UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
-----------------------------------------------
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of report
(Date of earliest event reported): July 31, 2006
OCWEN FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Florida 1-13219 65-0039856
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
1661 Worthington Road
Suite 100
West Palm Beach, Florida 33409
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (561) 682-8000
N/A
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions:
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act (17 CFR 240.13e-4(c))
Page 1 of 30
Exhibit Index on Page 4
Explanatory Note
This Amendment No. 1 on Form 8-K/A is being filed to amend the Current Report on
Form 8-K (the "Initial 8-K") filed August 4, 2006, by Ocwen Financial
Corporation to include the financial information referred to in Item 9.01(a),
below, relating to the acquisition of Bankruptcy Management Solutions, Inc. on
July 31, 2006 and to provide the consent of the independent accountants.
Pursuant to the instructions to Item 9.01 of Form 8-K, Ocwen Financial
Corporation hereby amends Item 9.01 of the Initial 8-K to include previously
omitted information and to update the consent of the independent accountants.
Forward Looking Statements
This Report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including, but not limited to assumptions
related to deferred tax assets, the valuation of assets, and estimates utilized
in development of the pro forma financial statements.
Forward-looking statements are not guarantees of future performance, and involve
a number of assumptions, risks and uncertainties that could cause actual results
to differ materially. Important factors that could cause actual results to
differ materially from those suggested by the forward-looking statements
include, but are not limited to, the following:
o general economic and market conditions,
o prevailing interest or currency exchange rates,
o governmental regulations and policies, and
o real estate market conditions and trends.
Further information on the risks specific to our business are detailed within
this report and our other reports and filings with the Securities and Exchange
Commission, including our periodic report on Form 10-K for the year ended
December 31, 2005, Form 10-Q for the quarters ended March 31 and June 30, 2006
and our Forms 8-K filed during 2006. The forward-looking statements speak only
as of the date they are made and should not be relied upon. Ocwen Financial
Corporation undertakes no obligation to update or revise the forward-looking
statements.
Item 2.01 Completion of Acquisition of Assets.
On July 31, 2006, BMS Intermediate, Inc., an entity formed by Ocwen Financial
Corporation ("Ocwen") and Charlesbank Equity Fund VI, Limited Partnership and
other Charlesbank-related funds ("Charlesbank"), completed the acquisition of
all of the issued and outstanding shares of Bankruptcy Management Solutions,
Inc. ("BMS") from its stockholders and warrant holder. BMS is a leading provider
of support services to Chapter 7 Bankruptcy Trustees. The total investment
involved in this acquisition was approximately $440,000,000, including the
purchase price (subject to various post-closing adjustments set forth in the
associated Stock Purchase Agreement), the repayment of existing debt and certain
related fees and expenses. Ocwen and Charlesbank each contributed approximately
$46,000,000 in equity. Approximately $345,000,000 of the investment was funded
through the issuance of senior and subordinated debt by BMS.
Item 9.01 Financial Statements and Exhibits
(a) Financial Statements of Businesses Acquired.
(1) The audited balance sheets of Bankruptcy Management Solutions,
Inc. as of December 31, 2005 and December 31, 2004 and the
statements of operations, statements of stockholders' equity
(deficit) and statements of cash flows for Bankruptcy Management
Solutions, Inc. for each of the two years in the period ended
December 31, 2005
(2) The unaudited balance sheet of Bankruptcy Management Solutions,
Inc. as of June 30, 2006 and the statements of operations and
statements of cash flows for the six-month periods ended June 30,
2006 and June 30, 2005
(b) Pro Forma Financial Information.
The unaudited pro forma balance sheet of Ocwen Financial Corporation
as of June 30, 2006 and the statements of operations for the year
ended December 31, 2005 and for the six months ended June 30, 2006.
(c) Not applicable
Page 2 of 30
(d) Exhibits
The following exhibits are filed as part of this report:
Exhibit Description
------- -----------
23.1 Consent of Independent Accountants
99.1 Audited balance sheets of Bankruptcy Management Solutions,
Inc. as of December 31, 2005 and December 31, 2004 and the
statements of operations, statements of stockholders' equity
(deficit) and statements of cash flows for Bankruptcy
Management Solutions, Inc. for each of the two years in the
period ended December 31, 2005
99.2 Unaudited balance sheet of Bankruptcy Management Solutions,
Inc. as of June 30, 2006 and the statements of operations and
statements of cash flows for the six-month periods ended June
30, 2006 and June 30, 2005
99.3 Unaudited pro forma balance sheet of Ocwen Financial
Corporation as of June 30, 2006 and the statements of
operations for the year ended December 31, 2005 and for the
six months ended June 30, 2006.
Page 3 of 30
SIGNATURES
Pursuant to the requirements 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, hereunto duly authorized.
OCWEN FINANCIAL CORPORATION
(Registrant)
By: /s/ DAVID J. GUNTER
-----------------------------------
David J. Gunter
Senior Vice President and
Chief Financial Officer
Date: October 16, 2006
Page 4 of 30
INDEX TO EXHIBITS
Exhibit No. Description Page
----------- ----------- ----
23.1 Consent of Independent Accountants 6
99.1 Audited balance sheets of Bankruptcy Management 7
Solutions, Inc. as of December 31, 2005 and
December 31, 2004 and the statements of operations,
statements of stockholders' equity (deficit) and
statements of cash flows for Bankruptcy Management
Solutions, Inc. for each of the two years in the
period ended December 31, 2005
99.2 Unaudited balance sheet of Bankruptcy Management 19
Solutions, Inc. as of June 30, 2006 and the
statements of operations and statements of cash
flows for the six-month periods ended June 30, 2006
and June 30, 2005
99.3 Unaudited pro forma balance sheet of Ocwen 24
Financial Corporation as of June 30, 2006 and the
statements of operations for the year ended
December 31, 2005 and for the six months ended June
30, 2006.
Page 5 of 30
Exhibit 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Nos. 333-44999 and 333-62217) and the Registration
Statement on Form S-3 (Nos. 333-64915 and 333-119698) of Ocwen Financial
Corporation of our report dated March 2, 2006 relating to the financial
statements of Bankruptcy Management Solutions, Inc., which appears in the
Current Report on Form 8-K of Ocwen Financial Corporation dated October 16,
2006.
/s/ PricewaterhouseCoopers LLP
Irvine, California
October 16, 2006
Page 6 of 30
Exhibit 99.1
BANKRUPTCY MANAGEMENT
SOLUTIONS, INC.
Financial Statements
December 31, 2005 and 2004
Page 7 of 30
BANKRUPTCY MANAGEMENT SOLUTIONS, INC.
Index
December 31, 2005 and 2004
- --------------------------------------------------------------------------------
Page(s)
Report of Independent Auditors.................................................9
Financial Statements
Balance Sheets................................................................10
Statements of Operations......................................................11
Statements of Stockholders' Equity (Deficit)..................................12
Statements of Cash Flows......................................................13
Notes to Financial Statements............................................14 - 18
Page 8 of 30
Report of Independent Auditors
To the Board of Directors and Stockholders
Bankruptcy Management Solutions, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, stockholders' equity and cash flows present fairly, in all material
respects, the financial position of Bankruptcy Management Solutions, Inc. at
December 31, 2005 and December 31, 2004, and the results of its operations and
its cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
/s/ PricewaterhouseCoopers LLP
Irvine, California
March 2, 2006
Page 9 of 30
BANKRUPTCY MANAGEMENT SOLUTIONS, INC.
Balance Sheets
At December 31, 2005 and 2004
- --------------------------------------------------------------------------------
2005 2004
------------- -------------
Assets
Current assets
Cash and cash equivalents .................................... $ 12,676,442 $ 54,946,283
Accounts receivable, trade ................................... 3,901,181 1,780,217
Prepaid expenses and other current assets .................... 407,533 406,420
Income taxes receivable ...................................... -- 10,298
Deferred tax assets .......................................... 116,005 --
------------- -------------
Total current assets ....................................... 17,101,161 57,143,218
------------- -------------
Long-term assets
Property and equipment, net .................................. 2,804,358 3,160,927
Goodwill ..................................................... 1,592,624 1,592,624
Other intangibles, net ....................................... 28,936,105 34,540,788
Deferred financing costs, net ................................ 3,925,299 4,913,575
Deferred tax assets .......................................... 2,236,010 1,875,060
------------- -------------
Total assets ............................................. $ 56,595,557 $ 103,226,192
============= =============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities
Accounts payable ............................................. $ 483,967 $ 625,228
Accrued expenses ............................................. 2,544,606 4,583,659
Income taxes payable ......................................... 1,481,845 --
Dividends payable ............................................ -- 48,046,752
Current portion of long-term debt ............................ 4,200,000 4,200,000
------------- -------------
Total current liabilities .................................. 8,710,418 57,455,639
------------- -------------
Long-term debt, less current portion ............................ 76,582,554 80,807,875
------------- -------------
Commitments ..................................................... -- --
Stockholders' equity
Common stock ................................................. 51,344 51,364
Additional paid in capital ................................... 15,928,519 15,928,539
Accumulated deficit .......................................... (44,677,278) (51,017,225)
------------- -------------
Total stockholders' equity (deficit) ....................... (28,697,415) (35,037,322)
------------- -------------
Total liabilities and stockholders' equity (deficit) ..... $ 56,595,557 $ 103,226,192
============= =============
|
See accompanying notes to financial statements.
Page 10 of 30
BANKRUPTCY MANAGEMENT SOLUTIONS, INC.
Statements of Operations
Years Ended December 31, 2005 and 2004
- --------------------------------------------------------------------------------
2005 2004
------------ ------------
Revenues .................................... $ 38,307,001 $ 19,720,358
Cost of sales ............................... 3,602,308 3,368,439
------------ ------------
Gross profit ................................ 34,704,693 16,351,919
------------ ------------
Other costs and expenses
Selling, general and administrative ...... 6,517,222 5,343,922
Loss on early extinguishment of debt ..... -- 4,040,062
Depreciation and amortization ............ 7,341,432 6,881,844
------------ ------------
Total costs and expenses ............... 13,858,654 16,265,828
------------ ------------
Income from operations ...................... 20,846,039 86,091
Interest expense, net ....................... 10,378,190 5,033,443
------------ ------------
Income (loss) before income taxes ........... 10,467,849 (4,947,352)
Provision (benefit) for income taxes ........ 4,127,902 (1,908,250)
------------ ------------
Net income (loss) ...................... $ 6,339,947 $ (3,039,102)
============ ============
See accompanying notes to financial statements.
Page 11 of 30
BANKRUPTCY MANAGEMENT SOLUTIONS, INC.
Statements of Stockholders' Equity (Deficit)
Years Ended December 31, 2005 and 2004
- --------------------------------------------------------------------------------
Class A Class B Class C Retained Note
Common Stock Common Stock Stock Repurchased Additional Earnings Receivable
-------------------- ------------------------- -------------------- Paid-in (Accumu- From Stock-
Shares Amount Shares Amount Shares Amount Capital lated Deficit) holders Total
---------- --------- ------------ ----------- ----------- -------- ------------ ------------- ------------ -----------
Balance at
December 31, 2003. 2,000 $ 20 4,393,536 $ 43,935 -- $ -- $ 15,871,132 $ 68,629 $ (569,687)$ 15,414,029
Sale of common stock. 82 1 -- -- -- -- 49,999 -- -- 50,000
Sale of common stock. -- -- 741,775 7,418 -- -- 7,418 -- -- 14,836
Repurchase of
common stock ..... -- -- (1,000) (10) -- -- (10) -- -- (20)
Payment of note
receivable ....... -- -- -- -- -- -- -- -- 569,687 569,687
Exchange of
common stock ..... -- -- (4,221,012) (42,210) 4,221,012 42,210 -- -- -- --
Net loss ............ -- -- -- -- -- -- -- (3,039,102) -- (3,039,102)
Dividends declared .. -- -- -- -- -- -- -- (48,046,752) -- (48,046,752)
---------- --------- ------------ ----------- ----------- --------- ------------ ------------ ------------ ------------
Balance at
December 31, 2004. 2,082 21 913,299 9,133 4,221,012 42,210 15,928,539 (51,017,225) -- (35,037,322)
Repurchase of
common stock ..... -- -- (2,000) (20) -- -- (20) -- -- (40)
Net income .......... -- -- -- -- -- -- -- 6,339,947 -- 6,339,947
---------- --------- ------------ ----------- ----------- --------- ------------ ------------ ------------ ------------
Balance at
December 31, 2005. 2,082 $ 21 911,299 $ 9,113 4,221,012 $ 42,210 $ 15,928,519 $(44,677,278) $ -- $(28,697,415)
========== ========= ============ =========== =========== ========= ============ ============ ============ ============
|
See accompanying notes to financial statements.
Page 12 of 30
BANKRUPTCY MANAGEMENT SOLUTIONS, INC.
Statements of Cash Flows
December 31, 2005 and 2004
- --------------------------------------------------------------------------------
2005 2004
------------ ------------
Cash flows from operating activities
Net profit (loss) ............................................................ $ 6,339,947 $ (3,039,102)
Adjustments to reconcile net profit (loss) to net cash provided by
operating activities
Depreciation and amortization ............................................. 8,329,707 7,922,988
Deferred taxes ............................................................ (476,955) (1,914,664)
Increase in debt due to payment in kind interest and original issue
discount accretion ....................................................... 974,679 316,319
Loss on disposal of property and equipment ................................ 11,680 --
Write-off of deferred financing costs and unamortized discount related
to retired debt .......................................................... -- 3,794,095
Changes in operating assets and liabilities
Accounts receivable ..................................................... (2,120,964) (967,791)
Income tax receivable ................................................... 10,298 (10,298)
Prepaid expenses and other current assets ............................... (1,113) (280,583)
Accounts payable ........................................................ (141,261) 400,642
Interest payable ........................................................ 697,897 (80,715)
Accrued expenses and other current liabilities .......................... (2,736,950) 3,452,149
Income taxes payable .................................................... 1,481,845 --
------------ ------------
Net cash provided by operating activities ............................. 12,368,810 9,593,040
------------ ------------
Cash flows from investing activities
Purchases of property and equipment .......................................... (1,399,767) (1,457,074)
Proceeds from disposal of property and equipment ............................. 7,908 --
------------ ------------
Net cash used in investing activities ................................. (1,391,859) (1,457,074)
------------ ------------
Cash flows from financing activities
Payment of dividends ......................................................... (48,046,752) --
Repayment of debt ............................................................ (5,200,000) (1,000,000)
Payment in full of contingent note payable to seller ......................... -- (2,000,000)
Early extinguishment of debt ................................................. -- (31,951,857)
Issuance of debt ............................................................. -- 85,000,000
Increase in deferred financing costs due to new debt ......................... -- (4,913,575)
Issuance of common stock ..................................................... -- 64,836
Purchase of common stock ..................................................... (40) (20)
Payment of subscribed stock receivable ....................................... -- 569,687
------------ ------------
Net cash (used in) provided by financing activities ................... (53,246,792) 45,769,071
------------ ------------
Increase in cash and cash equivalents ................................. (42,269,841) 53,905,037
Cash and cash equivalents
Beginning of year ............................................................ 54,946,283 1,041,246
------------ ------------
End of year .................................................................. $ 12,676,442 $ 54,946,283
============ ============
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest .................................................................. $ 7,773,213 $ 3,723,744
Income taxes .............................................................. 3,119,424 16,660
Noncash financing activity
Dividends declared ........................................................... -- $ 48,046,752
|
See accompanying notes to financial statements.
Page 13 of 30
BANKRUPTCY MANAGEMENT SOLUTIONS, INC.
Notes to Financial Statements
December 31, 2005 and 2004
1. Organization and Summary of Significant Accounting Policies
Description of Business
Bankruptcy Management Solutions, Inc. (the "Company") operated as a
division of a bank from 1984 to 2003. In December 2003 Lincolnshire
Equity Fund II, L.P. joined with the management of Bankruptcy
Management Solutions, Inc. (the "Company") to acquire the business from
JP Morgan Chase for approximately $45 million.
The Company provides technology-based case management solutions to
trustees, law firms, and debtor companies that administer cases in the
federal bankruptcy system.
Basis of Presentation
The accompanying financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of
America.
Cash and Cash Equivalents
The Company classifies cash on hand, deposits in banks, commercial
paper, money market accounts and any other highly liquid investments
with an original maturity of three months or less as cash and cash
equivalents.
Intangible Assets
Intangible assets consist of goodwill, intellectual property, customer
contracts and service agreements. Intellectual property, customer
contracts and service agreements are being amortized on a straight-line
basis over their estimated economic benefit period, ranging from 5 to
15 years.
The Company reviews its goodwill on an annual basis in December and
between annual tests if events or changes in circumstances have
indicated that the assets might be impaired in accordance with the
provisions of Statements of Financial Accounting Standards ("SFAS") No.
142, Goodwill and Intangible Assets.
The Company reviews its other intangibles for impairment whenever
events or changes in circumstances have indicated that the carrying
amount of its assets might not be recoverable.
Revenue Recognition
Revenues are derived through the delivery of bankruptcy management
services to bankruptcy trustees, law firms, and debtor companies. For
its customers, the Company provides hardware, software related
products, and back-office support at no direct charge. For these
services the customers maintain bankruptcy estate deposit accounts at
JP Morgan Chase through a contractual relationship with the Company.
The Company then collects monthly fees based on custodial deposits
maintained by its customers at JP Morgan Chase through a service
agreement with JP Morgan Chase. Revenues are only recognized after the
software related product is installed and deposits are transferred, and
the revenue is earned and estimatable.
Income Taxes
The Company accounts for income taxes using the asset and liability
method to compute the differences between the tax basis of asset and
liabilities and the related financial amounts. Deferred income taxes
are recorded under the asset and liability method of accounting for
income taxes, which requires the recognition of deferred income taxes,
based upon the tax consequences of "temporary differences" by applying
enacted statutory tax rates applicable to future years to differences
between the financial statements carrying amounts and the tax basis of
existing assets and liabilities. Valuation allowances are established,
when necessary, to reduce deferred tax assets that are not expected to
be realized.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 reported
amounts of revenues and expenses during the reporting years. Actual
results could differ from those estimates.
Recently Issued Accounting Standards
In December 2004, the FASB issued SFAS No. 123 (revised 2004)
Share-Based Payment or FAS 123R. FAS 123R revises SFAS No. 123
Accounting for Stock-Based Compensation, and supersedes APB No. 25
Accounting for Stock Issued to Employees and related interpretations
and SFAS No. 148 Accounting for Stock-Based Compensation-Transition and
Disclosure. FAS 123R requires compensation cost relating to all
share-based payments to employees to be recognized in the financial
statements based on their fair values in the first interim or annual
Page 14 of 30
reporting period beginning after June 15, 2005. The pro forma
disclosures previously permitted under FAS 123 will no longer be an
alternative to financial statement recognition. As the Company has not
granted any stock options, the Company does not expect adoption of this
statement to have an impact on its financial statements.
In December 2004, the FASB issued SFAS No. 153 Exchanges of Nonmonetary
Assets - an amendment of Accounting Principles Board ("APB") Opinion
No. 29 Accounting for Nonmonetary Transactions. The guidance in APB 29
is based on the principle that exchanges of nonmonetary assets should
be measured based on the fair value of the assets exchanged. The
guidance in that Opinion, however, included certain exceptions to that
principle. SFAS 153 amends APB 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with
a general exception for exchanges of nonmonetary assets that do not
have commercial substance. A nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. The provisions of SFAS 153
are applicable for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. The adoption of this statement
is not expected to have a material impact on the Company's financial
statements.
In May 2005, the FASB issued Statement of Financial Accounting
Standards No. 154, Accounting Changes and Error Corrections--A
Replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS 154
requires retrospective application to prior periods' financial
statements for changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the
cumulative effect of the change. SFAS 154 also requires that
retrospective application of a change in accounting principle be
limited to the direct effects of the change. Indirect effects of a
change in accounting principle, such as a change in nondiscretionary
profit-sharing payments resulting from an accounting change, should be
recognized in the period of the accounting change. SFAS 154 also
requires that a change in depreciation, amortization, or depletion
method for long-lived nonfinancial assets be accounted for as a change
in accounting estimate affected by a change in accounting principle.
SFAS 154 is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. Early adoption
is permitted for accounting changes and corrections of errors made in
fiscal years beginning after the date this Statement is issued.
Management does not believe the adoption of SFAS No. 154 will have a
material impact on the Company's financial position and results of
operations.
Reclassifications
Certain amounts in the prior year have been reclassified to conform to
the current year presentation.
2. Property and Equipment
Property and equipment consist of the followings as of December 31,
2005 and 2004:
2005 2004 Estimated Useful Life
2005 2004 Estimated Useful Life
------------ ------------ -------------------------------------------
Leasehold improvements........................ $ 51,758 $ 10,000 Shorter of 10 years or remainder of lease
Office equipment.............................. 72,321 25,000 5 years
Computer equipment and software............... 5,705,111 4,444,795 3 years
------------ ------------
5,829,190 4,479,795
Accumulated depreciation and amortization..... (3,024,832) (1,318,868)
------------ ------------
$ 2,804,358 $ 3,160,927
============ ============
|
Depreciation expense was $1,736,748 and $1,277,161 for the years ended
December 31, 2005 and 2004, respectively.
3. Intangible Assets
Intangible assets consisted of the following as of December 31, 2005
and 2004:
Estimated Useful Life 2005
----------------------- ---------------------------------------------------
Accumulated
Cost Amortization Net
-------------- --------------- ---------------
Intellectual property............... 5 years $ 21,059,000 $ (8,599,092) $ 12,459,908
Customer lists...................... 15 years 17,522,000 (2,384,938) 15,137,062
Service agreements.................. 8 years 1,798,000 (458,865) 1,339,135
-------------- --------------- ---------------
$ 40,379,000 $ (11,442,895) $ 28,936,105
============== =============== ===============
|
Page 15 of 30
Estimated Useful Life 2004
----------------------- ---------------------------------------------------
Accumulated
Cost Amortization Net
-------------- --------------- ---------------
Intellectual property................ 5 years $ 21,059,000 $ (4,387,292) $ 16,671,708
Customer lists....................... 15 years 17,522,000 (1,216,805) 16,305,195
Service agreements................... 8 years 1,798,000 (234,115) 1,563,885
-------------- --------------- ---------------
$ 40,379,000 $ (5,838,212) $ 34,540,788
============== =============== ===============
|
Amortization expense for the years ended December 31, 2005 and 2004 was
$5,604,683, and for the years ending December 31, is as follows:
2006................................................... $ 5,604,683
2007................................................... 5,604,683
2008................................................... 5,429,191
2009................................................... 1,392,883
2010................................................... 1,392,883
4. Line of Credit and Long-Term Obligations
On December 29, 2004 the Company went through a re-capitalization where
it retired its existing debt of $31,657,331 (net of discount of
$294,526) and assumed new debt of $85,000,000. The Company incurred a
$4,040,062 loss on the early extinguishment of the debt as a result of
the immediate write off of deferred financing costs of $3,499,569
related to the acquisition of the debt, along with prepayment penalties
related to the sub-debt of $245,967 and unamortized discount of
$294,526.
As of December 31, 2005, the Company's credit facility consists of
$52,800,000 of senior term loans, with amortizing principal quarterly
payments of $1,050,000, which began on March 1, 2005, and $27,000,000
in subordinated term loans. Additionally, the Company has available a
$2,500,000 revolving loan. The senior term loans and revolver mature
beginning on December 29, 2009, while the subordinated term loans
mature on December 29, 2012. Interest on the credit facility is
generally based on a spread over the LIBOR rates. The subordinated term
loans also include payment in kind interest at the rate of 3% and 4%.
The credit facility is guaranteed by BMS, LLC and contains financial
covenants related to EBITDA, total debt and interest charges, limits on
capital expenditures, and is collateralized by all assets of the
Company. Principal payments on the senior term loans and the
subordinated loans outstanding at December 31, 2005 are $4,200,000 per
year for the years ending December 31, 2006 through 2008; $3,200,000
for the year ending December 31, 2009; $37,000,000 for the year ending
December 31, 2010; and $27,000,000 thereafter.
As of December 31, 2005, the accrued interest on the long-term debt was
$762,823; no borrowings were outstanding on the revolving loan; and the
Company was in compliance with all covenants.
5. Commitments and Contingencies
The Company has noncancelable operating leases for office space
expiring in April 2010. Additionally, the Company has noncancelable
operating leases for office equipment expiring through July 2009.
Future minimum lease payments during the years ended December 31 are as
follows:
Fiscal year
2006..................................................... $ 275,842
2007..................................................... 280,680
2008..................................................... 288,227
2009..................................................... 294,484
2010..................................................... 98,496
------------
$ 1,237,729
============
Total operating lease expense for the year ended December 31, 2005 was
$233,369.
Page 16 of 30
6. Stockholders' Equity
On December 28, 2004 the stockholders approved an amendment to the
Company's Certificate of Incorporation authorizing 11,020,000 shares of
which (i) 20,000 shares shall be Class A Common Stock, par value $0.01,
(ii) 5,500,000 shares shall be Class B Common Stock, par value $0.01,
and (iii) 5,500,000 shares shall be Class C Common Stock, par value
$0.01. In the event of a liquidation, dissolution or merger of the
company the holders of the Class A Common Stock are entitled to a
preference payment in cash of their original purchase price plus a
cumulative return at a rate of 30% per annum. Further, upon written
notice a holder of Class B Common Stock may convert all or any such
shares in to Class C Common Stock, which resulted in 4,221,012 shares
of Class B common stock converted to Class C common stock.
On December 28, 2004 the Company declared dividends of:
o $9,672.46 per share on all outstanding shares of Class A Common
Stock payable in cash on January 3, 2005 to all stockholders of
record on the close of business on June 15, 2005
o $5.24 per share on all outstanding shares of Class B Common Stock
payable in cash on August 1, 2005 to all stockholders of record
on the close of business on June 15, 2005
o $5.24 per share on all outstanding shares of Class C Common Stock
payable in cash on January 3, 2005 to all stockholders of record
on the close of business on December 31, 2004
o $993,778 to American Capital Financial Services in respect of
warrants if they had been exercised.
7. Employee Benefit Plans
The Company has a defined contribution 401(k) plan covering
substantially all employees. The Company matches 100% of the first 5%
of employee contributions. Contributions were $555,087 and $471,322 for
the years ended December 31, 2005 and 2004, respectively.
8. Income Taxes
At December 31, 2004, the Company had net operating loss carryforwards
for federal income and state franchise tax purposes of approximately
$1,363,000 and $1,705,000, respectively. These carryforwards were
utilized in full in 2005.
Deferred income taxes are recorded under the asset and liability method
of accounting for income taxes, which requires the recognition of
deferred income taxes, based upon the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statements carrying
amounts and the tax basis of existing assets and liabilities.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which the temporary
differences become deductible. Management considers the projected
future taxable income and tax planning strategies in making this
assessment. Based upon the level of historical profitability and
projections for future taxable income, management believes it is more
likely than not the Company will realize the benefits of the deferred
tax assets. Accordingly, no deferred tax asset valuation allowance was
recorded at December 31, 2005.
The components of the income tax provision for the years ended December
31 are as follows:
2005 2004
------------ ------------
Current
Federal ............................. $ 3,689,020 $ 6,414
State ............................... 915,837 --
------------ ------------
4,604,857 6,414
------------ ------------
Deferred
Federal ............................. (376,100) (1,567,867)
State ............................... (100,855) (346,797)
------------ ------------
(476,955) (1,914,664)
------------ ------------
$ 4,127,902 $ (1,908,250)
============ ============
Page 17 of 30
Actual income tax provision differs from the income tax provision
computed by applying the U.S. federal statutory tax rate of 34% to
income before provision for income taxes for operations for the years
ended December 31, 2005 and 2004 as follows:
2005 2004
------------ ------------
Provision at the federal statutory rate ........ $ 3,559,069 $ (1,678,938)
State income taxes, net of federal benefit ..... 537,888 (224,653)
Meals and entertainment ........................ 19,061 17,244
Reversal of payable true up .................... -- (39,553)
True up ........................................ 11,884 17,650
------------ ------------
$ 4,127,902 $ (1,908,250)
============ ============
|
The components of the Company's deferred tax assets (liabilities) at
December 31, 2005 and 2004 are as follows:
2005 2004
------------ ------------
Current deferred tax asset
State taxes .................................... $ 116,005 $ --
------------ ------------
Noncurrent deferred tax asset
Depreciation and amortization .................. 2,236,010 1,221,149
State taxes .................................... -- 68,138
Net operating loss carryforward ................ -- 585,773
------------ ------------
Noncurrent deferred tax asset ............... 2,236,010 1,875,060
------------ ------------
$ 2,352,015 $ 1,875,060
============ ============
|
9. Related Party Transactions
The Company has a management agreement with Lincolnshire Management
Inc., a majority stockholder in the Company. The fees under this
agreement totaled $792,500 and $440,950 for the years ended December
31, 2005 and 2004, respectively. Amounts owed to Lincolnshire
Management Inc. are $46,720 and $10,500 as of December 31, 2005 and
2004, respectively.
The credit and note agreements are with American Capital Financial
Services, Inc. who own approximately 5.5% of the outstanding shares
along with warrants to purchase an additional 2% as of December 31,
2005.
10. Subsequent Events
As of January 1, 2006, the Company incorporated a subsidiary, which is
100% owned by Bankruptcy Management Solutions Inc. The subsidiary has
not commenced operations.
On February 8, 2006, the Company declared dividends of:
o $1.429 per share on all outstanding shares of Class B Common
Stock payable in cash on February 10, 2006 to all stockholders of
record on the close of business on February 9, 2006
o $1.429 per share on all outstanding shares of Class B Common
Stock payable in cash on February 10, 2006 to all stockholders of
record on the close of business on February 9, 2006
o $114,523 to American Capital Financial Services in respect of
warrants if they had been exercised.
Page 18 of 30
EXHIBIT 99.2
BANKRUPTCY MANAGEMENT
SOLUTIONS, INC.
Financial Statements
For the Six Months Ended June 30, 2006 and June 30, 2005
(Unaudited)
Page 19 of 30
Bankruptcy Management Solutions, Inc.
Balance Sheet
At June 30, 2006 (Unaudited)
Assets
Current assets
Cash and cash equivalents .................................. $ 10,705,477
Accounts receivable, trade ................................. 3,689,989
Prepaid expenses and other current assets .................. 330,014
Deferred tax assets ........................................ 116,005
------------
Total current assets ..................................... 14,841,485
------------
Property, plant and equipment, net ............................ 2,307,119
------------
Other assets
Goodwill and other intangible assets ....................... 27,726,387
Deferred financing costs ................................... 3,467,268
------------
Total other assets ....................................... 31,193,655
------------
Deferred tax assets ........................................... 2,236,010
------------
Total assets ............................................... $ 50,578,269
============
Liabilities and stockholders' equity (deficit)
Current liabilities
Accounts payable ........................................... $ 529,442
Interest payable ........................................... 772,148
Accrued expenses ........................................... 1,204,883
Income taxes payable ....................................... 1,199,898
Current portion of long-term debt .......................... 4,200,000
------------
Total current liabilities ................................ 7,906,371
------------
Total long-term debt, less current portion .................... 74,979,031
------------
Commitments ..................................................... --
Shareholders' equity (deficit)
Common stock ............................................... 51,323
Additional paid in capital ................................. 15,926,409
Accumulated deficit ........................................ (48,284,865)
------------
Total shareholders' equity (deficit) ..................... (32,307,133)
------------
Total liabilities and stockholders' equity (deficit) ....... $ 50,578,269
============
See Accompanying Notes to Financial Statements
Page 20 of 30
Bankruptcy Management Solutions, Inc.
Statements of Operations
For the Six Months Ended June 30 (Unaudited)
2006 2005
------------ ------------
Revenues ......................................... $ 21,548,953 $ 16,366,488
Cost of sales .................................... 1,916,124 1,822,194
------------ ------------
Gross profit .................................. 19,632,829 14,544,294
------------ ------------
Other costs and expenses
Selling, general and administrative ........... 3,967,771 3,064,227
Depreciation and amortization ................. 3,811,510 3,605,276
------------ ------------
Total costs and expenses .................... 7,779,281 6,669,503
------------ ------------
Income from operations ........................... 11,853,548 7,874,791
Interest expense, net ............................ 5,401,272 5,058,266
------------ ------------
Income before income taxes ....................... 6,452,276 2,816,525
Provision for income taxes ....................... 2,580,911 1,126,461
------------ ------------
Net Income ....................................... $ 3,871,365 $ 1,690,064
============ ============
See Accompanying Notes to Financial Statements
Page 21 of 30
Bankruptcy Management Solutions, Inc.
Statements of Cash Flows
For the Six Months Ended June 30 (Unaudited)
2006 2005
------------ ------------
Cash flow from operating activities
Net income ................................................................ $ 3,871,365 $ 1,690,064
Adjustments to reconcile net profit to net cash provided
by operating activities
Depreciation and amortization ........................................ 4,269,541 4,108,798
Increase in debt due to payment in kind interest and original
issue discount accretion ........................................... 496,478 479,032
Change in operating assets and liabilities
Accounts receivable ................................................ 211,192 (1,352,820)
Prepaid expenses and other current assets .......................... 77,519 76,827
Accounts payable ................................................... 45,475 (29,555)
Interest payable ................................................... 9,325 625,231
Accrued expenses and other current liabilities ..................... (576,907) (3,563,951)
Income taxes payable ............................................... (281,947) (41,015)
------------ ------------
Net cash provided by operating activities ........................ 8,122,041 1,992,611
------------ ------------
Cash flows from investing activities
Purchases of property and equipment .................................... (511,929) (786,124)
------------ ------------
Net cash used in investing activities ............................ (511,929) (786,124)
------------ ------------
Cash flows from financing activities
Payment of dividends ................................................... (7,478,946) (43,262,954)
Repayment of debt ...................................................... (2,100,000) (3,100,000)
Purchase of common stock ............................................... (2,131) (21)
------------ ------------
Net cash used in financing activities ............................ (9,581,077) (46,362,975)
------------ ------------
Net increase (decrease) in cash and cash equivalents ............. (1,970,965) (45,156,488)
Cash and cash equivalents
Beginning of period ....................................................... 12,676,442 54,946,283
------------ ------------
End of period ............................................................. $ 10,705,477 $ 9,789,795
============ ============
See Accompanying Notes to Financial Statements
Page 22 of 30
Bankruptcy Management Solutions, Inc.
Notes to Financial Statements
As of June 30, 2006 and
For the Six Months Ended June 30, 2006 and 2005 (Unaudited)
1. Organization and Basis of Presentation
Bankruptcy Management Solutions, Inc. (the "Company") operated as a
division of a bank from 1984 to 2003. In December 2003 Lincolnshire
Equity Fund II, L.P. joined with the management of the Company to
acquire the business from JP Morgan Chase for approximately $45
million.
The Company provides technology-based case management solutions to
trustees, law firms, and debtor companies that administer cases in the
federal bankruptcy system.
The accompanying financial statements as of June 30, 2006 and for the
six months ended June 30, 2006 and 2005 reflect the financial position
and operations of the Company.
The accompanying unaudited financial statements have been prepared in
conformity with the instructions of the Securities and Exchange
Commission ("SEC") to Form 10-Q and SEC Regulation S-X, Article 10,
Rule 10-01 for interim financial statements. Accordingly, they do not
include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for
complete financial statements. In our opinion, the accompanying
unaudited financial statements contain all adjustments, consisting only
of normal recurring accruals, necessary for a fair statement. The
results of operations and other data for the six months ended June 30,
2006 are not necessarily indicative of the results that may be expected
for any other interim period or for the entire year ending December 31,
2006. The unaudited financial statements presented herein should be
read in conjunction with the Company's audited financial statements and
related notes thereto included elsewhere in Item 9.01 of this Form
8-K/A.
2. Goodwill and Other Intangible Assets
Goodwill and other intangible assets consisted of the following as of
June 30, 2006:
Estimated Useful Life 2005
--------------------- ---------------------------------------------------
Accumulated
Cost Amortization Net
-------------- --------------- ---------------
Goodwill............................ N/A $ 1,592,624 $ -- $ 1,592,624
Intellectual property............... 5 years 21,059,000 (10,704,992) 10,354,008
Customer lists...................... 15 years 17,522,000 (2,969,005) 14,552,995
Service agreements.................. 8 years 1,798,000 (571,240) 1,226,760
-------------- --------------- ---------------
$ 41,971,624 $ (14,245,237) $ 27,726,387
============== =============== ===============
3. Subsequent Event
On May 23, 2006, the Company and its stockholders and warrant holder
entered into a stock purchase agreement with BMS Holdings, Inc. under
which the stockholders and warrant holder agreed to sell their
outstanding shares and cancel the warrant in exchange for $384,500,000,
subject to certain adjustments.
The transaction closed on July 31, 2006.
Page 23 of 30
EXHIBIT 99.3
OCWEN FINANCIAL CORPORATION
AND SUBSIDIARIES
Unaudited Pro Forma Consolidated Financial Statements
As of and for the Six Months Ended June 30, 2006
And for the Year Ended December 31, 2005
Page 25 of 30
OCWEN FINANCIAL CORPORATION
AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
On July 31, 2006, BMS Intermediate, Inc., an entity formed by Ocwen and
Charlesbank, completed the acquisition of all of the issued and outstanding
shares of BMS from its stockholders and warrant holder.
The following unaudited pro forma balance sheet and statements of operations
(the "pro forma financial statements") give effect to the acquisition as if it
had occurred on earlier dates using the purchase method of accounting as
required by Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 141, "Business Combinations" ("SFAS No. 141"). Under
this method of accounting, the purchase price is allocated to the fair values of
assets acquired and liabilities assumed. The allocation of purchase price
requires extensive use of accounting estimates and judgments, including but not
limited to estimating future cash flows and developing appropriate discount
rates. In order to complete this estimation process, Ocwen and Charlesbank have
engaged an independent third-party valuation firm to assist in determining the
fair values of identifiable intangible assets and certain tangible assets, and
have received preliminary information from them. We believe that the fair values
assigned to the assets acquired and liabilities assumed, as reflected in the
pro-forma financial statements, are based on reasonable assumptions. The
purchase price and fair value estimates for the purchase price allocation will
be refined as additional information becomes available.
We have determined that we will account for Ocwen's 46% investment in BMS as an
investment in an unconsolidated entity using the equity method of accounting. As
a result, the assets and liabilities of BMS will not be reflected in the
unaudited pro forma financial statements. The effect of the acquisition will be
reflected as an investment in unconsolidated entities and equity in earnings of
unconsolidated entities, which will include the pro forma effect of the
acquisition and purchase accounting adjustments on the historical financial
statements of BMS.
The unaudited pro forma financial statements are provided for informational
purposes only. The unaudited pro forma financial statements are not necessarily
and should not be assumed to be an indication of the results that would have
been achieved had the transaction been completed as of the dates indicated or
that may be achieved in the future. Furthermore, no effect has been given in the
unaudited pro forma statements of operations for synergistic benefits that may
be realized through the acquisition of BMS. The unaudited pro forma financial
statements should be read in conjunction with the respective historical
financial statements and the notes thereto for Ocwen that are filed on Form 10-K
and Form 10-Q with the Securities and Exchange Commission and the historical
statements of operations of BMS that are included elsewhere in Item 9.01 of this
Form 8-K/A.
Page 25 of 30
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2006
(Dollars in thousands, except share data)
Pro Forma
Historical Adjustments Pro Forma
------------ ------------ ------------
Assets
Cash .................................................................. $ 193,129 $ (45,435)(3) $ 147,694
Trading securities, at fair value
Investment grade .................................................. 202,444 -- 202,444
Subordinates and residuals ........................................ 57,421 -- 57,421
Loans held for resale, at lower of cost or market value ............... 114,485 -- 114,485
Advances .............................................................. 263,963 -- 263,963
Match funded advances ................................................. 351,593 -- 351,593
Mortgage servicing rights ............................................. 151,501 -- 151,501
Receivables ........................................................... 60,738 -- 60,738
Deferred tax assets, net .............................................. 171,300 -- 171,300
Premises and equipment, net ........................................... 37,446 -- 37,446
Other assets .......................................................... 55,655 45,435 (3) 101,090
------------ ------------ ------------
Total assets ...................................................... $ 1,659,675 $ -- $ 1,659,675
============ ============ ============
Liabilities and Stockholders' Equity
Liabilities
Match funded liabilities .......................................... $ 313,963 $ -- $ 313,963
Servicer liabilities .............................................. 395,936 -- 395,936
Lines of credit and other secured borrowings ...................... 187,835 -- 187,835
Debt securities ................................................... 150,329 -- 150,329
Other liabilities ................................................. 93,283 -- 93,283
------------ ------------ ------------
Total liabilities .............................................. 1,141,346 -- 1,141,346
------------ ------------ ------------
Minority interest in subsidiaries ..................................... 1,892 -- 1,892
Stockholders' Equity
Common stock, $.01 par value; 200,000,000 shares
authorized; 62,429,907shares issued and outstanding at
June 30, 2006 .................................................. 624 -- 624
Additional paid-in capital ........................................ 176,320 -- 176,320
Retained earnings ................................................. 338,817 -- 338,817
Accumulated other comprehensive income (loss), net of taxes ... 676 -- 676
------------ ------------ ------------
Total stockholders' equity ........................................ 516,437 -- 516,437
------------ ------------ ------------
Total liabilities and stockholders' equity ..................... $ 1,659,675 $ -- $ 1,659,675
============ ============ ============
See Accompanying Notes to Unaudited Pro Forma Consolidated Financial Statements
Page 26 of 30
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2006
(Dollars in thousands, except share data)
Pro Forma
Historical Adjustments Pro Forma
------------ ------------ ------------
Revenue
Servicing and subservicing fees ............................ $ 162,857 $ -- $ 162,857
Process management fees .................................... 38,149 -- 38,149
Other revenues ............................................. 6,580 -- 6,580
------------ ------------ ------------
Total revenue .......................................... 207,586 -- 207,586
------------ ------------ ------------
Operating expenses
Compensation and benefits .................................. 47,707 -- 47,707
Amortization of servicing rights ........................... 53,952 -- 53,952
Servicing and origination .................................. 25,904 -- 25,904
Technology and communications .............................. 12,673 -- 12,673
Professional services ...................................... 15,399 -- 15,399
Occupancy and equipment .................................... 9,799 -- 9,799
Other operating expenses ................................... 6,294 -- 6,294
------------ ------------ ------------
Total operating expenses ............................... 171,728 -- 171,728
------------ ------------ ------------
Other income (expense)
Interest income ............................................ 24,411 -- 24,411
Interest expense ........................................... (27,316) -- (27,316)
Gain (loss) on trading securities .......................... 1,327 -- 1,327
Loss on loans held for resale, net ......................... (1,221) -- (1,221)
Other, net ................................................. 5,793 -- 5,793
------------ ------------ ------------
Other income (expense), net ............................ 2,994 -- 2,994
------------ ------------ ------------
Income before income taxes and equity in loss of
unconsolidated entity ...................................... 38,852 -- 38,852
Income tax benefit ............................................. (136,767) -- (136,767)
Equity in loss of unconsolidated entity......................... -- (2,362)(4) (2,362)
------------ ------------ ------------
Net income ................................................. $ 175,619 $ (2,362) $ 173,257
============ ============ ============
Earnings per share
Basic ....................................................... $ 2.79 $ (0.04) $ 2.75
Diluted ..................................................... $ 2.47 $ (0.04) $ 2.43
Weighted average common shares outstanding
Basic ........................................................ 63,033,454 -- 63,033,454
Diluted ...................................................... 71,876,666 -- 71,876,666
See Accompanying Notes to Unaudited Pro Forma Consolidated Financial Statements
Page 27 of 30
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2005
(Dollars in thousands, except share data)
Pro Forma
Historical Adjustments Pro Forma
------------ ------------ ------------
Revenue
Servicing and subservicing fees .................................. $ 293,569 $ -- $ 293,569
Process management fees .......................................... 71,961 -- 71,961
Other revenues ................................................... 9,846 -- 9,846
------------ ------------ ------------
Total revenue ................................................ 375,376 -- 375,376
------------ ------------ ------------
Operating expenses
Compensation and benefits ........................................ 94,625 -- 94,625
Amortization of servicing rights ................................. 96,692 -- 96,692
Servicing and origination ........................................ 17,676 -- 17,676
Technology and communications .................................... 30,375 -- 30,375
Professional services ............................................ 25,975 -- 25,975
Occupancy and equipment .......................................... 61,083 -- 61,083
Other operating expenses ......................................... 27,060 -- 27,060
------------ ------------ ------------
Total operating expenses ..................................... 353,486 -- 353,486
------------ ------------ ------------
Other income (expense)
Interest income .................................................. 25,238 -- 25,238
Interest expense ................................................. (37,261) -- (37,261)
Gain (loss) on trading securities ................................ 13 -- 13
Loss on loans held for resale, net ............................... 4,258 -- 4,258
Other, net ....................................................... 6,742 -- 6,742
------------ ------------ ------------
Other income (expense), net .................................. (1,010) -- (1,010)
------------ ------------ ------------
Income before income taxes and equity in loss of
unconsolidated entity ............................................ 20,880 -- 20,880
Income tax expense (benefit) ......................................... 5,815 -- 5,815
Equity in loss of unconsolidated entity .............................. -- (5,643)(4) (5,643)
------------ ------------ ------------
Net income ....................................................... $ 15,065 $ (5,643) $ 9,422
============ ============ ============
Earnings per share
Basic ............................................................. $ 0.24 $ (0.09) $ 0.15
Diluted ........................................................... $ 0.24 $ (0.09) $ 0.15
Weighted average common shares outstanding
Basic .............................................................. 62,912,768 -- 62,912,768
Diluted ............................................................ 63,885,439 -- 63,885,439
See Accompanying Notes to Unaudited Pro Forma Consolidated Financial Statements
Page 28 of 30
OCWEN FINANCIAL CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
The pro forma adjustments are based upon the following assumptions with regard
to the purchase of BMS
1. Purchase Price
Ocwen and Charlesbank each contributed cash of $45,435 as equity in the purchase
transaction. This amount is reflected as the initial investment in
unconsolidated entities reflected on the unaudited pro forma balance sheet as of
June 30, 2006. The assumed total purchase price of $310,678 consists of cash
payments of $300,521 (including Ocwen and Charlesbank contributions as well as
new debt financing), the conversion of management equity in BMS to equity in BMS
Holdings, Inc. in the amount of $7,400 (representing an 8% ownership interest),
estimated direct transactions costs of $1,150 and cash transferred to BMS of
$1,607. All of the adjustments related to the recording of this transaction have
been pushed down to the financial statements of BMS.
2. Allocation of Purchase Price
The allocation of the total purchase price is summarized as follows:
Tangible assets acquired .............................. $ 7,979
Other assets .......................................... 56,288
Intangible assets ..................................... 258,600
Goodwill .............................................. 223,022
------------
Total assets ....................................... 545,889
Less:
Liabilities assumed ................................ 134,838
Deferred tax liability ............................. 100,373
------------
Net assets acquired ................................ $ 310,678
============
The tangible assets, other assets and assumed liabilities of BMS have been
recorded at their estimated fair value. The intangible assets have been recorded
based upon preliminary information obtained from the independent appraisal firm
engaged to assist in valuing the assets under SFAS No. 141. The deferred tax
liability has been recorded to recognize the tax liability associated with the
excess of the fair values assigned for accounting purposes over the tax bases of
the assets acquired, excluding goodwill. This excess relates primarily to the
intangible assets acquired. The following intangible assets have been identified
and valued at their estimated fair value:
Customer list (estimated useful life 23 years) ........ $ 255,900
Software (estimated useful life 6 years) .............. 2,700
------------
Total intangible assets ............................ $ 258,600
============
The final purchase price allocation will be determined when the valuation
process is completed, and the fair values could differ from those presented
above.
3. Unaudited Pro Forma Balance Sheet
The unaudited pro forma balance sheet gives effect to the acquisition as if it
had occurred on June 30, 2006. No effect is given to the pro forma adjustment
for equity in earnings of BMS Holdings, Inc. that is reflected in the pro forma
income statements. The adjustments reflected in the unaudited pro forma balance
sheet represents the initial equity investment of Ocwen Financial Corporation in
BMS Holdings, Inc.
4. Unaudited Pro Forma Statements of Operations
The unaudited pro forma statements of operations give effect to the acquisition
as if it had occurred at the beginning of each of the periods presented. The
adjustments reflected in the unaudited pro forma statements of operations
reflect the recording of Ocwen's equity in the earnings of BMS Holdings, Inc for
the applicable periods and the related tax effect of those earnings at the
statutory rate.
Page 29 of 30
5. Pro Forma Adjustments
The pro forma adjustments to the Ocwen unaudited pro forma financial statements
are based on the following adjustments to the historical statements of
operations of BMS:
Six Months Year Ended
Ended June 30, December 31,
2006 2005
------------ ------------
Previously reported net income ................................................... $ 3,871 $ 6,340
------------ ------------
Plus:
Eliminate interest costs associated with pre-existing debt .................... 5,438 10,421
Eliminate amortization of pre-existing intangibles ............................ 2,802 5,605
Less:
Interest on new debt (a) ...................................................... (16,307) (33,133)
Amortization of debt issuance costs on new debt (a) ........................... (918) (1,834)
Amortization of customer list (b) ............................................. (5,563) (11,126)
Amortization of software (b) .................................................. (225) (450)
------------ ------------
Net adjustment before income taxes .......................................... (14,773) (30,517)
Income taxes at statutory rate ................................................ 5,776 11,932
------------ ------------
Net adjustment after income taxes ........................................... (8,997) (18,585)
------------ ------------
Pro forma net loss (c) .................................................... $ (5,126) $ (12,245)
============ ============
Ocwen Financial Corporation percentage interest in BMS Holdings, Inc. ............ 46.0839% 46.0839%
Ocwen Financial Corporation equity in pro forma loss of BMS Holdings, Inc. (c) $ (2,362) $ (5,643)
============ ============
(a) The new debt bears interest at variable rates over time. For purposes of
this pro forma adjustment, the rate of 9.51%, which represents the blended
rate in effect as of the date of acquisition, was utilized. Interest
expense also includes the amortization of debt issuance costs associated
with the new debt, using the effective interest rate method. All scheduled
principal repayments were considered in determining the pro forma
adjustments.
(b) Reflects amortization on a straight-line basis over the estimated useful
lives.
(c) Effective August 1, 2006 and as an integral component of the acquisition
transaction, the software services agreement with JPM Chase was amended to
increase the rate inherent in the net fees earned by BMS. In August 2006,
the first month in which the amended agreement was in effect, the rate
earned by BMS increased by 50.47% and 64.22% from the rates earned during
the six months ended June 20, 2006 and the year ended December 31, 2005,
respectively, presented above. Had the August rate been in effect during
the periods presented, the pro forma earnings of BMS would have been $1,498
for the six months ended June 30, 2006 and $2,738 for the year ended
December 31, 2005. Correspondingly, Ocwen's equity in the pro forma
earnings would have been $690 and $1,262 for the six months ended June 30,
2006 and the year ended December 31, 2005, respectively.
Page 30 of 30
