|
OMAC
2005-4
|
August
25, 2005
|
11,639,366
|
12,551,775
|
|||
|
OMAC
2005-5
|
November
23, 2005
|
9,087,506
|
11,139,697
|
|||
|
OMAC
2006-1
|
March
23, 2006
|
12,741,216
|
-
|
|||
|
OMAC
2006-2
|
June
26, 2006
|
4,910,444
|
-
|
|||
|
Total
|
$
|
109,829,818
|
$
|
98,010,592
|
Key
economic assumptions used in measuring the fair value of retained interests
at
the date of securitization resulting from securitizations completed during
2005
and 2006 were as follows:
|
September
30, 2006
|
December
31, 2005
|
|
|
Prepayment
speeds (CPR)
|
36.26%
|
28.65%
|
|
Weighted-average-life
|
4.18
|
2.83
|
|
Expected
credit losses
|
0.74%
|
1.07%
|
|
Discount
rates
|
16.81%
|
14.90%
|
|
Interest
rates
|
Forward
LIBOR Yield curve
|
Forward
LIBOR Yield curve
|
As
of
September 30, 2006, and December 31, 2005, key economic assumptions and the
sensitivity of the current fair value of retained interests to the immediate
10%
and 20% adverse change in those assumptions are as follows:
|
September
30, 2006
|
December
31, 2005
|
|||
|
Balance
Sheet Carrying value of retained interests - fair value
|
$
|
109,829,818
|
$
|
98,010,592
|
|
Weighted
average life (in years)
|
4.39
|
2.62
|
||
|
Prepayment
assumption (annual rate)
|
36.59%
|
32.53%
|
||
|
Impact
on fair value of 10% adverse change
|
$
|
(9,326,848)
|
$
|
(7,817,000)
|
|
Impact
on fair value of 20% adverse change
|
$
|
(17,051,186)
|
$
|
(16,089,000)
|
|
Expected
Credit losses (annual rate)
|
0.58%
|
0.61%
|
||
|
Impact
on fair value of 10% adverse change
|
$
|
(3,236,459)
|
$
|
(3,247,000)
|
|
Impact
on fair value of 20% adverse change
|
$
|
(6,475,707)
|
$
|
(6,419,000)
|
|
Residual
Cash-Flow Discount Rate
|
15.72%
|
13.96%
|
||
|
Impact
on fair value of 10% adverse change
|
$
|
(4,962,825)
|
$
|
(3,804,000)
|
|
Impact
on fair value of 20% adverse change
|
$
|
(9,514,122)
|
$
|
(7,392,000)
|
|
Interest
rates on variable and adjustable loans and bonds
|
Forward
LIBOR Yield Curve
|
Forward
LIBOR Yield Curve
|
||
|
Impact
on fair value of 10% adverse change
|
$
|
(22,203,185)
|
$
|
(21,265,000)
|
|
Impact
on fair value of 20% adverse change
|
$
|
(44,846,814)
|
$
|
(34,365,000)
|
These
sensitivities are entirely hypothetical and should be used with caution.
As the
figures indicate, changes in fair value based upon 10% and 20% variations
in
assumptions generally cannot be extrapolated to greater or lesser percentage
variations because the relationship of the change in assumption to the change
in
fair value may not be linear. Also, in this table, the effect of the variation
in a particular assumption on the fair value of the retained interest is
calculated without changing any other assumption. In reality, changes in
one
factor may result in changes in another which may magnify or counteract the
sensitivities. To estimate the impact of a 10% and 20% adverse change of
the
September 30, 2006 forward LIBOR curve, a parallel shift in the Forward LIBOR
curve was assumed.
Static
pool loss percentages are calculated by dividing projected future credit
losses
(at the time of securitization) and actual losses incurred as of the date
indicated by the original balance of each pool of assets. The following static
pool loss percentages are calculated based upon all OFS securitizations that
have been completed to date:
|
Series
|
Issue
Date
|
Original
Unpaid Principal Balance
|
Projected
Aggregate Static Pool Loss Percentage
|
Static
Pool Loss Percentage
Through
September 30, 2006
|
Static
Pool Loss Percentage
Through
December 31, 2005
|
|
HMAC
2004-1
|
March
4, 2004
|
$
309,710,005
|
0.17%
|
0.10%
|
0.01%
|
|
HMAC
2004-2
|
May
10, 2004
|
$
388,737,548
|
0.16%
|
0.26%
|
0.12%
|
|
HMAC
2004-3
|
June
30, 2004
|
$
417,055,285
|
0.19%
|
0.11%
|
0.06%
|
|
HMAC
2004-4
|
August
16, 2004
|
$
410,122,752
|
0.29%
|
0.03%
|
0.01%
|
|
HMAC
2004-5
|
September
28, 2004
|
$
413,874,856
|
0.41%
|
0.01%
|
0.00%
|
|
HMAC
2004-6
|
November
17, 2004
|
$
761,026,691
|
0.54%
|
0.10%
|
0.01%
|
|
OMAC
2005-1
|
January
31, 2005
|
$
802,625,137
|
0.56%
|
0.03%
|
0.01%
|
|
OMAC
2005-2
|
April
5, 2005
|
$
883,987,488
|
0.50%
|
0.01%
|
0.00%
|
|
OMAC
2005-3
|
June
17, 2005
|
$
937,116,704
|
0.40%
|
0.00%
|
0.00%
|
|
OMAC
2005-4
|
August
25, 2005
|
$
1,321,738,691
|
0.70%
|
0.00%
|
0.00%
|
|
OMAC
2005-5
|
November
23, 2005
|
$
986,276,688
|
0.76%
|
0.00%
|
0.00%
|
|
OMAC
2006-1
|
March
23, 2006
|
$
934,441,049
|
0.73%
|
0.00%
|
-
|
|
OMAC
2006-2
|
June
26, 2006
|
$
491,571,939
|
0.86%
|
0.00%
|
-
|
|
|
|||||
|
Total
|
$
9,058,284,833
|
|
The
table
below summarizes certain cash flows received from and paid to securitization
trusts:
|
For
the Nine Months Ended
September
30, 2006
|
For
the Three Months Ended
September
30, 2006
|
|||
|
Proceeds
from securitizations
|
$
|
1,436,837,754
|
$
|
-
|
|
Servicing
fees received
|
13,719,852
|
4,467,391
|
||
|
Servicing
advances net of repayments
|
546,535
|
251,762
|
||
|
Cash
flows received on retained interests
|
3,642,263
|
1,633,486
|
The
following information presents quantitative information about delinquencies
and
credit losses on securitized financial assets as of September 30, 2006, and
December 31, 2005:
|
As
of Date
|
Total
Principal Amount of Loans
|
Principal
Amount of Loans Greater than 60 Days Past Due
|
Net
Credit Losses
|
|||
|
September
30, 2006
|
$
|
6,323,871,720
|
$
|
130,467,478
|
$
|
3,073,949
|
|
December
31, 2005
|
$
|
6,363,279,281
|
$
|
57,871,123
|
$
|
912,990
|
NOTE
5. MORTGAGE
SERVICING RIGHTS, NET
As
permitted by the effective date provisions of SFAS No. 156, the Company has
early adopted SFAS No. 156 as of January 1, 2006 with respect to the valuation
of its MSRs. (See Note 1 - Mortgage Servicing Rights.) Activities for MSRs
are
summarized as follows as of September 30, 2006:
|
For
the Nine Months Ended
September
30, 2006
|
||||
|
Balance
at beginning of period (at cost)
|
$
|
86,081,594
|
||
|
Adjustment
to fair value upon adoption of SFAS 156 at January 1, 2006
|
4,298,225
|
|||
|
Additions
|
34,959,864
|
|||
|
Changes
in fair value:
|
||||
|
Changes
in fair value
|
(22,944,393)
|
|||
|
Change
in fair value due to change in valuation assumptions
|
(1,144,733)
|
(24,089,126)
|
||
|
Balance
at end of period
|
$
|
101,250,557
|
The
Company elected to account for all originated MSRs as one class and, therefore,
all MSRs are carried at fair value. As a result of the early adoption of
SFAS
156, the carrying value of the MSRs has been increased by approximately $4.3
million (pre-tax) as of January 1, 2006. As required by the provisions of
SFAS
156, the net of tax effect, was recorded as a cumulative effect adjustment
to
retained earnings of OFS as of January 1, 2006. In addition, changes in value
due to run-offs of the portfolio are recorded as valuation adjustments instead
of amortization.
The
fair
value of MSRs is determined using discounted cash flow techniques. During
the
third quarter of 2006, OFS increased the MSR value in the aggregate by
$4.6 million primarily as a result of additions to the servicing portfolio
and changes in market conditions. Estimates of fair value involve several
assumptions, including the key valuation assumptions about market expectations
of future prepayment rates, interest rates and discount rates. Prepayment
rates
are projected using a prepayment model. The model considers key factors,
such as
refinance incentive, housing turnover, seasonality and aging of the pool
of
loans. Prepayment speeds incorporate expectations of future rates implied
by the
forward LIBOR/swap curve, as well as collateral specific information.
As
of
September 30, 2006, and December 31, 2005, key economic assumptions and the
sensitivity of the current fair value of MSR cash flows to the immediate
10% and
20% adverse change in those assumptions are as follows: (Note - base case
prepayment and discount rate assumptions are a weighted average of the values
applied to the various mortgage loans).
|
As
of September 30, 2006
|
As
of December 31, 2005
|
|||
|
Prepayment
assumption (annual rate) (PSA)
|
328.7
|
254.0
|
||
|
Impact
on fair value of 10% adverse change
|
$
|
(3,739,212)
|
$
|
(3,615,000)
|
|
Impact
on fair value of 20% adverse change
|
$
|
(7,121,265)
|
$
|
(6,936,000)
|
|
MSR
Cash-Flow Discount Rate
|
14.72%
|
10.74%
|
||
|
Impact
on fair value of 10% adverse change
|
$
|
(3,760,697)
|
$
|
(4,856,000)
|
|
Impact
on fair value of 20% adverse change
|
$
|
(7,213,037)
|
$
|
(9,280,000)
|
These
sensitivities are entirely hypothetical and should be used with caution.
As the
figures indicate, changes in fair value based upon 10% and 20% variations
in
assumptions generally cannot be extrapolated to greater or lesser percentage
variation because the relationship of the change in assumption to the change
in
fair value may not be linear. Also, in this table, the effect of the variation
in a particular assumption on the fair value of the MSR is calculated without
changing any other assumption. In reality, changes in one factor may result
in
changes in another which may magnify or counteract the sensitivities.
NOTE
6. MORTGAGE
BACKED SECURITIES
As
of
September 30, 2006, and December 31, 2005, all of Opteum's MBS were
classified as available-for-sale and, as such, are reported at their estimated
fair value. Estimated fair value was determined based on the average of
third-party broker quotes received and/or independent pricing sources when
available.
The
following are the carrying values of Opteum's MBS portfolio as of
September 30, 2006, and December 31, 2005:
|
September
30, 2006
|
December
31, 2005
|
|||
|
Adjustable
Rate Mortgages
|
$
|
2,139,858,096
|
$
|
2,006,767,437
|
|
Fixed
Rate and Balloon Mortgages
|
658,439,517
|
733,366,217
|
||
|
Hybrid
Arms
|
281,762,509
|
753,895,705
|
||
|
Totals
|
$
|
3,080,060,122
|
$
|
3,494,029,359
|
The
following table presents the components of the carrying value of Opteum's
MBS
portfolio as of September 30, 2006, and December 31, 2005:
|
September
30, 2006
|
December
31, 2005
|
|||
|
Principal
balance
|
$
|
3,055,791,372
|
$
|
3,457,887,912
|
|
Unamortized
premium
|
123,256,303
|
115,133,248
|
||
|
Unaccreted
discount
|
(956,749)
|
(2,497,423)
|
||
|
Gross
unrealized gains
|
1,566,588
|
265,615
|
||
|
Gross
unrealized losses
|
(99,597,392)
|
(76,759,993)
|
||
|
Carrying
value/estimated fair value
|
$
|
3,080,060,122
|
$
|
3,494,029,359
|
The
following table presents, for Opteum's MBS with gross unrealized losses,
the
estimated fair value and gross unrealized losses aggregated by investment
category as of September 30, 2006:
|
Loss
Position Less than 12 Months
|
Loss
Position More than 12 Months
|
Total
|
||||||||||
|
Estimated
Fair
Value
|
Unrealized
Losses
|
Estimated
Fair
Value
|
Unrealized
Losses
|
Estimated
Fair
Value
|
Unrealized
Losses
|
|||||||
|
Hybrid
Arms
|
$
|
351,756,737
|
$
|
(2,944,079)
|
$
|
516,863,254
|
$
|
(16,869,058)
|
$
|
868,619,991
|
$
|
(19,813,137)
|
|
Adjustable
Rate Mortgages
|
417,107,900
|
(13,547,507)
|
848,829,815
|
(35,714,631)
|
1,265,937,715
|
(49,262,138)
|
||||||
|
Fixed
Rate and Balloon Mortgages
|
65,163,576
|
(793,214)
|
586,841,616
|
(29,728,903)
|
652,005,192
|
(30,522,117)
|
||||||
|
$
|
834,028,213
|
$
|
(17,284,800)
|
$
|
1,952,534,685
|
$
|
(82,312,592)
|
$
|
2,786,562,898
|
$
|
(99,597,392)
|
|
The
following table presents, for Opteum's MBS with gross unrealized losses,
the
estimated fair value and gross unrealized losses aggregated by investment
category as of December 31, 2005:
|
Loss
Position Less than 12 Months
|
Loss
Position More than 12 Months
|
Total
|
||||||||||
|
Estimated
Fair
Value
|
Unrealized
Losses
|
Estimated
Fair
Value
|
Unrealized
Losses
|
Estimated
Fair
Value
|
Unrealized
Losses
|
|||||||
|
Hybrid
Arms and Balloons
|
$
|
563,661,156
|
$
|
(8,409,428)
|
$
|
141,675,752
|
$
|
(4,510,901)
|
$
|
705,336,908
|
$
|
(12,920,329)
|
|
Adjustable
Rate Mortgages
|
1,648,085,054
|
(27,917,630)
|
270,945,493
|
(8,944,837)
|
1,919,030,547
|
(36,862,467)
|
||||||
|
Fixed
Rate Mortgages
|
425,260,838
|
(10,762,306)
|
346,435,009
|
(16,214,890)
|
771,695,847
|
(26,977,197)
|
||||||
|
$
|
2,637,007,048
|
$
|
(47,089,364)
|
$
|
759,056,254
|
$
|
(29,670,628)
|
$
|
3,396,063,302
|
$
|
(76,759,993)
|
|
As
of
September 30, 2006, all of Opteum's MBS had contractual maturities greater
than
27 months. Actual maturities of MBS are generally shorter than stated
contractual maturities. Actual maturities of Opteum's MBS are affected by
the
contractual lives of the underlying mortgages, periodic payments of principal
and prepayments of principal.
The
decline in fair value of MBS is not considered to be other-than-temporary.
Accordingly, the write down to fair value is recorded in other comprehensive
loss as an unrealized loss. The factors considered in making this determination
include: the expected cash flow from the MBS, the general quality of the
MBS
owned, any credit protection available, current market conditions and the
magnitude and duration of the historical decline in market prices as well
as
Opteum's ability and intention to hold the MBS.
NOTE
7. EARNINGS
PER SHARE
Effective
November 3, 2005, the Company issued 1,223,208 shares of Class A Redeemable
Preferred Stock in connection with the acquisition of OFS. After January
1,
2006, and prior to March 31, 2006, holders of Class A Redeemable
Preferred Stock were entitled to receive dividends according to the formula
described in the Company’s amended Articles of Incorporation. For the Company’s
first quarter 2006 dividend, declared on March 10, 2006, the shares of Class
A
Redeemable Preferred Stock, although considered to be participating securities,
did not receive a dividend pursuant to the formula. Following the provisions
of
EITF 03-6, for the nine month period ended September 30, 2006, the Class
A
Redeemable Preferred Stock, a participating security prior to conversion
on
April 28, 2006, was excluded in the computation of basic EPS using the two-class
method. EITF 03-6 discusses the allocation of losses to nonconvertible and
convertible participating securities when using the two-class method. Losses
are
only allocated to a participating security if this security has a contractual
obligation to share in the loss. There was no such obligation for the Class
A
Redeemable Preferred Stock. Therefore, for the nine months ended September
30,
2006, the shares of Class A Redeemable Preferred Stock were not allocated
any of
the loss in the computation of basic EPS, even though it is a participating
security.
The
conversion of the Class A Redeemable Preferred Stock into shares of Class
A
Common Stock was approved by the stockholders at the Company’s 2006 Annual
Meeting of Shareholders on April 28, 2006, and the shares of Class A Redeemable
Preferred Stock were converted into shares of Class A Common Stock on that
date.
For purposes of the EPS computation, the conversion of the shares of Class
A
Redeemable Preferred Stock into shares of Class A Common Stock has been
accounted for as of April 28, 2006, and is included in the computation of
basic
EPS for the Class A Common Stock as of that date.
As
a
result of the conversion of the Class A Redeemable Preferred Stock, the EPS
presentation for these securities is no longer presented, beginning with
the
period ended June 30, 2006.
The
Company has dividend eligible stock incentive plan shares that were outstanding
during the nine and three months ended September 30, 2006 (see Note 14).
These
stock incentive plan shares have dividend participation rights, but no
contractual obligation to share in losses. Since there is no such obligation,
these incentive plan shares are not included, pursuant to EITF 03-6, in the
nine
and three months ended September 30, 2006, basic EPS computation for the
Class A
Common Stock, even though they are participating securities. For the computation
of diluted EPS for the Class A Common Stock for the period ended September
30,
2006, 76,375 restricted shares and 562,018 phantom shares as of September
30,
2006, are excluded as their inclusion would be anti-dilutive.
The
table
below reconciles the numerators and denominators of the basic and diluted
EPS.
|
(Unaudited)
|
(Unaudited)
|
||||||
|
Nine
Months Ended September 30,
|
Three
Months Ended September 30,
|
||||||
|
2006
|
2005
|
2006
|
2005
|
||||
|
Basic
and diluted EPS of Class A Common Stock:
|
|||||||
|
Numerator:
net (loss) income allocated to the shares of Class A Common Stock
|
$
|
(15,420,981)
|
$
|
26,595,023
|
$
(6,174,858)
|
$
|
7,756,746
|
|
Denominator:
basic and diluted:
|
|||||||
|
Shares
of Class A Common Stock outstanding at the balance sheet date
|
24,473,315
|
20,397,210
|
24,473,315
|
20,397,210
|
|||
|
Less:
restricted incentive plan shares
|
(76,375)
|
-
|
(76,375)
|
-
|
|||
|
Plus:
dividend eligible incentive plan shares issued as of the balance
sheet
date
|
-
|
504,675
|
-
|
504,675
|
|||
|
Effect
of weighting
|
(465,750)
|
(37,043)
|
(20,565)
|
(1,182)
|
|||
|
Weighted
average shares-basic and diluted
|
23,931,190
|
20,864,842
|
24,376,375
|
20,900,703
|
|||
|
Basic
and diluted EPS of Class A Common Stock
|
$
|
(0.64)
|
$
|
1.27
|
$
(0.25)
|
$
|
0.37
|
|
Basic
and diluted EPS of Class B Common Stock:
|
|||||||
|
Numerator:
net (loss) income allocated to Class B Common Stock
|
$
|
(201,881)
|
$
|
406,486
|
$
(80,837)
|
$
|
118,525
|
|
Denominator:
basic and diluted:
|
|||||||
|
Shares
of Class B Common Stock outstanding at the balance sheet date
|
319,388
|
319,388
|
319,388
|
319,388
|
|||
|
Effect
of weighting
|
-
|
-
|
-
|
-
|
|||
|
Weighted
average shares-basic and diluted
|
319,388
|
319,388
|
319,388
|
319,388
|
|||
|
Basic
and diluted EPS of Class B Common Stock
|
$
|
(0.63)
|
$
|
1.27
|
$
(0.25)
|
$
|
0.37
|
NOTE
8. WAREHOUSE
LINES OF CREDIT AND DRAFTS PAYABLE
OFS
issues drafts or wires at loan settlement in order to facilitate the closing
of
mortgage loans held for sale. Drafts payable represent mortgage loans on
which a
closing has occurred prior to quarter end, but the related drafts have not
cleared the respective bank. Upon clearing the bank, the drafts are funded
by
the appropriate warehouse line of credit. Warehouse and aggregate lines of
credit and loan sale agreements accounted for as financing consisted of the
following as of September 30, 2006:
|
Outstanding
Principal Balance as of
September
30, 2006
|
||
|
Warehouse
and aggregate lines of credit:
|
||
|
A
committed warehouse line of credit for $100.0 million between OFS
and
Residential Funding Corporation ("RFC"). The agreement expired
on November
30, 2006. The agreement provided for interest rates based upon
one month
LIBOR plus a margin between 1.00% and 2.50% depending on the product
that
was originated or acquired. This facility was initially extended
through
December 31, 2006 and subsequently cancelled on December 15, 2006
when RFC
became a member of the syndicated JP Morgan Chase
facility.
|
$
|
10,987,762
|
|
A
syndicated committed warehouse line of credit for $850.0 million
between
OFS and JP Morgan Chase (“JPM”). The agreement expires on May 30, 2007 and
is expected to be renewed prior to its expiration. The agreement
provides
for interest rates based upon one month LIBOR plus a margin of
0.60% to
1.50% depending on the product originated or acquired.
|
574,601,222
|
|
|
An
aggregation facility for $1.0 billion between OFS and Citigroup
Global
Markets Realty Inc. (“Citigroup”) to aggregate loans pending
securitization. The agreement expires on February 28, 2007. The
agreement
provides for interest rates based upon one month LIBOR plus a margin
of
0.50%.
|
9,598,669
|
|
|
A
$750.0 million purchase and security agreement between OFS and
UBS Warburg
Real Estate Securities, Inc. (“UBS Warburg”). The facility is due upon
demand and can be cancelled by either party upon notification to
the
counter-party. OFS incurs a charge for the facility based on one
month
LIBOR plus 1.00%. The facility is secured by loans held for sale
and cash
generated from sales to investors.
|
74,036,701
|
|
|
Drafts
payable
|
7,667,000
|
|
|
Loan
sale agreements accounted for as financings:
|
||
|
An
uncommitted $700.0 million purchase agreement between OFS and Colonial
Bank. The facility is due upon demand and can be cancelled by either
party
upon notification to the counter party. OFS incurs a charge for
the
facility based on one month LIBOR plus 0.50% for the first $300.0
million
purchased and one month LIBOR plus 0.75%
for
the amount used above and beyond $300.0 million. The
facility is secured by loans held for sale and cash generated from
sales
to investors.
|
175,785,292
|
|
|
Total
|
$
|
852,676,646
|
In
addition to the RFC, JPM, Citigroup, UBS Warburg and Colonial Bank facilities,
OFS has purchase and sale agreements with Fannie Mae and Greenwich Capital
Markets, Inc. These additional agreements allow OFS to accelerate the sale
of
its mortgage loan inventory, resulting in a more effective use of its warehouse
facilities. There was $9.7 million sold and being held under these agreements
at
September 30, 2006. These agreements are not committed facilities and may
be
terminated at the discretion of either party. RFC
replaced Citigroup in the syndicated JP Morgan Chase facility.
The
facilities are secured by mortgage loans and other assets of OFS. The facilities
contain various covenants pertaining to tangible net worth, net income,
available cash and liquidity, leverage ratio, current ratio and servicing
delinquency.
As of
September 30, 2006 and October 31, 2006, OFS was not in compliance with respect
to two covenants with one lender. The covenants pertained to net income and
tangible net worth as of September 30, 2006. OFS has obtained waivers from
the
covenant violations. At
October 31, 2006, OFS was not in compliance with respect to one covenant
with a
second lender. The covenant violation at October 31, 2006 with the second
lender pertained to tangible net worth. OFS has obtained a waiver from the
second lender with respect to the covenant violation as of October 31, 2006.
Also at September 30, 2006, the Company, as guarantor of OFS, was in violation
of one covenant with the second lender that pertained to cash flow coverage.
The
Company has obtained a waiver from the second lender with respect to the
covenant violation as of September 30, 2006. All waivers obtained were granted
with the mutual understanding that such violations will exist as of November
30,
2006. No additional covenant violations are anticipated at November 30,
2006.
NOTE
9. OTHER
SECURED BORROWINGS
Other
secured borrowings consisted of the following as of September 30,
2006:
|
Outstanding
Principal Balance as of
September
30, 2006
|
||
|
A
committed line of credit for $150.0 million between OFS and JPM
that
allows for a sublimit for MSRs. The agreement expires May 30, 2007
and is
expected to be renewed prior to its expiration. The agreement provides
for
an interest rate based on LIBOR plus 1.50% to 1.85% depending on
collateral type.
|
$
|
69,282,544
|
|
Citigroup
Global Realty Inc., working capital line of credit secured by the
retained
interests in securitizations through OMAC 2006-2. The facility
expires on
December 31, 2006. The agreement provides for an interest rate
based on
LIBOR plus 2.00%.
|
34,756,508
|
|
|
$
|
104,039,052
|
NOTE
10. REPURCHASE
AGREEMENTS
Opteum
has entered into repurchase agreements to finance the acquisition of most
of its
MBS. The repurchase agreements are effectively short-term borrowings that
bear
interest at rates that have historically moved in close relationship to LIBOR.
As of September 30, 2006, Opteum had
$3.0
billion of repurchase agreement borrowings with a net weighted average borrowing
rate of 5.29% that were collateralized by MBS with a fair value as of September
30, 2006, of $3.1 billion. As of December 31, 2005, Opteum had $3.3 billion
of repurchase agreement borrowings with a net weighted average borrowing
rate of
4.15% that were collateralized by MBS with a fair value as of December 31,
2005,
of $3.5 billion and restricted cash of $2.3 million.
As
of
September 30, 2006, Opteum's repurchase agreements had remaining maturities
as summarized below:
|
OVERNIGHT
(1
DAY OR LESS)
|
BETWEEN
2 AND
30
DAYS
|
BETWEEN
31 AND
90
DAYS
|
GREATER
THAN
90
DAYS
|
TOTAL
|
||||||
|
Agency-Backed
Mortgage Backed securities:
|
||||||||||
|
Amortized
cost of securities sold, including accrued interest
receivable
|
$
|
—
|
$
|
863,729,471
|
$
|
1,425,413,664
|
$
|
762,975,372
|
$
|
3,052,118,507
|
|
Fair
market value of securities sold, including accrued interest
receivable
|
$
|
—
|
$
|
837,257,623
|
$
|
1,386,056,997
|
$
|
736,756,041
|
$
|
2,960,070,661
|
|
Repurchase
agreement liabilities associated with these securities
|
$
|
—
|
$
|
898,377,240
|
$
|
1,374,639,489
|
$
|
723,723,000
|
$
|
2,996,739,729
|
|
Net
weighted average borrowing rate
|
—
|
5.21%
|
5.33%
|
5.31%
|
5.29%
|
As
of
December 31, 2005, Opteum's repurchase agreements had remaining maturities
as summarized below:
|
OVERNIGHT
(1
DAY OR LESS)
|
BETWEEN
2 AND
30
DAYS
|
BETWEEN
31 AND
90
DAYS
|
GREATER
THAN
90
DAYS
|
TOTAL
|
||||||
|
Agency-Backed
Mortgage Backed securities:
|
||||||||||
|
Amortized
cost of securities sold, including accrued interest
receivable
|
$
|
—
|
$
|
906,106,459
|
$
|
813,436,832
|
$
|
1,533,016,956
|
$
|
3,252,560,247
|
|
Fair
market value of securities sold, including accrued interest
receivable
|
$
|
—
|
$
|
893,159,892
|
$
|
791,259,152
|
$
|
1,498,980,224
|
$
|
3,183,399,268
|
|
Repurchase
agreement liabilities associated with these securities
|
$
|
—
|
$
|
914,262,355
|
$
|
857,995,007
|
$
|
1,565,341,000
|
$
|
3,337,598,362
|
|
Net
weighted average borrowing rate
|
—
|
4.22%
|
4.01%
|
4.19%
|
4.15%
|
Opteum
has entered into contracts and paid commitment fees to three counterparties
providing for an aggregate of $1.65 billion in committed repurchase facilities
at pre-determined borrowing rates and haircuts for a 364 day period following
the commencement date of each contract. Opteum is utilizing $0.5 billion
under
these
repurchase lines.
As
of
September 30, 2006, Opteum's repurchase agreements had the following
counterparties, amounts-at-risk and weighted average remaining maturities:
|
Repurchase
Agreement Counterparties
|
Amount
Outstanding ($000)
|
Amount
at Risk(1) ($000)
|
Weighted
Average Maturity of Repurchase Obligations in
Days
|
Percent
of Total Amount Outstanding
|
|||
|
Deutsche
Bank Securities, Inc.
|
$
|
1,023,632
|
10,723
|
132
|
34.16
|
%
|
|
|
JP
Morgan Securities
|
604,198
|
15,540
|
51
|
20.16
|
|||
|
Washington
Mutual
|
471,194
|
16,021
|
82
|
15.72
|
|||
|
Countrywide
Securities Corp
|
283,030
|
9,975
|
98
|
9.44
|
|||
|
Goldman
Sachs
|
163,987
|
4,474
|
15
|
5.47
|
|||
|
Nomura
Securities International, Inc.
|
102,180
|
2,507
|
171
|
3.41
|
|||
|
Lehman
Brothers
|
90,251
|
2,595
|
27
|
3.01
|
|||
|
BNP
Paribas Securities Corp
|
62,966
|
2,183
|
8
|
2.10
|
|||
|
Merrill
Lynch
|
59,495
|
1,312
|
52
|
1.99
|
|||
|
HSBC
Securities (USA) Inc.
|
58,302
|
2,116
|
11
|
1.95
|
|||
|
Bank
of America
|
36,178
|
1,462
|
4
|
1.21
|
|||
|
UBS
Investment Bank, LLC
|
24,405
|
639
|
17
|
0.82
|
|||
|
RBS
Greenwich Capital
|
16,922
|
51
|
61
|
0.56
|
|||
|
Total
|
$
|
2,996,740
|
|
69,598
|
|
100.00
|
%
|
(1) Equal
to
the fair value of securities sold, plus accrued interest income, minus the
sum
of repurchase agreement liabilities, plus accrued interest expense.
As
of
December 31, 2005, Opteum's repurchase agreements had the following
counterparties, amounts-at-risk and weighted average remaining maturities:
|
Repurchase
Agreement Counterparties
|
Amount
Outstanding ($000)
|
Amount
at Risk(1) ($000)
|
Weighted
Average Maturity of Repurchase Obligations in
Days
|
Percent
of Total Amount Outstanding
|
|||
|
Deutsche
Bank Securities, Inc.
|
$
|
894,748
|
12,018
|
135
|
26.81
|
%
|
|
|
Nomura
Securities International, Inc.
|
623,631
|
27,010
|
122
|
18.69
|
|||
|
Cantor
Fitzgerald
|
467,638
|
15,958
|
70
|
14.01
|
|||
|
Washington
Mutual
|
375,345
|
11,630
|
7
|
11.25
|
|||
|
Goldman
Sachs
|
207,525
|
7,438
|
44
|
6.22
|
|||
|
Bear
Stearns & Co. Inc.
|
167,610
|
6,096
|
157
|
5.02
|
|||
|
UBS
Investment Bank, LLC
|
158,781
|
5,059
|
93
|
4.76
|
|||
|
Merrill
Lynch
|
128,119
|
(7,949)
|
96
|
3.84
|
|||
|
JP
Morgan Securities
|
115,807
|
1,652
|
151
|
3.47
|
|||
|
Morgan
Stanley
|
73,505
|
1,767
|
26
|
2.20
|
|||
|
Lehman
Brothers
|
62,643
|
2,399
|
87
|
1.88
|
|||
|
Countrywide
Securities Corp
|
22,930
|
1,238
|
86
|
0.69
|
|||
|
Daiwa
Securities America Inc.
|
19,732
|
39
|
188
|
0.58
|
|||
|
Bank
of America Securities, LLC
|
19,584
|
815
|
27
|
0.58
|
|||
|
Total
|
$
|
3,337,598
|
85,170
|
100.00
|
%
|
(1) Equal
to
the fair value of securities sold, plus accrued interest income, minus the
sum
of repurchase agreement liabilities, plus accrued interest expense.
NOTE
11. TRUST
PREFERRED SECURITIES
On
May 17, 2005, Opteum completed a private offering of $50.0 million of trust
preferred securities of Bimini Capital Trust I (“BCTI”), a Delaware statutory
business trust sponsored by Opteum. BCTI used the proceeds of the private
offering, together with Opteum’s investment of $1.6 million in BCTI common
equity securities, to purchase $51.6 million aggregate principal amount of
Opteum’s BCTI Junior Subordinated Notes with terms that parallel the terms of
the BCTI trust preferred securities.
The
BCTI
trust preferred securities and Opteum’s BCTI Junior Subordinated Notes have a
fixed rate of interest until March 30, 2010, of 7.61% and thereafter,
through maturity in 2035, the rate will float at a spread of 3.30% over the
prevailing three-month LIBOR rate. The BCTI trust preferred securities and
Opteum’s BCTI Junior Subordinated Notes require quarterly interest distributions
and are redeemable at Opteum’s option, in whole or in part and without penalty,
beginning March 30, 2010 and at any date thereafter. Opteum’s BCTI
Junior Subordinated Notes are subordinate and junior in right of payment
of all
present and future senior indebtedness. The proceeds from the private offering
net of costs were approximately $48.5 million.
On
October 5, 2005, Opteum completed a private offering of $50.0 million of
trust
preferred securities of Bimini Capital Trust II (“BCTII”), a Delaware statutory
business trust sponsored by Opteum. BCTII used the proceeds of the private
offering, together with Opteum’s investment of $1.5 million in BCTII common
equity securities, to purchase $51.5 million aggregate principal amount of
Opteum’s BCTII Junior Subordinated Notes with terms that parallel the terms of
the BCTII trust preferred securities.
The
BCTII
trust preferred securities and Opteum’s BCTII Junior Subordinated Notes have a
fixed rate of interest until December 15, 2010, of 7.8575% and thereafter,
through maturity in 2035, the rate will float at a spread of 3.50% over the
prevailing three-month LIBOR rate. The BCTII trust preferred securities and
Opteum’s BCTII Junior Subordinated Notes require quarterly interest
distributions and are redeemable at Opteum’s option, in whole or in part and
without penalty, beginning December 15, 2010, and at any date thereafter.
Opteum’s BCTII Junior Subordinated Notes are subordinate and junior in right of
payment of all present and future senior indebtedness. The proceeds from
the
private offering net of costs were approximately $48.5 million.
Each
trust is a variable interest entity pursuant to FIN No. 46 because the
holders of the equity investment at risk do not have adequate decision making
ability over the trust’s activities. Since Opteum’s investment in each trust’s
common equity securities was financed directly by the applicable trust as
a
result of its loan of the proceeds to Opteum, that investment is not considered
to be an equity investment at risk pursuant to FIN No. 46. Since Opteum’s common
share investments in BCTI and BCTII are not a variable interest, Opteum is
not
the primary beneficiary of the trusts. Therefore, Opteum has not consolidated
the financial statements of BCTI and BCTII into its financial statements.
Based on the aforementioned accounting guidance, the accompanying consolidated
financial statements present Opteum’s BCTI and BCTII Junior Subordinated Notes
issued to the trusts as liabilities and Opteum’s investments in the common
equity securities of BCTI and BCTII as assets. For financial statement purposes,
Opteum records payments of interest on the Junior Subordinated Notes issued
to
BCTI and BCTII as interest expense.
NOTE
12. CAPITAL
STOCK
Changes
in Class A Common Stock
During
the nine and three months ended September 30, 2006, the Company issued a
total
of 31,380 and 9,385 shares of Class A Common Stock, respectively, to four
of its
independent directors for the payment of director fees for services
rendered.
During
the nine and the three months ended September 30, 2006, the Company issued
102,409 and 33,441 shares of its Class A Common Stock, respectively, to Opteum
employees pursuant to the terms of the stock incentive plan phantom share
grants
(see Note 14).
On
April
28, 2006, the Company issued a total of 1,223,208 shares of Class A Common
Stock
in conjunction with the conversion of the Class A Redeemable Preferred Stock
(see Note 7).
On
July
17, 2006, the Company granted 79,725 restricted shares of its Class A Common
Stock to certain key employees of the Company’s subsidiary pursuant to the terms
of the Opteum Inc. 2003 Long Term Incentive Compensation Plan. The shares
were
subject
to forfeiture prior to the November 3, 2006, vesting date. During the
three months ended September 30, 2006, 3,350 shares were forfeited. For the
period from October 1, 2006 through November 2, 2006, an additional 1,300
shares
were forfeited.
During
the nine months ended September 30, 2006, the Company retired 1.1
million
shares
of Class A Common Stock.
Dividends
On
September 7, 2006, the Company's Board of Directors declared a $0.05 per
share
cash dividend to the holders of its dividend
eligible securities on the record date of September 22, 2006. Dividends were
payable on 24,396,940 shares of Class A Common Stock, 562,018 phantom
shares and 76,375 restricted shares granted under the Company's stock incentive
plan (see Note 14) and 319,388 shares of Class B Common Stock. The
distribution totaling $1,267,736 was paid on October 13, 2006.
On
May
31, 2006, the Company's Board of Directors declared a $0.25 per share cash
dividend to the holders of its dividend eligible securities on the record
date
of June 21, 2006. Dividends were payable on 24,354,114 shares of Class A
Common Stock, 612,268 phantom shares granted under the Company's stock incentive
plan (see Note 14) and 319,388 shares of Class B Common Stock. The
shares of Class A Common Stock include the shares of Class A Redeemable
Preferred Stock that were converted on April 28, 2006. The distribution totaling
$6,321,444 was paid on July 7, 2006.
On
March
10, 2006, the Company’s Board of Directors declared a $0.11 per share cash
dividend to the holders of its dividend eligible securities. Dividends were
payable on 23,083,498 shares of Class A Common Stock, 650,320 phantom shares
granted under the Company’s stock incentive plan (see Note 14) and 319,388
shares of Class B Common Stock. No dividends were paid on the Class A Redeemable
Preferred Stock as the provisions of a formula in the Company’s amended Articles
of Incorporation were not met. The distribution totaling $2,645,853 was paid
on
April 7, 2006.
Other
Classes of Common and Preferred Stock
There
was
no change in the number of issued and outstanding shares of the Company’s Class
B Common Stock and Class C Common Stock.
The conversion of the outstanding shares of Class A Redeemable Preferred
Stock
into Class A Common Stock was approved by the Company’s stockholders at the
Company’s 2006 Annual Meeting of Stockholders on April 28, 2006, and the
outstanding shares of Class A Redeemable Preferred Stock were converted into
1,223,208 shares of Class A Common Stock on that date.
NOTE
13. TRANSACTIONS
WITH RELATED PARTIES
In
January 2006, the independent directors received a total of 10,115 shares
of Class A Common Stock, valued at $98,116, and a total of $38,125 cash as
compensation for their activities as directors.
In
April 2006, the independent directors received a total of 11,880 shares of
Class A Common Stock, valued at $98,129, and a total of $38,125 cash as
compensation for their activities as directors.
In
July
2006, the independent directors received a total of 9,385 shares of Class
A
Common Stock, valued at $81,274, and a total of $55,000 cash as compensation
for
their activities as directors.
In
January 2005, the independent directors received a total of 5,968 shares
of
Class A Common Stock, valued at $92,027, as compensation for their activities
as
directors.
In
April
2005, the independent directors received a total of 6,164 shares of Class
A
Common Stock, valued at $84,015, as compensation for their activities as
directors.
In
July
2005, the independent directors received a total of 5,967 shares of Class
A
Common Stock, valued at $84,015, as compensation for their activities as
directors.
NOTE
14. STOCK
INCENTIVE PLAN
On
December 1, 2003, Opteum adopted the 2003 Long Term Incentive Compensation
Plan (the “2003 Plan”) to provide Opteum with the flexibility to use stock-based
awards as part of an overall compensation package to provide a means of
performance-based compensation to attract and retain qualified personnel.
The
2003 Plan was amended and restated in March 2004. Key employees, directors
and consultants are eligible to be granted stock options, restricted stock,
phantom shares, dividend equivalent rights and other stock-based awards under
the 2003 Plan. Subject to adjustment upon certain corporate transactions
or
events, a maximum of 4,000,000 shares of Class A Common Stock (but not more
than
10% of the Class A Common Stock outstanding on the date of grant) may be
awarded
under the 2003 Plan.
Phantom
Shares
During
the nine months ended September 30, 2006, Opteum granted 215,389 phantom
shares to employees with an aggregate fair value of $2.0 million. No phantom
shares were granted during the three months ended September 30, 2006. Each
phantom share represents a right to receive a share of Opteum’s Class A
Common Stock. Dividend equivalent rights were also granted on these phantom
shares.
Phantom
share awards are valued at the fair value of Opteum’s Class A Common Stock
at the date of the grant. The total grant date value of all phantom share
awards
since the 2003 Plan’s inception is $9.8 million. The phantom awards do not have
an exercise price. The grant date fair value is being amortized as compensation
expense on a straight-line basis over the vesting period of the respective
award. The phantom shares vest, based on the employees’ continuing
employment, following a schedule as provided in the award agreements for
periods through June 1, 2009.
As
of
September 30, 2006, a total of 733,850 phantom stock awards have been granted
since the inception of the 2003 Plan, however, 2,090 shares were forfeited
during 2005. The future compensation charge that was eliminated by the
forfeiture totaled $31,852. Of the remaining phantom shares, 331,864 phantom
shares have fully vested and 399,896 phantom shares remain unvested. No
phantom share awards have expired. Of the vested phantom shares, a total
of
153,657 shares of Class A Common Stock were distributed (issued to grantees or
surrendered to pay income taxes) during the nine months ended September 30,
2006. A total of 168,742 shares of Class A Common Stock have been distributed
since inception. As of September 30, 2006, 563,018 phantom shares remain
outstanding. Total compensation expense recognized for the nine and three
months ended September 30, 2006, was $2.2
million
and $0.7 million, respectively, and for the nine and three months ended
September 30, 2005, was $1.6 million and $0.6 million, respectively. Dividends
paid on phantom shares are charged to retained earnings when
declared.
Restricted
Shares
On
July
17, 2006, the Company granted 79,725 restricted shares of its Class A Common
Stock to certain key employees of the Company’s subsidiary pursuant to the terms
of the 2003 Plan. Such share grants were initially recorded by OFS prior
to the
merger with the Company. However, during the three month period ended June
30,
2006, these awards were cancelled when the Company and the subject employees
agreed to forego the award in contemplation of a new grant under the Company’s
2003 Plan. The restricted shares are valued at the fair value of Opteum's
Class
A Common Stock at the date of grant, which totaled $693,608 for the July
2006
awards, and
this
amount is being amortized to compensation over the vesting period of the
award,
net of any forfeitures. The restricted shares do not have an exercise price.
Dividends paid on the restricted shares are charged to retained earnings
when
declared. The shares are subject to forfeiture prior to the November 3, 2006,
vesting date. During the three months ended September 30, 2006, 3,350
shares were forfeited. For the period from October 1, 2006 through November
2,
2006, an additional 1,300 shares were forfeited.
NOTE
15. SAVINGS
INCENTIVE PLANS
Opteum’s
employees have the option
to
participate in the Opteum Inc. 401(K) Plan (the “Plan”). Under the terms of the
Plan, eligible employees can make tax-deferred 401(k) contributions and at
Opteum’s sole discretion, Opteum can match the employees’ contributions. For the
nine and three months ended September 30, 2006, Opteum made 401(k) matching
contributions of $51,347 and $13,570, respectively and for the nine and three
months ended September 30, 2005, Opteum made 401(k) matching contributions
of
$31,915 and $13,368, respectively.
OFS’
employees have the option to participate in The Company Savings and Incentive
Plan (the “OFS Plan”). Under the terms of the OFS Plan, eligible employees can
make tax-deferred 401(k) contributions and at OFS’ sole discretion, OFS can
match the employees’ contributions as well as make annual profit-sharing
contributions to the OFS Plan. For the nine and three months ended September
30,
2006, OFS made 401(k) matching contributions of $649,865 and
$190,631,
respectively.
NOTE
16. COMMITMENTS
AND CONTINGENCIES
Loans
Sold to Investors.
Generally, OFS is not exposed to significant credit risk on its loans sold
to
investors. In the normal course of business, OFS provides certain
representations and warranties during the sale of mortgage loans which obligate
it to repurchase loans which are subsequently unable to be sold through the
normal investor channels. The repurchased loans are secured by the related
real
estate properties and can usually be sold directly to other permanent investors.
There can be no assurance, however, that OFS will be able to recover the
repurchased loan value either through other investor channels or through
the
assumption of the secured real estate.
OFS
recognizes a liability for the estimated fair value of this repurchase
obligation at the inception of each mortgage loan sale based on the anticipated
repurchase levels and historical experience. The liability is recorded as
a
reduction of the gain on sale of mortgage loans and included as part of other
liabilities in the accompanying financial statements.
Changes
in this liability for the nine months ended September 30, 2006:
|
Balance—Beginning
of period
|
$
|
2,037,980
|
|
Provision
|
3,802,448
|
|
|
Charge-Offs
|
(2,455,693)
|
|
|
Balance—End
of period
|
$
|
3,384,735
|
Loan
Funding and Delivery Commitments.
As of
September 30, 2006, OFS had commitments to fund loans approximating $331.8
million. OFS hedges the interest rate risk of such commitments primarily
with
mandatory delivery commitments. The remaining commitments to fund loans with
agreed-upon rates are anticipated to be sold through “best-efforts” and investor
programs.
Net
Worth Requirements.
OFS is
required to maintain certain specified levels of minimum net worth to maintain
its approved status with Fannie Mae, the U.S. Department of Housing and Urban
Development (“HUD”) and other investors. As of September 30, 2006, the highest
minimum net worth requirement applicable to OFS was approximately $1.7 million.
Contractual
Obligations and Commitments
The
following table provides information with respect to the Company’s contractual
obligations as of September 30, 2006 (dollars in thousands):
|
Payments
Due by Period
|
||||||||||
|
Contractual
Obligations
|
Total
|
Less
than 1 year
|
1-3
years
|
3-5
years
|
More
than 5 years
|
|||||
|
Repurchase
agreements
|
$
|
2,996,740
|
$
|
2,996,740
|
$
|
-
|
$
|
-
|
$
|
-
|
|
Warehouse
lines of credit
|
845,010
|
845,010
|
-
|
-
|
-
|
|||||
|
Drafts
payable
|
7,667
|
7,667
|
-
|
-
|
-
|
|||||
|
Other
secured borrowings
|
104,039
|
104,039
|
-
|
-
|
-
|
|||||
|
Junior
subordinated notes
|
103,097
|
-
|
-
|
103,097
|
-
|
|||||
|
Operating
leases
|
18,165
|
6,059
|
8,806
|
2,609
|
691
|
|||||
|
Total
|
$
|
4,074,718
|
$
|
3,959,515
|
$
|
8,806
|
$
|
105,706
|
$
|
691
|
Legal
Proceedings.
The
Company is involved in various lawsuits and claims, both actual and potential,
including some that it has asserted against others, in which monetary and
other
damages are sought. These lawsuits and claims relate primarily to contractual
disputes arising out of the ordinary course of the Company’s business. The
outcome of such lawsuits and claims is inherently unpredictable. However,
management believes that, in the aggregate, the outcome of all lawsuits and
claims involving the Company will not have a material effect on the Company’s
consolidated financial position or liquidity; however, any such outcome may
be
material to the results of operations of any particular period in which costs,
if any, are recognized.
NOTE
17. SEGMENTS
The
Company follows SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. The
Company operates in two reportable segments: as a REIT and as an originator
of
mortgage loans.
Certain
of the Company’s operations are qualifying activities under the REIT provisions
of the Code. The REIT activities primarily involve investing in residential
mortgage-related securities by Opteum. As a REIT, Opteum’s activities are not
subject to federal income tax as long as the REIT taxable income is distributed
to Opteum’s stockholders and certain other conditions are satisfied.
On
November 3, 2005, Opteum acquired OFS. OFS is a mortgage lender that
originates loans. Goodwill associated with the OFS merger was $2.3
million
as of September 30, 2006.
The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies in Note 1. The Company evaluates
the performance of its REIT segment and mortgage origination business segment
based on operating results. Each of the business segments’ net income or loss
includes direct costs attributable to such segment plus allocated
corporate-level expenses.
The
following tables show summarized financial information for the nine and three
months ended September 30, 2006, concerning the Company’s reportable
segments.
|
(Amounts
in thousands)
|
OPTEUM
|
OFS
|
CONSOLIDATED
TOTAL
|
|||
|
Nine
months
ended
September
30, 2006
|
Nine
months
ended
September
30, 2006
|
Nine
months
ended
September
30, 2006
|
||||
|
Net
interest income
|
$
|
17,100
|
$
|
10,190
|
$
|
20,442
|
|
Other
revenues, net
|
(95)
|
17,427
|
17,332
|
|||
|
Direct
REIT operating expenses
|
(742)
|
-
|
(742)
|
|||
|
Inter-segment
interest
income
(expense)
|
6,848
|
(6,848)
|
-
|
|||
|
General
and administrative expenses
|
(7,034)
|
(68,181)
|
(68,367)
|
|||
|
Income
(loss) before income taxes
|
9,228
|
(40,564)
|
(31,335)
|
|||
|
Income
tax benefit
|
-
|
15,713
|
15,713
|
|||
|
Total
assets
|
3,325,521
|
1,126,188
|
4,309,245
|
|||
|
Capital
expenditures
|
754
|
2,521
|
3,275
|
|
(Amounts
in thousands)
|
OPTEUM
|
OFS
|
CONSOLIDATED
TOTAL
|
|||
|
Three
months
ended
September
30, 2006
|
Three
months
ended
September
30, 2006
|
Three
months
ended
September
30, 2006
|
||||
|
Net
interest income
|
$
|
933
|
$
|
3,146
|
$
|
1,279
|
|
Other
revenues, net
|
(166)
|
15,258
|
15,091
|
|||
|
Direct
REIT operating expenses
|
(197)
|
-
|
(197)
|
|||
|
Inter-segment
interest
income
(expense)
|
2,799
|
(2,799)
|
-
|
|||
|
General
and administrative expenses
|
(1,877)
|
(26,416)
|
(25,493)
|
|||
|
Income
(loss) before income taxes
|
(1,307)
|
(8,012)
|
(9,318)
|
|||
|
Income
tax benefit
|
-
|
3,063
|
3,063
|
|||
|
Capital
expenditures
|
67
|
372
|
439
|
For
the
nine months ended September 30, 2006, general and administrative expenses
includes depreciation and amortization expense of $0.5 million for the REIT
and
$2.7 million for OFS. Other interest expense for OFS was $5.6 million, for
the
nine months ended September 30, 2006. For the three months ended September
30,
2006, general and administrative expenses includes depreciation and amortization
expense of $0.2
million
for the
REIT and $0.9 million for OFS. Other interest expense for OFS was $1.9 million
for the three months ended September 30, 2006.
The
following information is provided to reconcile the above segment amounts
to the
amounts shown in the accompanying consolidated financial statements. During
the
consolidation process, Opteum’s loans receivable totaling $116.4 million,
accrued interest of $1.0 million and the related interest income for the
nine
and three months ended September 30, 2006 of $6.9 million and $2.8 million,
respectively, are eliminated against corresponding liabilities and expenses
recorded in OFS’ segment financial statements. There were no inter-segment gross
revenues during the period ended September 30, 2006, except for this interest
and, therefore, all other revenues were from external sources.
For
the
nine months ended September 30, 2006, approximately 94.6%
of the
REIT interest income was derived from MBS issued or guaranteed by U.S.
governmental or quasi-governmental agencies.
NOTE
18. INCOME
TAXES
As
more
fully described in Note
2,
Opteum acquired OFS on November 3, 2005. OFS is a TRS, which is a taxpaying
entity for U.S. federal income tax purposes and is taxed separately from
Opteum.
There is no tax provision for the Company for the nine and three months ended
September 30, 2005, as this was prior to the acquisition of OFS, and Opteum
was
solely a non-taxpaying REIT during this period. At November 3, 2005, OFS
recorded a deferred tax liability of approximately $22.6 million related
to the
difference as of such date in the carrying amount and the tax basis of the
originated MSRs, among other items.
The
income tax benefit is as follows for the nine and three months ended September
30, 2006:
|
Deferred
income tax benefit:
|
Nine
Months ended September 30, 2006
|
Three
Months ended September 30, 2006
|
||
|
Federal
|
$
|
14,137,291
|
$
|
2,755,595
|
|
State
|
1,575,298
|
307,052
|
||
|
Total
deferred income tax benefit
|
$
|
15,712,589
|
$
|
3,062,647
|
The
effective income tax benefit for the nine and three months ended September
30,
2006, differs from the amount determined by applying the statutory Federal
rate
of 35% as follows:
|
Nine
months
ended
September 30, 2006
|
Three
months ended September 30, 2006
|
|||
|
Benefit
of the net loss at the Federal tax rate
|
$
|
10,967,408
|
$
|
3,261,420
|
|
Exclusion
of REIT Taxable Income/(loss)
|
3,229,968
|
(457,290)
|
||
|
Permanent
tax differences
|
(66,780)
|
(53,943)
|
||
|
State
tax benefit, net of Federal tax effect
|
1,581,993
|
312,460
|
||
|
Total
deferred income tax benefit
|
$
|
15,712,589
|
$
|
3,062,647
|
The
tax
affected cumulative temporary differences that give rise to deferred tax
assets
and liabilities as of September 30, 2006, are as follows:
|
Deferred
tax assets:
|
||
|
Federal
tax loss carry-forward
|
$
|
25,338,920
|
|
State
tax loss carry-forward
|
2,823,480
|
|
|
Mark-to-market
adjustments
|
158,370
|
|
|
Total
gross deferred tax assets
|
$
|
28,320,770
|
|
Deferred
tax liabilities:
|
||
|
Capitalized
cost of mortgage servicing rights
|
$
|
30,792,920
|
|
Loan
origination and other amounts
|
627,921
|
|
|
Intangible
assets
|
1,224,326
|
|
|
Total
gross deferred tax liabilities
|
$
|
32,645,167
|
|
Net
deferred tax liabilities
|
$
|
4,324,397
|
As
described in Note 1, the Company adopted SFAS No. 156 as of January 1, 2006.
As
a result of this adoption, net deferred tax liabilities were increased by
approximately $1.67 million.
Management believes that the deferred tax assets will more likely than not
be
realized due to the reversal of the deferred tax liabilities and expected
future
taxable income. As of September 30, 2006, the Company had an estimated federal
tax net operating loss carry-forward of $68.4
million,
which expires in 2025, and is fully available to offset future taxable
income.
Tax
differences on REIT income
Taxable
income, as generated by Opteum’s qualifying REIT activities, is computed
differently from Opteum’s financial statement net income as computed in
accordance with GAAP. Depending on the number and size of the various items
or
transactions being accounted for differently, the differences between Opteum’s
REIT taxable income and Opteum’s financial statement net income can be
substantial and each item can affect several years. Opteum's most significant
items and transactions currently being accounted for differently include
restricted stock awards, depreciation of property and equipment and the
accounting for debt issuance costs.
For
the
nine months ended September 30, 2006, Opteum's REIT taxable income was
approximately $1.5
million
greater than Opteum's financial statement net income. A substantial portion
of
this amount is attributable to phantom stock awards. The future deduction
of
phantom stock compensation against REIT taxable income is uncertain both
as to
the year (as the timing of the tax impact of each restricted stock award
is up
to each employee who has received a grant) and as to the amount (the amount
of
the tax impact is measured at the fair value of the shares as of a future
date
and this amount may be greater than or less than the financial statement
expense
already recognized by Opteum). Since inception through September 30, 2006,
Opteum's REIT taxable income is approximately $4.4
million
greater than Opteum's financial statement net income as reported in its
financial statements.
Forward-Looking
Statements
When
used
in this Quarterly Report on Form 10-Q, in future filings with the
Securities and Exchange Commission (the “Commission”) or in press releases or
other written or oral communications, statements which are not historical
in
nature, including those containing words such as “anticipate,” “estimate,”
“should,” “expect,” “believe,” “intend” and similar expressions, are intended to
identify “forward-looking statements” within the meaning of Section 27A of
the Securities Act of 1933, as amended (the “Securities Act”), and
Section 21E of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”).
These
forward-looking statements are subject to various risks and uncertainties,
including, but not limited to, those described or incorporated by reference
in
Part II - Item 1A - Risk Factors of this Form 10-Q. These and other risks,
uncertainties and factors, including those described in reports that the
Company
files from time to time with the Commission, could cause the Company’s actual
results to differ materially from those reflected in such forward-looking
statements. All forward-looking statements speak only as of the date they
are
made and the Company does not undertake, and specifically disclaims, any
obligation to update or revise any forward-looking statements to reflect
events
or circumstances occurring after the date of such statements.
The
following discussion of our financial condition and results of operations
should
be read in conjunction with the consolidated financial statements and related
notes included elsewhere in this report.
Introduction
As
used
in this document, discussions related to “Opteum,” the parent company, the
registrant, and to real estate investment trust (“REIT”) qualifying activities
or the general management of Opteum’s portfolio of mortgage backed securities
(“MBS”) refer to “Opteum Inc.” Further, as used in this document, “OFS,”
Opteum’s taxable REIT subsidiary (“TRS”) or non-REIT eligible assets refer to
Opteum Financial Services, LLC and its consolidated subsidiaries. Discussions
relating to the “Company” refer to the consolidated entity (the combination of
Opteum and OFS). The assets and activities that are not REIT eligible, such
as
mortgage origination, acquisition and servicing activities, are conducted
by
OFS.
Opteum
Inc., formerly Bimini Mortgage Management, Inc., was formed in September
2003 to
invest primarily in but not limited to, residential mortgage related securities
issued by the Federal National Mortgage Association (more commonly known
as
Fannie Mae), the Federal Home Loan Mortgage Corporation (more commonly known
as
Freddie Mac) and the Government National Mortgage Association (more commonly
known as Ginnie Mae). Opteum attempts to earn a return on the spread between
the
yield on its assets and its costs, including the interest expense on the
funds
it borrows. It generally intends to borrow between eight and twelve times
the
amount of its equity capital in an attempt to enhance its returns to
stockholders. This leverage may be adjusted above or below this range to
the
extent management or the Company’s Board of Directors deems necessary or
appropriate. For purposes of this calculation, Opteum treats its junior
subordinated notes as an equity capital equivalent. Opteum is self-managed
and
self-advised and has elected to be taxed as a real estate investment trust
(or
“REIT”) for U.S. federal income tax purposes.
In
November 2005, Opteum executed a definitive merger agreement with Opteum
Financial Services, LLC (“OFS”), a privately held home mortgage lender
headquartered in Paramus, New Jersey. As a result of the merger, OFS became
a
wholly-owned taxable REIT subsidiary (“TRS”) of Opteum. OFS
is
subject to corporate income taxes and files separate federal and state income
tax returns. OFS
acquires and originates mortgages that are either sold to third parties or
securitized by a wholly-owned
special purpose entity, Opteum
Mortgage Acceptance Corporation (“OMAC”). OFS services the mortgages securitized
by OMAC. In addition, OFS typically retains an interest in the securitizations
which represents their right to the residual cash flows from the transactions
once all debt service costs of the securities sold and expenses have been
met.
Dividends
to Stockholders
In
order
to maintain its qualification as a REIT, Opteum is required (among other
provisions) to annually distribute dividends to its stockholders in an amount
at
least equal to, generally, 90% of Opteum’s REIT taxable income. REIT taxable
income is a term that describes Opteum’s operating results calculated in
accordance with rules and regulations promulgated pursuant to the Internal
Revenue Code.
Opteum’s
REIT taxable income is computed differently from net income as computed in
accordance with generally accepted accounting principles ("GAAP net income"),
as
reported in the Company’s accompanying consolidated financial statements.
Depending on the number and size of the various items or transactions being
accounted for differently, the differences between REIT taxable income and
GAAP
net income can be substantial and each item can affect several reporting
periods. Generally, these items are timing or temporary differences between
years; for example, an item that may be a deduction for GAAP net income in
the
current year may not be a deduction for REIT taxable income until a later
year.
As
a
REIT, Opteum may be subject to a federal excise tax if Opteum distributes
less
than 85% of its taxable income by the end of the calendar year. Accordingly,
Opteum’s dividends are based on its taxable income, as determined for federal
income tax purposes, as opposed to its net income computed in accordance
with
GAAP (as reported in the accompanying consolidated financial
statements).
In
future
periods, Opteum’s REIT taxable income may grow to be even greater than the
Company’s consolidated GAAP net income because Opteum earns taxable interest
income on an inter-company loan that Opteum has made to OFS. Although this
taxable interest income is not reported on the Company’s consolidated financial
statements because it is eliminated in consolidation in accordance with GAAP,
it
is included in Opteum’s REIT taxable income that must be distributed annually to
stockholders.
Results
of Operations
PERFORMANCE
OVERVIEW
Described
below are the Company’s results of operations for the nine and three months
ended September 30, 2006, as compared to the Company’s results of operations for
the nine and three months ended September 30, 2005. Readers are cautioned
that
because the merger with OFS did not close until the fourth quarter of 2005,
the
results of operations of OFS are not included in the Company’s results of
operations for the nine and three months ended September 30, 2005, making
comparisons to the Company’s prior year results less meaningful.
The
Company’s results of operations for the
nine
and three months ended September 30, 2006, were negatively affected by changes
in various
market interest rates, including short-term rates, due primarily to the monetary
policy actions
of
the Federal Reserve during these periods. The Company’s financing is based on
short-term rates, which increased
during
these periods faster than the yields on Opteum’s MBS portfolio. The
increase in short-term borrowing rates also negatively impacted the net interest
spread earned by OFS on its mortgage loans held for sale due to increases
in the
funding costs associated with warehouse lines of credit used to fund its
mortgage loan originations.
Consolidated
net income/(loss) for the nine and three months ended September 30, 2006,
was
($15.6)
million and
($6.3)
million,
respectively, compared to $27.0
million
and $7.9 million for the nine and three months ended September 30, 2005,
respectively. Consolidated net loss per basic and diluted share of Class A
Common Stock was ($0.64)
and
($0.25) in
the
nine and three months ended September 30, 2006, respectively, compared to
$1.27
and
$0.37 of per share income, respectively, for the comparable prior periods.
Included
in the Company’s consolidated results are $20.4
million
and $1.3 million
of consolidated net interest income for the nine and three months ended
September 30, 2006, respectively, compared to $31.3 million
and
$10.1
million of net interest income for the nine and three months ended
September 30, 2005, respectively. For the nine and three months ended
September 30, 2006, consolidated interest income of $204.3 million
and $68.4 million, respectively, was partially offset by consolidated interest
expense of $183.8
million
and $67.1 million, respectively. These
figures are not reflected as annualized net yields on invested assets as
was
previously reported since the figures represent blended net interest earnings
on
both Opteum’s MBS portfolio and mortgage loans held for sale by OFS.
For
the
nine months and three months ended September 30, 2006, the Company’s
consolidated general and administrative costs were $68.4
million
and $25.5
million,
respectively. Operating expenses, which incorporate trading costs, fees and
other direct costs, were $0.7
million
and $0.2 million for the nine months and three months ended September 30,
2006,
respectively.
For
the
nine and three months ended September 30, 2006, comprehensive income/(loss)
was
($37.2)
million
and $6.1
million,
respectively, including the net unrealized gain/(loss) on available-for-sale
securities of ($21.5)
million
and
$12.4
million, respectively. For the nine and three months ended September 30,
2005,
comprehensive income/(loss) was ($24.3)
million and ($21.5) million, respectively, including the net unrealized loss
on
available-for-sale securities of ($49.3) million and ($29.3) million,
respectively. The factors resulting in the unrealized loss on available-for-sale
securities are described below.
Comprehensive
(loss) income is as follows:
|
Nine
Months Ended September 30,
|
Three
Months Ended September 30,
|
||||||
|
2006
|
2005
|
2006
|
2005
|
||||
|
Net
(loss) income
|
$
|
(15,622,862)
|
$
|
27,001,509
|
$
(6,255,695)
|
$
|
7,875,257
|
|
Less
realized gain on available-for-sale securities, net
|
-
|
(1,993,457)
|
-
|
(11,075)
|
|||
|
Plus
unrealized gain/(loss) on available-for-sale securities, net
|
(21,536,405)
|
(49,321,271)
|
12,359,938
|
(29,327,409)
|
|||
|
Comprehensive
(loss) income
|
$
|
(37,159,267)
|
$
|
(24,313,219)
|
$
6,104,243
|
$
|
(21,463,227)
|
Accumulated
other comprehensive loss, as reflected in stockholders’ equity, increased
approximately $21.5 million
from December 31, 2005, to September 30, 2006. This is
reflective of an overall decline in the fair value of Opteum’s MBS portfolio as
compared to the original aggregate purchase price of Opteum’s MBS. Changes
in interest rates over time are the primary market factor for this value
decline; generally, as interest rates rise, the value of long-term interest
rate
sensitive securities decline. The value of the majority of Opteum’s assets is
driven by movements in short-term rates—rates typically less than two years—and
these rates increased substantially over the period. Additionally, as
longer-term rates decreased, prepayment expectations increased resulting
in a
widening in the spreads at which Opteum’s assets are priced.
The
Company has negative retained earnings (titled “Accumulated deficit” in the
stockholders’ equity section of the accompanying consolidated financial
statements) at September 30, 2006, partially because of the consequences
of
Opteum’s tax qualification as a REIT. As is more fully described in the
“Dividends to Stockholders” section above, Opteum’s dividends are based on
its REIT taxable income, as determined for federal income tax purposes, and
not
on its net income computed in accordance with GAAP (as reported in the
accompanying consolidated financial statements).
For
the
nine months ended September 30, 2006, Opteum's REIT taxable income was
approximately $1.5
million
greater than Opteum's net income computed in accordance with GAAP. A substantial
portion of this amount is attributable to timing differences in the recognition
of compensation expense attributable to phantom stock awards. With respect
to
the phantom stock awards, the future deduction of this temporary difference
is
uncertain both as to the year (as the timing of the tax impact of each phantom
stock award is up to each employee who has received an award) and as to the
amount (the amount of the tax impact is measured at the fair value of the
shares
as of a future date and this amount may be greater than or less than the
financial statement deduction already taken by Opteum). Since inception through
September 30, 2006, Opteum's taxable income is approximately $4.4
million
greater than Opteum's financial statement net income as computed in accordance
with GAAP.
Therefore,
to the extent that Opteum’s cumulative taxable income is greater than
cumulative GAAP net income and Opteum continues to pay out as dividends all
of
its REIT taxable income, the Company will continue to report a deficit in
retained earnings on its balance sheet.
PERFORMANCE
OF OPTEUM’S MBS PORTFOLIO
For
the
nine and three month periods ended September 30, 2006, Opteum’s MBS portfolio
generated $17.1
million
and $0.9 million, respectively, of net interest income. Included in these
results were $144.7
million
and $45.8 million, respectively, of interest income, offset by $127.6 million
and $44.9 million, respectively, of interest expense.
Opteum
had no gains from the sale of any MBS from the investment portfolio during
the
nine months and three months ended September 30, 2006. For the nine and three
month periods ended September 30, 2005, Opteum reported $2.0 million and
$0.0
million, respectively, in gains from the sale of MBS.
At
September 30, 2006, Opteum’s
MBS portfolio consisted of $3.1 billion
of agency or government MBS at fair value and had
a
weighted average yield on assets of 4.80% and a net weighted average borrowing
cost of 5.29%. The
following tables summarize Opteum’s agency and government mortgage related
securities as of September 30, 2006:
|
Asset
Category
|
Market
Value
|
Percentage
of
Entire
Portfolio
|
Weighted
Average
Coupon
|
Weighted
Average
Maturity
in
Months
|
Longest
Maturity
|
Weighted
Average
Coupon
Reset
in Months
|
Weighted
Average
Lifetime
Cap
|
Weighted
Average
Periodic
Cap
|
|
|
Adjustable-Rate
MBS
|
$
|
2,139,858,096
|
69.47%
|
4.93%
|
327
|
1-Apr-44
|
4.63
|
10.27%
|
1.85%
|
|
Fixed-Rate
MBS
|
$
|
616,445,158
|
20.02%
|
6.47%
|
250
|
1-Apr-36
|
n/a
|
n/a
|
n/a
|
|
Hybrid
Adjustable-Rate MBS
|
$
|
281,762,509
|
9.15%
|
4.87%
|
330
|
1-Nov-35
|
16.49
|
10.03%
|
1.32%
|
|
Balloon
Maturity MBS
|
$
|
41,994,359
|
1.36%
|
4.03%
|
39
|
1-Feb-11
|
n/a
|
n/a
|
n/a
|
|
Total
Portfolio
|
$
|
3,080,060,122
|
100.00%
|
5.22%
|
308
|
1-Apr-44
|
6.01
|
10.25%
|
1.80%
|
|
Agency
|
Market
Value
|
Percentage
of
Entire
Portfolio
|
|
|
Fannie
Mae
|
$
|
2,063,769,680
|
67.00%
|
|
Freddie
Mac
|
547,471,702
|
17.78%
|
|
|
Ginnie
Mae
|
468,818,740
|
15.22%
|
|
|
Total
Portfolio
|
$
|
3,080,060,122
|
100.00%
|
|
Entire
Portfolio
|
||
|
Effective
Duration (1)
|
1.143
|
|
|
Weighted
Average Purchase Price
|
$
|
102.34
|
|
Weighted
Average Current Price
|
$
|
100.79
|
| (1) |
Effective
duration of 1.143 indicates that an interest rate increase of 1%
would be
expected to cause a 1.143% decline in the value of the MBS in the
Company’s investment portfolio.
|
In
evaluating Opteum’s MBS portfolio assets and their performance, Opteum’s
management team primarily evaluates these critical factors: asset performance
in
differing interest rate environments, duration of the security, yield to
maturity, potential for prepayment of principal and the market price of the
investment.
Opteum’s
portfolio of MBS will typically be comprised of adjustable-rate MBS, fixed-rate
MBS, hybrid adjustable-rate MBS and balloon maturity MBS. Opteum seeks to
acquire low duration assets that offer high levels of protection from mortgage
prepayments. Although the duration of an individual asset can change as a
result
of changes in interest rates, Opteum strives to maintain a portfolio with
an
effective duration of less than 2.0. The stated contractual final maturity
of
the mortgage loans underlying Opteum’s portfolio of MBS generally ranges up to
30 years. However, the effect of prepayments of the underlying mortgage
loans tends to shorten the resulting cash flows from Opteum’s investments
substantially. Prepayments occur for various reasons, including refinancing
of
underlying mortgages and loan payoffs in connection with home sales. In order
to
reduce leverage Opteum did not reinvest all of the proceeds of the mortgage
loan
prepayments and scheduled principal payments that occurred during the third
quarter of 2006. The last time mortgage assets were added to the Opteum
portfolio was on April 27, 2006.
Prepayments
on the loans underlying Opteum’s MBS can
alter
the timing of the cash flows from the underlying loans to the Company. As
a
result, Opteum gauges the interest rate sensitivity of its assets by measuring
their effective duration. While modified duration measures the price sensitivity
of a bond to movements in interest rates, effective duration captures both
the
movement in interest rates and the fact that cash flows to a mortgage related
security are altered when interest rates move. Accordingly, when the contract
interest rate on a mortgage loan is substantially above prevailing interest
rates in the market, the effective duration of securities collateralized
by such
loans can be quite low because of expected prepayments. Although some of
the
fixed-rate MBS in Opteum’s portfolio are collateralized by loans with a lower
propensity to prepay when the contract rate is above prevailing rates, their
price movements track securities with like contract rates and therefore exhibit
similar effective duration.
At
September 30, 2006, approximately
50.2% of Opteum’s 15-year fixed-rate coupon MBS and approximately 47.1% of
Opteum’s 30-year fixed-rate coupon MBS contain only loans with principal
balances of $85,000 or less. Because of the low loan balance on these mortgages,
Opteum believes borrowers have a lower economic incentive to refinance and
have
historically prepaid more slowly than comparable securities.
The
value
of Opteum’s MBS portfolio changes as interest rates rise or fall. Opteum faces
the risk that the market value of its assets will increase or decrease at
different rates than that of its liabilities, including its hedging instruments.
Opteum primarily assesses its interest rate risk by estimating the duration
of
its assets and the duration of its liabilities. Duration essentially measures
the market price volatility of financial instruments as interest rates change.
Opteum generally calculates duration using various financial models and
empirical data and different models and methodologies can produce different
duration numbers for the same securities.
The
following sensitivity analysis shows the estimated impact on the fair value
of
Opteum's interest rate-sensitive investments at September 30, 2006,
assuming rates instantaneously fall 100 basis points, rise 100 basis points
and
rise 200 basis points:
|
Interest
Rates Fall
100
Basis Points
|
Interest
Rates Rise
100
Basis Points
|
Interest
Rates Rise
200
Basis Points
|
||||
|
Adjustable-Rate
MBS
|
||||||
|
(Fair
Value $2,139,858,096)
|
||||||
|
Change
in fair value
|
$
|
14,110,517
|
$
|
(14,110,517)
|
$
|
(28,221,034)
|
|
Change
as a percent of fair value
|
0.66%
|
(0.66)%
|
(1.32)%
|
|||
|
Fixed-Rate
MBS
|
||||||
|
(Fair
Value $616,445,159)
|
||||||
|
Change
in fair value
|
$
|
16,644,269
|
$
|
(16,644,269)
|
$
|
(33,288,539)
|
|
Change
as a percent of fair value
|
2.70%
|
(2.70)%
|
(5.40)%
|
|||
|
Hybrid
Adjustable-Rate MBS
|
||||||
|
(Fair
Value $281,762,509)
|
||||||
|
Change
in fair value
|
$
|
3,601,896
|
$
|
(3,601,896)
|
$
|
(7,203,792)
|
|
Change
as a percent of fair value
|
1.28%
|
(1.28)%
|
(2.56)%
|
|||
|
Balloon
Maturity MBS
|
||||||
|
(Fair
Value $41,994,359)
|
||||||
|
Change
in fair value
|
$
|
850,750
|
$
|
(850,750)
|
$
|
(1,701,499)
|
|
Change
as a percent of fair value
|
2.03%
|
(2.03)%
|
(4.05)%
|
|||
|
Cash
|
||||||
|
(Fair
Value $65,122,207)
|
||||||
|
Portfolio
Total
|
||||||
|
(Fair
Value $3,080,060,122)
|
||||||
|
Change
in fair value
|
$
|
35,207,432
|
$
|
(35,207,432)
|
$
|
(70,414,864)
|
|
Change
as a percent of fair value
|
1.14%
|
(1.14)%
|
(2.29)%
|
The
table
below reflects the same analysis presented above but with the figures in
the
columns that indicate the estimated impact of a 100 basis point fall or rise
adjusted to reflect the impact of convexity.
|
Interest
Rates Fall
100
Basis Points
|
Interest
Rates Rise
100
Basis Points
|
Interest
Rates Rise
200
Basis Points
|
||||
|
Adjustable-Rate
MBS
|
||||||
|
(Fair
Value $2,139,858,096)
|
||||||
|
Change
in fair value
|
$
|
7,596,621
|
$
|
(18,483,640)
|
$
|
(45,792,186)
|
|
Change
as a percent of fair value
|
0.36%
|
(0.86)%
|
(2.14)%
|
|||
|
Fixed-Rate
MBS
|
||||||
|
(Fair
Value $616,445,159)
|
||||||
|
Change
in fair value
|
$
|
12,505,435
|
$
|
(19,524,978)
|
$
|
(42,517,101)
|
|
Change
as a percent of fair value
|
2.03%
|
(3.17)%
|
(6.90)%
|
|||
|
Hybrid
Adjustable-Rate MBS
|
||||||
|
(Fair
Value $281,762,509)
|
||||||
|
Change
in fair value
|
$
|
2,570,157
|
$
|
(4,468,290)
|
$
|
(10,461,762)
|
|
Change
as a percent of fair value
|
0.91%
|
(1.59)%
|
(3.71)%
|
|||
|
Balloon
Maturity MBS
|
||||||
|
(Fair
Value $41,994,359)
|
||||||
|
Change
in fair value
|
$
|
797,101
|
$
|
(869,053)
|
$
|
(1,741,408)
|
|
Change
as a percent of fair value
|
1.90%
|
(2.07)%
|
(4.15)%
|
|||
|
Cash
|
||||||
|
(Fair
Value $65,122,207)
|
||||||
|
Portfolio
Total
|
||||||
|
(Fair
Value $3,080,060,122)
|
||||||
|
Change
in fair value
|
$
|
23,469,313
|
$
|
(43,345,961)
|
$
|
(100,512,457)
|
|
Change
as a percent of fair value
|
0.76%
|
(1.41)%
|
(3.26)%
|
In
addition to changes in interest rates, other factors impact the fair value
of
Opteum's interest rate-sensitive investments and hedging instruments, such
as
the shape of the yield curve, market expectations as to future interest rate
changes and other market conditions. Accordingly, in the event of changes
in
actual interest rates, the change in the fair value of Opteum's assets would
likely differ from that shown above and such difference might be material
and
adverse to Opteum's stockholders.
For
reference, the table below shows the principal balance of Opteum’s investment
securities, the net unamortized premium, amortized cost of securities held,
average cost expressed as a price, the fair market value of investments and
the
fair market value expressed as a price for the current quarter and each of
the
previous nine
quarters
for the portfolio of MBS securities only. The data in the table below does
not include information pertaining to OFS.
|
Quarter
Ended
|
Principal
Balance
of
Investment
Securities
Held
|
Unamortized
Premium
(Net)
|
Amortized
Cost of
Securities
Held
|
Amortized
Cost/Principal
Balance
Held
|
Fair
Market
Value
of
Investment
Securities
Held
|
Fair
Market
Value/Principal
Balance
Held
|
||||
|
At
September 30, 2006
|
$
|
3,055,791,372
|
$
|
122,299,554
|
$
|
3,178,090,926
|
104.002
|
$
|
3,080,060,122
|
100.794
|
|
At
June 30, 2006
|
3,396,909,813
|
120,768,942
|
3,517,678,755
|
103.555
|
3,407,288,014
|
100.306
|
||||
|
At
March 31,2006
|
3,515,112,798
|
111,360,553
|
3,626,473,350
|
103.168
|
3,538,554,210
|
100.667
|
||||
|
At
December 31, 2005
|
3,457,891,363
|
112,635,825
|
3,570,527,188
|
103.257
|
3,494,029,359
|
101.045
|
||||
|
At
September 30, 2005
|
3,797,400,645
|
113,392,661
|
3,910,793,306
|
102.986
|
3,858,319,701
|
101.604
|
||||
|
At
June 30, 2005
|
3,784,668,467
|
114,672,670
|
3,899,341,137
|
103.030
|
3,876,205,996
|
102.419
|
||||
|
At
March 31, 2005
|
3,212,516,823
|
109,389,703
|
3,321,906,527
|
103.405
|
3,299,051,561
|
102.694
|
||||
|
At
December 31, 2004
|
2,876,319,085
|
97,753,097
|
2,974,072,182
|
103.399
|
2,973,232,897
|
103.369
|
||||
|
At
September 30, 2004
|
1,589,828,988
|
48,498,955
|
1,638,327,943
|
103.051
|
1,638,264,065
|
103.047
|
||||
|
At
June 30, 2004
|
1,479,500,209
|
38,033,673
|
1,517,533,882
|
102.571
|
1,508,421,270
|
101.955
|
||||
|
At
March 31, 2004
|
1,473,583,661
|
39,535,014
|
1,513,118,676
|
102.683
|
1,516,539,744
|
102.915
|
The
table
below shows Opteum’s average investments held, total interest income, yield on
average earning assets, average repurchase obligations outstanding, interest
expense, average cost of funds, net interest income and net interest spread
for
the quarter ended September 30, 2006, and the nine previous quarters for
Opteum’s portfolio of MBS securities only. The data in the table below
does not include information pertaining to OFS’ results of operations.
As
indicated in the table below, Net Interest Spread contracted in the third
quarter of 2006 as funding costs continued to rise at a rate greater than
the
rate of increase on our investment securities held.
RATIOS
FOR THE QUARTERS HAVE BEEN ANNUALIZED
|
Quarter
Ended
|
Average
Investment
Securities
Held
|
Total
Interest Income
|
Yield
on
Average
Interest
Earning
Assets
|
Average
Balance
of
Repurchase
Obligations
Outstanding
|
Interest
Expense
|
Average
Cost
of
Funds
|
Net
Interest
Income
|
Net
Interest
Spread
|
|||||
|
September
30, 2006
|
$
|
3,243,674,068
|
$
|
45,849,978
|
5.654%
|
$
|
3,151,813,490
|
$
|
43,691,941
|
5.545%
|
$
|
2,158,036
|
0.109%
|
|
June
30, 2006
|
3,472,921,112
|
57,027,180
|
6.568%
|
3,360,421,038
|
42,829,452
|
5.098%
|
14,197,728
|
1.470%
|
|||||
|
March
31, 2006
|
3,516,291,784
|
42,344,654
|
4.817%
|
3,375,776,594
|
37,660,857
|
4.462%
|
4,683,796
|
0.354%
|
|||||
|
December
31, 2005
|
3,676,174,530
|
43,139,911
|
4.694
%
|
3,533,486,002
|
35,912,966
|
4.065
%
|
7,226,945
|
0.629
%
|
|||||
|
September
30, 2005
|
3,867,262,849
|
43,574,308
|
4.507
%
|
3,723,603,116
|
33,101,847
|
3.556
%
|
10,472,461
|
0.951
%
|
|||||
|
June 30,
2005
|
3,587,628,779
|
36,748,640
|
4.097
%
|
3,449,743,973
|
26,703,422
|
3.096
%
|
10,045,218
|
1.001
%
|
|||||
|
March 31,
2005
|
3,136,142,229
|
31,069,934
|
3.963
%
|
2,976,409,157
|
19,841,710
|
2.667
%
|
11,228,224
|
1.296
%
|
|||||
|
December 31,
2004
|
2,305,748,481
|
20,463,071
|
3.550
%
|
2,159,890,886
|
10,824,164
|
2.005
%
|
9,638,907
|
1.545
%
|
|||||
|
September 30,
2004
|
1,573,342,668
|
11,017,346
|
2.801
%
|
1,504,919,407
|
4,253,337
|
1.131
%
|
6,764,009
|
1.670
%
|
|||||
|
June 30,
2004
|
1,512,480,507
|
10,959,098
|
2.898
%
|
1,452,004,000
|
4,344,012
|
1.197
%
|
6,615,086
|
1.702
%
|
|||||
|
March 31,
2004
|
871,140,453
|
7,194,033
|
3.303
%
|
815,814,500
|
2,736,434
|
1.342
%
|
4,457,599
|
1.962
%
|
For
the
three months ended September 30, 2006, $3.5 million of the $45.8 million
of
interest income was derived from the quarterly retrospective adjustment.
The
adjustment represented 43.4 basis points of the 565.1 basis points of the
yield
on average interest earning assets. For the three months ended September
30,
2005, $4.3 million of the $43.6 million of interest income was derived from
the
quarterly retrospective adjustment. The adjustment represented 45.0 basis
points
of the 450.7 basis points of the yield on average interest earning
assets.
PERFORMANCE
OF OFS
The
principal business activities of OFS are the origination and sale of mortgage
loans. In addition, as part of the securitization of loans sold, OFS retains
an
interest in the resulting residual interest cash flows more fully described
above. Finally, OFS services the loans securitized as well as some loans
sold on
a whole loan basis.
At
September 30, 2006, OFS owned $875.3
million
of mortgage loans which were classified as mortgage loans held for sale.
Gains
realized on the sale of mortgage loans held for sale for the nine and three
months ended September 30, 2006, were $18.7
million
and $20.7
million,
respectively. These
gains reflect the effects of the mark to market of IRLCs and loans held for
sale
prior to the sale date of $1.2 million and $0.4 million,
respectively.
Opteum
had no such gains for the nine and three months ended September 30, 2005,
as
those periods predate the acquisition of OFS by Opteum.
Gains
on
the sale of mortgage loans held for sale include changes in the fair value
of
retained interests in securitizations and the associated hedge gains or losses.
Excluding changes in fair value of retained interests in securitizations
net of
hedge gains and losses, OFS had gains from sales of mortgages held for sale
of
$26.1 million and $3.6 million for the nine and three months ended September
30,
2006, respectively.
The
retained interests in securitizations represent residual interests in loans
originated or purchased by OFS prior to securitization. These retained interests
are classified on the accompanying consolidated balance sheet as Retained
Interest, Trading. The total fair market value of these retained interests
was
approximately $109.8 million as of September 30, 2006. Fluctuations in value
of
retained interests are primarily driven by projections of future interest
rates
(the forward LIBOR curve), the discount rate used to determine the present
value
of the residual cash flows and prepayment and loss estimates on the underlying
mortgage loans. Due to favorable movements in interest rates, particularly
forward LIBOR rates, the market value of the retained interests increased
by
$11.8 million and $21.4 million, respectively, for the nine and three months
ended September 30, 2006. The increase of $11.8 million for the nine months
ended September 30, 2006 includes the addition of $16.9 million of new retained
interests in securitizations associated with two securitizations consummated
in
the first six months of the year. Net of these additions, the value of the
retained interests in securitizations declined over the nine months ended
September 30, 2006 by $5.1 million, primarily as a result of cash received
from
the retained interests of $3.6 million and upward movements in forward Libor
rates since the beginning of the period.
It
is our
intention to hedge these retained interests so as to protect earnings from
an
unexpected change due to a decline in value of the retained interests. However,
movements in the variables that affect the value of the retained interests,
in
particular forward LIBOR rates and prepayment estimates, also affect
retrospective adjustments to the effective interest computation of the Opteum
MBS portfolio and the value of the Company’s mortgage servicing rights
(“MSRs”).
Movements in these two variables have the opposite effect on the value of
the
retained interests and the retrospective adjustment to the effective interest
computation of the Opteum MBS portfolio and the MSRs. Since movements in
these
two variables affect reported earnings in an offsetting fashion, they tend
to
naturally hedge the Company’s earnings when taken as a whole. Accordingly, we
take this fact into consideration when constructing and implementing our
hedging
strategy.
Changes
in the fair value of retained interests described above are net of the results
of hedge transactions. The results above include net losses on hedging
transactions of $6.8 million and $6.7 million for the nine and three months
ended September 30, 2006, respectively.
The
table
below provides details of OFS’ gain/(loss) on the sale of mortgage loans held
for sale for the nine and three months ended September 30, 2006. OFS recognizes
a gain on sale of mortgages held for sale only when the loans are actually
sold.
GAINS
ON
MORTGAGE BANKING ACTIVITIES
(in
thousands)
|
For
the Nine months Ending September 30, 2006
|
For
the Three months Ending September 30, 2006
|
||
|
Fair
value adjustment of retained interests, trading
|
$
|
(1,406)
|
23,071
|
|
Gain
on sales of mortgage loans
|
65,775
|
20,288
|
|
|
Fees
on brokered loans
|
4,485
|
1,350
|
|
|
Gain/(loss)
on derivatives
|
(7,329)
|
(9,851)
|
|
|
Direct
loan origination expenses, deferred
|
686
|
(3)
|
|
|
Fees
earned, brokering
|
2,054
|
748
|
|
|
Write
off purchased pipeline (Purchase Accounting Adjustment)
|
(534)
|
-
|
|
|
63,731
|
35,603
|
||
|
Direct
loan origination expenses, reclassified
|
(45,065)
|
(14,861)
|
|
|
Net
gain on sale of mortgage loans
|
$
|
18,666
|
20,742
|
|
Change
in market value of IRLCs
|
(34)
|
775
|
|
|
Change
in market value of mortgage loans held for sale
|
(1,202)
|
(1,201)
|
|
|
Gain/(loss)
on mortgage banking activities
|
$
|
17,430
|
20,136
|
For
the
nine and three months ended September 30, 2006, OFS originated mortgage loans
of
$4.706 billion and $1.941 billion, respectively. For the same periods, OFS
sold
$4.499 billion and $1.758 billion of these originated mortgage loans. Of
the
originated mortgage loans sold during the nine and three months ended September
30, 2006, $2.947 billion of the $4.499 billion and $1.253 billion of the
$1.758
billion, respectively, were sold on a servicing retained basis.
For
the
nine and three months ended September 30, 2006, OFS had net servicing income
(loss) of ($5.2) million and ($7.1) million, respectively. The results for
the
nine and three month periods were driven primarily by negative fair value
adjustments to the MSRs (inclusive of run-off of the servicing portfolio)
in
third quarter and the Company’s early adoption of SFAS 156 on January 1, 2006
(as reported in the Company’s first quarter results of operations).
As
of
September 30, 2006, OFS held originated MSRs on approximately $9.1 billion
in
mortgages with a fair market value of approximately $101.3
million.
For the nine and three months ended September 30, 2006, the net fair value
adjustments to the MSRs were a decrease of $22.9 million and $13.3 million,
respectively. In turn, the net fair value adjustments for the nine and three
months ended September 30, 2006, reflect declines in fair value due to run-off
of $14.6 million and $4.2 million and adjustments due to (decreases)/increases
in fair value of ($8.4) million and ($9.1) million, respectively.
OFS
had
interest rate lock commitments (“IRLCs”), along with other instruments that are
hedges for both these IRLCs and retained interests, securitizations, and
both
are considered derivatives. The changes to the fair value of these derivatives
from inception to the period end are recorded at their fair value with the
resulting gain or loss reflected in current period earnings. The result of
the
changes in the fair value of these derivatives was a loss of approximately
$7.3
million as of September 30, 2006.
Liquidity
and Capital Resources
The
Company presently believes that its equity and junior subordinated debt capital,
combined with the cash flow from operations and the utilization of borrowings,
will be sufficient to enable the Company to meet its anticipated liquidity
requirements. Various changes in market conditions could, however, adversely
affect the Company’s liquidity, including increases in interest rates, increases
in prepayment rates substantially above expectations or the reduction of
fee
income generated through mortgage originations at OFS. If cash resources
are, at
any time, insufficient to satisfy the Company’s liquidity requirements, such as
when cash flow from operations were materially negative, the Company may
be
required to pledge additional assets to meet margin calls, liquidate assets,
sell additional debt or equity securities or pursue other financing
alternatives. Any sale of mortgage-related securities or originated mortgage
loans held for sale by OFS at prices lower than the carrying value of such
assets would reduce our income.
The
Company may, in the future, increase capital resources by making additional
offerings of equity and debt securities, including classes of preferred stock,
common stock, commercial paper, medium-term notes, collateralized mortgage
obligations and senior or subordinated notes. All debt securities, other
borrowings and classes of preferred stock will be senior to the Class A
Common Stock in a liquidation of the company. Additional equity offerings
may be
dilutive to stockholders' equity or reduce the market price of the Class A
Common Stock or both. The Company is unable to estimate the amount, timing
or
nature of any additional offerings as they will depend upon market conditions
and other factors.
In
addition to its equity and junior subordinated debt capital and cash flow
from
operations, which consists primarily of monthly principal and interest payments
received on Opteum’s mortgage-related securities and cash generated by OFS from
sales of mortgage loans, retained interests in mortgage securitizations,
originated MSRs and originated loan fees, the Company presently relies upon
repurchase agreements and credit facilities to finance its operations.
Repurchase
agreements are used primarily in connection with the financing of Opteum’s MBS
portfolio and, although structured as repurchase agreements, are treated
as
secured loans for U.S. federal income tax purposes. Credit facilities are
used
primarily in connection with OFS’ mortgage loan origination
activities.
OPTEUM’S
LIQUIDITY AND CAPITAL RESOURCES
At
September 30, 2006 the Company, as guarantor of OFS, was in violation of
a
covenant with a warehouse lender of OFS that pertained to cash flow coverage.
The Company has obtained a waiver from the lender with respect to the covenant
violation as of October 31, 2006.
At
September 30, 2006, Opteum had master repurchase agreements in place with
18 counterparties
and had outstanding balances under 13 of these agreements. None of the
counterparties to these agreements are affiliates of Opteum. These agreements
are secured by Opteum’s MBS and bear interest rates that are based on a spread
to LIBOR.
As
of
September 30, 2006, Opteum had obligations outstanding under its repurchase
agreements totaling $3.0 billion with a net weighted average borrowing cost
of
5.29%. All of Opteum’s outstanding repurchase agreement obligations are due in
less than one year with $0.9 billion maturing between two and 30 days,
$1.4 billion maturing between 31 and 90 days and $0.7 billion
maturing in more than 90 days. Securing these repurchase agreement
obligations as of September 30, 2006, were MBS with an estimated fair value
of
$3.1 billion and a weighted average maturity of 308 months.
At
September 30, 2006, Opteum’s repurchase agreements had the following
counterparties, amounts outstanding, amounts-at-risk and weighted average
remaining maturities:
|
Repurchase
Agreement Counterparties
|
Amount
Outstanding ($000)
|
Amount
at Risk(1) ($000)
|
Weighted
Average Maturity of Repurchase Obligations in
Days
|
Percent
of Total Amount Outstanding
|
|||
|
Deutsche
Bank Securities, Inc.
|
$
|
1,023,632
|
10,723
|
132
|
34.16
|
%
|
|
|
JP
Morgan Securities
|
604,198
|
15,540
|
51
|
20.16
|
|||
|
Washington
Mutual
|
471,194
|
16,021
|
82
|
15.72
|
|||
|
Countrywide
Securities Corp
|
283,030
|
9,975
|
98
|
9.44
|
|||
|
Goldman
Sachs
|
163,987
|
4,474
|
15
|
5.47
|
|||
|
Nomura
Securities International, Inc.
|
102,180
|
2,507
|
171
|
3.41
|
|||
|
Lehman
Brothers
|
90,251
|
2,595
|
27
|
3.01
|
|||
|
BNP
Paribas Securities Corp
|
62,966
|
2,183
|
8
|
2.10
|
|||
|
Merrill
Lynch
|
59,495
|
1,312
|
52
|
1.99
|
|||
|
HSBC
Securities (USA) Inc
|
58,302
|
2,116
|
11
|
1.95
|
|||
|
Bank
of America
|
36,178
|
1,462
|
4
|
1.21
|
|||
|
UBS
Investment Bank, LLC
|
24,405
|
639
|
17
|
0.82
|
|||
|
RBS
Greenwich Capital
|
16,922
|
51
|
61
|
0.56
|
|||
|
Total
|
$
|
2,996,740
|
|
69,598
|
100.00
|
%
|
(1) Equal
to
the fair value of securities sold, plus accrued interest income, minus the
sum
of repurchase agreement liabilities, plus accrued interest expense.
Opteum’s
master repurchase agreements have no stated expiration, but can be terminated
at
any time at Opteum’s option or at the option of the counterparty. However, once
a definitive repurchase agreement under a master repurchase agreement has
been
entered into, it generally may not be terminated by either party. A negotiated
termination can occur, but may involve a fee to be paid by the party seeking
to
terminate the repurchase agreement transaction.
During
2005 and the nine months ended September 30, 2006, Opteum entered into contracts
and paid commitment fees to three counterparties providing for an aggregate
of
$1.7 billion in committed repurchase agreement facilities at pre-determined
borrowing rates and haircuts for a 364 day period following the commencement
date of each contract. Opteum has no obligation to utilize these repurchase
agreement facilities. All of these facilities have been renewed for an
additional 364 day period.
In
addition, two of the agreements described above are available to provide
financing for up to $150 million to cover margin requirements associated
with
monthly principal payments on the MBS portfolio.
It
is the
Company’s present intention to seek to renew its various committed and
uncommitted repurchase agreements as they become due or expire. However,
market
conditions could change making the renewal of these contractual arrangements
more expensive or unattainable. Further, as discussed above, increases in
short-term interest rates could negatively impact the valuation of Opteum’s MBS
portfolio. Should this occur, Opteum’s ability to enter into new repurchase
agreements or extend its existing repurchase agreements could be limited
and may
cause Opteum’s repurchase agreement counterparties to initiate margin calls.
Under this scenario, Opteum would likely seek alternative sources of financing
which could include additional debt or equity financing or sales of
assets.
In
May 2005, Opteum completed a private offering of $51.5 million of trust
preferred securities of Bimini Capital Trust I (“BCTI”) resulting in the
issuance by Opteum of $50 million of junior subordinated notes. The interest
rate payable by Opteum on the BCTI junior subordinated notes is fixed for
the
first five years at 7.61% and then floats at a spread of 3.30% over three-month
LIBOR for the remaining 25 years. However, the BCTI junior subordinated notes
and the corresponding BCTI trust preferred securities are redeemable at Opteum’s
option at the end of the first five year period and at any subsequent date
that
Opteum chooses.
In
addition, in October 2005, Opteum completed a private offering of an additional
$51.5 million of trust preferred securities of Bimini Capital Trust II (“BCTII”)
resulting in the issuance by Opteum of an additional $50 million of junior
subordinated notes. The interest rate on the BCTII junior subordinated notes
and
the corresponding BCTII trust preferred securities is fixed for the first
five
years at 7.8575% and then floats at a spread of 3.50% over three-month LIBOR for
the remaining 25 years. However, the BCTII junior subordinated notes and
the
corresponding BCTII trust preferred securities are redeemable at Opteum’s option
at the end of the first five year period and at any subsequent date that
Opteum
chooses.
Opteum
attempts to ensure that the income generated from available investment
opportunities, when the use of leverage is employed for the purchase of assets,
exceeds the cost of its borrowings. However, the issuance of debt at a fixed
rate for any long-term period, considering the use of leverage, could create
an
interest rate mismatch if Opteum is not able to invest at yields that exceed
the
interest rates of the Company’s junior subordinated notes and other
borrowings.
OFS’
LIQUIDITY AND CAPITAL RESOURCES
In
order
to facilitate the origination of mortgage loans, OFS has various warehouse
and
aggregation lines of credit available, some of which are committed facilities
while others are uncommitted. With respect to the committed lines, the
commitments are for 364 day periods. At September 30, 2006 OFS had committed
warehouse lines of $0.95 billion, uncommitted warehouse lines of $1.25 billion
and a committed aggregation line of $1 billion. In addition, OFS had $0.25
billion of various committed lines of credit secured by OFS’s retained interests
in securitizations and originated mortgage servicing rights.
At
September 30, 2006, OFS had outstanding balances of approximately $853 million
under their various warehouse and aggregation lines and approximately $104
million outstanding on other lines of credit with various lenders. The rates
on
these borrowings generally are based on a spread to LIBOR.
The
committed and uncommitted warehouse an aggregation lines are sufficient to
support OFS’s production at current levels while also providing ample capacity
for growth. However, in the event OFS were not able to renew the existing
lines
or growth in the level of production caused OFS to exceed their capacity
under
the lines, OFS would have to seek to obtain additional financing that might
only
be available at less favorable terms or not available at all. In such instance,
OFS might have to curtail production or pledge additional assets to obtain
financing.
OFS
has
commitments to borrowers to fund residential mortgage loans as well as
commitments to purchase and sell mortgage loans to third parties. As of
September 30, 2006, OFS had outstanding commitments to originate loans of
approximately $331.8
million.
As of September 30, 2006, OFS had outstanding commitments to sell loans of
approximately $367.8
million.
The commitments to originate and purchase loans do not necessarily represent
future cash requirements, as some portion of the commitments are likely to
expire without being drawn upon or may be subsequently declined for credit
or
other reasons.
The
Company’s TRS, OFS has been in violation of certain covenants with respect to
their warehouse lines of credit related to their loan origination operations
for
three consecutive quarters. While the violations to the covenants has been
waived by the lender, should conditions in the mortgage origination industry
continue to deteriorate or fail to recover in sufficient time, it is possible
OFS may not be able to obtain such waivers in the future. Under such
circumstances, OFS might be precluded from accessing their warehouse lending
agreements to the extent they do now and might have to curtail their
originations accordingly. At
October 31, 2006, OFS was not in compliance with respect to a covenant with
a second lender. The covenant violation at October 31, 2006 with the
second lender pertained to tangible net worth. OFS has obtained a waiver
from the second lender with respect to the covenant violation as of October
31,
2006. All waivers obtained were granted with the mutual understanding that
such
violations will exist as of November 30, 2006. No additional covenant violations
are anticipated at November 30, 2006.
Outlook
As
discussed above, the
Company’s results of operations for the
nine
and three months ended September 30, 2006, were negatively affected by changes
in various
market interest rates due primarily to the monetary policy actions
of
the Federal Reserve during these periods. If the Federal Reserve further
tightens monetary policy by increasing its target for the federal funds rate,
the Company’s borrowing costs will likely increase and will further impact the
Company’s consolidated results of operations and liquidity. To mitigate the
affect of further increases in short-term interest rates, the Company may
seek
to restructure its portfolio further by increasing the allocation to monthly
resetting floating rate securities, engage in hedging transactions to reduce
our
funding costs or sell lower yielding assets and redeploy the proceeds into
assets with yields above our funding costs, if available.
However,
if short-term rates declined, the Company’s consolidated results of operations
and liquidity will likely be positively impacted. In this event, the Company
may
seek to raise additional equity or debt financing or reposition its assets
to
maximize its earnings and dividend potential.
Finally,
in the event short-term rates remained the same, the effect on the Company’s
consolidated results of operations would depend on the rate at which our
portfolio of adjustable MBS securities reset upward in relation to our funding
costs and future retrospective adjustments. The actions taken by management
in
such instance would depend on the outcome realized.
Further,
recent downward trends in the residential housing market may impact the
Company’s consolidated results of operations and liquidity due to lower mortgage
originations at OFS. However, any decline in mortgage originations due to
a
cooling of the housing market may be partially offset by appreciation in
the
value of OFS’s originated mortgage servicing rights and retained interests in
securitizations, which generally are positively impacted by declining prepayment
rates.
Recently,
operations at OFS have been cash flow negative and such shortfalls have been
funded by Opteum. As a result management is currently evaluating various
alternatives to ensure the Company will be able to maintain adequate liquidity.
Should these efforts prove unsuccessful, the Company’s liquidity may be further
reduced.
Critical
Accounting Policies
The
Company’s financial statements are prepared in accordance with U.S. generally
accepted accounting principles (“GAAP”). The Company’s significant accounting
policies are described in Note 1 to the Company’s accompanying Consolidated
Financial Statements.
GAAP
requires the Company’s management to make some complex and subjective decisions
and assessments. The Company’s most critical accounting policies involve
decisions and assessments which could significantly affect our reported assets
and liabilities, as well as our reported revenues and expenses. The Company
believes that all of the decisions and assessments upon which its financial
statements are based were reasonable at the time made based upon information
available to it at that time. Management has identified its most critical
accounting policies to be the following:
MORTGAGE
BACKED SECURITIES
The
Company’s investments in MBS are classified as available-for-sale securities. As
a result, changes in fair value are recorded as a balance sheet adjustment
to
accumulated other comprehensive income (loss), which is a component of
stockholders' equity, rather than through the statement of operations. The
Company’s MBS have fair values determined by management based on the average of
third-party broker quotes received and/or by independent pricing sources
when
available. Because the price estimates may vary to some degree between sources,
management must make certain judgments and assumptions about the appropriate
price to use to calculate the fair values for financial reporting purposes.
Alternatively, management could opt to have the value of all of its positions
in
MBS determined by either an independent third-party pricing source or do
so
internally based on managements own estimates. Management believes pricing
on
the basis of third-party broker quotes is the most consistent with the
definition of fair value described in Statement of Financial Accounting
Standards (“SFAS”) No. 107, Disclosures
about the Fair Value of Financial Instruments.
RETAINED
INTEREST, TRADING
Retained
interest, trading is the subordinated interests retained by the Company from
the
Company’s various securitizations and includes the over-collateralization and
residual net interest spread remaining after payments to the Public Certificates
and NIM Notes. (See Notes 1 and 4 in the accompanying consolidated financial
statements.) Retained interest, trading represents the present value of
estimated cash flows to be received from these subordinated interests in
the
future. The subordinated interests retained are classified as “trading
securities” and are reported at fair value with unrealized gains or losses
reported in earnings. In order to value these unrated and unquoted retained
interests, the Company utilizes either pricing available directly from dealers
or calculates their present value by projecting their future cash flows on
a
publicly-available analytical system. When a publicly-available analytical
system is employed, the Company uses the following variable factors in
estimating the fair value of these assets:
Interest
Rate Forecast.
The
forward London Interbank Offered Rate (“LIBOR”) interest rate curve.
Discount
Rate.
The
present value of all future cash flows utilizing a discount rate assumption
established at the discretion of the Company to represent market conditions
and
value.
Prepayment
Forecast.
The
prepayment forecast may be expressed by the Company in accordance with one
of
the following standard market conventions: Constant Prepayment Rate (“CPR”) or
Percentage of a Prepayment Vector. Prepayment forecasts are made utilizing
Citigroup Global Markets Yield Book and/or management estimates based on
historical experience. Conversely, prepayment speed forecasts could have
been
based on other market conventions or third-party analytical systems. Prepayment
forecasts may be changed as OFS observes trends in the underlying collateral
as
delineated in the Statement to Certificate Holders generated by the
securitization trust’s Trustee for each underlying security.
Credit
Performance Forecast.
A
forecast of future credit performance of the underlying collateral pool will
include an assumption of default frequency, loss severity and a recovery
lag. In
general, the Company will utilize the combination of default frequency and
loss
severity in conjunction with a collateral prepayment assumption to arrive
at a
target cumulative loss to the collateral pool over the life of the pool based
on
historical performance of similar collateral by the originator. The target
cumulative loss forecast will be developed and noted at the pricing date
of the
individual security but may be updated by the Company consistent with
observations of the actual collateral pool performance.
At
September 30, 2006, and December 31, 2005, key economic assumptions and the
sensitivity of the current fair value of retained interests to the immediate
10%
and 20% adverse change in those assumptions are as follows:
|
September
30, 2006
|
December
31, 2005
|
|||
|
Balance
Sheet Carrying value of retained interests - fair value
|
$
|
109,829,818
|
$
|
98,010,592
|
|
Weighted
average life (in years)
|
4.39
|
2.62
|
||
|
Prepayment
assumption (annual rate)
|
36.59%
|
32.53%
|
||
|
Impact
on fair value of 10% adverse change
|
$
|
(9,326,848)
|
$
|
(7,817,000)
|
|
Impact
on fair value of 20% adverse change
|
$
|
(17,051,186)
|
$
|
(16,089,000)
|
|
Expected
Credit losses (annual rate)
|
0.58%
|
0.61%
|
||
|
Impact
on fair value of 10% adverse change
|
$
|
(3,236,459)
|
$
|
(3,247,000)
|
|
Impact
on fair value of 20% adverse change
|
$
|
(6,475,707)
|
$
|
(6,419,000)
|
|
Residual
Cash-Flow Discount Rate
|
15.72%
|
13.96%
|
||
|
Impact
on fair value of 10% adverse change
|
$
|
(4,962,825)
|
$
|
(3,804,000)
|
|
Impact
on fair value of 20% adverse change
|
$
|
(9,514,122)
|
$
|
(7,392,000)
|
|
Interest
rates on variable and adjustable loans and bonds
|
Forward
LIBOR Yield Curve
|
Forward
LIBOR Yield Curve
|
||
|
Impact
on fair value of 10% adverse change
|
$
|
(22,203,185)
|
$
|
(21,265,000)
|
|
Impact
on fair value of 20% adverse change
|
$
|
(44,846,814)
|
$
|
(34,365,000)
|
These
sensitivities are entirely hypothetical and should be used with caution.
As the
figures indicate, changes in fair value based upon 10% and 20% variations
in
assumptions generally cannot be extrapolated to greater or lesser percentage
variations because the relationship of the change in assumption to the change
in
fair value may not be linear. Also, in this table, the effect of the variation
in a particular assumption on the fair value of the subordinated interest
is
calculated without changing any other assumption. In reality, changes in
one
factor may result in changes in another that may magnify or counteract the
sensitivities. To estimate the impact of a 10% and 20% adverse change of
the
forward LIBOR curve, a parallel shift in the forward LIBOR curve was assumed
based on the forward LIBOR curve at September 30, 2006.
MORTGAGE
SERVICING RIGHTS
The
Company recognizes mortgage servicing rights (“MSRs”) as assets when separated
from the underlying mortgage loans in connection with the sale of such loans.
Upon sale of a loan, the Company measures the retained MSRs by allocating
the
total cost of originating a mortgage loan between the loan and the servicing
right based on their relative fair values. Gains or losses on the sale of
MSRs
are recognized when title and all risks and rewards have irrevocably passed
to
the purchaser of such MSRs and there are no significant unresolved
contingencies.
In
March
2006, the FASB issued SFAS No. 156, Accounting
for Servicing of Financial Assets
("SFAS
156"). The Company elected to early adopt SFAS 156 as of January 1, 2006,
and to
measure all mortgage servicing assets at fair value (and as one class). (See
Notes 1 and 5 in the accompanying consolidated financial
statements.)
To
facilitate hedging of the MSRs, management has elected to utilize an internal
model for valuation purposes. Accordingly, fair value is estimated based
on
internally generated expected cash flows considering market prepayment
estimates, historical prepayment rates, portfolio characteristics, interest
rates and other economic factors.
At
September 30, 2006, and December 31, 2005, key economic assumptions and the
sensitivity of the current fair value of MSR cash flows to the immediate
10
percent and 20 percent adverse change in those assumptions are as
follows:
|
At
September 30, 2006
|
At
December 31, 2005
|
|||
|
Prepayment
assumption (annual rate) (PSA)
|
328.7
|
254.0
|
||
|
Impact
on fair value of 10% adverse change
|
$
|
(3,739,212)
|
$
|
(3,615,000)
|
|
Impact
on fair value of 20% adverse change
|
$
|
(7,121,265)
|
$
|
(6,936,000)
|
|
MSR
Cash-Flow Discount Rate
|
14.72%
|
10.74%
|
||
|
Impact
on fair value of 10% adverse change
|
$
|
(3,760,697)
|
$
|
(4,856,000)
|
|
Impact
on fair value of 20% adverse change
|
$
|
(7,213,037)
|
$
|
(9,280,000)
|
These
sensitivities are entirely hypothetical and should be used with caution.
As the
figures indicate, changes in fair value based upon 10% and 20% variations
in
assumptions generally cannot be extrapolated to greater or lesser percentage
variations because the relationship of the change in assumption to the change
in
fair value may not be linear. Also, in this table, the effect of the variation
in a particular assumption on the fair value of the MSRs is calculated without
changing any other assumption. In reality, changes in one factor may result
in
changes in another which may magnify or counteract the sensitivities.
INCOME
RECOGNITION
Interest
income on MBS is accrued based on the actual coupon rate and the outstanding
principal amount of the underlying mortgages. Premiums and discounts are
amortized or accreted into interest income over the estimated lives of the
MBS
using the effective yield method adjusted for the effects of estimated
prepayments based on SFAS No. 91, Accounting
for Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans
and Initial Direct Costs of Leases; an
amendment of FASB Statements No. 13, 60 and 65 and a rescission of FASB
Statement No. 17. Adjustments are made using the retrospective method to
the effective interest computation each reporting period based on the actual
prepayment experiences to date and the present expectation of future prepayments
of the underlying mortgages. To make assumptions as to future estimated rates
of
prepayments, the Company currently uses actual market prepayment history
for the
securities it owns and for similar securities that the Company does not own
and
current market conditions. If the estimate of prepayments is incorrect, the
Company is required to make an adjustment to the amortization or accretion
of
premiums and discounts that would have an impact on future income.
With
respect to mortgage loans held for sale, interest income and interest expense
are recognized as earned or incurred. Loans are placed on a non-accrual status
when concern exists as to the ultimate collectability of principal or interest.
Loans return to accrual status when principal and interest become current
and
are anticipated to be fully collectible. The Company recognizes gain (or
loss)
on the sale of these loans. Gains or losses on such sales are recognized
at the time legal title transfers to the purchaser of such loans based upon
the
difference between the sales proceeds from the purchaser and the allocated
basis
of the loan sold, adjusted for net deferred loan fees and certain direct
costs
and selling costs. The Company defers net loan origination costs and fees
as a
component of the loan balance on the balance sheet. Such costs are not amortized
and are recognized into income as a component of the gain or loss upon sale.
Accordingly, salaries, commissions, benefits and other operating expenses
of
$45.1 million and $14.9 million during the nine and three months ended September
30, 2006, respectively, were capitalized as direct loan origination costs.
Servicing
fee income is generally a fee based on a percentage of the outstanding principal
balances of the mortgage loans serviced by the Company (or by a sub-servicer
where the Company is the master servicer) and is recorded as income as the
installment payments on the mortgages are received by the Company or the
sub-servicer.
Off-Balance
Sheet Arrangements
As
previously discussed,
OFS
pools the loans they originate or purchase and then sells them or securitizes
them to obtain long-term financing for its assets. Securitized loans are
transferred to a trust where they serve as collateral for asset-backed bonds,
which the trust primarily issues to the public. During the third quarter
of
2006,
OFS did
not execute a securitization. However, OFS held approximately $109.8 million
of
retained interests from securitizations as of September 30, 2006. OFS’
ability to access the capital markets via the use of securitizations is critical
to the operations and overall profitability of the business and OFS’ liquidity.
External
factors that are reasonably likely to affect OFS’ ability to continue to
complete securitizations would be those factors that could disrupt the
securitization capital markets. A disruption in the markets could prevent
OFS
from being able to securitize its mortgage loans at a favorable price or
at all.
Factors that could disrupt the securitization capital markets include an
international liquidity crisis such as occurred in the fall of 1998, a terrorist
attack, outbreak of war or other significant event risk or market specific
events such as a default of a comparable type of securitization. If OFS was
unable to access the securitization capital markets, OFS may still be able
to
finance its mortgage operations by selling the loans to investors in the
whole
loan market, but at lower than anticipated margins.
Specific
items that may affect OFS’ ability to use the securitizations to finance OFS’
specific loans relate primarily to the performance of the loans that have
been
securitized. Extremely poor loan performance may lead to poor bond performance
and investor unwillingness to buy bonds supported by OFS’ collateral. OFS’
financial condition could also have an adverse impact on its ability to access
the securitization market if there was the perception that its financial
condition had deteriorated to the point where investors would question OFS’
ability to stand behind its representations and warranties made in connection
with its securitizations even though Opteum has guaranteed the performance
of
OFS’ representation and warranties. It is too early to evaluate the impact of
the underlying collateral’s performance attributable to the financial
performance and condition of the past securitizations of OFS. Additionally,
past
economic conditions that may have contributed to a favorable performance
may not
be an indication of future performance should economic conditions change
unfavorably.
The
cash
flows associated with OFS’s securitization activities over the nine and three
months ended September 30, 2006, were as follows:
|
For
the Nine Months Ended September 30, 2006
|
For
the Three Months Ended September 30, 2006
|
|||
|
Proceeds
from securitizations
|
$
|
1,436,837,754
|
$
|
-
|
|
Servicing
fees received
|
13,719,852
|
4,467,391
|
||
|
Servicing
advances net of repayments
|
546,535
|
251,762
|
||
|
Cash
flows received on retained interests
|
3,642,263
|
1,633,486
|
There
have been no material changes to the Company’s exposure to market risk since
December 31, 2005. The information set forth under Item 7A - Quantitative
and
Qualitative Disclosures About Market Risk in the Company’s amended Annual Report
on Form 10-K/A for the period ended December 31, 2005, is incorporated herein
by
reference.
ITEM
4. CONTROLS
AND PROCEDURES.
Evaluation
of Disclosure Controls and Procedures
The
Company maintains disclosure controls and procedures that are designed to
ensure
that information required to be disclosed in the Company’s Exchange Act reports
is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms and that such information is
accumulated and communicated to the Company’s management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure based closely on the definition of
“disclosure controls and procedures” in Rule 13a-15(e). In designing and
evaluating the disclosure controls and procedures, management recognized
that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives
and management necessarily was required to apply its judgment in evaluating
the
cost-benefit relationship of possible controls and procedures.
As
of the
end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of the Company’s management,
including the Company’s Chief Executive Officer and the Company’s Chief
Financial Officer, of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures. Based on the foregoing, the
Company’s Chief Executive Officer and Chief Financial Officer concluded that the
Company’s disclosure controls and procedures were effective.
Changes
in Internal Controls over Financial Reporting
On November 3, 2005, the Company acquired Opteum Financial
Services, LLC, (“OFS”) a privately held company. Management’s assessment of the
internal controls at the OFS level started with the assumption that OFS, as
a
private company, may not possess a system of internal controls sufficient to
comply fully with all of the rules and requirements for internal control systems
for SEC registrants at the time of the acquisition. Accordingly, management
conducted a comprehensive review of all controls in place coupled with an
assessment of all critical processes so as to ensure full compliance with the
rules and requirements for SEC registrants by year end. This process was a
substantial undertaking and required the Company to hire external consultants
to
assist. As of the dates the Company’s quarterly reports for the periods ended
March 31, 2006 and June 30, 2006 were filed, this process was not complete.
During the period ended September 30, 2006, as part of the process of
establishing whether or not the system of internal controls that existed at
OFS
were sufficient to comply, management discovered a material weakness with
respect to the controls in place associated with the accounting by OFS for
IRLCs. Owing to a lack of sufficient internal controls being in place, the
accounting treatment utilized to account for IRLCs up to that point was not
in
compliance with GAAP and the quarterly financial statements issued for the
periods ended March 31, 2006 and June 30, 2006 required re-statement. Management
has since made changes, where needed, at the OFS level to ensure such
system of internal control is adequate to allow management to rely on the OFS
internal controls for purposes of preparing the Company’s quarterly and annual
reports.
There
were no significant changes in the Company’s internal control over financial
reporting that occurred during the Company’s most recent fiscal quarter, other
than as reported above, that have materially affected or are reasonably likely
to materially affect, the Company’s internal control over financial reporting.
PART
II. OTHER INFORMATION.
ITEM
1. LEGAL PROCEEDINGS.
The
Company is involved in various lawsuits and claims, both actual and potential,
including some that it has asserted against others, in which monetary and other
damages are sought. These lawsuits and claims relate primarily to contractual
disputes arising out of the ordinary course of the Company’s business. The
outcome of such lawsuits and claims is inherently unpredictable. However,
management believes that, in the aggregate, the outcome of all lawsuits and
claims involving the Company will not have a material effect on the Company’s
consolidated financial position or liquidity; however, any such outcome may
be
material to the results of operations of any particular period in which costs,
if any, are recognized.
ITEM
1A. RISK FACTORS.
During
the period covered by this report, there were no material changes from the
risk
factors previously disclosed under Item 1A - Risk Factors in the Company’s
second amended Annual Report on Form 10-K/A for the period December 31, 2005
as
filed on October 13, 2006. The information set forth under Item 1A - Risk
Factors in the Company’s amended Annual Report on Form 10-K/A for the period
ended December 31, 2005, is incorporated herein by reference.
ITEM
6. EXHIBITS.
Exhibit
No.
|
2.1
|
Agreement
and Plan of Merger, incorporated
by reference to Exhibit 2.1 to the Company’s Form 8-K, dated September 29,
2005, filed with the SEC on September 30, 2005
|
|
3.1
|
Articles
of Amendment and Restatement, incorporated by reference to Exhibit
3.1 to the
Company’s Form S-11/A, filed with the SEC on April 29,
2004
|
|
3.2
|
Articles
Supplementary, incorporated by reference to Exhibit
3.1 to the
Company’s Form 8-K, dated November 3, 2005, filed with the SEC on November
8, 2005
|
|
3.3
|
Articles
of Amendment, incorporated by reference to Exhibit
3.1 to the
Company’s Form 8-K, dated February 10, 2006, filed with the SEC on
February 15, 2006
|
|
3.4
|
Amended
and Restated Bylaws, incorporated by reference to Exhibit
3.1 to the
Company’s Form 8-K, filed with the SEC on September 26,
2006
|
|
4.1
|
Specimen
Common Stock Certificate incorporated by reference to Exhibit 4.1
to the
Company’s Form 10-Q for the period ended March 31, 2006, filed with the
SEC on May 8, 2006.
|
|
*10.1
|
Opteum
Inc. 2003 Long Term Incentive Compensation Plan
|
|
10.2
|
Employment
Agreement between Bimini Mortgage Management, Inc. and Jeffrey J.
Zimmer, incorporated by reference to Exhibit
10.3 to the
Company’s Form S-11/A, dated April 12, 2004, filed with the SEC on April
29, 2004
|
|
10.3
|
Employment
Agreement between Bimini Mortgage Management, Inc. and Robert E.
Cauley, incorporated by reference to Exhibit
10.4 to the
Company’s Form S-11/A, dated April 12, 2004, filed with the SEC on April
29, 2004
|
|
10.4
|
Employment
Agreement between Opteum Financial Services, LLC and Peter R.
Norden,
incorporated by reference to Exhibit
10.5 to the
Company’s Form 10-K, dated September 29, 2005, filed with the SEC on March
10, 2006
|
|
10.5
|
Letter
Agreement, dated November 4, 2003 from AVM, L.P. to Bimini Mortgage
Management, Inc. with respect to consulting services to be provided
by AVM, L.P. and Letter Agreement, dated February 10, 2004 from AVM,
L.P. to Bimini Mortgage Management with respect to assignment of
AVM,
L.P.'s rights, interest and responsibilities to III Associates,
incorporated by reference to Exhibit 10.5 to the Company’s Form S-11/A,
filed
with the SEC on May 26, 2004
|
|
10.6
|
Agency
Agreement, dated November 20, 2003 between AVM, L.P. and Bimini
Mortgage Management, Inc., incorporated by reference to Exhibit
10.6 to the
Company’s Form S-11/A, dated November 20, 2003, filed with the SEC on May
26, 2004
|
|
*10.7
|
Opteum
Inc. 2004 Performance Bonus Plan
|
|
10.8
|
Phantom
Share Award Agreement between Bimini Mortgage Management, Inc. and
Jeffrey J. Zimmer, incorporated by reference to Exhibit
10.8 to the
Company’s Form S-11/A, dated August 13, 2004, filed with the SEC on August
25, 2004
|
|
10.9
|
Phantom
Share Award Agreement between Bimini Mortgage Management, Inc. and
Robert E. Cauley, incorporated by reference to Exhibit
10.9 to the
Company’s Form S-11/A, dated August 13, 2004, filed with the SEC on August
25, 2004
|
|
10.10
|
Voting
Agreement, among certain stockholders of Bimini Mortgage Management,
Inc.,
Jeffrey J. Zimmer, Robert E. Cauley, Amber K. Luedke, George H. Haas,
IV,
Kevin L. Bespolka, Maureen A. Hendricks, W. Christopher Mortenson,
Buford
H. Ortale, Peter Norden, certain of Mr. Norden’s affiliates, Jason Kaplan,
certain of Mr. Kaplan’s affiliates and other former owners of Opteum
Financial Services, LLC, incorporated by reference to Exhibit 99(D)
to the
Company’s Schedule 13D, dated November 3, 2005, filed with the SEC on
November 14, 2005
|
|
*10.11
|
Form
of Phantom Share Award Agreement
|
|
*10.12
|
Form
of Restricted Stock Award Agreement
|
|
*31.1
|
Certification
of the Principal Executive Officer, pursuant to Rule 13a-14(a) or
15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant
to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
*31.2
|
Certification
of the Principal Financial Officer, pursuant to Rule 13a-14(a) or
15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant
to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
*32.1
|
Certification
of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
*32.2
|
Certification
of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
*
Filed herewith.
|
Signatures
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this report to be signed on
its
behalf by the undersigned, thereunto duly authorized.
OPTEUM
INC.
Date:
December 19, 2006 By: /s/
Robert E. Cauley
Robert
E.
Cauley
Vice
Chairman, Senior Executive Vice President,
Chief
Financial Officer and Chief Investment Officer
Exhibit
Index
Exhibit
No.
|
2.1
|
Agreement
and Plan of Merger, incorporated
by reference to Exhibit 2.1 to the Company’s Form 8-K, dated September 29,
2005, filed with the SEC on September 30, 2005
|
|
3.1
|
Articles
of Amendment and Restatement, incorporated by reference to Exhibit
3.1 to the
Company’s Form S-11/A, filed with the SEC on April 29,
2004
|
|
3.2
|
Articles
Supplementary, incorporated by reference to Exhibit
3.1 to the
Company’s Form 8-K, dated November 3, 2005, filed with the SEC on November
8, 2005
|
|
3.3
|
Articles
of Amendment, incorporated by reference to Exhibit
3.1 to the
Company’s Form 8-K, dated February 10, 2006, filed with the SEC on
February 15, 2006
|
|
3.4
|
Amended
and Restated Bylaws, incorporated by reference to Exhibit
3.1 to the
Company’s Form 8-K, filed with the SEC on September 26,
2006
|
|
4.1
|
Specimen
Common Stock Certificate incorporated by reference to Exhibit 4.1
to the
Company’s Form 10-Q for the period ended March 31, 2006, filed with the
SEC on May 8, 2006.
|
|
*10.1
|
Opteum
Inc. 2003 Long Term Incentive Compensation Plan
|
|
10.2
|
Employment
Agreement between Bimini Mortgage Management, Inc. and Jeffrey J.
Zimmer, incorporated by reference to Exhibit
10.3 to the
Company’s Form S-11/A, dated April 12, 2004, filed with the SEC on April
29, 2004
|
|
10.3
|
Employment
Agreement between Bimini Mortgage Management, Inc. and Robert E.
Cauley, incorporated by reference to Exhibit
10.4 to the
Company’s Form S-11/A, dated April 12, 2004, filed with the SEC on April
29, 2004
|
|
10.4
|
Employment
Agreement between Opteum Financial Services, LLC and Peter R.
Norden,
incorporated by reference to Exhibit
10.5 to the
Company’s Form 10-K, dated September 29, 2005, filed with the SEC on March
10, 2006
|
|
10.5
|
Letter
Agreement, dated November 4, 2003 from AVM, L.P. to Bimini Mortgage
Management, Inc. with respect to consulting services to be provided
by AVM, L.P. and Letter Agreement, dated February 10, 2004 from AVM,
L.P. to Bimini Mortgage Management with respect to assignment of
AVM,
L.P.'s rights, interest and responsibilities to III Associates,
incorporated by reference to Exhibit 10.5 to the Company’s Form S-11/A,
filed
with the SEC on May 26, 2004
|
|
10.6
|
Agency
Agreement, dated November 20, 2003 between AVM, L.P. and Bimini
Mortgage Management, Inc., incorporated by reference to Exhibit
10.6 to the
Company’s Form S-11/A, dated November 20, 2003, filed with the SEC on May
26, 2004
|
|
*10.7
|
Opteum
Inc. 2004 Performance Bonus Plan
|
|
10.8
|
Phantom
Share Award Agreement between Bimini Mortgage Management, Inc. and
Jeffrey J. Zimmer, incorporated by reference to Exhibit
10.8 to the
Company’s Form S-11/A, dated August 13, 2004, filed with the SEC on August
25, 2004
|
|
10.9
|
Phantom
Share Award Agreement between Bimini Mortgage Management, Inc. and
Robert E. Cauley, incorporated by reference to Exhibit
10.9 to the
Company’s Form S-11/A, dated August 13, 2004, filed with the SEC on August
25, 2004
|
|
10.10
|
Voting
Agreement, among certain stockholders of Bimini Mortgage Management,
Inc.,
Jeffrey J. Zimmer, Robert E. Cauley, Amber K. Luedke, George H. Haas,
IV,
Kevin L. Bespolka, Maureen A. Hendricks, W. Christopher Mortenson,
Buford
H. Ortale, Peter Norden, certain of Mr. Norden’s affiliates, Jason Kaplan,
certain of Mr. Kaplan’s affiliates and other former owners of Opteum
Financial Services, LLC, incorporated by reference to Exhibit 99(D)
to the
Company’s Schedule 13D, dated November 3, 2005, filed with the SEC on
November 14, 2005
|
|
*10.11
|
Form
of Phantom Share Award Agreement
|
|
*10.12
|
Form
of Restricted Stock Award Agreement
|
|
*31.1
|
Certification
of the Principal Executive Officer, pursuant to Rule 13a-14(a) or
15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant
to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
*31.2
|
Certification
of the Principal Financial Officer, pursuant to Rule 13a-14(a) or
15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant
to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
*32.1
|
Certification
of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
*32.2
|
Certification
of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
*
Filed herewith.
|
Exhibit
10.1
OPTEUM
INC.
2003
LONG TERM INCENTIVE COMPENSATION PLAN
Opteum
Inc., a Maryland corporation, wishes to attract key employees, directors and
consultants to the Company and its Subsidiaries and induce key employees,
directors and consultants to remain with the Company and its Subsidiaries,
and
encourage them to increase their efforts to make the Company’s business more
successful whether directly or through its Subsidiaries. In furtherance thereof,
the Opteum Inc. 2003 Long Term Incentive Compensation Plan is designed to
provide equity-based incentives to key employees, directors and consultants
of
the Company and its Subsidiaries. Awards under the Plan may be made to selected
key employees, directors and consultants of the Company and its Subsidiaries
in
the form of Options, Restricted Stock, Phantom Shares, Dividend Equivalent
Rights or other forms of equity-based compensation.
1. DEFINITIONS.
Whenever
used herein, the following terms shall have the meanings set forth
below:
“Award,”
except where referring to a particular category of grant under the Plan, shall
include Incentive Stock Options, Non-Qualified Stock Options, Restricted Stock,
Phantom Shares and Dividend Equivalent Rights.
“Award
Agreement” means a written agreement in a form approved by the Committee to be
entered into by the Company and the Participant as provided in Section
3.
“Board”
means the Board of Directors of the Company.
“Cause”
means, unless otherwise provided in the Participant’s Award Agreement, (i)
engaging in (A) willful or gross misconduct or (B) willful or gross
neglect; (ii) repeatedly failing to adhere to the directions of superiors or
the
Board or the written policies and practices of the Company or its Subsidiaries
or its affiliates; (iii) the commission of a felony or a crime of moral
turpitude, dishonesty, breach of trust or unethical business conduct, or any
crime involving the Company or its Subsidiaries, or any affiliate thereof;
(iv)
fraud, misappropriation or embezzlement; (v) a material breach of the
Participant’s employment agreement (if any) with the Company or its Subsidiaries
or its affiliates; (vi) acts or omissions constituting a material failure to
perform substantially and adequately the duties assigned to the Participant,;
(vi) any illegal act detrimental to the Company or its Subsidiaries or its
affiliates; or (vii) repeated failure to adhere to the directions of the Board,
to adhere to the Company’s policies and practices or to devote substantially all
of Participant’s business time and efforts to the Company if required by
Participant’s employment agreement; provided, however, that, if at any
particular time the Participant is subject to an effective employment agreement
with the Company, then, in lieu of the foregoing definition, “Cause” shall at
that time have such meaning as may be specified in such employment
agreement.
“Change
in Control” shall mean the happening of any of the following:
(i) any
“person,” including a “group” (as such terms are used in Sections 13(d) and
14(d) of the Exchange Act, but excluding the Company, any entity controlling,
controlled by or under common control with the Company, any employee benefit
plan of the Company or any such entity, and with respect to any particular
Participant, the Participant and any “group” (as such term is used in Section
13(d)(3) of the Exchange Act) of which the Participant is a member, is or
becomes the “beneficial owner” (as defined in Rule 13(d)(3) under the Exchange
Act), directly or indirectly, of securities of the Company representing 30%
or
more of either (A) the combined voting power of the Company’s then outstanding
securities or (B) the then outstanding Shares (in either such case other than
as
a result of an acquisition of securities directly from the Company); provided,
however, that, in no event shall a Change in Control be deemed to have occurred
upon an initial public offering of the Common Stock under the Securities Act;
or
(ii) any
consolidation or merger of the Company where the shareholders of the Company,
immediately prior to the consolidation or merger, would not, immediately after
the consolidation or merger, beneficially own (as such term is defined in Rule
13d-3 under the Exchange Act), directly or indirectly, shares representing
in
the aggregate 50% or more of the combined voting power of the securities of
the
corporation issuing cash or securities in the consolidation or merger (or of
its
ultimate parent corporation, if any); or
(iii) there
shall occur (A) any sale, lease, exchange or other transfer (in one transaction
or a series of transactions contemplated or arranged by any party as a single
plan) of all or substantially all of the assets of the Company, other than
a
sale or disposition by the Company of all or substantially all of the Company’s
assets to an entity, at least 50% of the combined voting power of the voting
securities of which are owned by “persons” (as defined above in Section (i)) in
substantially the same proportion as their ownership of the Company immediately
prior to such sale or (B) the approval by shareholders of the Company of any
plan or proposal for the liquidation or dissolution of the Company;
or
(iv) the
members of the Board at the beginning of any consecutive 24-calendar-month
period (the “Incumbent Directors”) cease for any reason other than due to death
to constitute at least a majority of the members of the Board; provided that
any
director whose election, or nomination for election by the Company’s
shareholders, was approved by a vote of at least a majority of the members
of
the Board then still in office who were members of the Board at the beginning
of
such 24-calendar-month period, shall be deemed to be an Incumbent
Director.
“Code”
means the Internal Revenue Code of 1986, as amended.
“Committee”
means the Compensation Committee of the Board.
“Common
Stock” means the Company’s Class A Common Stock, par value $.001 per share,
either currently existing or authorized hereafter.
“Company”
means the Opteum Inc., a corporation.
“Director”
means a non-employee director of the Company or it Subsidiaries.
“Disability”
means, unless otherwise provided by the Committee in the Participant’s Award
Agreement, a disability which renders the Participant incapable of performing
all of his or her material duties for a period of at least 180 consecutive
or
non-consecutive days during any consecutive twelve-month period.
“Dividend
Equivalent Right” means a right awarded under Section 8 of the Plan to receive
(or have credited) the equivalent value (in cash or Shares of Common Stock)
of
dividends declared on shares of Class A Common Stock otherwise subject to an
award.
“Exchange
Act” means the Securities Exchange Act of 1934, as amended.
“Fair
Market Value” per Share as of a particular date means (i) if Shares are then
listed on a national stock exchange, the closing sales price per Share on the
exchange for the last preceding date on which there was a sale of Shares on
such
exchange, as determined by the Committee, (ii) if Shares are not then listed
on
a national stock exchange but are then traded on an over-the-counter market,
the
average of the closing bid and asked prices for the Shares in such
over-the-counter market for the last preceding date on which there was a sale
of
such Shares in such market, as determined by the Committee, or (iii) if Shares
are not then listed on a national stock exchange or traded on an
over-the-counter market, such value as the Committee in its discretion may
in
good faith determine; provided that, where the Shares are so listed or traded,
the Committee may make such discretionary determinations where the Shares have
not been traded for 10 trading days.
“Grantee”
means an employee, director or consultant granted Restricted Stock, Phantom
Shares or Dividend Equivalent Rights hereunder.
“Incentive
Stock Option” means an “incentive stock option” within the meaning of Section
422(b) of the Code.
“Non-Qualified
Stock Option” means an Option which is not an Incentive Stock
Option.
“Option”
means the right to purchase, at a price and for the term fixed by the Committee
in accordance with the Plan, and subject to such other limitations and
restrictions in the Plan and the applicable Award Agreement, a number of Shares
determined by the Committee.
“Optionee”
means an employee or director of, or consultant to, the Company to whom an
Option is granted, or the Successors of the Optionee, as the context so
requires.
“Option
Price” means the exercise price per Share.
“Participant”
means a Grantee or Optionee.
“Phantom
Share” means a right, pursuant to the Plan, of the Grantee to payment of the
Phantom Share Value.
“Phantom
Share Value,” per Phantom Share, means the Fair Market Value of a Share of Class
A Common Stock, or, if so provided by the Committee, such Fair Market Value
to
the extent in excess of a base value established by the Committee at the time
of
grant.
“Plan”
means the Company’s 2003 Long Term Incentive Compensation Plan, as set forth
herein and as the same may from time to time be amended.
“Restricted
Stock” means an award of Shares that are subject to restrictions
hereunder.
“Retirement”
means, unless otherwise provided by the Committee in the Participant’s Award
Agreement, the Termination of Service (other than for Cause) of a Participant
on
or after the Participant’s attainment of age 65 or on or after the Participant’s
attainment of age 55 with five consecutive years of service with the Company
and
or its Subsidiaries or its affiliates.
“Securities
Act” means the Securities Act of 1933, as amended.
“Settlement
Date” means the date determined under Section 7.4(c).
“Shares”
means shares of Class A Common Stock of the Company.
“Subsidiary”
means any corporation (other than the Company) that is a “subsidiary
corporation” with respect to the Company under Section 424(f) of the Code. In
the event the Company becomes a subsidiary of another company, the provisions
hereof applicable to subsidiaries shall, unless otherwise determined by the
Committee, also be applicable to any company that is a “parent corporation” with
respect to the Company under Section 424(e) of the Code.
“Successor
of the Optionee” means the legal representative of the estate of a deceased
Optionee or the person or persons who shall acquire the right to exercise an
Option by bequest or inheritance or by reason of the death of the
Optionee.
“Termination
of Service” means a Participant’s termination of employment or other service, as
applicable, with the Company and its Subsidiaries. Cessation of service as
an
officer, employee, director or consultant shall not be treated as a Termination
of Service if the Participant continues without interruption to serve thereafter
in another one (or more) of such other capacities.
2. EFFECTIVE
DATE AND TERMINATION OF PLAN.
The
effective date of the Plan is December 1, 2003. The Plan shall not become
effective unless and until it is approved by the shareholders of the Company.
The Plan shall terminate on, and no Award shall be granted hereunder on or
after, the 10-year anniversary of the earlier of the approval of the Plan by
(i)
the Board or (ii) the shareholders of the Company; provided, however, that
the
Board may at any time prior to that date terminate the Plan.
3. ADMINISTRATION
OF PLAN.
(a) The
Plan
shall be administered by the Committee appointed by the Board. The Committee,
upon and after such time as it is covered in Section 16 of the Exchange Act,
shall consist of at least two individuals each of whom shall be a “nonemployee
director” as defined in Rule 16b-3 as promulgated by the Securities and Exchange
Commission (“Rule 16b-3”) under the Exchange Act and shall, at such times as the
Company is subject to Section 162(m) of the Code (to the extent relief from
the
limitation of Section 162(m) of the Code is sought with respect to Awards),
qualify as “outside directors” for purposes of Section 162(m) of the Code.
The acts of a majority of the members present at any meeting of the Committee
at
which a quorum is present, or acts approved in writing by a majority of the
entire Committee, shall be the acts of the Committee for purposes of the Plan.
If and to the extent applicable, no member of the Committee may act as to
matters under the Plan specifically relating to such member. If no Committee
is
designated by the Board to act for these purposes, the Board shall have the
rights and responsibilities of the Committee hereunder and under the Award
Agreements.
(b) Subject
to the provisions of the Plan, the Committee shall in its discretion as
reflected by the terms of the Award Agreements (i) authorize the granting of
Awards to key employees, directors and consultants of the Company and its
Subsidiaries; and (ii) determine the eligibility of an employee, director or
consultant to receive an Award, as well as determine the number of Shares to
be
covered under any Award Agreement, considering the position and responsibilities
of the employee, director or consultant, the nature and value to the Company
of
the employee’s, director’s or consultant’s present and potential contribution to
the success of the Company whether directly or through its Subsidiaries and
such
other factors as the Committee may deem relevant.
(c) The
Award
Agreement shall contain such other terms, provisions and conditions not
inconsistent herewith as shall be determined by the Committee. In the event
that
any Award Agreement or other agreement hereunder provides (without regard to
this sentence) for the obligation of the Company or any affiliate thereof to
purchase or repurchase Shares from an Participant or any other person, then,
notwithstanding the provisions of the Award Agreement or such other agreement,
such obligation shall not apply to the extent that the purchase or repurchase
would not be permitted under governing state law. The Participant shall take
whatever additional actions and execute whatever additional documents the
Committee may in its reasonable judgment deem necessary or advisable in order
to
carry out or effect one or more of the obligations or restrictions imposed
on
the Participant pursuant to the express provisions of the Plan and the Award
Agreement.
(d) Without
limiting the generality of the Committee’s discretion hereunder, the Committee
may (subject to such considerations as may arise under Section 16 of the
Exchange Act, or under other corporate, securities or tax laws) take any steps
it deems appropriate, that are not inconsistent with the purposes and intent
of
the Plan, to establish performance-based criteria applicable to Awards otherwise
permitted to be granted hereunder, and to attempt to procure shareholder
approval with respect thereto, to take into account the provisions of Section
162(m) of the Code.
4. SHARES
AND UNITS SUBJECT TO THE PLAN.
4.1 In
General.
(a) Subject
to Section 4.2, and subject to adjustments as provided in Section 13, the total
number of Shares subject to Options granted under the Plan, Shares of Restricted
Stock and Phantom Shares granted under the Plan, in the aggregate, may not
exceed 4,000,000, or, if less, 10% of the number of Shares outstanding from
time
to time. Shares distributed under the Plan may be treasury Shares or authorized
but unissued Shares. Any Shares that have been granted as Restricted Stock
or
that have been reserved for distribution in payment for Options or Phantom
Shares but are later forfeited or for any other reason are not payable under
the
Plan may again be made the subject of Awards under the Plan.
(b) Shares
subject to Dividend Equivalent Rights, other than Dividend Equivalent Rights
based directly on the dividends payable with respect to Shares subject to
Options or the dividends payable on a number of Shares corresponding to the
number of Phantom Shares awarded, shall be subject to the limitation of Section
4.1(a).
(c) The
certificates for Shares issued hereunder may include any legend which the
Committee deems appropriate to reflect any restrictions on transfer hereunder
or
under the Award Agreement, or as the Committee may otherwise deem
appropriate.
4.2 Options.
Subject
to adjustments pursuant to Section 13, and subject to the last sentence of
Section 4.1(a), Options with respect to an aggregate of no more than 4,000,000
Shares may be granted under the Plan, or, if less, 10% of the number of Shares
outstanding from time to time. Subject to adjustments pursuant to Section 13,
in
no event may any Optionee receive Options for more than 2,000,000 Shares over
the life of the Plan. The aggregate Fair Market Value, determined as of the
date
an Option is granted, of the Common Stock for which any Optionee may be awarded
Incentive Stock Options which are first exercisable by the Optionee during
any
calendar year under the Plan (or any other stock option plan required to be
taken into account under Section 422(d) of the Code) shall not exceed
$100,000.
5. PROVISIONS
APPLICABLE TO STOCK OPTIONS.
5.1 Grant
of Option.
Subject
to the other terms of the Plan, the Committee shall, in its discretion as
reflected by the terms of the applicable Award Agreement: determine and
designate from time to time those key employees, directors and consultants
of
the Company and its Subsidiaries to whom Options are to be granted and the
number of Shares to be optioned to each employee, director and consultant;
(ii)
determine whether to grant Options intended to be Incentive Stock Options,
or to
grant Non-Qualified Stock Options, or both (to the extent that any Option does
not qualify as an Incentive Stock Option, it shall constitute a separate
Non-Qualified Stock Option); provided that Incentive Stock Options may only
be
granted to employees; (iii) determine the time or times when and the manner
and
condition in which each Option shall be exercisable and the duration of the
exercise period; (iv) designate each Option as one intended to be an Incentive
Stock Option or as a Non-Qualified Stock Option; and (v) determine or impose
other conditions to the grant or exercise of Options under the Plan as it may
deem appropriate.
5.2 Option
Price.
The
Option Price shall be determined by the Committee on the date the Option is
granted and reflected in the Award Agreement, as the same may be amended from
time to time. Any particular Award Agreement may provide for different exercise
prices for specified amounts of Shares subject to the Option. The Option Price
with respect to each Incentive Stock Option, or other Option intended to qualify
for relief from the restrictions of Section 162(m) of the Code, shall not be
less than 100% (or, for Incentive Stock Options, 110%, in the case of an
individual described in Section 422(b)(6) of the Code (relating to certain
10%
owners)) of the Fair Market Value of a Share on the day the Option is granted.
5.3 Period
of Option and Vesting.
(a) Unless
earlier expired, forfeited or otherwise terminated, each Option shall expire
in
its entirety upon the 10th anniversary of the date of grant or shall have such
other shorter term as is set forth in the applicable Award Agreement (except
that, in the case of an individual described in Section 422(b)(6) of the Code
(relating to certain 10% owners) who is granted an Incentive Stock Option,
the
term of such Option shall be no more than five years from the date of grant).
The Option shall also expire, be forfeited and terminate at such times and
in
such circumstances as otherwise provided hereunder or under the Award
Agreement.
(b) Each
Option, to the extent that the Optionee has not had a Termination of Service
and
the Option has not otherwise lapsed, expired, terminated or been forfeited,
shall first become exercisable according to the terms and conditions set forth
in the Award Agreement, as determined by the Committee at the time of grant.
Unless otherwise determined by the Committee at the time of the grant, such
stock options shall vest ratably, in annual installments, over a five-year
period beginning on the date of the grant. Unless otherwise provided in the
Award Agreement, no Option (or portion thereof) shall ever be exercisable if
the
Optionee has a Termination of Service before the time at which such Option
would
otherwise have become exercisable, and any Option that would otherwise become
exercisable after such Termination of Service shall not become exercisable
and
shall be forfeited upon such termination. Notwithstanding the foregoing
provisions of this Section 5.3(b), Options exercisable pursuant to the schedule
set forth by the Committee at the time of grant may be fully or more rapidly
exercisable or otherwise vested at any time in the discretion of the Committee.
Upon and after the death of an Optionee, such Optionee’s Options, if and to the
extent otherwise exercisable hereunder or under the applicable Award Agreement
after the Optionee’s death, may be exercised by the Successors of the
Optionee.
5.4 Exercisability
Upon and After Termination of Optionee.
(a) Subject
to provisions of the Award Agreement, in the event the Optionee has a
Termination of Service other than by the Company or its Subsidiaries for Cause,
other than by the Optionee for any reason, or other than by reason of death,
Retirement or Disability, no exercise of an Option may occur after the
expiration of the three-month period to follow the termination, or if earlier,
the expiration of the term of the Option as provided under Section 5.3(a);
provided that, if the Optionee should die after the Termination of Service,
such
termination being for a reason other than Disability or Retirement, but while
the Option is still in effect, the Option (if and to the extent otherwise
exercisable by the Optionee at the time of death) may be exercised until the
earlier of (i) one year from the date of the Termination of Service of the
Optionee, or (ii) the date on which the term of the Option expires in accordance
with Section 5.3(a).
(b) Subject
to provisions of the Award Agreement, in the event the Optionee has a
Termination of Service on account of death or Disability or Retirement, the
Option (whether or not otherwise exercisable) may be exercised until the earlier
of (i) one year from the date of the Termination of Service of the Optionee,
or
(ii) the date on which the term of the Option expires in accordance with Section
5.3.
(c) Notwithstanding
any other provision hereof, unless otherwise provided in the Award Agreement,
if
the Optionee has a Termination of Service by the Company for Cause, the
Optionee’s Options, to the extent then unexercised, shall thereupon cease to be
exercisable and shall be forfeited forthwith.
5.5 Exercise
of Options.
(a) Subject
to vesting, restrictions on exercisability and other restrictions provided
for
hereunder or otherwise imposed in accordance herewith, an Option may be
exercised, and payment in full of the aggregate Option Price made, by an
Optionee only by written notice (in the form prescribed by the Committee) to
the
Company specifying the number of Shares to be purchased.
(b) Without
limiting the scope of the Committee’s discretion hereunder, the Committee may
impose such other restrictions on the exercise of Incentive Stock Options
(whether or not in the nature of the foregoing restrictions) as it may deem
necessary or appropriate.
(c) If
Shares
acquired upon exercise of an Incentive Stock Option are disposed of in a
disqualifying disposition within the meaning of Section 422 of the Code by
an
Optionee prior to the expiration of either two years from the date of grant
of
such Option or one year from the transfer of Shares to the Optionee pursuant
to
the exercise of such Option, or in any other disqualifying disposition within
the meaning of Section 422 of the Code, such Optionee shall notify the Company
in writing as soon as practicable thereafter of the date and terms of such
disposition and, if the Company (or any affiliate thereof) thereupon has a
tax-withholding obligation, shall pay to the Company (or such affiliate) an
amount equal to any withholding tax the Company (or affiliate) is required
to
pay as a result of the disqualifying disposition.
5.6 Payment.
(a) The
aggregate Option Price shall be paid in full upon the exercise of the Option.
Payment must be made by one of the following methods:
(i) a
certified or bank cashier’s check;
(ii) the
proceeds of a Company loan program or third-party sale program or a notice
acceptable to the Committee given as consideration under such a program, in
each
case if permitted by the Committee in its discretion, if such a program has
been
established and the Optionee is eligible to participate therein;
(iii) if
approved by the Committee in its discretion, Shares of previously owned Common
Stock, which have been previously owned for more than six months, having an
aggregate Fair Market Value on the date of exercise equal to the aggregate
Option Price; or
(iv) by
any
combination of such methods of payment or any other method acceptable to the
Committee in its discretion.
(b) Except
in
the case of Options exercised by certified or bank cashier’s check, the
Committee may impose limitations and prohibitions on the exercise of Options
as
it deems appropriate, including, without limitation, any limitation or
prohibition designed to avoid accounting consequences which may result from
the
use of Common Stock as payment upon exercise of an Option.
(c) The
Committee may provide that no Option may be exercised with respect to any
fractional Share. Any fractional Shares resulting from an Optionee’s exercise
that is accepted by the Company shall in the discretion of the Committee be
paid
in cash.
5.7 Exercise
by Successors.
An
Option
may be exercised, and payment in full of the aggregate Option Price made, by
the
Successors of the Optionee only by written notice (in the form prescribed by
the
Committee) to the Company specifying the number of Shares to be purchased.
Such
notice shall state that the aggregate Option Price will be paid in full, or
that
the Option will be exercised as otherwise provided hereunder, in the discretion
of the Company or the Committee, if and as applicable.
5.8 Nontransferability
of Option.
Each
Option granted under the Plan shall be nontransferable by the Optionee except
by
will or the laws of descent and distribution of the state wherein the Optionee
is domiciled at the time of his death; provided, however, that the Committee
may
(but need not) permit other transfers, where the Committee concludes that such
transferability (i) does not result in accelerated U.S. federal income taxation,
(ii) does not cause any Option intended to be an Incentive Stock Option to
fail
to be described in Section 422(b) of the Code, and (iii) is otherwise
appropriate and desirable.
5.9 Deferral.
The
Committee may establish a program under which Participants will have Phantom
Shares subject to Section 7 credited upon their exercise of Options, rather
than
receiving Shares at that time.
6. PROVISIONS
APPLICABLE TO RESTRICTED STOCK.
6.1 Grant
of Restricted Stock.
Subject
to the other terms of the Plan, the Committee may, in its discretion as
reflected by the terms of the applicable Award Agreement: (i) authorize the
granting of Restricted Stock to key employees, directors and consultants of
the
Company and its Subsidiaries; (ii) provide a specified purchase price for the
Restricted Stock (whether or not the payment of a purchase price is required
by
any state law applicable to the Company); (iii) determine the restrictions
applicable to Restricted Stock and (iv) determine or impose other conditions
to
the grant of Restricted Stock under the Plan as it may deem appropriate.
Restricted Stock may be awarded on an annual basis.
6.2 Certificates.
(a) Each
Grantee of Restricted Stock shall be issued a stock certificate in respect
of
Shares of Restricted Stock awarded under the Plan. Such certificate shall be
registered in the name of the Grantee. Without limiting the generality of
Section 4.1(c), the certificates for Shares of Restricted Stock issued hereunder
may include any legend which the Committee deems appropriate to reflect any
restrictions on transfer hereunder or under the Award Agreement, or as the
Committee may otherwise deem appropriate, and, without limiting the generality
of the foregoing, shall bear a legend referring to the terms, conditions, and
restrictions applicable to such Award, substantially in the following
form:
The
transferability of this certificate and the shares of stock represented hereby
are subject to the terms and conditions (including forfeiture) of the Opteum
Inc. 2003 Long Term Incentive Compensation Plan and an Award Agreement entered
into between the registered owner and Opteum Inc. Copies of such Plan and Award
Agreement are on file in the offices of Opteum Inc., at 3305 Flamingo Drive,
Suite 100, Vero Beach, Florida 32963.
(b) The
Committee shall require that the stock certificates evidencing such Shares
be
held in custody by the Company until the restrictions hereunder shall have
lapsed, and that, as a condition of any Award of Restricted Stock, the Grantee
shall have delivered a stock power, endorsed in blank, relating to the stock
covered by such Award. If and when such restrictions so lapse, the stock
certificates shall be delivered by the Company to the Grantee or his or her
designee as provided in Section 6.3.
6.3 Restrictions
and Conditions.
Unless
otherwise provided by the Committee, the Shares of Restricted Stock awarded
pursuant to the Plan shall be subject to the following restrictions and
conditions:
(i) Subject
to the provisions of the Plan and the Award Agreements, during a period
commencing with the date of such Award and ending on the date the period of
forfeiture with respect to such Shares lapses, the Grantee shall not be
permitted voluntarily or involuntarily to sell, transfer, pledge, anticipate,
alienate, encumber or assign Shares of Restricted Stock awarded under the Plan
(or have such Shares attached or garnished). Subject to the provisions of the
Award Agreements and clauses (iv) and (v) below, the period of forfeiture with
respect to Shares granted hereunder shall lapse as provided in the applicable
Award Agreement. Notwithstanding the foregoing, unless otherwise expressly
provided by the Committee, the period of forfeiture with respect to such Shares
shall only lapse as to whole Shares.
(ii) Subject
to the provisions of the Plan and Award Agreements, unless otherwise determined
by the Committee at the time of grant, the period of forfeiture described in
clause (i) shall be a three-year period, and restriction shall lapse ratably
in
annual installments over the period. In addition, unless otherwise provided
by
the Committee at the time of the grant, 50% of each grant of Restricted Stock
granted pursuant to the Plan shall also be subject to the Company’s achieving
such financial hurdles, pre-determined by the Committee, as the Committee may
determine are applicable for each of the applicable three years.
(iii) Except
as
provided in the foregoing clause (i), below in this clause (iii), or in Section
13, the Grantee shall have, in respect of the Shares of Restricted Stock, all
of
the rights of a shareholder of the Company, including the right to vote the
Shares, and, except as provided below, the right to receive any cash dividends.
The Committee may provide in the Award Agreement that cash dividends on such
Shares shall be held by the Company (unsegregated as a part of its general
assets) until the period of forfeiture lapses (and forfeited if the underlying
Shares are forfeited), and paid over to the Grantee as soon as practicable
after
such period lapses (if not forfeited), or alternatively may provide for other
treatment of such dividends (including without limitation the crediting of
Phantom Shares in respect of dividends or other deferral provisions).
Certificates for Shares (not subject to restrictions hereunder) shall be
delivered to the Grantee or his or her designee promptly after, and only after,
the period of forfeiture shall lapse without forfeiture in respect of such
Shares of Restricted Stock.
(iv) Except
if
otherwise provided in the applicable Award Agreement, and subject to clause
(v)
below, if the Grantee has a Termination of Service by the Company and its
Subsidiaries for Cause, or by the Grantee for any reason, during the applicable
period of forfeiture, then (A) all Shares still subject to restriction shall
thereupon, and with no further action, be forfeited by the Grantee, and (B)
the
Company shall pay to the Grantee as soon as practicable (and in no event more
than 30 days) after such termination an amount equal to the lesser of (x) the
amount paid by the Grantee for such forfeited Restricted Stock as contemplated
by Section 6.1, and (y) the Fair Market Value on the date of termination of
the
forfeited Restricted Stock.
(v) Subject
to the provisions of the Award Agreement, in the event the Grantee has a
Termination of Service on account of death or Disability or Retirement during
the applicable period of forfeiture, then restrictions under the Plan will
immediately lapse on all Restricted Stock granted to the applicable Grantee.
7. PROVISIONS
APPLICABLE TO PHANTOM SHARES.
7.1 Grant
of Phantom Shares.
Subject
to the other terms of the Plan, the Committee shall, in its discretion as
reflected by the terms of the applicable Award Agreement: (i) authorize the
granting of Phantom Shares to key employees, directors and consultants of the
Company and its Subsidiaries and (ii) determine or impose other conditions
to
the grant of Phantom Shares under the Plan as it may deem
appropriate.
7.2 Term.
The
Committee may provide in an Award Agreement that any particular Phantom Share
shall expire at the end of a specified term.
7.3 Vesting.
Phantom
Shares shall vest as provided in the applicable Award Agreement.
7.4 Settlement
of Phantom Shares.
(a) Each
vested and outstanding Phantom Share shall be settled by the transfer to the
Grantee of one Share; provided that, the Committee at the time of grant may
provide that a Phantom Share may be settled (i) in cash at the applicable
Phantom Share Value, (ii) in cash or by transfer of Shares as elected by the
Grantee in accordance with procedures established by the Committee or (iii)
in
cash or by transfer of Shares as elected by the Company.
(b) Each
Phantom Share shall be settled with a single-sum payment by the Company;
provided that, with respect to Phantom Shares of a Grantee which have a common
Settlement Date, the Committee may permit the Grantee to elect in accordance
with procedures established by the Committee to receive installment payments
over a period not to exceed 10 years.
(c) (i) The
Settlement Date with respect to a Grantee is the first day of the month to
follow the Grantee’s Termination of Service, provided that a Grantee may elect,
in accordance with procedures to be adopted by the Committee, that such
Settlement Date will be deferred as elected by the Grantee to a time permitted
by the Committee under procedures to be established by the Committee. Unless
otherwise determined by the Committee, elections under this Section 7.4(c)(i)
must be made at least six months before, and in the year prior to the year
in
which, the Settlement Date would occur in the absence of such
election.
(ii) Notwithstanding
Section 7.4(c)(i), the Committee may provide that distributions of Phantom
Shares can be elected at any time in those cases in which the Phantom Share
Value is determined by reference to Fair Market Value to the extent in excess
of
a base value, rather than by reference to unreduced Fair Market
Value.
(iii) Notwithstanding
the foregoing, the Settlement Date, if not earlier pursuant to this Section
7.4(c), is the date of the Grantee’s death.
(d) Notwithstanding
the other provisions of this Section 7, in the event of a Change in Control,
the
Settlement Date shall be the date of such Change in Control and all amounts
due
with respect to Phantom Shares to a Grantee hereunder shall be paid as soon
as
practicable (but in no event more than 30 days) after such Change in Control,
unless such Grantee elects otherwise in accordance with procedures established
by the Committee.
(e) Notwithstanding
any other provision of the Plan, a Grantee may receive any amounts to be paid
in
installments as provided in Section 7.4(b) or deferred by the Grantee as
provided in Section 7.4(c) in the event of an “Unforeseeable Emergency.” For
these purposes, an “Unforeseeable Emergency,” as determined by the Committee in
its sole discretion, is a severe financial hardship to the Grantee resulting
from a sudden and unexpected illness or accident of the Grantee or “dependent,”
as defined in Section 152(a) of the Code, of the Grantee, loss of the Grantee’s
property due to casualty, or other similar extraordinary and unforeseeable
circumstances arising as a result of events beyond the control of the Grantee.
The circumstances that will constitute an Unforeseeable Emergency will depend
upon the facts of each case, but, in any case, payment may not be made to the
extent that such hardship is or may be relieved:
(i) through
reimbursement or compensation by insurance or otherwise,
(ii) by
liquidation of the Grantee’s assets, to the extent the liquidation of such
assets would not itself cause severe financial hardship, or
(iii) by
future
cessation of the making of additional deferrals under Section 7.4 (b) and
(c).
Without
limitation, the need to send a Grantee’s child to college or the desire to
purchase a home shall not constitute an Unforeseeable Emergency. Distributions
of amounts because of an Unforeseeable Emergency shall be permitted to the
extent reasonably needed to satisfy the emergency need.
7.5 Other
Phantom Share Provisions.
(a) Rights
to
payments with respect to Phantom Shares granted under the Plan shall not be
subject in any manner to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance, attachment, garnishment, levy, execution, or other legal
or
equitable process, either voluntary or involuntary; and any attempt to
anticipate, alienate, sell, transfer, assign, pledge, encumber, attach or
garnish, or levy or execute on any right to payments or other benefits payable
hereunder, shall be void.
(b) A
Grantee
may designate in writing, on forms to be prescribed by the Committee, a
beneficiary or beneficiaries to receive any payments payable after his or her
death and may amend or revoke such designation at any time. If no beneficiary
designation is in effect at the time of a Grantee’s death, payments hereunder
shall be made to the Grantee’s estate. If a Grantee with a vested Phantom Share
dies, such Phantom Share shall be settled and the Phantom Share Value in respect
of such Phantom Shares paid, and any payments deferred pursuant to an election
under Section 7.4(c) shall be accelerated and paid, as soon as practicable
(but
no later than 60 days) after the date of death to such Grantee’s beneficiary or
estate, as applicable.
(c) The
Committee may establish a program under which distributions with respect to
Phantom Shares may be deferred for periods in addition to those otherwise
contemplated by foregoing provisions of this Section 7. Such program may
include, without limitation, provisions for the crediting of earnings and losses
on unpaid amounts, and, if permitted by the Committee, provisions under which
Participants may select from among hypothetical investment alternatives for
such
deferred amounts in accordance with procedures established by the
Committee.
(d) Phantom
Shares (including for purposes of this Section 7.5(d) any accounts established
to facilitate the implementation of Section 7.4(c)), are solely a device for
the
measurement and determination of the amounts to be paid to a Grantee under
the
Plan. Each Grantee’s right in the Phantom Shares is limited to the right to
receive payment, if any, as may herein be provided. The Phantom Shares do not
constitute Common Stock and shall not be treated as (or as giving rise to)
property or as a trust fund of any kind; provided, however, that the Company
may
establish a mere bookkeeping reserve to meet its obligations hereunder or a
trust or other funding vehicle that would not cause the Plan to be deemed to
be
funded for tax purposes or for purposes of Title I of the Employee Retirement
Income Security Act of 1974, as amended. The right of any Grantee of Phantom
Shares to receive payments by virtue of participation in the Plan shall be
no
greater than the right of any unsecured general creditor of the
Company.
(e) Notwithstanding
any other provision of this Section 7, any fractional Phantom Share will be
paid
out in cash at the Fair Market Value as of the Settlement Date.
(f) Nothing
contained in the Plan shall be construed to give any Grantee any rights with
respect to Shares or any ownership interest in the Company. Except as may be
provided in accordance with Section 8, no provision of the Plan shall be
interpreted to confer upon any Grantee any voting, dividend or derivative or
other similar rights with respect to any Phantom Share.
7.6 Claims
Procedures.
(a) The
Grantee, or his beneficiary hereunder or authorized representative, may file
a
claim for payments with respect to Phantom Shares under the Plan by written
communication to the Committee or its designee. A claim is not considered filed
until such communication is actually received. Within 90 days (or, if special
circumstances require an extension of time for processing, 180 days, in which
case notice of such special circumstances should be provided within the initial
90-day period) after the filing of the claim, the Committee will
either:
(i) approve
the claim and take appropriate steps for satisfaction of the claim;
or
(ii) if
the
claim is wholly or partially denied, advise the claimant of such denial by
furnishing to him a written notice of such denial setting forth (A) the specific
reason or reasons for the denial; (B) specific reference to pertinent provisions
of the Plan on which the denial is based and, if the denial is based in whole
or
in part on any rule of construction or interpretation adopted by the Committee,
a reference to such rule, a copy of which shall be provided to the claimant;
(C)
a description of any additional material or information necessary for the
claimant to perfect the claim and an explanation of the reasons why such
material or information is necessary; and (D) a reference to this Section 7.6
as
the provision setting forth the claims procedure under the Plan.
(b) The
claimant may request a review of any denial of his claim by written application
to the Committee within 60 days after receipt of the notice of denial of such
claim. Within 60 days (or, if special circumstances require an extension of
time
for processing, 120 days, in which case notice of such special circumstances
should be provided within the initial 60-day period) after receipt of written
application for review, the Committee will provide the claimant with its
decision in writing, including, if the claimant’s claim is not approved,
specific reasons for the decision and specific references to the Plan provisions
on which the decision is based.
8. PROVISIONS
APPLICABLE TO DIVIDEND EQUIVALENT RIGHTS.
8.1 Grant
of Dividend Equivalent
Rights.
Subject
to the other terms of the Plan, the Committee shall, in its discretion as
reflected by the terms of the Award Agreements, authorize the granting of
Dividend Equivalent Rights to key employees, directors and consultants of the
Company and its Subsidiaries based on the dividends declared on Common Stock,
to
be credited as of the dividend payment dates, during the period between the
date
an Award is granted, and the date such Award is exercised, vests or expires,
as
determined by the Committee. Such Dividend Equivalent Rights shall be converted
to cash or additional Shares of Common Stock by such formula and at such time
and subject to such limitation as may be determined by the Committee. With
respect to Dividend Equivalent Rights granted with respect to Options intended
to be qualified performance-based compensation for purposes of Section 162(m)
of
the Code, such Dividend Equivalent Rights shall be payable regardless of whether
such Option is exercised. If a Dividend Equivalent Right is granted in respect
of another Award hereunder, then, unless otherwise stated in the Award
Agreement, in no event shall the Dividend Equivalent Right be in effect for
a
period beyond the time during which the applicable portion of the underlying
Award is in effect.
8.2 Certain
Terms.
(a) The
term
of a Dividend Equivalent Right shall be set by the Committee in its
discretion.
(b) Unless
otherwise determined by the Committee, a Dividend Equivalent Right is
exercisable or payable only while the Participant is an employee, director
or
consultant.
(c) Payment
of the amount determined in accordance with Section 8.1 shall be in cash, in
Common Stock or a combination of the both, as determined by the
Committee.
(d) The
Committee may impose such employment-related conditions on the grant of a
Dividend Equivalent Right as it deems appropriate in its
discretion.
8.3 Other
Types of Dividend Equivalent Rights.
The
Committee may establish a program under which Dividend Equivalent Rights of
a
type not described in the foregoing provisions of this Section 8 may be granted
to Participants. For example, and without limitation, the Committee may grant
a
dividend equivalent right in respect of each Share subject to an Option or
with
respect to a Phantom Share, which right would consist of the right (subject
to
Section 8.4) to receive a cash payment in an amount equal to the dividend
distributions paid on a Share from time to time.
8.4 Deferral.
(a) The
Committee may establish a program under which Participants (i) will have Phantom
Shares credited, subject to the terms of Sections 7.4 and 7.5 as though directly
applicable with respect thereto, upon the granting of Dividend Equivalent
Rights, or (ii) will have payments with respect to Dividend Equivalent Rights
deferred.
(b) The
Committee may establish a program under which distributions with respect to
Dividend Equivalent Rights may be deferred. Such program may include, without
limitation, provisions for the crediting of earnings and losses on unpaid
amounts, and, if permitted by the Committee, provisions under which Participants
may select from among hypothetical investment alternatives for such deferred
amounts in accordance with procedures established by the Committee.
9. OTHER
STOCK-BASED AWARDS
The
Board
shall have the right to grant other Awards based upon the Common Stock having
such terms and conditions as the Board may determine, including the grant of
shares based upon certain conditions, the grant of securities convertible into
Common Stock and the grant of stock appreciation rights.
10. TAX
WITHHOLDING.
10.1 In
General.
The
Company shall be entitled to withhold from any payments or deemed payments
any
amount of tax withholding determined by the Committee to be required by law.
Without limiting the generality of the foregoing, the Committee may, in its
discretion, require the Participant to pay to the Company at such time as the
Committee determines the amount that the Committee deems necessary to satisfy
the Company’s obligation to withhold federal, state or local income or other
taxes incurred by reason of (i) the exercise of any Option, (ii) the lapsing
of
any restrictions applicable to any Restricted Stock, (iii) the receipt of a
distribution in respect of Phantom Shares or Dividend Equivalent Rights or
(iv)
any other applicable income-recognition event (for example, an election under
Section 83(b) of the Code).
10.2 Share
Withholding.
(a) Upon
exercise of an Option, the Optionee may, if approved by the Committee in its
discretion, make a written election to have Shares then issued withheld by
the
Company from the Shares otherwise to be received, or to deliver previously
owned
Shares, in order to satisfy the liability for such withholding taxes. In the
event that the Optionee makes, and the Committee permits, such an election,
the
number of Shares so withheld or delivered shall have an aggregate Fair Market
Value on the date of exercise sufficient to satisfy the applicable withholding
taxes. Where the exercise of an Option does not give rise to an obligation
by
the Company to withhold federal, state or local income or other taxes on the
date of exercise, but may give rise to such an obligation in the future, the
Committee may, in its discretion, make such arrangements and impose such
requirements as it deems necessary or appropriate.
(b) Upon
lapsing of restrictions on Restricted Stock (or other income-recognition event),
the Grantee may, if approved by the Committee in its discretion, make a written
election to have Shares withheld by the Company from the Shares otherwise to
be
released from restriction, or to deliver previously owned Shares (not subject
to
restrictions hereunder), in order to satisfy the liability for such withholding
taxes. In the event that the Grantee makes, and the Committee permits, such
an
election, the number of Shares so withheld or delivered shall have an aggregate
Fair Market Value on the date of exercise sufficient to satisfy the applicable
withholding taxes.
(c) Upon
the
making of a distribution in respect of Phantom Shares or Dividend Equivalent
Rights, the Grantee may, if approved by the Committee in its discretion, make
a
written election to have amounts (which may include Shares) withheld by the
Company from the distribution otherwise to be made, or to deliver previously
owned Shares (not subject to restrictions hereunder), in order to satisfy the
liability for such withholding taxes. In the event that the Grantee makes,
and
the Committee permits, such an election, any Shares so withheld or delivered
shall have an aggregate Fair Market Value on the date of exercise sufficient
to
satisfy the applicable withholding taxes.
10.3 Withholding
Required.
Notwithstanding
anything contained in the Plan or the Award Agreement to the contrary, the
Participant’s satisfaction of any tax-withholding requirements imposed by the
Committee shall be a condition precedent to the Company’s obligation as may
otherwise be provided hereunder to provide Shares to the Participant and to
the
release of any restrictions as may otherwise be provided hereunder, as
applicable; and the applicable Option, Restricted Stock, Phantom Shares or
Dividend Equivalent Rights shall be forfeited upon the failure of the
Participant to satisfy such requirements with respect to, as applicable, (i)
the
exercise of the Option, (ii) the lapsing of restrictions on the Restricted
Stock
(or other income-recognition event) or (iii) distributions in respect of any
Phantom Share or Dividend Equivalent Right.
11. REGULATIONS
AND APPROVALS.
(a) The
obligation of the Company to sell Shares with respect to an Award granted under
the Plan shall be subject to all applicable laws, rules and regulations,
including all applicable federal and state securities laws, and the obtaining
of
all such approvals by governmental agencies as may be deemed necessary or
appropriate by the Committee.
(b) The
Committee may make such changes to the Plan as may be necessary or appropriate
to comply with the rules and regulations of any government authority or to
obtain tax benefits applicable to an Award.
(c) Each
grant of Options, Restricted Stock, Phantom Shares (or issuance of Shares in
respect thereof) or Dividend Equivalent Rights (or issuance of Shares in respect
thereof) is subject to the requirement that, if at any time the Committee
determines, in its discretion, that the listing, registration or qualification
of Shares issuable pursuant to the Plan is required by any securities exchange
or under any state or federal law, or the consent or approval of any
governmental regulatory body is necessary or desirable as a condition of, or
in
connection with, the issuance of Options, Shares of Restricted Stock, Phantom
Shares or Dividend Equivalent Rights or other Shares, no payment shall be made,
or Phantom Shares or Shares issued or grant of Restricted Stock made, in whole
or in part, unless listing, registration, qualification, consent or approval
has
been effected or obtained free of any conditions in a manner acceptable to
the
Committee.
(d) In
the
event that the disposition of stock acquired pursuant to the Plan is not covered
by a then current registration statement under the Securities Act, and is not
otherwise exempt from such registration, such Shares shall be restricted against
transfer to the extent required under the Securities Act, and the Committee
may
require any individual receiving Shares pursuant to the Plan, as a condition
precedent to receipt of such Shares, to represent to the Company in writing
that
such Shares are acquired for investment only and not with a view to distribution
and that such Shares will be disposed of only if registered for sale under
the
Securities Act or if there is an available exemption for such disposition.
(e) Notwithstanding
any other provision of the Plan, the Company shall not be required to take
or
permit any action under the Plan or any Award Agreement which, in the good-faith
determination of the Company, would result in a material risk of a violation
by
the Company of Section 13(k) of the Exchange Act.
12. INTERPRETATION
AND AMENDMENTS; OTHER RULES.
The
Committee may make such rules and regulations and establish such procedures
for
the administration of the Plan as it deems appropriate. Without limiting the
generality of the foregoing, the Committee may (i) determine the extent, if
any,
to which Options, Phantom Shares or Shares (whether or not Shares of Restricted
Stock) or Dividend Equivalent Rights shall be forfeited (whether or not such
forfeiture is expressly contemplated hereunder); (ii) interpret the Plan and
the
Award Agreements hereunder, with such interpretations to be conclusive and
binding on all persons and otherwise accorded the maximum deference permitted
by
law; and (iii) take any other actions and make any other determinations or
decisions that it deems necessary or appropriate in connection with the Plan
or
the administration or interpretation thereof. In the event of any dispute or
disagreement as to the interpretation of the Plan or of any rule, regulation
or
procedure, or as to any question, right or obligation arising from or related
to
the Plan, the decision of the Committee shall be final and binding upon all
persons. Unless otherwise expressly provided hereunder, the Committee, with
respect to any grant, may exercise its discretion hereunder at the time of
the
Award or thereafter. No action which is otherwise permitted under or in
connection with the Plan shall be prohibited hereunder merely because it
constitutes a repricing of an Award, and, in furtherance of the foregoing,
the
Committee is expressly authorized and empowered, without limitation, to effect
repricings that are consistent with the terms of the Plan. The Board may amend
the Plan as it shall deem advisable, except that no amendment may adversely
affect a Participant with respect to an Award previously granted unless such
amendments are required in order to comply with applicable laws; provided,
however, that the Plan may not be amended without shareholder approval in any
case in which amendment in the absence of shareholder approval would cause
the
Plan to fail to comply with any applicable legal requirement or applicable
exchange or similar rule.
13. CHANGES
IN CAPITAL STRUCTURE.
(a) If
(i)
the Company or its Subsidiaries shall at any time be involved in a merger,
consolidation, dissolution, liquidation, reorganization, exchange of shares,
sale of all or substantially all of the assets or stock of the Company or its
Subsidiaries or a transaction similar thereto, (ii) any stock dividend, stock
split, reverse stock split, stock combination, reclassification,
recapitalization or other similar change in the capital structure of the Company
or its Subsidiaries, or any distribution to holders of Common Stock other than
cash dividends, shall occur or (iii) any other event shall occur which in the
judgment of the Committee necessitates action by way of adjusting the terms
of
the outstanding Awards, then:
(x)
the
maximum aggregate number of Shares which may be made subject to Options and
Dividend Equivalent Rights under the Plan, the maximum aggregate number maximum
aggregate number and kind of Shares of Restricted Stock that may be granted
under the Plan, and the maximum aggregate number of Phantom Shares which may
be
granted under the Plan may be appropriately adjusted by the Committee in its
discretion; and
(y)
the
Committee may take any such action as in its judgment shall be necessary to
maintain the Optionees' rights hereunder (including under the Award Agreements)
so that they are substantially in their respective Options, Phantom Shares
and
Dividend Equivalent Rights substantially proportionate to the rights existing
in
such Options, Phantom Shares and Dividend Equivalent Rights prior to such event,
including, without limitation, adjustments in (A) the number of Options, Phantom
Shares and Dividend Equivalent Rights granted, (B) the number and kind of shares
or other property to be distributed in respect of Options, Phantom Shares and
Dividend Equivalent Rights (as applicable), (C) the Option Price and Phantom
Share Value, and (D) performance-based criteria established in connection with
Awards; provided that, in the discretion of the Committee, the foregoing clause
(D) may also be applied in the case of any event relating to a Subsidiary if
the
event would have been covered under this Section 13(a) had the event related
to
the Company.
(b) Any
Shares or other securities distributed to a Grantee with respect to Restricted
Stock or otherwise issued in substitution of Restricted Stock shall be subject
to the restrictions and requirements imposed by Section 6, including depositing
the certificates therefor with the Company together with a stock power and
bearing a legend as provided in Section 6.2(a).
(c) If
the
Company shall be consolidated or merged with another corporation or other
entity, each Grantee who has received Restricted Stock that is then subject
to
restrictions imposed by Section 6.3(a) may be required to deposit with the
successor corporation the certificates for the stock or securities or the other
property that the Grantee is entitled to receive by reason of ownership of
Restricted Stock in a manner consistent with Section 6.2(b), and such stock,
securities or other property shall become subject to the restrictions and
requirements imposed by Section 6.3(a), and the certificates therefor or other
evidence thereof shall bear a legend similar in form and substance to the legend
set forth in Section 6.2(a).
(d) If
a
Change in Control shall occur, then the Committee may make such adjustments
as
it, in its discretion, determines are necessary or appropriate in light of
the
Change in Control, provided that the Committee determines that such adjustments
do not have an adverse economic impact on the Participant as determined at
the
time of the adjustments.
(e) The
judgment of the Committee with respect to any matter referred to in this Section
13 shall be conclusive and binding upon each Participant without the need for
any amendment to the Plan.
14. MISCELLANEOUS.
14.1 No
Rights to Employment or Other Service.
Nothing
in the Plan or in any grant made pursuant to the Plan shall confer on any
individual any right to continue in the employ or other service of the Company
or its Subsidiaries or interfere in any way with the right of the Company or
its
Subsidiaries and its shareholders to terminate the individual’s employment or
other service at any time.
14.2 Right
of First Refusal; Right of Repurchase.
At
the
time of grant, the Committee may provide in connection with any grant made
under
the Plan that Shares received hereunder shall be subject to a right of first
refusal pursuant to which the Company shall be entitled to purchase such Shares
in the event of a prospective sale of the Shares, subject to such terms and
conditions as the Committee may specify at the time of grant or (if permitted
by
the Award Agreement) thereafter, and to a right of repurchase, pursuant to
which
the Company shall be entitled to purchase such Shares at a price determined
by,
or under a formula set by, the Committee at the time of grant or (if permitted
by the Award Agreement) thereafter.
14.3 No
Fiduciary Relationship.
Nothing
contained in the Plan (including without limitation Sections 7.5(c) and 8.4(b),
and no action taken pursuant to the provisions of the Plan, shall create or
shall be construed to create a trust of any kind, or a fiduciary relationship
between the Company or its Subsidiaries, or their officers or the Committee,
on
the one hand, and the Participant, the Company, its Subsidiaries or any other
person or entity, on the other.
14.4 Notices.
All
notices under the Plan shall be in writing, and if to the Company, shall be
delivered to the Board or mailed to its principal office, addressed to the
attention of the Board; and if to the Participant, shall be delivered
personally, sent by facsimile transmission or mailed to the Participant at
the
address appearing in the records of the Company. Such addresses may be changed
at any time by written notice to the other party given in accordance with this
Section 14.4.
14.5 Exculpation
and Indemnification.
The
Company shall indemnify and hold harmless the members of the Board and the
members of the Committee from and against any and all liabilities, costs and
expenses incurred by such persons as a result of any act or omission to act
in
connection with the performance of such person’s duties, responsibilities and
obligations under the Plan, to the maximum extent permitted by law.
14.6 Captions.
The
use
of captions in this Plan is for convenience. The captions are not intended
to
provide substantive rights.
14.7 Governing
Law.
THE
PLAN
SHALL BE GOVERNED BY THE LAWS OF FLORIDA WITHOUT REFERENCE TO PRINCIPLES OF
CONFLICT OF LAWS.
NYA
639537.10
Exhibit
10.7
OPTEUM
INC.
2004
PERFORMANCE BONUS PLAN
|
1.
|
Purpose
of the Plan
|
The
Plan
is intended to advance the interests of the Company by providing an opportunity
to selected employees of the Company to earn bonuses, and to encourage and
motivate them to achieve superior operating results for Opteum Inc. The Plan
is
effective as of August 13, 2004 and is an amendment and complete restatement
of
a predecessor hereto adopted by the Committee (as defined below) on May 4,
2004.
|
2.
|
Definitions
|
As
used
in this Plan, the following definitions apply:
“Annual
Supplemental Bonus” means the bonus described in Section 4(b).
“Board”
means the Board of Directors of Opteum Inc.
“Bonus”
means a Formula Bonus, an Annual Supplemental Bonus or any bonus described
in
Section 3(c).
“Committee”
means the Compensation Committee of the Board.
“Company”
means Opteum Inc., and its subsidiaries.
“Formula
Bonus” means the bonus described in Section 4(a).
“Key
Employee” means an officer or other employee of the Company whose position and
responsibilities, in the judgment of the Committee, enable the employee to
have
a significant impact on the operating results of the Company.
“Performance
Period” means each applicable fiscal year of the Company.
“Plan”
means this Opteum Inc. 2004 Performance Bonus Plan, as the same may be amended
from time to time.
“Termination
of Service” means a Key Employee’s termination of employment or other service,
as applicable, with the Company. Cessation of service as an officer, employee,
director or consultant shall not be treated as a Termination of Service if
the
Key Employee continues without interruption to serve thereafter in another
one
(or more) of such other capacities.
3. Bonuses
- In General
(a)
There
are two types of bonuses provided for hereunder: (i) a Formula Bonus and (ii)
an
Annual Supplemental Bonus.
(b)
Eligibility
from among Key Employees shall be determined by the Committee. The Formula
Bonus
shall be determined based on a formula, as described in Section 4(a). The
Committee may determine the Annual Supplemental Bonus a Key Employee will
receive with regard to a Performance Period or other period. Subject to the
provisions of the Plan, the Committee shall (i) determine and designate from
time to time those Key Employees to whom Bonuses are to be granted; (ii)
determine, consistently with the Plan, the amount of the Bonus to be granted
to
any Key Employee for any Performance Period; (iii) determine, consistently
with
the Plan, the terms and conditions of each Bonus; and (iv) determine,
consistently with the Plan, whether the stock (or stock-based grants) will
vest
upon the occurrence of a change in control (as may be defined for purposes
of
the applicable grant) and in the case of terminations of employment by the
Company without cause (as may be defined for purposes of the applicable grant)
or by the Key Employee for such good reason as may be specified by the
Committee. Bonuses may be so awarded by the Committee prior to the commencement
of any Performance Period or at the end of or after such Performance
Period.
(c) The
Committee may grant discretionary bonuses within the parameters of the Plan
based on Company performance otherwise than as specified in Section 3(a) on
account of a registration statement on Form S-11 having been declared effective
and on account of the completion of a capital raising event.
4. Amount
of Awards
(a) Unless
otherwise provided for by the Committee, the Formula Bonus is determined
pursuant to a formula, determined
as follows: if the Company’s funds from operations during the applicable
quarterly period exceed the product of (i) 25% (except for purposes of the
last
sentence of this Section 4(a)) of (A) the annualized 10-year U.S. Treasury
rate
for the applicable quarterly period, as determined by the Committee in
accordance with such rules as it may prescribe, plus (B) 2.25%, and (ii) the
weighted average net book value of the Company (any such excess, the “Excess
FFO”), then the Formula Bonus shall be calculated and paid quarterly, as
follows:
| (i) |
15%
of the Excess FFO as to the initial $1.0 billion of invested
assets;
|
| (ii) |
10%
of the Excess FFO as to the invested assets over $1 billion, but
under $2
billion; and
|
| (iii) |
5%
of the Excess FFO as to the invested assets over $2
billion.
|
The
foregoing pool shall be allocated amongst Key Employees as determined by the
Committee. Formula Bonuses shall never cause general and administrative
(G&A) expenses to exceed 18 basis points of assets, as determined by the
Committee. Notwithstanding the foregoing provisions of this Section 4(a), at
the
end of each fiscal year, a hypothetical Formula Bonus shall be determined based
on the foregoing formula, and performance, on a full-year basis (and, for the
avoidance of doubt, without regard to the 25% reduction in clause (i) of the
first sentence of this Section 4(a)) and the final quarterly Formula Bonus
for
the year shall be increased or decreased (but not to below zero) so that the
aggregate of the four quarterly Formula Bonuses for the year conforms to such
hypothetical Formula Bonus, as determined by the Committee.
(b) The
Committee shall decide whether to grant an Annual Supplemental Bonus, in
addition to the Formula Bonus, based on the performance of the Company as
compared with its peer group and other material factors not otherwise taken
into
account for purposes of the Formula Bonus, considering, without limitation,
the
Key Employee’s aggregate Formula Bonus and other compensation that would be
payable in the aggregate in the absence of the Annual Supplemental Bonus.
Subject to the other terms of the Plan, no Annual Supplemental Bonus shall
exceed 100% of the Key Employee’s aggregate salary for the year. Notwithstanding
the foregoing, for any employee with an employment agreement that contemplates
bonus payments, the Committee may provide in its discretion that Annual
Supplemental Bonuses in excess of 100% of the Key Employee’s aggregate salary
for the year may be paid. Further, without limitation by the Plan, any
capital-raising bonus expressly provided for in an employment agreement shall
be
payable, without duplication, in accordance with the applicable employment
agreement, in addition to the Bonuses hereunder.
(c) The
Committee may provide for partial Bonus payments at target and other levels.
Any
performance hurdles or measures for any Bonuses may be adjusted by the Committee
in its discretion to reflect (i) dilution from corporate acquisitions and share
offerings and (ii) changes in applicable accounting rules and
standards.
(d) The
Committee may determine that Bonuses shall be paid in cash or stock (or other
stock-based grants), or a combination thereof; provided that, unless otherwise
determined by the Committee, (i) Formula Bonuses shall, at the election of
the
Key Employee, be paid in cash, stock (or other equity-based grants) or any
combination thereof, (ii) Annual Supplemental Bonuses shall be paid 60% in
cash
and 40% in stock (or other equity-based grants) and (iii) Bonuses under Section
3(c) shall be paid in cash. The Committee may provide that any such stock or
stock-based grants be made under the Opteum Inc. 2003 Long Term Incentive
Compensation Plan (the “LTIP”) or any other equity-based plan or program of the
Company and, notwithstanding any provision of the Plan to the contrary, in
the
case of any such grant, the grant shall be governed in all respects by the
LTIP
or such other plan or program of the Company; provided that, unless otherwise
provided by the Committee, Annual Supplemental Bonus payments in stock (or
other
equity-based grants) shall vest in equal proportions over three years and
Formula Bonus payments in stock (or other equity-based grants) shall vest at
the
time of grant.
(e) The
Committee may provide for programs under which the payment of Bonuses may be
deferred at the election of the Key Employee.
5.
Termination
of Employment
(a) Unless
otherwise determined by the Committee, no Bonus payments shall be made to any
Key Employee who is not employed on the date payment is to be made; provided
that no Bonuses shall be made in any event to a Key Employee who is terminated
for “Cause.” For these purposes, Cause shall mean, unless otherwise provided in
the grantee’s award agreement, (i) engaging in (A) willful or gross
misconduct or (B) willful or gross neglect; (ii) repeatedly failing to
adhere to the directions of superiors or the Board or the written policies
and
practices of the Company or its affiliates; (iii) the commission of a felony
or
a crime of moral turpitude, dishonesty, breach of trust or unethical business
conduct, or any crime involving the Company, or any affiliate thereof; (iv)
fraud, misappropriation or embezzlement; (v) a material breach of the Key
Employee’s employment agreement (if any) with the Company or its affiliates;
(vi) acts or omissions constituting a material failure to perform substantially
and adequately the duties assigned to the Key Employee; (vii) any illegal act
detrimental to the Company or its affiliates; or (viii) repeated failure to
devote substantially all of the Key Employee’s business time and efforts to the
Company if required by the Key Employee’s employment agreement; provided,
however, that, if at any particular time the Key Employee is subject to an
effective employment agreement with the Company, then, in lieu of the foregoing
definition, “Cause” shall at that time have such meaning as may be specified in
such employment agreement.
(b) Unless
otherwise provided by the Committee, no portion of the 40% Annual Supplemental
Bonus awarded in stock (in accordance with Section 4(d)) shall be transferred
to
the Key Employee if the Key Employee has a Termination of Service before three
years from the date of the grant and such Shares shall be forfeited upon such
termination.
6. Administration
of the Plan; Amendment and Termination
(a) The
Plan
shall be administered by the Committee.
(b) The
Committee will have full power to construe, interpret and administer the Plan
and to amend and rescind the rules and regulations for its administration,
with
such interpretations to be conclusive and binding on all persons and otherwise
accorded the maximum deference permitted by law. In the event of any dispute
or
disagreement as to the interpretation of the Plan or of any rule, regulation
or
procedure, or as to any question, right or obligation arising from or related
to
the Plan, the decision of the Committee shall be final and binding upon all
persons.
(c) The
Committee will have discretion to determine whether a Bonus is established
for
particular Key Employees. The Committee’s decisions and determinations under the
Plan need not be uniform and may be made selectively among Key Employees,
whether or not such Key Employees are similarly situated.
(d)
No
Key
Employee shall have any claim to a bonus until it is actually granted under
the
Plan. To the extent that any person acquires a right to receive payments from
the Company under the Plan, such right shall be no greater than the right of
an
unsecured general creditor of the Company. All payments provided for under
the
Plan shall be paid in cash from the general funds of the Company. The Plan
does
not create a fiduciary relationship between the Board or Committee on one hand,
and employees, their beneficiaries or any other persons on the
other.
(e)
The
Board
or the Committee may at any time amend or terminate the Plan. No amendment
to or
termination of the Plan may affect any Key Employee’s right to receive a Bonus
which, before the amendment or termination, has been earned by the Key Employee
and is payable without any contingency or other further action, unless the
Key
Employee consents to the change.
7.
Beneficiaries
Each
Key
Employee shall designate a beneficiary to receive such Key Employee’s Bonus, if
any, in the event of death. In the event of a failure to designate a
beneficiary, amounts, if any, so payable to a Key Employee in the event of
death
shall be payable to the estate of such Key Employee. The last designation
received by the Company shall be controlling; provided, however, that no
designation, or change or revocation thereof, shall be effective unless received
by the Company prior to the Key Employee’s death, and in no event shall it be
effective as of a date prior to such receipt. If no such beneficiary designation
is in effect at the time of a Key Employee’s death, or if no designated
beneficiary survives the Key Employee or if such designation conflicts with
law,
the Key Employee’s estate shall be entitled to receive the amounts, if any,
payable under the Plan upon his or her death. If the Company is in doubt as
to
the right of any person to receive such amounts, the Company may retain such
amounts, without liability for any interest thereon, until the Company
determines the rights thereto, or the Company may pay such amounts into any
court of appropriate jurisdiction and such payment shall be a complete discharge
of the liability of the Company therefor. No rights to Bonuses granted hereunder
shall be transferable by a Key Employee otherwise than by will or the laws
of
descent and distribution.
8.
Miscellaneous
(a) The
Company may cause to be made, as a condition precedent to the payment of any
Bonus, or otherwise, appropriate arrangements with the Key Employee or his
or
her beneficiary for the withholding of any federal, state, local or foreign
taxes.
(b) Nothing
in the Plan and no award of any Bonus which is payable immediately or in the
future (whether or not future payments may be forfeited), will give any Key
Employee a right to continue to be an employee of the Company or in any other
way affect the right of the Company to terminate the employment of any Key
Employee at any time.
(c)
All
elections, designations, requests, notices, instructions and other
communications from a Key Employee, beneficiary or other person, required or
permitted under the Plan, shall be in such form as is prescribed from time
to
time by the Committee.
(d) In
the
event that the Company’s fiscal year is changed, the Committee may make such
adjustments to the Plan, as he or she may deem necessary or appropriate to
effectuate the intent of the Plan. All such adjustments, without the need for
Plan amendment, shall be effective and binding for all Bonuses and otherwise
for
all purposes of the Plan.
(e) The
use
of captions in this Plan is for convenience. The captions are not intended
to
provide substantive rights.
NYA
675398.4
Exhibit
10.11
OPTEUM
INC.
(FORMERLY
BIMINI MORTGAGE MANAGEMENT, INC.)
2003
LONG
TERM INCENTIVE COMPENSATION PLAN
PHANTOM
SHARE AWARD AGREEMENT
AGREEMENT
by and between Opteum Inc., a Maryland corporation (the “Company”)
and
(the
“Grantee”),
dated
as of the ___ day of ___________, 200_.
WHEREAS,
the Company maintains the Opteum Inc. (formerly Bimini Mortgage Management,
Inc.) 2003 Long Term Incentive Compensation Plan, as it may be amended from
time
to time (the “Plan”)
(capitalized terms used but not defined herein shall have the respective
meanings ascribed thereto by the Plan);
WHEREAS,
the Grantee is an employee of the Company or one of its Subsidiaries;
WHEREAS,
the Committee has determined that it is in the best interests of the Company
and
its shareholders to grant Phantom Shares to the Grantee subject to the terms
and
conditions set forth below.
NOW,
THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Grant
of Phantom Shares.
The
Company hereby grants the Grantee _____________ Phantom Shares. The Phantom
Shares are subject to the terms and conditions of this Agreement, and are
also
subject to the provisions of the Plan. The Plan is hereby incorporated herein
by
reference as though set forth herein in its entirety.
2. Vesting.
The
Phantom Shares shall be subject to the following:
|
(a)
|
The
Phantom Shares shall vest, except as provided herein, if and as
employment
continues, pursuant to the following schedule:
|
|
Number
of Phantom Shares
|
Vesting
Date
|
|
(b)
|
Upon
Termination of Service, all Phantom Shares which have not vested
prior to
or concurrently with such Termination of Service shall thereupon,
and with
no further action, be forfeited by the Grantee.
|
|
(c)
|
The
Phantom Shares shall fully vest upon (i) Termination of Service
by the
Company without Cause or for Disability, (ii) Termination of Service
by
the Grantee for “Good Reason” (as defined below), within 30 days of the
occurrence (or initial occurrence, in the case of a continuing
condition)
thereof, (iii) the Grantee's death while employed or (iv) the occurrence
of a Change of Control while employed. For these purposes, “Good
Reason”
shall mean, without the Grantee's prior consent, a material diminution
by
the Company in the Grantee's title, duties or responsibilities;
provided
that (i) if the Grantee wishes to terminate for Good Reason, the
Grantee
shall give notice to the Company, and (ii) Good Reason shall not
be deemed
to exist if the Company cures any such diminution within a reasonable
period (which shall be at least 15 days) after receipt of such
notice.
|
|
3.
|
Distributions
|
Distributions
to the Grantee attributable to the Grantee’s receipt of Phantom Shares hereunder
will be distributed as soon as practicable after the first day of the month
following the date on which the Phantom Shares vest. Other than in accordance
with an election permitted by the Committee, distributions made to the Grantee
will be made as a single delivery of Common Stock.
|
4.
|
Dividend
Equivalent Rights.
|
A
Dividend Equivalent Right is hereby granted to the Grantee, consisting of
the
right to receive, with respect to each Phantom Share, cash in an amount equal
to
the cash dividend distributions paid in the ordinary course on a Share to
the
Company's common shareholders (each, a "Dividend
Payment"),
as
set forth below. For each Phantom Share then outstanding, whether or not
then
vested, if a cash dividend is payable in the ordinary course on a Share,
the
Company shall make a payment to the Grantee in an amount equal to the applicable
Dividend Payment, on or about the date of the Dividend Payment; provided
that
the Grantee may elect, in accordance with such procedures as may be prescribed
by the Committee, to receive, in lieu of such Dividend Payment, a number
of
additional Phantom Shares equal to (x) the otherwise payable Dividend Payment,
divided by (y) the Fair Market Value of a Share on the date of the Dividend
Payment.
5. Tax
Withholding.
Upon
the
making of a distribution in respect of Phantom Shares or Dividend Equivalent
Rights, the Grantee may, in accordance with procedures set forth by the
Committee, make a written election to have amounts (which may include Shares)
withheld by the Company from the distribution otherwise to be made, or to
deliver previously owned Shares (not subject to restrictions hereunder),
in
order to satisfy the liability for such withholding taxes. In the event that
the
Grantee makes, and the Committee permits, such an election, any Shares so
withheld or delivered shall have an aggregate Fair Market Value on the date
of
exercise sufficient to satisfy the applicable withholding taxes.
6. Miscellaneous.
|
(a)
|
The
value of a Phantom Share may decrease depending upon the performance
of a
Share from time to time. Neither the Company nor the Committee,
nor any
other party associated with the Plan, shall be held liable for
any
decrease in the value of my Phantom Shares. If the value of my
Phantom
Shares decreases, there will be a decrease in the value of what
is
distributed to the Grantee under the Plan and this Agreement.
|
|
(b)
|
With
respect to this Agreement, (i) the Phantom Shares are mere bookkeeping
entries, (ii) the obligations of the Company under the Plan are
unsecured
and constitute a mere promise by the Company to make benefit payments
in
the future, (iii) to the extent that any person acquires a right
to
receive payments from the Company under the Plan, such right shall
be no
greater than the right of any general unsecured creditor of the
Company,
(iv) all payments under the Plan (including distributions of Shares)
shall
be paid from the general funds of the Company and (v) no special
or
separate fund shall be established or other segregation of assets
made to
assure such payments (except that the Company may in its discretion
establish a mere bookkeeping reserve to meet its obligations under
the
Plan). The Plan is intended to be an arrangement that is unfunded
for tax
purposes and for purposes of Title I of the Employee Retirement
Income
Security Act of 1974, as amended.
|
|
(c)
|
The
Grantee shall take whatever additional actions and execute whatever
additional documents the Company may in its reasonable judgment
deem
necessary or advisable in order to carry out or effect one or more
of the
obligations or restrictions imposed on the Grantee pursuant to
the express
provisions of the Plan. The issuance of shares of Common Stock,
if
applicable, and delivery of the certificate or certificates therefor,
shall be subject to any delay necessary to complete (i) the listing
of
such Shares on any stock exchange upon which shares of the same
class are
then listed, (ii) such registration or other qualification of such
Phantom
Shares under any state or federal law, rule, or regulation as the
Company
may determine to be necessary or advisable, and (iii) the making
of
provision for the payment or withholding of any taxes required
to be
withheld pursuant to any applicable law, in respect of the receipt
of such
Common Stock.
|
|
(d)
|
THIS
AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF FLORIDA,
WITHOUT
REFERENCE TO PRINCIPLES OF CONFLICT OF LAWS. The
captions of this Agreement are not part of the provisions hereof
and shall
have no force or effect. This Agreement may not be amended or modified
except by a written agreement executed by the parties hereto or
their
respective successors and legal representatives. The invalidity
or
unenforceability of any provision of this Agreement shall not affect
the
validity or enforceability of any other provision of this
Agreement.
|
|
(e)
|
The
Committee may make such rules and regulations and establish such
procedures for the administration of this Agreement as it deems
appropriate. Without limiting the generality of the foregoing,
the
Committee may interpret this Agreement, with such interpretations
to be
conclusive and binding on all persons and otherwise accorded the
maximum
deference permitted by law. In the event of any dispute or disagreement
as
to the interpretation of this Agreement or of any rule, regulation
or
procedure, or as to any question, right or obligation arising from
or
related to this Agreement, the decision of the Committee shall
be final
and binding upon all persons.
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|
(f)
|
All
notices hereunder shall be in writing, and if to the Company, shall
be
delivered to the Board or mailed to its principal office, addressed
to the
attention of the Board; and if to the Grantee, shall be delivered
personally, sent by facsimile transmission or mailed to the Grantee
at the
address appearing in the records of the Company. Such addresses
may be
changed at any time by written notice to the other party given
in
accordance with this paragraph
6(f).
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|
(g)
|
The
failure of the Grantee or the Company to insist upon strict compliance
with any provision of this Agreement or the Plan, or to assert
any right
the Grantee or the Company, respectively, may have under this Agreement
or
the Plan, shall not be deemed to be a waiver of such provision
or right or
any other provision or right of this Agreement or the
Plan.
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|
(h)
|
Nothing
in this Agreement shall confer on the Grantee any right to continue
in the
employ or other service of the Company or its Subsidiaries or interfere
in
any way with the right of the Company or its Subsidiaries and its
shareholders to terminate the Grantee’s employment or other service at any
time.
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|
(i)
|
This
Agreement contains the entire agreement between the parties with
respect
to the subject matter hereof and supersedes all prior agreements,
written
or oral, with respect thereto.
|
IN
WITNESS WHEREOF, the Company and the Grantee have executed this Agreement
as of
the day and year first above written.
OPTEUM
INC.
By:
Name:
Title:
_______________________________________
[Grantee]
Exhibit
10.12
OPTEUM
INC.
(FORMERLY
BIMINI MORTGAGE MANAGEMENT, INC.)
2003
LONG
TERM INCENTIVE COMPENSATION PLAN
RESTRICTED
STOCK AWARD AGREEMENT
AGREEMENT
by and between Opteum Inc., a Maryland corporation (the “Company”)
and
(the
“Grantee”),
dated
as of the ___ day of _______________, 200_.
WHEREAS,
the Company maintains the Opteum Inc. (formerly Bimini Mortgage Management,
Inc.) 2003 Long Term Incentive Compensation Plan (the “Plan”)
(capitalized terms used but not defined herein shall have the respective
meanings ascribed thereto by the Plan);
WHEREAS,
the Grantee is an employee of the Company or one of its Subsidiaries;
and
WHEREAS,
the Committee has determined that it is in the best interests of the Company
and
its shareholders to grant Restricted Stock to the Grantee subject to the terms
and conditions set forth below.
NOW,
THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Grant
of Restricted Stock.
The
Company hereby grants the Grantee Shares
of
Restricted Stock of the Company, subject to the following terms and conditions
and subject to the provisions of the Plan. The Plan is hereby incorporated
herein by reference as though set forth herein in its entirety.
2. Restrictions
and Conditions.
The
Restricted Stock awarded pursuant to this Agreement and the Plan shall be
subject to the following restrictions and conditions:
| (i) |
Subject
to clauses (iii) and (iv) below, the period of restriction with respect
to
Shares granted hereunder (the “Restriction
Period”)
shall begin on the date hereof and lapse on ,
200_ (for the avoidance of doubt, without regard to the Company’s
achievement of financial hurdles).
|
Notwithstanding
the foregoing, unless otherwise expressly provided by the Committee, the
Restriction Period with respect to such Shares shall only lapse as to whole
Shares. Subject to the provisions of the Plan and this Agreement, during the
Restriction Period, the Grantee shall not be permitted voluntarily or
involuntarily to sell, transfer, pledge, anticipate, alienate, encumber or
assign the Shares (or have such Shares attached or garnished).
| (ii) |
Except
as provided in the foregoing clause (i), below in this clause (ii)
or in
the Plan, the Grantee shall have, in respect of the Shares of Restricted
Stock, all of the rights of a shareholder of the Company, including
the
right to vote the Shares and the right to receive dividends. Certificates
for Shares (not subject to restrictions under the Plan) shall be
delivered
to the Grantee or his or her designee promptly after, and only after,
the
Restriction Period lapses without forfeiture in respect of such Shares
of
Restricted Stock.
|
| (iii) |
Subject
to clause (iv) below, if the Grantee has a Termination of Service
for any
reason whatsoever during the Restriction Period, then all Shares
still
subject to restriction shall thereupon, and with no further action,
be
forfeited by the Grantee.
|
| (iv) |
In
the event the Grantee has a Termination of Service on account of
death or
Disability during the Restriction Period, then the Restriction Period
will
immediately lapse on all Restricted Stock granted to the
Grantee.
|
3. Miscellaneous.
| (a) |
THIS
AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS
OF THE STATE OF FLORIDA, WITHOUT REGARD TO ANY PRINCIPLES OF CONFLICTS
OF
LAW WHICH COULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION
OTHER THAN THE STATE OF FLORIDA.
The captions of this Agreement are not part of the provisions hereof
and
shall have no force or effect. This Agreement may not be amended
or
modified except by a written agreement executed by the parties hereto
or
their respective successors and legal representatives. The invalidity
or
unenforceability of any provision of this Agreement shall not affect
the
validity or enforceability of any other provision of this
Agreement.
|
| (b) |
The
Committee may make such rules and regulations and establish such
procedures for the administration of this Agreement as it deems
appropriate. Without limiting the generality of the foregoing, the
Committee may interpret the Plan and this Agreement, with such
interpretations to be conclusive and binding on all persons and otherwise
accorded the maximum deference permitted by law and take any other
actions
and make any other determinations or decisions that it deems necessary
or
appropriate in connection with the Plan, this Agreement or the
administration or interpretation thereof. In the event of any dispute
or
disagreement as to interpretation of the Plan or this Agreement or
of any
rule, regulation or procedure, or as to any question, right or obligation
arising from or related to the Plan or this Agreement, the decision
of the
Committee shall be final and binding upon all persons.
|
| (c) |
All
notices hereunder shall be in writing, and if to the Company or the
Committee, shall be delivered to the Board or mailed to its principal
office, addressed to the attention of the Board; and if to the Grantee,
shall be delivered personally, sent by facsimile transmission, e-mailed
or
mailed to the Grantee at the address appearing in the records of
the
Company. Such addresses may be changed at any time by written notice
to
the other party given in accordance with this paragraph
3(c).
|
| (d) |
The
failure of the Grantee or the Company to insist upon strict compliance
with any provision of this Agreement, or to assert any right the
Grantee
or the Company, respectively, may have under this Agreement, shall
not be
deemed to be a waiver of such provision or right or any other provision
or
right of this Agreement.
|
| (e) |
Nothing
in this Agreement shall confer on the Grantee any right to continue
in the
employ or other service of the Company or its Subsidiaries or interfere
in
any way with the right of the Company or its Subsidiaries and its
shareholders to terminate the Grantee’s employment or other service at any
time.
|
| (f) |
This
Agreement contains the entire agreement between the parties with
respect
to the subject matter hereof and supersedes all prior agreements,
written
or oral, with respect thereto.
|
IN
WITNESS WHEREOF, the Company and the Grantee have executed this Agreement as
of
the day and year first above written.
OPTEUM
INC.
By:
Name:
Jeffrey J. Zimmer
Title:
Chairman, President and Chief Executive Officer
GRANTEE
[Name
of
Grantee]
Exhibit 31.1
CERTIFICATION
PURSUANT TO RULE 13a-14(a) OF THE SECURITIES
EXCHANGE
ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY
ACT OF 2002
I,
Jeffrey J. Zimmer, Chairman of the Board, President and Chief Executive Officer,
certify that:
|
1.
|
I
have reviewed this Quarterly Report on Form 10-Q for the period ended
September 30, 2006, of Opteum Inc. (the "registrant");
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make
the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects
the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
|
|
4.
|
The
registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
|
|
|
a)
|
designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being
prepared;
|
|
|
b)
|
designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision,
to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
|
|
c)
|
evaluated
the effectiveness of the registrant's disclosure controls and procedures
and presented in this report our conclusions about the effectiveness
of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
|
|
|
d)
|
disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely
to
materially affect, the registrant’s internal control over financial
reporting; and
|
|
5.
|
The
registrant's other certifying officer and I have disclosed, based
on our
most recent evaluation of internal control over financial reporting,
to
the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing equivalent functions):
|
|
a)
|
all
significant deficiencies and material weakness in the design or operation
of internal control over financial reporting which are reasonably
likely
to adversely affect the registrant's ability to record, process,
summarize
and report financial information; and
|
|
b)
|
any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control
over financial reporting.
|
|
Date:
December 19, 2006
/s/
Jeffrey J. Zimmer
Name:
Jeffrey J. Zimmer
Title:
Chairman of the Board, President and Chief Executive Officer
|
|
|
Exhibit 31.2
CERTIFICATION
PURSUANT TO RULE 13a-14(a) OF THE SECURITIES
EXCHANGE
ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY
ACT OF 2002
I,
Robert
E. Cauley, Vice Chairman of the Board, Senior Executive Vice President, Chief
Financial Officer and Chief Investment Officer, certify that:
|
1.
|
I
have reviewed this Quarterly Report on Form 10-Q for the period ended
September 30, 2006, of Opteum Inc. (the "registrant");
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make
the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects
the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
|
|
4.
|
The
registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
|
|
|
a)
|
designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being
prepared;
|
|
|
b)
|
designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision,
to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
|
|
c)
|
evaluated
the effectiveness of the registrant's disclosure controls and procedures
and presented in this report our conclusions about the effectiveness
of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
|
|
|
d)
|
disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely
to
materially affect, the registrant’s internal control over financial
reporting; and
|
|
5.
|
The
registrant's other certifying officer and I have disclosed, based
on our
most recent evaluation of internal control over financial reporting,
to
the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing equivalent functions):
|
|
a)
|
all
significant deficiencies and material weakness in the design or operation
of internal control over financial reporting which are reasonably
likely
to adversely affect the registrant's ability to record, process,
summarize
and report financial information; and
|
|
b)
|
any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control
over financial reporting.
|
|
Date:
December 19, 2006
/s/
Robert E. Cauley
Name:
Robert E. Cauley
Title:
Vice Chairman of the Board, Senior Executive Vice President, Chief
Financial Officer and Chief Investment Officer
|
Exhibit 32.1
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Quarterly Report on Form 10-Q of Opteum Inc. (the
"Company") for the fiscal quarter ended September 30, 2006, as filed with
the
Securities and Exchange Commission on the date hereof (the "Report"), I,
Jeffrey
J. Zimmer, Chairman of the Board, President and Chief Executive Officer of
the
Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
|
1.
|
The
Report fully complies with the requirements of Section 13(a) or
15(d), as applicable, of the Securities Exchange Act of 1934; and
|
|
2.
|
The
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of
the Company
as of, and for, the periods presented in the Report.
|
|
December
19, 2006
|
|
/s/
Jeffrey J. Zimmer
Jeffrey
J. Zimmer
Chairman
of the Board, President
and
Chief Executive Officer
|
Exhibit 32.2
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Quarterly Report on Form 10-Q of Opteum Inc. (the
"Company") for the fiscal quarter ended September 30, 2006, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Robert
E. Cauley, Vice Chairman of the Board, Senior Executive Vice President, Chief
Financial Officer and Chief Investment Officer of the Company, hereby certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
|
1.
|
The
Report fully complies with the requirements of Section 13(a) or
15(d), as applicable, of the Securities Exchange Act of 1934; and
|
|
2.
|
The
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company
as of, and for, the periods presented in the Report.
|
|
December
19, 2006
|
|
/s/
Robert E. Cauley
Robert
E. Cauley
Vice
Chairman of the Board,
Senior
Executive Vice President,
Chief
Financial Officer and
Chief
Investment Officer
|