<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 5, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES
________________
ANNALY MORTGAGE MANAGEMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS GOVERNING INSTRUMENTS)
1500 HARBOR BLVD.
WEEHAWKEN, NJ 07087
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
________________
MICHAEL A. J. FARRELL
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
ANNALY MORTGAGE MANAGEMENT, INC.
1500 HARBOR BLVD.
WEEHAWKEN, NJ 07087
(NAME AND ADDRESS OF AGENT FOR SERVICE)
________________
COPIES TO:
NANCY H. CORBETT, ESQ. CATHERINE S. GALLAGHER, ESQ.
MORGAN, LEWIS & BOCKIUS LLP ANDREWS & KURTH L.L.P.
101 PARK AVENUE 1701 PENNSYLVANIA AVENUE, N.W.
NEW YORK, NY 10178 WASHINGTON, DC 20006
________________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
________________
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_] _____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]
________________
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===========================================================================================================================
Title of Securities Being Amount Being Proposed Maximum Proposed Maximum Amount of
Registered Registered Offering Price Per Share Aggregate Offering Price Registration Fee
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value 7,187,500 shares (1) $12.50 (2) 89,843,750 (2) $27,225.38
$.01 per share
===========================================================================================================================
</TABLE>
(1) Includes up to 937,500 shares of Common Stock which the Underwriters have
the option to purchase solely to cover over-allotments.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(a).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION
(THE "COMMISSION"), ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
<PAGE>
ANNALY MORTGAGE MANAGEMENT, INC.
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
FORM S-11 CAPTION IN PROSPECTUS
ITEM NUMBER AND CAPTION OR PAGE REFERENCE
------------------------ ----------------------
<S> <C>
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus............................. Forepart of Registration Statement; Outside
Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus...................................................... Inside Front Cover Page of Prospectus; Outside
Back Cover Page of Prospectus
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges.......................................... Outside Front Cover Page of Prospectus;
Prospectus Summary; Risk Factors; Business
Strategy; Selected Financial Data
4. Determination of Offering Price.................................... Outside Front Cover Page of Prospectus;
Underwriting
5. Dilution........................................................... Dilution
6. Selling Security Holders........................................... Principal and Selling Stockholders
7. Plan of Distribution............................................... Outside Front Cover Page of Prospectus;
Underwriting
8. Use of Proceeds.................................................... Prospectus Summary; Use of Proceeds
9. Selected Financial Data............................................ Selected Financial Data
10. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ Management's Discussion and Analysis of
Financial Condition and Results of Operations
11. General Information as to Registrant............................... Prospectus Summary; The Company; Business
Strategy
12. Policy with Respect to Certain Activities.......................... Business Strategy; Description of Capital Stock;
Available Information
13. Investment Policies of Registrant.................................. Prospectus Summary; Business Strategy
14. Description of Real Estate......................................... *
15. Operating Data..................................................... *
16. Tax Treatment of Registrant and Its Security Holders............... Prospectus Summary; Risk Factors; Certain Federal
Income Tax Considerations; ERISA Considerations
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
17. Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters..................... Risk Factors; Distribution Policy
18. Description of Registrant's Securities............................ Outside Front Cover Page of Prospectus;
Prospectus Summary; Certain Federal Income Tax
Considerations; ERISA Considerations;
Description of Capital Stock
19. Legal Proceedings................................................. Business Strategy
20. Security Ownership of Certain Beneficial Owners
and Management.................................................... Management; Principal and Selling Stockholders
21. Directors and Executive Officers.................................. Management
22. Executive Compensation............................................ Management
23. Certain Relationships and Related Transactions.................... Risk Factors; Management
24. Selection, Management and Custody of Registrant's
Investments....................................................... Risk Factors; Business Strategy
25. Policies with Respect to Certain Transactions..................... Risk Factors; Management
26. Limitations of Liability.......................................... Management; Description of Capital Stock
27. Financial Statements and Information.............................. Index to Financial Statements
28. Interests of Named Experts and Counsel............................ *
29. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities.................... *
30. Quantitative and Qualitative Disclosures
About Market Risk................................................. *
</TABLE>
- --------------
* Not Applicable
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
Subject To Completion, Dated August 5, 1997
PROSPECTUS
(Symbol)
___________ SHARES
ANNALY MORTGAGE MANAGEMENT, INC.
COMMON STOCK
___________________
Annaly Mortgage Management, Inc. (the "Company") specializes in
investing in mortgage-backed securities, including mortgage pass-through
certificates, collateralized mortgage obligations and other securities
representing interests in or obligations backed by pools of mortgage loans which
can be readily financed. The Company seeks to generate net income for
distribution to stockholders from the spread between the interest income on its
mortgage-backed securities and the costs of borrowing to finance its acquisition
of mortgage-backed securities. The Company will elect to be taxed as a real
estate investment trust (a "REIT") under the Internal Revenue Code of 1986, as
amended. The Company is self-advised and self-managed.
Of the __________ shares (the "Shares") of common stock, par value
$.01 per share, of the Company (the "Common Stock") being offered hereby to the
public, 6,250,000 Shares are being offered by the Company and _____ Shares are
being offered by certain stockholders of the Company (the "Selling
Stockholders"). The Company will not receive any of the proceeds from the sale
of Shares by the Selling Stockholders.
Prior to this offering of Common Stock, there has been no public
market for the Common Stock. It is currently estimated that the initial public
offering price for the Common Stock will be between $11.50 and $12.50 per Share.
See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price. Application is being made to
have the Common Stock quoted on the NASDAQ National Market under the symbol
"AMMO".
To ensure that the Company qualifies as a REIT, the Shares offered
hereby are subject to certain restrictions on ownership and transferability
which prohibit any person (either alone or with others as a group) from owning a
number of shares of Common Stock in excess of 9.8% of the outstanding shares of
the Company's capital stock. See "Description of Capital Stock -- Restrictions
on Ownership and Transfer".
___________________
SEE "RISK FACTORS" COMMENCING ON PAGE 11 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES
OFFERED HEREBY. THESE RISKS INCLUDE, AMONG OTHERS:
. Risks Associated with Differences Between Mortgage-Backed Security and
Borrowing Characteristics; Rate Adjustment Caps
. Prepayment Risks of Mortgage-Backed Securities
. Risks Associated with Leverage
. Risk of Decline in Market Value of Mortgage-Backed Securities; Margin Calls
and Defaults
. Risks of Increased Borrowing Costs and Failure to Refinance Outstanding
Borrowings
. Risk of Decrease in Net Interest Income Due to Interest Rate Fluctuations
. Risks Associated with Interest Rate Changes and Hedging
. Credit Risks Associated with Investment Strategy
. Ability to Acquire Mortgage-Backed Securities at Favorable Yields;
Competition and Supply
. Dependence on Key Personnel
. Limited Operating History of the Company
. Conflicts of Interest
. Risks of Losing Investment Company Act Exemption and REIT Status
___________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
==========================================================================
Price to Underwriting Proceeds to Proceeds to Selling
Public Discount(1) Company(2) Stockholders
- --------------------------------------------------------------------------
Per Share $ $ $ $
- --------------------------------------------------------------------------
Total $ (3) $ (3) $ (3) $
- --------------------------------------------------------------------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at
$__________.
(3) The Company has granted the several Underwriters a 30-day option to
purchase up to 937,500 additional Shares, to cover over-allotments. If
all of such Shares are purchased, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $_____, $_____ and
$_____, respectively. See "Underwriting."
The Shares are offered by the Underwriters, subject to receipt and
acceptance by the Underwriters, approval of certain legal matters by counsel
for the Underwriters and certain other conditions. The Underwriters reserve
the right to withdraw, cancel or modify such offer and to reject orders in
whole or in part. It is expected that delivery of the Shares will be made
against payment therefor at the offices of Friedman, Billings, Ramsey & Co.,
Inc., Arlington, Virginia, or in book-entry form through the facilities of
The Depository Trust Company on or about ____________, 1997.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
SUTRO & CO. INCORPORATED
TUCKER ANTHONY
INCORPORATED
THE DATE OF THIS PROSPECTUS IS ____________, 1997.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
STABILIZATION, THE PURCHASE OF COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS
AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
IN CONNECTION WITH THE OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
2
<PAGE>
TABLE OF CONTENTS
Page
----
PROSPECTUS SUMMARY.................................. 4
RISK FACTORS........................................11
Operations Risks.................................11
General Risks....................................17
Legal and Other Risks............................18
THE COMPANY.........................................23
USE OF PROCEEDS.....................................23
CAPITALIZATION......................................24
DISTRIBUTION POLICY.................................25
DILUTION............................................25
SELECTED FINANCIAL DATA.............................27
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND RESULTS
OF OPERATIONS....................................28
Overview.........................................28
Results of Operations............................28
Financial Condition..............................33
Asset/Liability Management and
Effect of Changes in Interest Rates............37
Inflation........................................37
BUSINESS STRATEGY...................................38
General..........................................38
Mortgage-Backed Securities.......................39
Capital Investment Policy........................46
Future Revisions in Policies and
Strategies.....................................52
Legal Proceedings................................52
MANAGEMENT..........................................52
Directors and Executive Officers.................52
Compensation of Directors and
Executive Officers.............................55
Employment Agreements............................56
Long-Term Stock Incentive Plan...................57
Involvement of Officers in
Certain Legal Proceedings......................58
Page
----
Certain Relationships; Conflicts of
Interest.......................................59
PRINCIPAL AND SELLING
STOCKHOLDERS.....................................60
CERTAIN FEDERAL INCOME
TAX CONSIDERATIONS...............................62
General..........................................62
Taxation of the Company..........................65
Taxable Subsidiaries.............................65
Taxation of Stockholders; Common Stock...........66
Taxation of Tax Exempt Entities..................67
State and Local Taxes............................67
Certain United States Federal Income
Tax Considerations Applicable to
Foreign Holders................................67
ERISA CONSIDERATIONS................................69
Employee Benefit Plans, Tax-
Qualified Retirement Plans and IRAs............69
Status of the Company under ERISA................70
DESCRIPTION OF CAPITAL STOCK........................71
General..........................................71
Common Stock.....................................71
Restrictions on Ownership and Transfer...........72
Indemnification..................................74
Limitation of Liability..........................74
Control Share Acquisitions.......................74
Transfer Agent and Registrar.....................75
COMMON STOCK AVAILABLE FOR
FUTURE SALE......................................75
Registration Rights..............................76
UNDERWRITING........................................76
LEGAL MATTERS.......................................78
EXPERTS.............................................78
ADDITIONAL INFORMATION..............................79
GLOSSARY............................................79
INDEX TO FINANCIAL STATEMENTS F-1
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing throughout the Prospectus. Unless otherwise indicated,
all information in this Prospectus assumes that (i) the offering price of the
Shares (the "Offering Price") is $12.00 per Share and (ii) the Underwriters'
over-allotment option is not exercised. Certain capitalized and other terms used
but not defined herein shall have the meanings set forth in the Glossary
beginning on page 79.
THE COMPANY
Annaly Mortgage Management, Inc., a Maryland corporation (the "Company"),
specializes in investing in mortgage-backed securities, including mortgage pass-
through certificates ("Pass-Through Certificates"), collateralized mortgage
obligations ("CMOs") and other securities representing interests in or
obligations backed by pools of mortgage loans (collectively, "Mortgage-Backed
Securities") which can be readily financed. The Company's principal business
objective is to generate net income for distribution to stockholders from the
spread between the interest income on its Mortgage-Backed Securities and the
costs of borrowing to finance its acquisition of Mortgage-Backed Securities.
The Company will elect to be taxed as a "real estate investment trust" ("REIT")
under the Internal Revenue Code of 1986, as amended (the "Code"). Therefore,
substantially all of its assets consist (and will consist) of Qualified REIT
Real Estate Assets (of the type described in Section 856(c)(6)(B) of the Code).
The Company is self-advised and self-managed.
The Company was organized on November 25, 1996 and commenced operations on
February 18, 1997 with its private placement (the "Private Placement") of
3,600,000 shares of Common Stock. The Company has financed its purchases of
Mortgage-Backed Securities with (i) net proceeds of approximately $33 million
from the Private Placement, (ii) proceeds of $878,000 from the July 31, 1997
sale of 87,800 shares of Common Stock to certain directors, officers and
employees of the Company (the "Direct Offering"), and (iii) borrowings under
repurchase agreements whose interest rates adjust based on changes in short-term
market interest rates. The Company plans to finance additional purchases of
Mortgage-Backed Securities with the proceeds of this offering (the "Offering"),
future offerings and future borrowings.
Under the Capital Investment Policy adopted by the Company (the "Capital
Investment Policy"), at least 75% of the Company's total assets will be
comprised of "High Quality" Mortgage-Backed Securities and "High Quality" short-
term investments. The term "High Quality" as used herein means securities (i)
which are rated within one of the two highest rating categories by at least one
of the nationally recognized rating agencies, (ii) that are unrated but are
either guaranteed by the United States government or an agency of the United
States government, or (iii) that are unrated or whose ratings have not been
updated but are determined to be of comparable quality to rated High Quality
Mortgage-Backed Securities on the basis of credit enhancement features that meet
the High Quality credit criteria approved by the Company's Board of Directors.
The remainder of the Company's assets, comprising not more than 25% of total
assets, may consist of other Qualified REIT Real Estate Assets which are unrated
or rated less than High Quality but which are at least "investment grade" (rated
"BBB" or better) or, if not rated, are determined by the Company to be of
comparable credit quality to an investment which is rated "BBB" or better.
Mortgage-Backed Securities to be acquired by the Company may include, but will
not be limited to, Mortgage-Backed Securities backed by single-family
residential mortgage loans ("Single-Family Mortgage Loans") and Mortgage-Backed
Securities backed by loans on multi-family, commercial or other real estate-
related properties.
At June 30, 1997, all of the Mortgage-Backed Securities held by the Company
were "Agency Certificates" which, although not rated, carry an implied "AAA"
rating. "Agency Certificates" consist of mortgage participation certificates
issued by the Federal Home Loan Mortgage Corporation ("FHLMC"), Pass-Through
Certificates issued by the Federal National Mortgage Association ("FNMA"), and
fully modified Pass-Through Certificates guaranteed by the Government
4
<PAGE>
National Mortgage Association ("GNMA"). All such Agency Certificates held by
the Company at June 30, 1997 were backed by Single-Family Mortgage Loans, of
which at June 30, 1997, approximately 93% had coupon rates which adjust over
time (subject to certain limitations and lag periods) in conjunction with
changes in short-term interest rates, reflecting the Company's strategy of
investing primarily in adjustable-rate Mortgage-Backed Securities. The Company
intends to continue to invest primarily in adjustable-rate Mortgage-Backed
Securities. The Company may also invest on a limited basis in mortgage
derivative securities representing the right to receive interest only or a
disproportionately large amount of interest. The Company has not and will not
invest in real estate mortgage investment conduit ("REMIC") residuals, other CMO
residuals or any Mortgage-Backed Securities, such as inverse floaters, which
have imbedded leverage as part of their structural characteristics. At June 30,
1997, the weighted average yield on the Company's portfolio of earning assets
was 6.63%, and the weighted average term to next rate adjustment was one month.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition -- Mortgage-Backed Securities."
The Company attempts to structure its borrowings to have interest rate
adjustment indices and interest rate adjustment periods that, on an aggregate
basis, correspond generally (within a range of one to six months) to the
interest rate adjustment indices and periods of the adjustable-rate Mortgage-
Backed Securities purchased by the Company. However, the Company is subject to
the risk that periodic rate adjustments on borrowings may be less frequent than
rate adjustments on its Mortgage-Backed Securities. At June 30, 1997, the
weighted average cost of funds for all of the Company's borrowings was 5.64% and
the weighted average term to next rate adjustment was 20 days. See "Risk
Factors -- Operations Risks -- Risks Associated with Differences Between
Mortgage-Backed Security and Borrowing Characteristics; Rate Adjustment Caps"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition -- Borrowings."
The Company generally expects to maintain a ratio of debt-to-equity of between
8:1 and 12:1, although the ratio may vary from time to time depending upon
market conditions and other factors deemed relevant by management of the
Company. For purposes of calculating this ratio, the Company's equity is equal
to the value of the Company's investment portfolio on a mark-to-market basis,
less the book value of the Company's obligations under repurchase agreements and
other collateralized borrowings. At June 30, 1997, the ratio of debt-to-equity
of the Company was 10:1. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Financial Condition --Leverage" and
"Business Strategy -- Capital Investment Policy -- Capital and Leverage."
To the extent consistent with its election to qualify as a REIT, the Company
may enter into hedging transactions to protect its portfolio of Mortgage-Backed
Securities and related borrowings against the effects of major interest rate
changes. Such hedging would be used to mitigate declines in the market value of
the Company's Mortgage-Backed Securities during periods of increasing or
decreasing interest rates and to limit or cap the rate on the Company's
borrowings. These hedging transactions may include interest rate swaps, the
purchase or sale of interest rate collars, caps or floors, and the purchase of
"interest only" Mortgage-Backed Securities. No hedging strategy can totally
eliminate interest rate risk and the Company's ability to enter into such
hedging transactions may be limited by provisions of the Code relating to
qualifying assets and qualifying income and transaction costs associated with
entering into such transactions. To date, the Company has not entered into any
hedging transactions. See "Business Strategy --Capital Investment Policy" and
"Certain Federal Income Tax Considerations."
The Company regularly monitors its purchases of Mortgage-Backed Securities and
the income from such assets and, to the extent the Company enters into hedging
transactions in the future, will monitor income from its hedging transactions as
well so as to ensure at all times that the Company maintains its qualification
as a REIT and its exempt status under the Investment Company Act of 1940, as
amended (the "Investment Company Act"). The Company has engaged Deloitte &
Touche L.L.P. to conduct quarterly compliance reviews designed to determine
compliance with sections 856 through 860 of the Code (the "REIT Provisions of
the Code") and the Company's exempt status under the Investment Company Act.
See "Certain Federal Income Tax Considerations" and "Risk Factors -- Legal and
Other Risks."
5
<PAGE>
The executive officers of the Company are Michael A.J. Farrell (Director,
Chairman of the Board and Chief Executive Officer), Timothy J. Guba (Director,
President and Chief Operating Officer), Wellington J. St. Claire (Director and
Vice Chairman of the Board) and Kathryn F. Fagan (Chief Financial Officer and
Treasurer). Messrs. Farrell and Guba and Ms. St. Claire have an average of 15
years' experience in the investment banking and investment management industries
where, in various capacities, they have each managed portfolios of Mortgage-
Backed Securities, arranged collateralized borrowings and utilized hedging
techniques to mitigate interest rate and other risk within fixed-income
portfolios. Ms. Fagan is a certified public accountant and, prior to becoming
Chief Financial Officer and Treasurer of the Company, served as Chief Financial
Officer and Controller of a publicly owned savings and loan association. Since
1994, Messrs. Farrell and Guba and Ms. St. Claire have managed Fixed Income
Discount Advisory Company ("FIDAC"), a registered investment advisor which, at
June 30, 1997, managed, assisted in managing or supervised approximately $500
million in gross assets for a wide array of clients, of which, at such date,
approximately $250 million was managed on a discretionary basis. See "Risk
Factors -- General Risks -- Conflicts of Interest" and "Management -- Directors
and Executive Officers" and "-- Certain Relationships; Conflicts of Interest."
DISTRIBUTION POLICY
To maintain its qualification as a REIT, the Company must distribute
substantially all of its taxable income to stockholders for each year, which the
Company intends to do. The Company also intends to declare regular quarterly
dividends. The Company declared dividends of $0.075 per share (or $276,000 in
the aggregate) for the period from February 18, 1997 (commencement of
operations) to March 31, 1997 and $.255 per share (or $938,400 in the aggregate)
for the second quarter of 1997. See "Distribution Policy" and "Certain Federal
Income Tax Considerations." The Company is considering the adoption of a
Dividend Reinvestment Plan that would allow holders of Common Stock to reinvest
dividends automatically in additional shares of Common Stock, although the
Company has no plans to institute such a Dividend Reinvestment Plan (if at all)
prior to 1998.
RISK FACTORS
The purchase of the Shares offered hereby is subject to certain risks. See
"Risk Factors." Among such risks are the following:
. Interest rate fluctuations may affect the Company's earnings as a result
of potential changes in the spread between the interest rates on its
borrowings and the interest rates on its Mortgage-Backed Securities.
Mortgage-Backed Securities held by the Company generally are subject to
interest rate caps while the Company's borrowings generally are not
similarly restricted.
. Mortgage prepayment rates vary depending on such factors as mortgage
interest rates and market conditions. Changes in anticipated prepayment
rates may affect the Company's earnings by changing the speed of
amortization of purchase discounts and premiums.
. The Company's strategy of borrowing a substantial portion of the market
value of the Mortgage-Backed Securities to finance the acquisition of such
Mortgage-Backed Securities may result in the Company incurring a decrease
in net interest income and incurring net losses if returns on Mortgage-
Backed Securities are not sufficient to cover borrowing costs.
. Various factors, including the Company's intent to structure its
investment portfolio to continue to qualify for an exemption from
regulation as an investment company under the Investment Company Act, may
prevent the Company from attaining the level of leverage it deems optimal,
which may cause the Company to be less profitable than it otherwise would
be.
6
<PAGE>
. A decline in the market value of the Mortgage-Backed Securities may limit
the Company's ability to borrow or result in lenders initiating margin
calls, which may require the Company to sell Mortgage-Backed Securities
under adverse market conditions. A decline in market value and the
initiation of margin calls could also result in a default by the Company
under its collateralized borrowings and a liquidation of collateral.
. The Company's business strategy relies on short-term borrowings to fund
Mortgage-Backed Securities with adjustable-rate coupons and long-term
maturities. In the event the Company is not able to renew or replace
maturing borrowings, the Company could be required to sell Mortgage-Backed
Securities under possibly adverse market conditions and could incur losses
as a result.
. The Company's borrowing costs generally correspond to the London Interbank
Offered Rate, as defined in the applicable borrowing ("LIBOR"), or another
short-term index, plus or minus a margin. Margins vary depending upon the
lender, the underlying collateral, interest rates, the availability of
financing and other factors. Increased borrowing costs, resulting from
increases in such indices or margins, could adversely impact the Company's
net income.
. Rising short-term rates will increase the Company's borrowing costs to
acquire additional Mortgage-Backed Securities and, to the extent such
costs rise more rapidly than the yields, the Company's net income may be
reduced or a net loss may result.
. Asset/liability management hedging strategies involve risk and may not be
effective in reducing the Company's exposure to interest rate changes.
Moreover, compliance with the REIT Provisions of the Code may prevent the
Company from effectively implementing the strategies that the Company
determines, absent such compliance, would best insulate the Company from
the risks associated with changing interest rates.
. The Company's net income depends on the Company's ability to acquire
Mortgage-Backed Securities at favorable spreads to borrowing costs.
Increased competition for the acquisition of eligible Mortgage-Backed
Securities or a diminution in the available supply could result in higher
prices and thus lower yields on such Mortgage-Backed Securities which
could further narrow the yield spread over borrowing costs.
. The Company's operations depend in significant part upon the contributions
of its executive officers. The loss of any key person could have a
material adverse effect on the Company's business and results of
operations.
. The Company commenced operations on February 18, 1997 and therefore has a
limited operating history. Prior to the commencement of operations by the
Company on February 18, 1997, none of the Company's officers had any
experience in managing a REIT.
. Certain of the Company's officers and employees are actively involved in
managing other portfolios of mortgage-backed securities and advising
financial institutions. These relationships may create conflicts of
interest for the Company and its officers and employees.
. Under the current interpretation of the staff of the Securities and
Exchange Commission (the "Commission"), in order to qualify for an
exemption from regulation as an investment company under the Investment
Company Act, under certain circumstances the Company will be required to
maintain at least 55% of its assets in certain qualifying interests in
real estate. This restriction may adversely affect the yield to be
obtained by the Company on its portfolio of Mortgage-Backed Securities.
7
<PAGE>
. If the Company fails to maintain its qualification as a REIT, the Company
will be subject to Federal income tax as a regular corporation which would
result in a substantial reduction of income available for dividend payments
to stockholders.
. The investment policies and operating policies and strategies of the
Company set forth in this Prospectus may be modified or waived by the Board
of Directors, subject in certain cases to approval by a majority of the
Independent Directors, without stockholder consent. "Independent Directors"
means the directors of the Company who are not officers or employees of the
Company.
THE OFFERING(1)
Common Stock Offered by:
The Company........................................ 6,250,000 Shares
The Selling Stockholders........................... _________ Shares
Common Stock to be Outstanding
after the Offering................................. 10,017,800 shares of
Common Stock(2)
Use of Proceeds...................................... The net proceeds from
the sale of the Shares
offered by the Company
will be used, together
with borrowings, to
purchase additional
Mortgage-Backed
Securities and, pending
such use, to purchase
High Quality Short-Term
Investments. None of
the proceeds from the
sale of Shares offered
by Selling Stockholders
will be contributed to
the Company.
NASDAQ Symbol........................................ AMMO
- --------------
(1) Assumes the Underwriters' over-allotment option to purchase up to an
additional 937,500 Shares from the Company is not exercised. See
"Underwriting."
(2) Excludes 500,000 shares of Common Stock reserved for issuance under the
Company's Long-Term Stock Incentive Plan (the "Incentive Plan"). Options to
acquire 348,500 shares have been granted to directors, officers and
employees of the Company pursuant to the Incentive Plan. See "Management -
- Long-Term Stock Incentive Plan."
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SUMMARY FINANCIAL INFORMATION
PERIOD FROM FEBRUARY 18, 1997 TO JUNE 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
The financial data set forth below should be read in conjunction with the
Financial Statements of the Company and related Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included herein.
STATEMENT OF OPERATIONS DATA:
Days in period 133
Interest income $ 6,509
Interest expense 5,149
----------
Net interest income 1,360
Gain on sale of mortgage-backed securities 230
General and administrative expenses (G&A expense) 250
----------
Net income $ 1,340
==========
Net income per share $ 0.36
Dividends declared per share 0.33
BALANCE SHEET DATA AT JUNE 30, 1997:
Mortgage-Backed Securities 364,367
Total assets 398,236
Repurchase agreements 326,987
Total liabilities 365,418
Stockholders' equity 32,819
Number of common shares outstanding 3,680,000
Interest rate spread 0.99%
OTHER DATA:
Average total assets $ 283,100
Average borrowings 242,027
Average equity 33,115
Yield on interest earning assets at June 30, 1997 6.63%
Cost of funds on interest bearing liabilities at June 30, 1997 5.64%
Efficiency ratio (G&A expense/net interest income) 18.37%
ANNUALIZED FINANCIAL RATIOS(1):
Net interest margin (net interest income/average total assets) 1.32%
G&A expense as a percentage of average assets 0.24%
G&A expense as a percentage of average equity 2.07%
Return on average assets 1.30%
Return on average equity 11.11%
(1) Each ratio has been computed by annualizing the results for the 133-
day period ended June 30, 1997.
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<PAGE>
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act").
Such forward-looking statements include, without limitation, statements
concerning the Company's ability to mitigate interest rate, prepayment and other
risks and the Company's ability to grow and become more efficient over time.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of the Company to be materially different from the results of
operations or plans expressed or implied by such forward-looking statements.
Among those factors which may impact the Company's actual results, performance
and achievements are changes in interest rates, changes in the yield curve,
changes in prepayment rates, the availability of Mortgage-Backed Securities for
purchase, the availability of financing and, if available, the terms of any such
financing. Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate and, therefore, there can be no assurance that
the forward-looking statements included in this Prospectus will prove to be
accurate. In light of the significant uncertainties inherent in the forward-
looking statements included herein, the inclusion of such information should not
be regarded as a representation by the Company or any other person that the
results or conditions described in such forward-looking statements or the
objectives and plans of the Company will be achieved. Investors should review
carefully the more detailed descriptions of risks and uncertainties set forth
under the caption "Risk Factors" in this Prospectus.
10
<PAGE>
RISK FACTORS
Before investing in the Common Stock offered hereby, prospective investors
should give special consideration, in addition to the information set forth
elsewhere in this Prospectus, to the information set forth below. The Company
cautions the reader, however, that this list of factors may not be exhaustive.
Further, this Prospectus contains forward-looking statements within the meaning
of Section 27A of the Securities Act. Disclosure regarding such forward-looking
statements may be found under "Prospectus Summary," "Use of Proceeds",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business Strategy," as well as within the Prospectus generally.
Actual results could differ materially from those projected in the forward-
looking statements as a result of the risk factors set forth below and the
matters set forth in the Prospectus generally.
OPERATIONS RISKS
GENERAL
The results of the Company's operations are affected by various factors, many
of which are beyond the control of the Company. The results of the Company's
operations depend on, among other things, the level of net interest income
generated by the Company's Mortgage-Backed Securities, the market value of such
Mortgage-Backed Securities and the supply of and demand for such Mortgage-Backed
Securities. The Company's net interest income varies primarily as a result of
changes in short-term interest rates, borrowing costs and prepayment rates, the
behavior of which involves various risks and uncertainties as set forth below.
Prepayment rates, interest rates and borrowing costs depend on the nature and
terms of the Mortgage-Backed Securities, conditions in financial markets, the
fiscal and monetary policies of the United States government and the Board of
Governors of the Federal Reserve System, international economic and financial
conditions, competition and other factors, none of which can be predicted with
any certainty. Since changes in interest rates may significantly affect the
Company's activities, the operating results of the Company depend, in large
part, upon the ability of the Company to effectively manage its interest rate
and prepayment risks while maintaining its status as a REIT. See "-- Risks
Associated with Interest Rate Changes and Hedging," "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Asset/Liability
Management and Effect of Changes in Interest Rates," and "Business Strategy --
Capital Investment Policy -- Interest Rate Risk Management."
RISKS ASSOCIATED WITH DIFFERENCES BETWEEN MORTGAGE-BACKED SECURITY
AND BORROWING CHARACTERISTICS; RATE ADJUSTMENT CAPS
At June 30, 1997, all of the Mortgage-Backed Securities held by the Company
were Agency Certificates backed by Single-Family Mortgage Loans, of which
approximately 93% had coupon rates which adjust over time (subject to certain
limitations and lag periods) in conjunction with changes in short-term interest
rates, such adjustments being based on an objective index such as LIBOR, the
Treasury Index or the CD Rate. It is expected in the future that a substantial
portion of the Company's Mortgage-Backed Securities will consist of adjustable-
rate Pass-Through Certificates ("ARM Certificates") or floating rate CMOs which
are also subject to periodic interest rate adjustments based on such objective
indices ("Floaters"). "LIBOR" means the London Interbank Offered Rate as it may
be defined, and for a period of time specified, in a Mortgage-Backed Security or
borrowing of the Company. "Treasury Index" means the monthly/weekly average
yield of the benchmark U.S. Treasury securities, as published by the Board of
Governors of the Federal Reserve System. "CD Rate" means the weekly average of
secondary market interest rates on six-month negotiable certificates of deposit,
as published by the Federal Reserve Board in its Statistical Release H.15(519),
Selected Interest Rates.
Interest rates on the Company's borrowings are expected to continue to be
based on short-term indices. To the extent any of the Company's Mortgage-Backed
Securities are financed with borrowings bearing interest based on or varying
with an index different from that used for the related Mortgage-Backed
Securities, so-called "basis" interest rate risk arises. In such event, if the
index used for the Mortgage-Backed Securities is a "lagging" index that reflects
market
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<PAGE>
interest rate changes on a delayed basis, and the rate borne by the related
borrowings reflects market rate changes more rapidly, the Company's net interest
income will be adversely affected in periods of increasing market interest
rates.
The Company's adjustable-rate Mortgage-Backed Securities are subject to
periodic rate adjustments which may not be matched precisely with increases or
decreases in rates borne by the borrowings or financings utilized by the
Company. Accordingly, in a period of increasing interest rates, the Company
could experience a decrease in net interest income or a net loss because the
interest rates on borrowings could adjust faster than the interest rates on the
Company's adjustable-rate Mortgage-Backed Securities.
Interest rates on the Company's Mortgage-Backed Securities are subject
typically to periodic and lifetime interest rate caps which limit the amount an
interest rate can change during any given period. The Company's borrowings are
not subject to similar restrictions. Hence, in a period of rapidly increasing
interest rates, the Company could also experience a decrease in net interest
income or a net loss because the interest rates on borrowings could increase
without limitation while the interest rates on the Company's Mortgage-Backed
Securities (consisting primarily of ARM Certificates and Floaters) would be
limited by caps. While the Company may hedge certain risks associated with
interest rate increases, the Company has not entered into any interest rate
hedging agreements. No hedging strategy can insulate the Company completely
from interest rate risk.
The Company expects that the net effect of these factors, all other factors
being equal, could be to lower the Company's net interest income or cause a net
loss during periods of rapidly rising market interest rates, which could
negatively impact the level of dividend distributions and affect the market
price of the Common Stock.
PREPAYMENT RISKS OF MORTGAGE-BACKED SECURITIES
Prepayment rates on Mortgage-Backed Securities vary from time to time and may
cause changes in the amount of the Company's net interest income. Prepayments of
ARM Certificates and Floaters usually can be expected to increase when mortgage
interest rates fall below the then-current interest rates on ARMs and decrease
when mortgage interest rates exceed the then-current interest rate on ARMs,
although such effects are not predictable. Prepayment experience also may be
affected by the conditions in the housing and financial markets, general
economic conditions and the relative interest rates on fixed-rate and
adjustable-rate mortgage loans underlying Mortgage-Backed Securities. Some
Mortgage-Backed Securities are structured so that certain classes are provided
protection from prepayments for a period of time. However, in a period of
extremely rapid prepayments, during which earlier-paying classes may be retired
faster than expected, the protected classes may receive unscheduled payments of
principal earlier than expected and would have average lives that, while longer
than the average lives of the earlier-paying classes, would be shorter than
originally expected. The Company seeks to minimize prepayment risk through a
variety of means, including structuring a diversified portfolio with a variety
of prepayment characteristics, investing in certain Mortgage-Backed Security
structures which have prepayment protection, and balancing assets purchased at a
premium with assets purchased at a discount. No strategy, however, can
completely insulate the Company from prepayment risks arising from the effects
of interest rate changes. Prepayment risk may be increased if the Company
purchases interest-only strips to protect against interest rate increases.
Certain Mortgage-Backed Securities may have underlying mortgage loans which are
convertible to fixed-rate loans. Since converted loans are required to be
repurchased by the applicable Agency (FHLMC, FNMA or GNMA) or servicer, the
conversion of a loan results, in effect, in the prepayment of such loan.
Changes in anticipated prepayment rates of Mortgage-Backed Securities could
affect the Company in several adverse ways. A portion of the Mortgage-Backed
Securities to be acquired by the Company may be recently originated and bear
initial interest rates which are lower than their "fully-indexed" rates (the
applicable index plus margin). In the event that such a Mortgage-Backed
Security is prepaid faster than anticipated prior to or soon after the time of
adjustment to a fully-indexed rate, the Company will experience an adverse
effect on its net interest income during the time it holds such Mortgage-Backed
Security compared with holding a fully-indexed Mortgage-Backed Security and
12
<PAGE>
will lose the opportunity to receive interest at the fully-indexed rate over the
expected life of the Mortgage-Backed Security. These effects may be mitigated to
the extent Mortgage-Backed Securities are acquired at a discount. In addition,
the faster than anticipated prepayment of any Mortgage-Backed Security that is
purchased at a premium by the Company would generally result in a faster than
anticipated write-off of any remaining capitalized premium amount and consequent
reduction of the Company's net interest income by such amount. At June 30,
1997, a majority of the Company's Mortgage-Backed Securities had been acquired
at a premium.
RISKS ASSOCIATED WITH LEVERAGE
The Company's financing strategy is designed to increase the size of its
Mortgage-Backed Security investment portfolio by borrowing a substantial portion
(which may vary depending upon the mix of the Mortgage-Backed Securities in the
Company's portfolio and the application of the Company's Capital Investment
Policy requirements to such mix of Mortgage-Backed Securities) of the market
value of its Mortgage-Backed Securities. If the coupon income on the Mortgage-
Backed Securities purchased with borrowed funds fails to cover the cost of the
borrowings, the Company will experience net interest losses and may experience
net losses. Such losses could be increased substantially as a result of the
Company's substantial leverage.
The Company expects generally to maintain a ratio of debt-to-equity of between
8:1 and 12:1, although the ratio may vary from time to time depending upon
market conditions and other factors deemed relevant by management. However, the
Company is not limited under its Bylaws in respect of the amount of its
borrowings, whether secured or unsecured, and the debt-to-equity ratio could at
times be greater than 12:1. For purposes of calculating the debt-to-equity
ratio, the Company's equity equals the value of the Company's investment
portfolio on a mark-to-market basis less the book value of the Company's
obligations under repurchase agreements and other collateralized borrowings. At
June 30, 1997, the debt-to-equity ratio of the Company was 10:1. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition -- Leverage" and "Business Strategy -- Capital
Investment Policy -- Capital and Leverage."
The ability of the Company to achieve its investment objectives depends on its
ability to borrow money in sufficient amounts and on favorable terms. Through
increases in haircuts (i.e., the over-collateralization amount required by a
lender), decreases in the market value of the Company's Mortgage-Backed
Securities, increases in interest rate volatility, changes in the availability
of financing in the market, conditions then applicable in the lending market and
other factors, the Company may not be able to achieve the degree of leverage it
believes to be optimal, which may cause the Company to be less profitable than
it would be otherwise. In addition, as a result of the Company's intention to
structure its investment portfolio to qualify for an exemption from regulation
as an investment company, the Company may be limited in the types and amounts of
Mortgage-Backed Securities it can purchase which, in turn, may affect the
ability of the Company to achieve the degree of leverage it believes to be
optimal.
RISK OF DECLINE IN MARKET VALUE OF MORTGAGE-BACKED SECURITIES;
MARGIN CALLS AND DEFAULTS
Certain of the Company's Mortgage-Backed Securities are cross-collateralized
to secure multiple borrowing obligations of the Company to a single lender. A
decline in the market value of such assets may limit the Company's ability to
borrow or result in lenders initiating margin calls (i.e., requiring a pledge of
cash or additional Mortgage-Backed Securities to re-establish the ratio of the
amount of the borrowing to the value of the collateral). The Company's fixed-
rate Mortgage-Backed Securities generally are more susceptible to margin calls
as increases in interest rates tend to more negatively affect the market value
of fixed-rate Mortgage-Backed Securities than adjustable-rate Mortgage-Backed
Securities. This remains true despite effective hedging against such
fluctuations as the hedging instruments may not be part of the collateral
securing the collateralized borrowings. Additionally, it may be difficult to
realize the full value of the hedging instrument when desired for liquidity
purposes due to the applicable REIT Provisions of the Code.
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<PAGE>
The Company could be required to sell Mortgage-Backed Securities under adverse
market conditions in order to maintain liquidity. Such sales may be effected by
the Company when deemed necessary in order to preserve the capital base of the
Company. If these sales were made at prices lower than the amortized cost of the
Mortgage-Backed Securities, the Company would experience losses. A default by
the Company under its collateralized borrowings could also result in a
liquidation of the collateral, including any cross-collateralized assets, and a
resulting loss of the difference between the value of the collateral and the
amount borrowed.
Additionally, in the event of a bankruptcy of the Company, certain repurchase
agreements may qualify for special treatment under the Bankruptcy Code, the
effect of which is, among other things, to allow the creditors under such
agreements to avoid the automatic stay provisions of the Bankruptcy Code and to
liquidate the collateral under such agreements without delay. See "-- Legal and
Other Risks -- Bankruptcy Code Treatment of Repurchase Agreements."
To the extent the Company is compelled to liquidate Mortgage-Backed Securities
qualifying as Qualified REIT Real Estate Assets to repay borrowings, the Company
may be unable to comply with the REIT Provisions of the Code regarding assets
and sources of income requirements, ultimately jeopardizing the Company's status
as a REIT. The Code does not provide for any mitigating provisions with respect
to the 30% Gross Income Test. Accordingly, if the Company failed to meet the 30%
Gross Income Test, its status as a REIT would terminate automatically. The 30%
Gross Income Test means the requirement for each taxable year that less than 30%
of the Company's gross income is derived from the sale of Qualified REIT Real
Estate Assets held for less than four years, stock or securities held for less
than one year (including certain interest rate swap and cap agreements entered
into to hedge variable rate debt incurred to acquire Qualified Real Estate
Assets) and certain "dealer" property. Under legislation pending in Congress,
the 30% Gross Income Test would be repealed for taxable years beginning after
the date of enactment. See "Certain Federal Income Tax Considerations --
General -- Asset Tests", "-- Gross Income Tests" and "-- Pending Legislation."
RISKS OF INCREASED BORROWING COSTS AND FAILURE
TO REFINANCE OUTSTANDING BORROWINGS
Currently, all of the Company's borrowings are collateralized borrowings in
the form of repurchase agreements. The ability of the Company to enter into
repurchase agreements in the future will depend, among other factors, on the
market value of the Mortgage-Backed Securities pledged to secure the specific
borrowings, the availability of financing, and other conditions then applicable
in the lending market. The Company may effect additional borrowings through
using other types of collateralized borrowings, loan agreements, lines of
credit, Dollar-Roll Agreements and other credit facilities with institutional
lenders or through the issuance of debt securities. A "Dollar-Roll Agreement"
is an agreement to sell a security for delivery on a specified future date
entered into simultaneously with an agreement to repurchase the same or a
substantially similar security (with the same coupon and original maturity
periods) on a specified future date. The cost of borrowings under repurchase
agreements generally corresponds to LIBOR plus or minus a margin, although such
agreements may not expressly incorporate a LIBOR index. The cost of borrowings
under other sources of funding which the Company may use may refer or correspond
to other short-term indices, plus or minus a margin. The margins on such
borrowings over or under LIBOR or such other short-term indices may vary
depending on the lender, the nature and liquidity of the underlying collateral,
the movement of interest rates, the availability of financing in the market and
other factors. Increased borrowing costs could adversely impact the Company's
net income.
The Company's business strategy relies primarily on short-term borrowings to
fund Mortgage-Backed Securities with adjustable-rate coupons and long-term
maturities. Thus, the ability of the Company to achieve its investment
objectives depends not only on its ability to borrow money in sufficient amounts
and on favorable terms but also on the Company's ability to renew or replace on
a continuous basis its maturing short-term borrowings. In the event the Company
is not able to renew or replace maturing borrowings, the Company could be
required to sell Mortgage-Backed Securities under possibly adverse market
conditions and could incur losses as a result. In addition, in such event, the
Company may be required to terminate any hedging positions, which could result
in further costs to the Company. At the same time, the market value of the
assets in which the Company's liquidity capital is invested may have decreased.
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<PAGE>
A number of such factors in combination could cause difficulties for the Company
and might result in a liquidation of a major portion of the Company's Mortgage-
Backed Securities at disadvantageous prices with consequent losses, which could
have a material adverse effect on the Company and its solvency.
RISK OF DECREASE IN NET INTEREST INCOME DUE TO INTEREST RATE FLUCTUATIONS
At June 30, 1997, approximately 93% of the Company's Mortgage-Backed
Securities had adjustable interest or pass-through rates based on short-term
interest rates, and substantially all of the Company's borrowings bore interest
at short-term rates and had maturities of less than one year. Consequently,
changes in short-term interest rates may significantly influence the Company's
net interest income. While increases in short-term interest rates will generally
increase the yields on the Company's adjustable-rate Mortgage-Backed Securities,
rising short-term rates will also increase the costs of borrowings by the
Company which will be utilized to fund the Mortgage-Backed Securities and, to
the extent such costs rise more rapidly than the yields, the Company's net
interest income may be reduced or a net loss may result. Increases in short-
term rates relative to long-term rates could adversely impact the Company's net
income. In periods of high interest rates, the Company's net income may be less
than income generated through alternative investments of equal or lower risk,
which could negatively impact the price of the Common Stock. No assurance can
be given as to the amount or timing of changes in interest rates or their effect
on the Company's Mortgage-Backed Securities or net interest income.
RISKS ASSOCIATED WITH INTEREST RATE CHANGES AND HEDGING
The Company's operating strategy subjects it to interest rate risks as
described under "-- Risk of Decrease in Net Interest Income Due to Interest Rate
Fluctuations" above. The Company has adopted policies as part of its Capital
Investment Policy intended to protect against interest rate changes and
prepayments. See "Business Strategy -- Capital Investment Policy --Interest
Rate Risk Management." The Company may purchase from time to time interest rate
caps, interest rate swaps and similar instruments to attempt to mitigate the
risk of the cost of its variable rate liabilities increasing at a faster rate
than the earnings on its assets during a period of rising rates. However, it is
not expected that such hedging strategies will completely insulate the Company
against interest rate risk. To date, the Company has not entered into any
hedging transactions.
Developing an effective asset/liability management strategy is complex and no
strategy can completely insulate the Company from risks associated with interest
rate changes and prepayments. In addition, to the extent the Company engages in
hedging, there can be no assurance that the Company's hedging activities will
have the desired beneficial impact on the Company's results of operations or
financial condition. Hedging typically involves costs, including transaction
costs, which increase dramatically as the period covered by the hedge increases
and which also increase during periods of rising and volatile interest rates.
The Company may increase its hedging activity, and thus increase its hedging
costs, during such periods when interest rates are volatile or rising and
hedging costs have increased. Such hedging costs may cause the Company to
conclude that a particular hedging transaction is not appropriate for the
Company, thereby affecting the Company's ability to mitigate interest rate risk.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Asset/Liability Management and Effect of Changes in Interest
Rates" and "Business Strategy -- Capital Investment Policy -- Interest Rate Risk
Management."
Federal tax laws applicable to REITs may substantially limit the Company's
ability to engage in asset/liability management transactions. Such Federal tax
laws may prevent the Company from effectively implementing hedging strategies
that the Company determines, absent such restrictions, would best insulate the
Company from the risks associated with changing interest rates and prepayments.
See "Certain Federal Income Tax Considerations -- General" and "-- Taxation of
the Company." In this regard, the amount of income the Company may earn from
its interest rate caps and other hedging instruments may be subject to
substantial limitations under the REIT Provisions of the Code. In particular,
income generated by such instruments is non-qualifying income for purposes of
the 75% Gross Income Test and is income from the sale of a security subject to
the 30% Gross Income Test. Additionally, the Company will
15
<PAGE>
treat such income as non-qualifying income for the 95% Gross Income Test unless
it receives advice from its tax advisors that such income constitutes qualifying
income for purposes of such test. Under pending legislation, the 30% Gross
Income Test would be repealed, but such income would still not qualify for the
75% Gross Income Test or, subject to the preceding sentence, the 95% Gross
Income Test. See "Certain Federal Income Tax Considerations -- General --Gross
Income Tests" and "-- Pending Legislation." This determination may result in
management electing to have the Company bear a level of interest rate risk that
might otherwise be hedged. The "75% Gross Income Test" means the requirement
for each taxable year that at least 75% of the Company's gross income must be
derived from certain specified real estate sources including interest income and
gain from the disposition of Qualified REIT Real Estate Assets or "qualified
temporary investment income" (i.e., income derived from "new capital" within one
year of the receipt of such capital). The "95% Gross Income Test" means the
requirement for each taxable year that at least 95% of the Company's gross
income for each taxable year must be derived from sources of income qualifying
for the 75% Gross Income Test, dividends, interest, and gains from the sale of
stock or other securities (including certain interest rate swap and cap
agreements entered into to hedge variable rate debt incurred to acquire
Qualified REIT Real Estate Assets) not held for sale in the ordinary course of
business.
If the Company purchases interest rate caps or other interest rate agreements
to hedge against lifetime and periodic rate or payment caps, and the provider of
interest rate agreements becomes financially unsound or insolvent, the Company
may be forced to unwind its interest rate agreements with such provider and may
take a loss on such interest rate agreements. Although the Company intends to
purchase interest rate agreements only from financially sound institutions and
to monitor the financial strength of such institutions on a periodic basis, no
assurance can be given that the Company can avoid such third party risks.
CREDIT RISKS ASSOCIATED WITH INVESTMENT STRATEGY
The Company's Capital Investment Policy provides that at least 75% of the
Company's total assets are to be comprised of High Quality Mortgage-Backed
Securities and High Quality Short-Term Investments. "Short-Term Investments"
means short-term bank certificates of deposit, short-term United States treasury
securities, short-term United States government agency securities, commercial
paper, reverse repurchase agreements, short-term CMOs, short-term asset-backed
securities and other similar types of short-term investment instruments, all of
which will have maturities or average lives of less than one year. The Capital
Investment Policy provides that the remainder of the Company's assets,
comprising not more than 25% of total assets, may consist of Mortgage-Backed
Securities and other Qualified REIT Real Estate Assets which are unrated or
rated less than High Quality. The Company's investment strategy seeks to
balance the risk and return potential of its investments in a manner that
attempts to maximize return while minimizing the risk of losses to the Company
through defaults on portfolio obligations. This strategy determines the relative
weightings within the Company's portfolio of Mortgage-Backed Securities of
different ratings. The Company attempts to structure its portfolio to maintain a
minimum weighted average rating (including the Company's deemed comparable
ratings for unrated Mortgage-Backed Securities based on a comparison to rated
Mortgage-Backed Securities with like characteristics) of its Mortgage-Backed
Securities of at least single "A" under the S&P rating system and at the
comparable level under the other rating systems. There can be no assurance the
Company's deemed comparable ratings will agree with assessments by others as to
how such Mortgage-Backed Securities would be rated. In addition, to the extent
that the Company invests in High Quality investments, the yield on such assets
may be lower than the yield on lower rated securities. To date, the Company has
invested solely in Agency Certificates which, although not rated, carry an
implied "AAA" rating.
ABILITY TO ACQUIRE MORTGAGE-BACKED SECURITIES AT FAVORABLE YIELDS;
COMPETITION AND SUPPLY
The Company's net income depends, in large part, on the Company's ability to
acquire Mortgage-Backed Securities at favorable spreads over the Company's
borrowing costs. In acquiring Mortgage-Backed Securities, the Company competes
with other REITs, investment banking firms, savings and loan associations,
banks, insurance companies,
16
<PAGE>
mutual funds, other lenders, and other entities purchasing Mortgage-Backed
Securities, many of which have greater financial resources than the Company. In
addition, there are several mortgage REITs similar to the Company, and others
may be organized in the future. The effect of the existence of additional REITs
may be to increase competition for the available supply of Mortgage-Backed
Securities suitable for purchase by the Company. Further, in fluctuating
interest rate environments, the spread between interest rates on adjustable-rate
mortgage loans and interest rates on fixed-rate mortgage loans may decrease, and
may cease to exist or become negative. Under such conditions, mortgagors tend to
favor fixed-rate mortgage loans, thereby decreasing the supply of adjustable-
rate Mortgage-Backed Securities available to the Company for purchase. The
relative availability of adjustable-rate Mortgage-Backed Securities may also be
diminished by a number of other market and regulatory considerations.
There can be no assurance that the Company will be able to continue to acquire
sufficient Mortgage-Backed Securities from mortgage suppliers at spreads above
the Company's cost of funds. The Company will also face competition for
financing sources, and the effect of the existence of additional mortgage REITs
may be to deny the Company access to sufficient funds to carry out its business
strategy and/or to increase the cost of funds to the Company.
GENERAL RISKS
DEPENDENCE ON KEY PERSONNEL
The Company's operations depend in significant part upon the contributions of
its executive officers. Although Michael Farrell, Chairman of the Board and
Chief Executive Officer, Timothy Guba, President and Chief Operating Officer and
Wellington St. Claire, Vice Chairman of the Board, currently have employment
agreements with the Company, there can be no assurance of the continued
employment of all such officers. The loss of any key person could have a
material adverse effect on the Company's business and results of operations.
See "Management."
LIMITED OPERATING HISTORY OF THE COMPANY
The Company commenced operations on February 18, 1997 upon consummation of the
Private Placement and accordingly has not yet developed an earnings history or
experienced a wide variety of interest rate or market conditions. Further, prior
to such commencement of operations, none of the officers of the Company had any
experience in managing a REIT.
CONFLICTS OF INTEREST
Messrs. Farrell and Guba, and Ms. St. Claire and Jennifer A. Stephens,
Secretary of the Company, are actively involved in managing fixed income assets
for institutional clients through Fixed Income Discount Advisory Company
("FIDAC"). FIDAC is a registered investment adviser which at June 30, 1997
managed, assisted in managing or supervised approximately $500 million in gross
assets for a wide array of clients, of which, at such date, approximately $250
million was managed on a discretionary basis. Michael Farrell is a member of
the Board of Directors of the U.S. Dollar Floating Rate Fund (the "Floating Rate
Fund") and FIDAC is the investment adviser to the Floating Rate Fund. The
executive officers of the Company named above have performed and will continue
to perform such services for FIDAC, such institutional clients and the Floating
Rate Fund; however, such officers devote and intend to continue to devote a
majority of their time to the business of the Company. Their several
responsibilities may create conflicts of interest if they are presented with
corporate opportunities that may benefit both the Company and the Floating Rate
Fund and other clients for whom FIDAC acts as an investment adviser.
Investment opportunities currently are allocated by determining the entity or
account for which such investment is most suitable. In making such
determination, management considers the investment strategy and guidelines of
each entity or account with respect to acquisition of assets, leverage,
liquidity and other factors which management determines appropriate.
17
<PAGE>
The Company shares with FIDAC office space and certain office expenses, such
as lease payments, utilities charges and ancillary services performed by office
personnel, at cost on a pro rata basis based on the relative use of such
facilities and services by the Company and FIDAC.
Generally, under Maryland corporate law, a director of a corporation is
required to first offer to the Company corporate opportunities learned of solely
as a result of his or her service as a member of the Board of Directors.
Maryland law provides further that in order for a contract or other transaction
between a corporation and any of its directors or in which a director has a
material financial interest not to be void or voidable: (i) the contract or
transaction must be fair and reasonable to the corporation; or (ii) the fact of
such interest must be disclosed or known to (a) the board or committee that
authorizes, approves or ratifies the contract or transaction and such
authorization, approval or ratification must be by a vote of a majority of the
disinterested directors or (b) the stockholders entitled to vote on such
contract or transaction and the contract or transaction is authorized, approved
and ratified by a majority of the votes cast by disinterested stockholders
entitled to vote. See "Management -- Certain Relationships; Conflicts of
Interest."
The Company's policy is that the approval of the Board of Directors (with any
interested director abstaining) is required for any director, officer, security
holder or affiliate of the Company (a) to engage for his or her own account in
realizing upon a corporate opportunity learned of solely as a result of his or
her service to or representation of the Company or (b) to have any direct or
indirect pecuniary interest in any investment to be acquired or disposed of by
the Company or in any transaction to which the Company is a party or has an
interest.
LEGAL AND OTHER RISKS
LOSS OF INVESTMENT COMPANY ACT EXEMPTION WOULD ADVERSELY AFFECT THE COMPANY
The Company at all times intends to conduct its business so as not to become
regulated as an investment company under the Investment Company Act.
Accordingly, the Company does not expect to be subject to the restrictive
provisions of the Investment Company Act. The Investment Company Act exempts
entities that are "primarily engaged in the business of purchasing or otherwise
acquiring mortgages and other liens on and interests in real estate"
("Qualifying Interests"). Under the current interpretation of the staff of the
Commission, in order to qualify for this exemption, the Company must maintain at
least 55% of its assets directly in mortgage loans, qualifying Pass-Through
Certificates and certain other qualifying interests in real estate. In
addition, unless certain Mortgage-Backed Securities represent all the
certificates issued with respect to an underlying pool of mortgages, such
Mortgage-Backed Securities may be treated as securities separate from the
underlying mortgage loans and, thus, may not qualify as Qualifying Interests for
purposes of the 55% requirement. Therefore, the Company's ownership of certain
Mortgage-Backed Securities may be limited by the provisions of the Investment
Company Act. In addition, in meeting the 55% requirement under the Investment
Company Act, the Company considers mortgage pass-through certificates issued
with respect to an underlying pool as to which the Company holds all issued
certificates as Qualifying Interests. If the Securities and Exchange
Commission, or its staff, adopts a contrary interpretation with respect to such
securities, the Company could be required to restructure its activities to the
extent its holdings of such mortgage pass-through certificates did not comply
with the interpretation. Such a restructuring could require the sale of a
substantial amount of mortgage pass-through certificates held by the Company at
a time it would not otherwise do so, which sale could occur under adverse market
conditions and the Company could incur losses as a result. Further, in order to
insure that the Company at all times continues to qualify for the above
exemption from the Investment Company Act, the Company may be required at times
to adopt less efficient methods of financing certain of its Mortgage-Backed
Securities than would otherwise be the case and may be precluded from acquiring
certain types of Mortgage-Backed Securities whose yield is somewhat higher than
the yield on Mortgage-Backed Securities that could be purchased in a manner
consistent with the exemption. The net effect of these factors may be to lower
at times the Company's net interest income. If the Company fails to qualify for
exemption from registration as an investment company, its ability to use
leverage would be substantially reduced and it would be unable to conduct its
business as described herein. Any such failure to qualify for such exemption
could have a material adverse effect on the Company.
18
<PAGE>
FAILURE TO MAINTAIN REIT STATUS WOULD SUBJECT THE COMPANY TO ADDITIONAL TAX
In order to maintain its qualification as a REIT for Federal income tax
purposes, the Company must comply with the REIT Provisions of the Code,
including satisfying certain tests with respect to the sources of its income,
the nature and diversification of its assets, the amount of its distributions to
stockholders and the ownership of its stock.
The Company intends, at all times, to operate so as to qualify as a REIT for
Federal income tax purposes. To qualify as a REIT, the Company must satisfy a
series of complicated tests related to the nature of its assets and income and
it must also distribute substantially all of its income (as specially defined
for these purposes) to its stockholders. If the Company fails to qualify as a
REIT in any taxable year and certain relief provisions of the Code do not apply,
the Company would be subject to Federal income tax as a regular domestic
corporation, and its stockholders would be subject to tax in the same manner as
stockholders of such corporation. Distributions to stockholders in any year in
which the Company fails to qualify as a REIT would not be deductible by the
Company in computing its taxable income. As a result, the Company could be
subject to income tax liability, thereby significantly reducing or eliminating
the amount of cash available for distribution to its stockholders. Further, the
Company could also be disqualified from re-electing REIT status for the four
taxable years following the year during which it became disqualified.
No assurance can be given that future legislation, regulations, administrative
interpretations or court decisions will not significantly change the tax laws
with respect to the Company's qualification as a REIT or the Federal income tax
consequences of such qualification, which changes may reduce or eliminate the
Company's competitive advantage over non-REIT competitors. See "Certain Federal
Income Tax Considerations -- Taxation of the Company."
POTENTIAL CHARACTERIZATION OF DISTRIBUTIONS AS UBTI; TAXATION OF TAX-EXEMPT
INVESTORS
In the event that (i) the Company is subject to the rules relating to taxable
mortgage pools (discussed below) or the Company is a "pension-held REIT," or
(ii) a tax-exempt stockholder has incurred indebtedness to purchase or hold its
Common Stock or is not exempt from Federal income taxation under certain special
sections of the Code, distributions to and, in the case of a stockholder
described in (ii), gains realized on the sale of Common Stock by, such tax-
exempt stockholder may be subject to Federal income tax as UBTI (i.e.,
"unrelated business taxable income" as defined in section 512 of the Code). See
"Certain Federal Income Tax Considerations -- Taxation of Tax-Exempt Entities."
TAXABLE MORTGAGE POOL RISK; INCREASED TAXATION
A REIT that incurs debt obligations with two or more maturities and which are
secured by assets such as the Mortgage-Backed Securities may be classified as a
"taxable mortgage pool" under the Code if payments required to be made on such
debt obligations bear a relationship to the payments received on such assets.
If the Company were to be subject to the taxable mortgage pool rules, the
Company's status as a REIT would not be impaired but a portion or all of the
taxable income (in excess of a specified return to investors) generated by the
Company's Mortgage-Backed Securities constituting a taxable mortgage pool may,
under regulations to be issued by the Treasury Department, be characterized as
"excess inclusion" income and allocated to the stockholders. Any such excess
inclusion income (i) would not be allowed to be offset by the net operating
losses of a stockholder, and (ii) would be subject to tax as UBTI to a tax-
exempt stockholder. See "Certain Federal Income Tax Considerations -- Taxation
of Tax-Exempt Entities."
The Company does not intend to issue debt obligations with differing
maturities backed by a single pool of Mortgage-Backed Securities, but it does
intend to enter into master repurchase agreements pursuant to which the Company
may borrow funds with differing maturity dates which are cross-collateralized by
specific Mortgage-Backed Securities. The Treasury Department has issued
regulations that adopt a broad view of what may constitute a taxable mortgage
pool including anti-avoidance rules that authorize the IRS to treat equity
interests issued by the Company as debt if such equity interests correspond to
maturity of classes of debt such as the Mortgage-Backed Securities. The
19
<PAGE>
Company does not believe that the master repurchase agreements or its other
financing arrangements should cause the Mortgage-Backed Securities to be treated
as a taxable mortgage pool. No assurances can be given, however, that the IRS
might not successfully maintain that the Mortgage-Backed Securities
collateralizing such master repurchase agreements constitute a taxable mortgage
pool.
BANKRUPTCY CODE TREATMENT OF REPURCHASE AGREEMENTS
In the event of a bankruptcy of the Company, certain repurchase agreements may
qualify for special treatment under the Bankruptcy Code, the effect of which is,
among other things, to allow the creditors under such agreements to avoid the
automatic stay provisions of the Bankruptcy Code and to liquidate the collateral
under such agreements without delay. Conversely, in the event of the bankruptcy
of a party with whom the Company has a repurchase agreement, the Company might
experience difficulty recovering the collateral under such agreement if it were
to be repudiated and the Company's claim against the bankrupt lender for damages
resulting therefrom were to be treated simply as one of an unsecured creditor.
Should this occur, the Company's claims would be subject to significant delay
and recoveries, if and when received, may be substantially less than the damages
actually suffered by the Company. Although the Company has, and intends to
continue to, enter into repurchase agreements with several different parties and
has developed policies to reduce its exposure to such risks, no assurance can be
given that the Company will be able to avoid such third party risks. See
"Business Strategy -- Capital Investment Policy -- Capital and Leverage."
RISK OF FUTURE REVISIONS IN POLICIES AND STRATEGIES
The Board of Directors has established the investment policies and operating
policies and strategies set forth in this Prospectus as the investment policies
and operating policies and strategies of the Company. However, these policies
and strategies may be modified or waived by the Board of Directors, subject in
certain cases to approval by a majority of the Independent Directors, without
stockholder consent. Although a majority of the Board of Directors will be
comprised of Independent Directors, the initial selection of the Independent
Directors was made by the initial stockholders of the Company who are also
officers or directors of the Company.
LACK OF PUBLIC MARKET
Prior to the Offering, there has been no public market for the Common Stock or
any other securities of the Company. Although application has been made to have
the Company's Common Stock quoted on the NASDAQ National Market, there can be no
assurance that an active trading market will develop or be sustained or that if
one does develop and is sustained, that the market price will equal or exceed
the public offering price set forth on the cover page of this Prospectus. For
discussion of the factors considered in determining the initial public offering
price, see "Underwriting."
COMMON STOCK AVAILABLE FOR FUTURE SALE
Following the closing of the Offering (and assuming that the Underwriters'
over-allotment option is not exercised), there will be outstanding (or reserved
for issuance upon exercise of outstanding options) 10,366,300 shares of Common
Stock, which include (i) 6,250,000 Shares being offered by the Company hereby,
(ii) 3,600,000 shares of Common Stock issued by the Company in the Private
Placement (the "Private Placement Shares"), (iii) 87,800 shares of Common Stock
issued to certain directors, officers and employees of the Company in the Direct
Offering (the "Direct Offering Shares"), (iv) 80,000 shares of Common Stock
issued to founders of the Company (the "Founders' Shares") and (v) 348,500
shares of Common Stock reserved for issuance upon the exercise of outstanding
options. The Private Placement Shares not being included in the Offering, the
Direct Offering Shares and the Founders' Shares are "restricted securities"
within the meaning of Rule 144 promulgated under the Securities Act ("Rule 144")
and may not be sold in the absence of registration under the Securities Act
unless an exemption from registration is available, including exemptions
contained in Rule 144. Such restricted securities will be available for resale
pursuant to Rule 144 following
20
<PAGE>
a holding period ending one year from the date of acquisition by the holder,
subject to the volume limitation of Rule 144 and, unless held by "affiliates" of
the Company (within the meaning of Rule 144), will become unrestricted two years
from the date of acquisition by the holder. Certain Private Placement Shares
are also presently available for resale, under certain conditions, to
institutional "accredited investors" within the meaning of Regulation D under
the Securities Act, "qualified institutional buyers" within the meaning of Rule
144A under the Securities Act, and to persons who are not "U.S. persons" within
the meaning of Regulation S under the Securities Act in accordance with
Regulation S. In addition, the holders of the Private Placement Shares have
certain registration rights with respect to such Private Placement Shares. See
"Description of Capital Stock -- Common Stock Available for Future Sale --
Registration Rights." Purchasers in the Direct Offering have agreed not to sell
their shares of Common Stock purchased in the Direct Offering for a period of
180 days after the Offering.
As of August 5, 1997, options to purchase 348,500 shares of Common Stock were
outstanding, of which options to purchase 7,500 shares are currently
exercisable; options to purchase 275,000 shares vest in four equal installments
on January 2, 1998, 1999, 2000 and 2001; options to purchase 36,000 shares vest
in four equal installments on January 21, 1998, 1999, 2000 and 2001; options to
purchase 25,000 shares vest in four equal installments on January 28, 1998,
1999, 2000 and 2001; and an option to purchase 5,000 shares vests in four equal
installments on June 26, 1998, 1999, 2000 and 2001. None of the shares of
Common Stock underlying the outstanding stock options has been registered under
the Securities Act.
No prediction can be made as to the effect, if any, that future sales of
shares of Common Stock, or the availability of such shares for future sale, will
have on the market price prevailing from time to time. Sales of substantial
amounts of Common Stock, or the perception that such sales could occur, may
affect adversely the prevailing market price of the Common Stock.
DILUTION; RISK OF POTENTIAL FUTURE OFFERINGS
The initial public offering price per share of Common Stock will exceed the
net tangible book value per share of Common Stock. Accordingly, assuming the
Underwriters' over-allotment option is not exercised, the purchasers of Common
Stock will experience immediate dilution (in the amount of $1.15 per share based
upon an assumed initial public offering price of $12.00 per share) in the net
tangible book value of their equity investment in the Company. See "Dilution."
The Company may in the future increase its capital resources by making
additional offerings of equity and debt securities, including classes and series
of preferred stock, additional classes and series of common stock, commercial
paper, medium-term notes and senior or subordinated notes. All debt securities
and classes of preferred stock will be senior to the Common Stock in a
liquidation of the Company. The effect of additional equity offerings may be the
dilution of the equity of stockholders of the Company or the reduction of the
price of shares of the Company's Common Stock, or both. The Company is unable
to estimate the amount, timing or nature of additional offerings as they will
depend upon market conditions and other factors.
ILLIQUIDITY OF CERTAIN INVESTMENTS
A small portion of the Company's portfolio may be invested in Mortgage-Backed
Securities for which the secondary trading market is not as well developed as
the market for certain other Mortgage-Backed Securities (or which are otherwise
considered less marketable or illiquid). Although the Company expects that most
of the Company's investments will be in Mortgage-Backed Securities for which a
resale market exists, certain of the Company's investments may lack a regular
trading market and may be illiquid. In addition, during turbulent market
conditions, the liquidity of all of the Company's Mortgage-Backed Securities may
be adversely impacted. There is no limit on the percentage of the Company's
investments that may be invested in illiquid Mortgage-Backed Securities.
21
<PAGE>
ISSUANCE OF PREFERRED STOCK
The Articles of Incorporation authorize the Board of Directors to reclassify
any of the unissued shares of authorized capital stock into a class or classes
of preferred stock. The issuance of preferred stock could have the effect of
making an attempt to gain control of the Company more difficult by means of a
merger, tender offer, proxy contest or otherwise. Preferred stock, if issued,
could have a preference on dividend payments over the Common Stock which could
affect the ability of the Company to make dividend distributions to the holders
of Common Stock.
RESTRICTIONS ON OWNERSHIP OF CAPITAL STOCK
In order that the Company may meet the requirements for qualification as a
REIT, the Articles of Incorporation prohibit any person from acquiring or
holding, directly or constructively, ownership of a number of shares of capital
stock in excess of 9.8% in number of shares or value (the "Ownership Limit") of
the outstanding shares. For this purpose the term "ownership" is defined as
either direct ownership or constructive ownership in accordance with the
constructive ownership provisions of section 544 of the Code. Any transfer of
shares of capital stock that would result in disqualification of the Company as
a REIT or that would (a) create a direct or constructive ownership of shares of
stock in excess of the Ownership Limit, or (b) from and after the earlier of
January 1, 1998 and the date of closing of the sale of Shares pursuant to the
Offering (the "One Hundred Stockholder Date"), result in the shares of stock
being beneficially owned (within the meaning section 856(a) of the Code) by
fewer than 100 persons (determined without reference to any rules of
attribution), or (c) result in the Company being "closely held" within the
meaning of section 856(h) of the Code, will be null and void, and the intended
transferee (the "purported transferee") will acquire no rights to such shares.
Any purported transfer of shares that would result in a person owning (directly
or constructively) shares in excess of the Ownership Limit (except as otherwise
waived by the Board of Directors) due to the unenforceability of the transfer
restrictions set forth above will constitute "Excess Securities." Excess
Securities will be transferred by operation of law to a trust to be established
by the Company for the exclusive benefit of a charitable organization, until
such time as the trustee of the trust, which shall be a banking institution
designated as trustee by the Company which is unaffiliated with either the
Company or the purported transferee, retransfers the Excess Securities. Subject
to the Ownership Limit, Excess Securities may be transferred by the trust to any
person (if such transfer would not result in Excess Securities) at a price not
to exceed the price paid by the purported transferee (or, if no consideration
was paid by the purported transferee, the fair market value of the Excess
Securities on the date of the purported transfer), at which point the Excess
Securities will automatically cease to be Excess Securities. See "Description
of Capital Stock --Restrictions on Ownership and Transfer" and "Certain Federal
Income Tax Considerations -- General -- Stock Ownership Tests."
Subject to certain limitations, the Board of Directors may increase or
decrease the Ownership Limit. In addition, to the extent consistent with the
REIT Provisions of the Code, the Board of Directors has the right, pursuant to
the Company's Articles of Incorporation, to waive the Ownership Limit for and at
the request of a purchaser of the Common Stock. In connection with any such
waiver, the Company may require that the stockholder requesting such a waiver
enter into an agreement with the Company providing for the repurchase by the
Company of shares from the stockholder under certain circumstances to ensure
compliance with the REIT Provisions of the Code. Such repurchase would be at
fair market value as set forth in the agreement between the Company and such
stockholder. The consideration received by the stockholder in such repurchase
might be characterized as the receipt by the stockholder of a dividend from the
Company, and any stockholder entering into such an agreement with the Company
should consult its tax advisor in connection with its entering into such an
agreement. At present, the Company does not intend to waive the Ownership Limit
for any purchaser of shares of the Common Stock.
The provisions described above may inhibit market activity and a resulting
takeover or other transaction in which holders of some or a majority of the
Company's capital stock might receive a premium for their shares or which such
holders might believe to be otherwise in their best interests. Such provisions
also may make the Company an unsuitable
22
<PAGE>
investment vehicle for any person seeking to obtain ownership of more than 9.8%
of the outstanding shares of capital stock. See "Description of Capital Stock --
Restrictions on Ownership and Transfer."
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's Articles of Incorporation limit the liability of its directors
and officers to the Company and its stockholders to the fullest extent permitted
by Maryland law, and the Company's Articles of Incorporation provide for
indemnification of the directors and officers to such extent. See "Management -
- - Limits of Responsibility."
THE COMPANY
Annaly Mortgage Management, Inc. (the "Company") was incorporated in the State
of Maryland on November 25, 1996. The Company commenced operations on February
18, 1997 upon the consummation of the Private Placement. The Company raised
additional capital on July 31, 1997 upon the consummation of the Direct
Offering.
The Company specializes in investing in Mortgage-Backed Securities. Its
principal business objective is to generate net income for distribution to
stockholders from the spread between the interest income on its Mortgage-Backed
Securities and the costs of borrowing to finance its acquisition of Mortgage-
Backed Securities. The Company will elect to be taxed as a REIT.
The Company is self-advised and self-managed. The management of the Company
manages the day-to-day operations, subject to the supervision of the Company's
Board of Directors. Messrs. Farrell and Guba, and Ms. St. Claire, executive
officers of the Company, have an average of 15 years' experience in the
investment banking and investment management industries where, in various
capacities, they have each managed portfolios of Mortgage-Backed Securities,
arranged collateralized borrowings and utilized hedging techniques to mitigate
interest rate and other risk within fixed-income portfolios. Ms. Fagan, the
Company's Chief Financial Officer and Treasurer, has served as Chief Financial
Officer and Controller of a publicly owned savings and loan association. See
"Management."
The Company has an office located at 1500 Harbor Blvd., Weehawken, New Jersey
07087 which it leases. The telephone number for the Company is (201) 223-1900.
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of 6,250,000
Shares being offered hereby by the Company are estimated to be approximately
$________ after deducting the expenses of the Offering. If the Underwriters'
over-allotment option is exercised in full, the net proceeds to the Company are
estimated to be approximately $_________. The Company will not receive any
proceeds from the sale of Shares by the Selling Stockholders.
The Company intends to use such net proceeds to acquire additional Mortgage-
Backed Securities. The Company then intends to increase its investment assets
by borrowing against such Mortgage-Backed Securities and using the proceeds to
acquire additional Mortgage-Backed Securities. See "Business Strategy --
Capital Investment Policy -- Capital and Leverage."
It is expected that the Company may require from one to four months to invest
fully the proceeds of the Offering in Mortgage-Backed Securities and to
implement fully the Company's leveraging strategy to increase its Mortgage-
Backed Security investments to the desired level. Pending full investment in
the desired mix of Mortgage-Backed Securities, the net proceeds will be invested
in High Quality Short-Term Investments that are expected to provide a lower net
return than the Company hopes to achieve from its intended primary Mortgage-
Backed Security investments.
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<PAGE>
CAPITALIZATION
The capitalization of the Company, at June 30, 1997, as adjusted to reflect
the sale of 87,800 shares of Common Stock at a price of $10.00 per share
pursuant to the Direct Offering, and as adjusted to reflect the sale of the
6,250,000 Shares offered by the Company pursuant to the Offering, is as follows:
<TABLE>
<CAPTION>
As Adjusted for
As Adjusted Direct Offering
for Direct and the Offering
Actual (1) Offering (1) (1)(2)
-------------------------------------------------
<S> <C> <C> <C>
Common Stock, par value $.01 per share:
Authorized -- 100,000,000 shares
Outstanding -- 3,680,000 shares (as adjusted,
3,767,800 shares and 10,017,800 shares,
respectively) .............................. $ 36,800 $ 37,678 $100,178
Additional Paid-In Capital..................... 32,955,104 33,832,226
------------------------------------------------
Total $32,991,904 $33,869,904 $
================================================
</TABLE>
- ------------------------------------
(1) Does not include 348,500 shares of Common Stock issuable upon the exercise
of options granted pursuant to the Incentive Plan.
(2) Assumes no exercise of the Underwriters' over-allotment option.
24
<PAGE>
DISTRIBUTION POLICY
The Company intends to distribute substantially all of its taxable income with
respect to each year (which does not ordinarily equal net income as calculated
in accordance with GAAP) to its stockholders so as to comply with the REIT
Provisions of the Code. The Company intends to declare regular quarterly
dividends. It is intended that any taxable income remaining after the
distribution of the final regular quarterly dividend each year will be
distributed together with the first regular quarterly dividend payment of the
following taxable year or in a special dividend distributed prior thereto. The
dividend policy is subject to revision at the discretion of the Board of
Directors. All distributions will be made by the Company at the discretion of
the Board of Directors and will depend on the taxable earnings of the Company,
the financial condition of the Company, maintenance of REIT status and such
other factors as the Board of Directors deems relevant. See "Certain Federal
Income Tax Considerations -- General -- Distribution Requirement."
To date, the Company has declared a dividend of $0.075 per share of Common
Stock (or $276,000 in the aggregate) for the period from February 18, 1997
(commencement of operations) to March 31, 1997, and a dividend of $.255 per
share of Common Stock (or $938,400 in the aggregate) for the second quarter of
1997. The level of quarterly dividends is based on a number of factors and
should not be deemed indicative of taxable income for the quarter in which
declared or future quarters or of income calculated in accordance with GAAP. All
dividends declared following the closing of the Offering will be payable to
holders of the Common Stock, subject to the terms of any other class of capital
stock that may be issued in the future. See "Risk Factors -- Legal and Other
Risks -- Dilution."
Distributions to stockholders will generally be subject to tax as ordinary
income, although a portion of such distributions may be designated by the
Company as capital gain or may constitute a tax-free return of capital. The
Company does not intend to declare dividends that would result in a return of
capital. The Company will annually furnish to each of its stockholders a
statement setting forth distributions paid during the preceding year and their
characterization as ordinary income, capital gains or return of capital. For a
discussion of the Federal income tax treatment of distributions by the Company,
see "Certain Federal Income Tax Considerations -- Taxation of Stockholders."
The Company is considering the adoption of a Dividend Reinvestment Plan that
will allow holders of Common Stock to have their dividends reinvested
automatically in additional shares of Common Stock. The Company has no plans to
adopt such a Dividend Reinvestment Plan (if at all) prior to 1998.
DILUTION
The net tangible book value of the Company at June 30, 1997 was $32.8 million,
or $8.92 per share of Common Stock. Net tangible book value per share represents
the total tangible assets of the Company, reduced by the amount of its total
liabilities, and divided by the number of shares of Common Stock outstanding as
of that date.
After giving effect to the net proceeds from the sale of shares of Common
Stock in the Direct Offering on July 31, 1997, and assuming no exercise of any
options granted to directors of the Company which are exercisable at June 30,
1997, the pro forma net tangible book value of the Company at June 30, 1997
would have been $33.7 million, or $8.94 per share.
After giving effect to the net proceeds from the sale of shares in the Direct
Offering on July 31, 1997 and the estimated net proceeds to the Company from the
sale of the Shares offered by the Company hereby at an assumed initial public
offering price of $12.00 per share, and assuming no exercise of any options
granted to directors of the Company which were exercisable at June 30, 1997, the
pro forma net tangible book value of the Company at June 30, 1997 would have
been $108.7 million or $10.85 per share of Common Stock. This represents an
immediate increase in net tangible
25
<PAGE>
book value of $1.91 per share to existing stockholders and immediate dilution of
$1.15 per share to new investors purchasing Shares in the Offering at an assumed
Offering Price equal to $12.00 per Share.
The following table illustrates this dilution in net tangible book value on a
per-share basis:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per Share.......................... $12.00
Net tangible book value per share at June 30, 1997.................... $8.92
Increase attributable to sale of shares of Common Stock in the Direct
Offering............................................................ .02
Increase attributable to purchase of Shares by new investors in the
Offering............................................................ 1.91
-----
Pro forma net tangible book value per share of Common Stock after
giving effect to the consummation of the Offering....................... $10.85
------
Dilution in net tangible book value per share of Common Stock to new
investors in the Offering............................................... $ 1.15
======
</TABLE>
The following table summarizes on a pro forma basis at June 30, 1997 the total
consideration and the average price per share of Common Stock paid by (i)
existing stockholders at June 30, 1997, (ii) purchasers in the Direct Offering,
and (iii) new investors in the Offering at an assumed Offering Price of $12.00
per share:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
----------------- -------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholders at June 30, 1997......... 3,680,000 36.73% $ 36,012,000 32.19% $ 9.79
Purchasers in the Direct Offering.............. 87,800 0.88% $ 878,000 0.78% $10.00
New Investors in the Offering.................. 6,250,000 62.39% $ 75,000,000 67.03% $12.00
Total..................................... 10,017,800 100.00% $111,890,000 100.00%
</TABLE>
The above calculations assume no exercise of the Underwriters' over-
allotment option. The above calculations also assume no exercise of any
outstanding options under the Company's Incentive Plan. As of August 4, 1997,
options to acquire 348,500 shares of Common Stock were outstanding, consisting
of: options to acquire 208,250 shares at an exercise price of $4.00 per share,
which options will vest in four equal installments on January 2, 1998, 1999,
2000 and 2001; options to acquire 66,750 shares at an exercise price of $10.00
per share, which options will vest in four equal installments on January 2,
1998, 1999, 2000 and 2001; options to acquire 36,000 shares at an exercise price
of $10.00 per share, which options will vest in four equal installments on
January 21, 1998, 1999, 2000 and 2001; options to acquire 25,000 shares at an
exercise price of $10.00 per share, which options will vest in four equal
installments on January 28, 1998, 1999, 2000 and 2001; an option to acquire
5,000 shares at an exercise price of $10.00 per share, which option will vest in
four equal installments on June 26, 1998, 1999, 2000 and 2001; and options to
acquire 7,500 shares of Common Stock at an exercise price of $10.00 per share,
which options vested on June 26, 1997. See "Management--Long-Term Stock
Incentive Plan."
26
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data are derived from the audited
financial statements of the Company for the period from commencement of
operations on February 18, 1997 to June 30, 1997. The selected financial data
should be read in conjunction with the more detailed information contained in
the Financial Statements and Notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this Prospectus.
PERIOD FROM FEBRUARY 18, 1997 TO JUNE 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA:
<S> <C>
Days in period 133
Interest income $ 6,509
Interest expense 5,149
----------
Net interest income 1,360
Gain on sale of mortgage-backed securities 230
General and administrative expenses (G&A expense) 250
----------
Net income $ 1,340
==========
Net income per share $ 0.36
Dividends declared per share 0.33
BALANCE SHEET DATA AT JUNE 30, 1997:
Mortgage-Backed Securities 364,367
Total assets 398,236
Repurchase agreements 326,987
Total liabilities 365,418
Stockholders' equity 32,819
Number of common shares outstanding 3,680,000
Interest rate spread 0.99%
OTHER DATA:
Average total assets $ 283,100
Average borrowings 242,027
Average equity 33,115
Yield on interest earning assets at June 30, 1997 6.63%
Cost of funds on interest bearing liabilities at June 30, 1997 5.64%
Efficiency ratio (G&A expense/net interest income) 18.37%
ANNUALIZED FINANCIAL RATIOS(1):
Net interest margin (net interest income/average total assets) 1.32%
G&A expense as a percentage of average assets 0.24%
G&A expense as a percentage of average equity 2.07%
Return on average assets 1.30%
Return on average equity 11.11%
</TABLE>
(1) Each ratio has been computed by annualizing the results for the 133-day
period ended June 30, 1997
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a real estate investment trust ("REIT") which acquires and
manages Mortgage-Backed Securities which can be readily financed. The Company
commenced operations on February 18, 1997 upon the closing of the Private
Placement which resulted in proceeds to the Company of approximately $33
million. The Company received additional proceeds of $878,000 upon the closing
of the Direct Offering on July 31, 1997.
The Company's principal business objective is to generate net income for
distribution to stockholders from the spread between the interest income on its
Mortgage-Backed Securities and the costs of borrowing to finance its acquisition
of Mortgage-Backed Securities. Since the commencement of operations on February
18, 1997, the Company has been in the process of building its balance sheet by
acquiring Mortgage-Backed Securities. Therefore, the operating results of the
Company reflected in the financial statements included in this Prospectus should
be interpreted in light of this growth process and are not necessarily
representative of what they may be in the future.
The Company will seek to generate growth in earnings and dividends per share
in a variety of ways, including through (i) issuing new Common Stock and
increasing the size of the balance sheet when opportunities in the market for
Mortgage-Backed Securities are likely to allow growth in earnings per share,
(ii) seeking to improve productivity by increasing the size of the balance sheet
at a rate faster than the rate of increase in operating expenses, (iii)
continually reviewing the mix of Mortgage-Backed Security types on the balance
sheet in an effort to improve risk-adjusted returns, and (iv) attempting to
improve the efficiency of the Company's balance sheet structure through the
issuance of uncollateralized subordinated debt, preferred stock and other forms
of capital, to the extent management deems such issuances appropriate.
RESULTS OF OPERATIONS: FEBRUARY 18, 1997 TO JUNE 30, 1997
The Company's 1997 fiscal year commenced with the start of operations on
February 18, 1997 and will conclude December 31, 1997. The 133-day period from
February 18, 1997 to June 30, 1997 is referred to herein as "the period ended
June 30, 1997."
NET INCOME SUMMARY
For the period ended June 30, 1997, net income was $1,340,059, or $0.36 per
share. Net income per share is computed by dividing net income by the weighted
average number of shares of outstanding Common Stock during the period.
Dividends per share was $0.33 per share, $1,214,400 in total. Taxable income did
not differ from GAAP income for the period. Return on average equity was 11.11%
on an annualized basis.
Management's policy is to focus on income and expense measures as a percentage
of equity rather than as a percentage of assets. Therefore, improvements in
asset-based measures such as net interest margin or operating expenses as a
percentage of assets do not necessarily translate into improved stockholder
returns. Improvements in net interest income or operating expenses as a
percentage of equity, however, indicate that the Company is effectively
utilizing its equity capital base. The Company seeks to increase net income as a
percentage of equity consistent with its Capital Investment Policy.
28
<PAGE>
NET INCOME SUMMARY
------------------
Period Ended
June 30, 1997
------------------
(dollars in
thousands, except
per share amounts)
Interest Income................................... $ 6,509
Interest Expense.................................. 5,149
----------
Net Interest Income............................... 1,360
Gain on Sale of Mortgage-Backed Securities........ 230
General and Administrative Expenses............... 250
----------
Net Income........................................ 1,340
Average Number of Outstanding Shares.............. 3,680,000
Net Income Per Share.............................. $ 0.36
Average Total Assets.............................. $ 283,100
Average Equity.................................... $ 33,115
Annualized Return on Average Assets 1.30%
Annualized Return on Average Equity 11.11%
TAXABLE INCOME AND GAAP INCOME
For the period ended June 30, 1997, income as calculated for tax purposes
(taxable income) did not differ from income as calculated according to generally
accepted accounting principles (GAAP income). However, such amounts could
differ in the future for various reasons. For example, the Company may take
credit provisions which would affect GAAP income whereas only actual credit
losses are deducted in calculating taxable income. In addition, general and
administrative expenses may differ due to differing treatment of leasehold
amortization, certain stock option expenses and other items. As of June 30,
1997, the Company had not taken credit provisions because all of the Mortgage-
Backed Securities acquired by the Company through June 30, 1997 had been Agency
Certificates which, although not rated, carry an implied "AAA" rating.
The distinction between taxable income and GAAP income is important to the
Company's stockholders because dividends are declared on the basis of taxable
income. While the Company does not pay taxes so long as it satisfies the
requirements for exemption from taxation pursuant to the REIT Provisions of the
Code, each year the Company completes a corporate tax form wherein taxable
income is calculated as if the Company were to be taxed. This taxable income
level determines the amount of dividends the Company can pay out over time.
INTEREST INCOME AND AVERAGE EARNING ASSET YIELD
The Company had average earning assets of $275.9 million for the period
ended June 30, 1997. The Company's primary source of income for the period
ended June 30, 1997 was interest income. A portion of income was generated by
gains on sales of Mortgage-Backed Securities. Interest income was $6.5 million
for the period ended June 30, 1997. The yield on average earning assets was
6.44% for the same period. The table below shows the Company's average balance
of cash equivalents and Mortgage-Backed Securities, the yields earned on each
type of earning assets, the yield on average earning assets and interest income.
29
<PAGE>
<TABLE>
<CAPTION>
AVERAGE EARNING ASSET YIELD
---------------------------
Yield on
Average Average
Amortized Amortized
Cost of Yield on Cost of Yield on
Average Mortgage- Average Average Mortgage- Average
Cash Backed Earning Cash Backed Earning Interest
Equivalents Securities Assets Equivalents Securities Assets Income
----------- ---------- ------- ----------- ---------- -------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
For the Period Ended June 30, 1997.. $121 $275,858 $275,979 4.63% 6.44% 6.44% $6,509
</TABLE>
The Constant Prepayment Rate (or "CPR") on the Company's portfolio of
Mortgage-Backed Securities for the period ended June 30, 1997 was 12%. "CPR"
means an assumed rate of prepayment for the Company's Mortgage-Backed
Securities, expressed as an annual rate of prepayment relative to the
outstanding principal balance of the Company's Mortgage-Backed Securities. This
CPR does not purport to be either a historical description of the prepayment
experience of the Company's Mortgage-Backed Securities or a prediction of the
anticipated rate of prepayment of the Company's Mortgage-Backed Securities.
Since a large portion of the Company's assets was purchased at a premium to par
value and only a small portion of the Company's assets was purchased at a
discount to par value, the premium balance in the Company's portfolio is
substantially higher than the discount balance. Principal prepayments had a
negative effect on the Company's earning asset yield for the period ended June
30, 1997 because the Company adjusts its rates of premium amortization and
discount accretion monthly based on actual payments received.
INTEREST EXPENSE AND THE COST OF FUNDS
The Company anticipates that its largest expense will usually be the cost
of borrowed funds. The Company had average borrowed funds of $242.0 million and
total interest expense of $5.1 million for the period ended June 30, 1997. The
average cost of funds was 5.84% for the same period. Interest expense is
calculated in the same manner for GAAP and tax purposes.
With the Company's current asset/liability management strategy, changes in
the Company's cost of funds are expected to be closely correlated with changes
in short-term LIBOR, although the Company may choose to extend the maturity of
its liabilities at any time. See "Business Strategy -- Capital Investment
Policy -- Interest Rate Risk Management." The Company's average cost of funds
was 0.15% above one-month LIBOR for the period ended June 30, 1997. The Company
generally has structured its borrowings to adjust with one-month LIBOR because
the Company believes that one-month LIBOR may continue to be lower than six-
month LIBOR in the present interest rate environment. On average, one-month
LIBOR was 0.28% lower than six-month LIBOR during the period ended June 30,
1997.
The table below shows the Company's average borrowed funds and average cost
of funds as compared to average one- and average six-month LIBOR.
30
<PAGE>
AVERAGE COST OF FUNDS
---------------------
<TABLE>
<CAPTION>
Average
One-Month Average Cost of Average Cost of
Average Average LIBOR Relative Funds Relative Funds Relative to
Average Average One- Six- to Average to Average Average
Borrowed Interest Cost of Month Month Six-Month One-Month Six-Month
Funds Expense Funds LIBOR LIBOR LIBOR LIBOR LIBOR
----------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Period Ended
June 30, 1997...... $242,027 $5,149 5.84% 5.69% 5.97% (0.28%) 0.15% (0.13%)
</TABLE>
NET INTEREST RATE AGREEMENT EXPENSE
For the period ended June 30, 1997, the Company did not enter into any
interest rate agreements. As part of its asset/liability management process, the
Company may enter into interest rate agreements such as interest rate caps,
floors and swaps. These agreements would be entered into to reduce interest
rate risk and would be designed to provide income and capital appreciation to
the Company in the event of certain changes in interest rates. The Company
reviews the need for interest rate agreements on a regular basis consistent with
its Capital Investment Policy. While the Company has determined, based upon the
current interest rate environment and other relevant factors, that it would not
be economically advantageous, at present, for the Company to enter into interest
rate agreements, the Company may enter into such agreements in the future.
NET INTEREST INCOME
Net interest income, which equals interest income less interest expense,
totaled $1.4 million for the period ended June 30, 1997. Net interest spread,
which equals the yield on the Company's average assets for the period less the
average cost of funds for the period, was 0.60% for the period ended June 30,
1997. Net interest margin, which equals net interest income divided by average
total assets, was 1.32% on an annualized basis. The principal reason that
annualized net interest margin exceeded net interest spread is that average
assets exceeded average liabilities. A portion of the Company's assets are
funded with equity rather than borrowings. The Company did not have any
interest rate agreement expenses for the period ended June 30, 1997.
The table below shows interest income by earning asset type, average
earning assets by type, total interest income, interest expense, average
repurchase agreements, average cost of funds, and net interest income for the
period ended June 30, 1997.
NET INTEREST INCOME
-------------------
<TABLE>
<CAPTION>
Average
Amortized
Cost of Interest Yield on
Mortgage- Income on Interest Average
Backed Mortgage- Income on Total Interest
Securities Backed Average Cash Interest Earning
Held Securities Cash Equivalents Equivalents Income Assets
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Period Ended
June 30, 1997............ $275,858 $6,478 $121 $31 $6,509 6.44%
<CAPTION>
Average
Balance of Average Net
Repurchase Interest Cost of Interest
Agreements Expense Funds Income
----------------------------------------------------
<S> <C> <C> <C> <C>
For the Period Ended
June 30, 1997............ $242,027 $5,149 5.84% $1,360
</TABLE>
31
<PAGE>
GAINS AND LOSSES ON SALES OF MORTGAGE-BACKED SECURITIES
For the period ended June 30, 1997, the Company sold Mortgage-Backed
Securities with an aggregate historical amortized cost of $74.5 million for an
aggregate gain of $229,865. The difference between the sale price and the
historical amortized cost of the Mortgage-Backed Securities is a realized gain
and increased income accordingly. The Company does not expect to sell assets on
a frequent basis, but may from time to time sell existing assets to move into
new assets which management believes might have higher risk-adjusted returns or
to manage its balance sheet as part of management's asset/liability management
strategy.
CREDIT EXPENSES
The Company has not experienced credit losses on its portfolio of Mortgage-
Backed Securities to date, but losses may be experienced in the future. At June
30, 1997, the Company had limited its exposure to credit losses on its
portfolio of Mortgage-Backed Securities by purchasing only Agency Certificates
which, although not rated, carry an implied "AAA" rating.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses ("operating expense" or "G&A expense")
was $249,895 for the period ended June 30, 1997. There were no differences in
the calculation of G&A expense for taxable and GAAP income purposes.
G&A EXPENSE AND OPERATING EXPENSE RATIOS
----------------------------------------
<TABLE>
<CAPTION>
Total G&A Total G&A
Cash Comp Other G&A Total G&A Expense/Average Expense/Average Efficiency
and Benefits Expense Expense Assets Equity Ratio
Expense (annualized) (annualized) (annualized)
-----------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
For the Period Ended
June 30, 1997...... $140 $110 $250 0.24% 2.07% 18.37%
</TABLE>
The Company expects G&A expense to increase following the Offering. The
Company plans to hire new employees to expand the Company's capabilities with
respect to acquiring and monitoring its portfolio of Mortgage-Backed Securities.
In addition, certain compensation expenses will increase commensurate with
growth in the Company's equity base. See "Management -- Compensation of
Directors and Executive Officers." Despite these increases in operating
expenses, management believes that the Company's operating expenses over time
are likely to grow at a slower rate than its asset or equity base and thus
management believes that the Company's operating expense ratios are likely to
continue to improve over time.
NET INCOME AND RETURN ON AVERAGE EQUITY
Net income was $1.3 million in the period ended June 30, 1997. Return on
average equity was 11.11% on an annualized basis. The table below shows, on an
annualized basis, the Company's net interest income, gain on sale of Mortgage-
Backed Securities and G&A expense each as a percentage of average equity, and
the return on average equity.
32
<PAGE>
<TABLE>
<CAPTION>
COMPONENTS OF RETURN ON AVERAGE EQUITY
--------------------------------------
Gain on Sale of
Mortgage-Backed
Net Interest Securities/ G&A Return on
Income/Average Average Expense/Average Average
Equity Equity Equity Equity
---------------- ----------------- ----------------- ----------
<S> <C> <C> <C> <C>
For the Period Ended June 30, 1997
(on an annualized basis)....... 11.27% 1.91% 2.07% 11.11%
</TABLE>
DIVIDENDS AND TAXABLE INCOME
The Company will elect to be taxed as a REIT under the Code. Accordingly,
the Company intends to distribute substantially all of its taxable income for
each year to stockholders, including income resulting from gains on sales of
Mortgage-Backed Securities. On a cumulative basis through June 30, 1997, earned
taxable income exceeded dividend declarations by $125,659, or $0.03 per share,
based on the number of shares of Common Stock outstanding at period end.
<TABLE>
<CAPTION>
DIVIDEND SUMMARY
----------------
Taxable Cumulative
Taxable Common Net Dividends Dividend Undistributed
Net Shares Income Declared Total Pay-out Taxable
Income Outstanding Per Share Per Share Dividends Ratio Income
------- ----------- ----------- --------- --------- --------- -------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
For the Period Ended
June 30, 1997...... $1,340 3,680,000 $0.36 $0.33 $1,214 90.6% $126
</TABLE>
FINANCIAL CONDITION
MORTGAGE-BACKED SECURITIES
All of the Company's Mortgage-Backed Securities at June 30, 1997 were
adjustable-rate or fixed-rate Mortgage-Backed Securities backed by Single-Family
Mortgage Loans. All of the mortgage assets underlying such Mortgage-Backed
Securities were secured with a first lien position with respect to the
underlying single-family properties. At June 30, 1997, all the Company's
Mortgage-Backed Securities were Agency Certificates which carry an implied "AAA"
rating. All of the Company's earning assets are marked-to-market at liquidation
value.
Discount balances are accreted as an increase in interest income over the
life of discount Mortgage-Backed Securities and premium balances are amortized
as a decrease in interest income over the life of premium Mortgage-Backed
Securities. At June 30, 1997, the Company had on its balance sheet a total of
$2,399 of unamortized discount (which is the difference between the remaining
principal value and current historical amortized cost of Mortgage-Backed
Securities acquired at a price below principal value) and a total of $10.3
million of unamortized premium (which is the difference between the remaining
principal value and the current historical amortized cost of Mortgage-Backed
Securities acquired at a price above principal value).
Mortgage principal repayments received were $13.7 million for the period
ended June 30, 1997, which equals a CPR of 12%. Given the Company's current
portfolio composition, if mortgage principal prepayment rates increase over the
life of the Mortgage-Backed Securities comprising the current portfolio, all
other factors being equal, the Company's net interest income should decrease
during the life of such Mortgage-Backed Securities as the Company will be
required to amortize its net premium balance into income over a shorter time
period. Similarly, if mortgage
33
<PAGE>
principal prepayment rates decrease over the life of such Mortgage-Backed
Securities, all other factors being equal, the Company's net interest income
should increase during the life of such Mortgage-Backed Securities as the
Company will amortize its net premium balance over a longer time period.
The table below summarizes the Company's Mortgage-Backed Securities at June
30, 1997.
MORTGAGE-BACKED SECURITIES
---------------------------
<TABLE>
<CAPTION>
Estimated
Amortized Estimated Fair Value/ Weighted
Net Amortized Cost/Principal Fair Principal Average
Principal Value Premium Cost Value Value Value Yield
--------------- ------- --------- ---------------- --------- ------------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
At June 30, 1997.. $354,329 $10,337 $364,666 102.92% $364,367 102.83% 6.63%
</TABLE>
During the period ended June 30, 1997, the Company's Mortgage-Backed
Securities consisted solely of Agency Certificates. However, the Company may
purchase other types of Mortgage-Backed Securities in the future.
The tables below set forth certain characteristics of the Company's
Mortgage-Backed Securities at June 30, 1997. The index level for adjustable-
rate Mortgage-Backed Securities is the weighted average rate of the various
short-term interest rate indices which determine the coupon rate.
<TABLE>
<CAPTION>
ADJUSTABLE-RATE MORTGAGE-BACKED SECURITY CHARACTERISTICS
--------------------------------------------------------
Weighted
Weighted Weighted Average Principal Value at
Average Average Weighted Term Weighted Weighted Period End as % of
Principal Coupon Index Average Net to Next Average Average Asset Mortgage-Backed
Value Rate Level Margin Adjustment Lifetime Cap Yield Securities
-----------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
At June 30, 1997.. $329,953 7.25% 5.47% 1.78% 1 month 11.22% 6.59% 93.13%
</TABLE>
<TABLE>
<CAPTION>
FIXED-RATE MORTGAGE-BACKED SECURITY CHARACTERISTICS
---------------------------------------------------
Principal Value at
Weighted Weighted Period End as % of
Principal Average Average Mortgage-Backed
Value Coupon Rate Asset Yield Securities
-------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
At June 30, 1997.. $24,376 8.00% 7.33% 6.87%
</TABLE>
At June 30, 1997, the Company held Mortgage-Backed Securities with coupons
linked to the one- and three-year Treasury Indices, one-month LIBOR and the six-
month CD rate. The table below segments the Company's adjustable-rate Mortgage-
Backed Securities by type of adjustment index, coupon adjustment frequency and
annual and lifetime cap adjustment.
34
<PAGE>
ADJUSTABLE-RATE MORTGAGE-BACKED SECURITIES BY INDEX
---------------------------------------------------
<TABLE>
<CAPTION>
1-Year 3-Year
One-Month Six-Month Treasury Treasury
LIBOR CD Rate Index Index
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Weighted Average Adjustment Frequency..... 1 mo. 6 mo. 12 mo. 36 mo.
Weighted Average Term to Next Adjustment... 1 mo. 3 mo. 6 mo. 12 mo.
Weighted Average Annual Period Cap......... none 2.00% 1.78% 2.00%
Weighted Average Lifetime Cap.............. 9.73% 11.06% 11.82% 14.16%
Mortgage Principal Value as Percentage of
Mortgage-Backed Securities............... 18.73% 21.59% 52.21% 0.60%
</TABLE>
The table below shows unrealized gains and losses on the Mortgage-Backed
Securities in the Company's portfolio.
UNREALIZED GAINS AND LOSSES
---------------------------
<TABLE>
<CAPTION>
At June 30,
1997
------------
(dollars in
thousands)
<S> <C>
Unrealized Gain......................................................... $ 438
Unrealized Loss......................................................... (737)
Net Unrealized Loss..................................................... (299)
Net Unrealized Loss as % of Mortgage-Backed Securities Principal Value.. 0.08%
Net Unrealized Loss as % of Mortgage-Backed Securities Amortized Cost... 0.08%
</TABLE>
INTEREST RATE AGREEMENTS
Interest rate agreements are assets that are carried on a balance sheet at
estimated liquidation value. At June 30, 1997, there were no interest rate
agreements on the Company's balance sheet.
BORROWINGS
To date, the Company's debt has consisted entirely of borrowings
collateralized by a pledge of the Company's Mortgage-Backed Securities. These
borrowings appear on the balance sheet as repurchase agreements. At June 30,
1997, the Company had established uncommitted borrowing facilities in this
market with nineteen lenders in amounts which the Company believes are in excess
of its needs. All of the Company's Mortgage-Backed Securities are currently
accepted as collateral for such borrowings. The Company, however, limits its
borrowings, and thus its potential asset growth, in order to maintain unused
borrowing capacity and thus increase the liquidity and strength of its balance
sheet.
For the period ended June 30, 1997, the term to maturity of the Company's
borrowings has ranged from one day to six months, with a weighted average
original term to maturity of 66 days and a weighted average remaining maturity
of 20 days at June 30, 1997. Many of the Company's borrowings have a cost of
funds which adjust monthly based on a fixed spread over or under one-month LIBOR
or based on the daily Fed Funds rate. As a result, the average term to the next
rate adjustment for the Company's borrowings is typically shorter than the term
to maturity for the Company's Mortgage-Backed Securities. At June 30, 1997, the
weighted average cost of funds for all of the Company's borrowings was 5.64% and
the weighted average term to next rate adjustment was 20 days.
35
<PAGE>
LIQUIDITY
Liquidity, which is the Company's ability to turn non-cash assets into
cash, allows the Company to purchase additional Mortgage-Backed Securities and
to pledge additional assets to secure existing borrowings should the value of
pledged assets decline. Potential immediate sources of liquidity for the
Company include cash balances and unused borrowing capacity. Unused borrowing
capacity will vary over time as the market value of the Company's Mortgage-
Backed Securities varies. The Company's balance sheet also generates liquidity
on an on-going basis through mortgage principal repayments and net earnings held
prior to payment as dividends. Should the Company's needs ever exceed these on-
going sources of liquidity plus the immediate sources of liquidity discussed
above, management believes that the Company's Mortgage-Backed Securities could
in most circumstances be sold to raise cash. The maintenance of liquidity is
one of the goals of the Company's Capital Investment Policy. Under this policy,
asset growth is limited in order to preserve unused borrowing capacity for
liquidity management purposes.
STOCKHOLDERS' EQUITY
The Company uses "available-for-sale" treatment for its Mortgage-Backed
Securities; these assets are carried on the balance sheet at estimated market
value rather than historical amortized cost. Based upon such "available-for-
sale" treatment, the Company's equity base at June 30, 1997 was $32.8 million,
or $8.92 per share. If the Company had used historical amortized cost
accounting, the Company's equity base at June 30, 1997 would have been $33.1
million, or $9.00 per share.
With the Company's "available-for-sale" accounting treatment, unrealized
fluctuations in market values of assets do not impact GAAP or taxable income but
rather are reflected on the balance sheet by changing the carrying value of the
asset and reflecting the change in stockholders' equity under "Net Unrealized
Losses on Assets Available for Sale." By accounting for its assets in this
manner, the Company hopes to provide useful information to stockholders and
creditors and to preserve flexibility to sell assets in the future without
having to change accounting methods.
As a result of this mark-to-market accounting treatment, the book value and
book value per share of the Company are likely to fluctuate far more than if the
Company used historical amortized cost accounting. As a result, comparisons
with companies that use historical cost accounting for some or all of their
balance sheet may be misleading.
Unrealized changes in the estimated net market value of Mortgage-Backed
Securities have one direct effect on the Company's potential earnings and
dividends: positive market-to-market changes will increase the Company's equity
base and allow the Company to increase its borrowing capacity while negative
changes will tend to limit borrowing capacity under the Company's Capital
Investment Policy. A very large negative change in the net market value of the
Company's Mortgage-Backed Securities might impair the Company's liquidity
position, requiring the Company to sell assets with the likely result of
realized losses upon sale. "Net Unrealized Losses on Assets Available for Sale"
was $298,761, or 0.08% of the amortized cost of Mortgage-Backed Securities at
June 30, 1997.
The table below shows the Company's equity capital base as reported and on
a historical amortized cost basis at June 30, 1997. The historical cost equity
capital base is influenced by issuances of Common Stock, the level of GAAP
earnings as compared to dividends declared, and other factors. The GAAP
reported equity capital base is influenced by these factors plus changes in the
"Net Unrealized Losses on Assets Available for Sale" account.
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STOCKHOLDERS' EQUITY
--------------------
<TABLE>
<CAPTION>
GAAP
Historical Net Unrealized Reported Historical GAAP Reported
Amortized Cost Losses on Assets Equity Base Amortized Cost Equity (Book
Equity Base Available for Sale (Book Value) Equity Per Share Value) Per Share
----------------------------------------------------------------------------------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
At June 30, 1997.. $33,118 $299 $32,819 $9.00 $8.92
</TABLE>
LEVERAGE
The Company's debt-to-GAAP reported equity ratio at June 30, 1997 was 10:1.
The Company generally expects to maintain a ratio of debt-to-equity of between
8:1 and 12:1, although the ratio may vary from time to time based upon various
factors, including management's opinion of the level of risk of its assets and
liabilities, the Company's liquidity position, the level of unused borrowing
capacity and over-collateralization levels required by lenders when the Company
pledges assets to secure borrowings.
The target debt-to-GAAP reported equity ratio is determined under the
Company's Capital Investment Policy. Should the actual debt-to-equity ratio of
the Company increase above the target level due to asset acquisition and/or
market value fluctuations in assets, management will cease to acquire new
assets. Management will, at such time, present a plan to its Board of Directors
to bring the Company back to its target debt-to-equity ratio; in many
circumstances, this would be accomplished in time by the monthly reduction of
the balance of Mortgage-Backed Securities through principal repayments. See
"Business Strategy -- Capital Investment Policy --Capital and Leverage."
ASSET/LIABILITY MANAGEMENT AND EFFECT OF CHANGES IN INTEREST RATES
Management continually reviews the Company's asset/liability management
strategy with respect to interest rate risk, mortgage prepayment risk, credit
risk and the related issues of capital adequacy and liquidity. The Company
seeks attractive risk-adjusted stockholder returns while maintaining a strong
balance sheet.
The Company seeks to manage the extent to which net income changes as a
function of changes in interest rates by matching adjustable-rate assets with
variable-rate borrowings. In addition, although it has not done so to date, the
Company may seek to mitigate the potential impact on net income of periodic and
lifetime coupon adjustment restrictions in its portfolio of Mortgage-Backed
Securities by entering into interest rate agreements such as interest rate caps
and interest rate swaps. While the Company has determined, based upon the
current interest rate environment and other relevant factors, that it would not
be economically advantageous, at present, for the Company to enter into interest
rate agreements, the Company may enter into such agreements in the future.
Changes in interest rates may also have an effect on the rate of mortgage
principal prepayments and, as a result, prepayments on Mortgage-Backed
Securities. The Company will seek to mitigate the effect of changes in the
mortgage principal repayment rate from an economic point of view by balancing
assets purchased at a premium with assets purchased at a discount. To date, the
aggregate premium exceeds the aggregate discount on Mortgage-Backed Securities
in the Company's portfolio. As a result, prepayments, which result in the
expensing of unamortized premium, will reduce the Company's net income compared
to what net income would be absent such prepayments.
INFLATION
Virtually all of the Company's assets and liabilities are financial in
nature. As a result, interest rates and other factors drive the Company's
performance far more than does inflation. Changes in interest rates do not
necessarily correlate with inflation rates or changes in inflation rates. The
Company's financial statements are prepared in
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accordance with GAAP and the Company's dividends are determined by the Company's
net income as calculated for tax purposes; in each case, the Company's
activities and balance sheet are measured with reference to historical cost or
fair market value without considering inflation.
BUSINESS STRATEGY
GENERAL
The Company's principal business objective is to generate income for
distribution to its stockholders, primarily from the net cash flows on its
Mortgage-Backed Securities qualifying as Qualified REIT Real Estate Assets. The
Company's net cash flows result primarily from the difference between (i) the
interest income on its Mortgage-Backed Security investments and (ii) the
borrowing and financing costs of the Mortgage-Backed Securities. To achieve its
business objective and generate dividend yields, the Company's strategy is:
. to purchase Pass-Through Certificates, CMOs and other Mortgage-Backed
Securities, substantially all of which are expected to have
adjustable interest rates based on changes in short-term market
interest rates;
. to acquire only those Mortgage-Backed Securities which the Company
believes it has the necessary expertise to evaluate and manage, which
can be readily financed and which are consistent with the Company's
balance sheet guidelines and risk management objectives and generally
to seek to acquire assets whose investment returns are attractive in
more than a limited range of scenarios;
. to finance purchases of Mortgage-Backed Securities with the proceeds
of equity offerings and, to the extent permitted by the Company's
Capital Investment Policy, to utilize leverage to increase potential
returns to stockholders through borrowings (primarily under
repurchase agreements);
. to attempt to structure its borrowings to have interest rate
adjustment indices and interest rate adjustment periods that, on an
aggregate basis, generally correspond (within a range of one to six
months) to the interest rate adjustment indices and interest rate
adjustment periods of the adjustable and floating rate Mortgage-
Backed Securities purchased by the Company;
. to utilize interest rate caps, swaps and similar instruments to
mitigate the risk of the cost of its variable rate liabilities
increasing at a faster rate than the earnings on its assets during a
period of rising interest rates;
. to seek to minimize prepayment risk by structuring a diversified
portfolio with a variety of prepayment characteristics and through
other means; and
. to issue new equity or debt and increase the size of the balance
sheet when opportunities in the market for Mortgage-Backed Securities
are likely to allow growth in earnings per share.
The Company believes it is able to obtain cost efficiencies through its
facilities-sharing arrangement with FIDAC and by virtue of management's
experience in managing portfolios of Mortgage-Backed Securities and in arranging
collateralized borrowings. The Company will strive to become even more cost-
efficient over time by:
. seeking to raise additional capital from time to time in order to
increase its ability to invest in Mortgage-Backed Securities as
operating costs are not anticipated to increase as quickly as assets
and
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because growth will increase the Company's purchasing influence with
suppliers of Mortgage-Backed Securities;
. striving to lower its effective borrowing costs over time through
seeking direct funding with collateralized lenders rather than using
financial intermediaries and investigating the possibility of using
commercial paper and medium term note programs;
. improving the efficiency of its balance sheet structure by
investigating the issuance of uncollateralized subordinated debt,
preferred stock and other forms of capital; and
. utilizing information technology to the fullest extent possible in
its business, which technology the Company believes can be developed
to improve the Company's ability to monitor the performance of its
Mortgage-Backed Securities, improve its ability to assess credit
risk, improve hedge efficiency and lower operating costs.
MORTGAGE-BACKED SECURITIES
GENERAL
The Company's Capital Investment Policy provides that at least 75% of its
total assets will be comprised of High Quality Mortgage-Backed Securities and
High Quality Short-Term Investments. The term "High Quality" as used herein
means securities (i) which are rated within one of the two highest rating
categories by at least one of the nationally recognized rating agencies, (ii)
that are unrated but are either guaranteed by the United States government or an
agency of the United States government, or (iii) that are unrated or whose
ratings have not been updated but are determined to be of comparable quality to
rated High Quality Mortgage-Backed Securities on the basis of credit enhancement
features that meet the High Quality credit criteria approved by the Company's
Board of Directors. To date, all of the Mortgage-Backed Securities acquired by
the Company have been High Quality Mortgage-Backed Securities which, although
not rated, carry an implied "AAA" rating.
In accordance with the Company's Capital Investment Policy, the remainder of
the Company's assets, comprising not more than 25% of total assets, may consist
of Mortgage-Backed Securities and other Qualified REIT Real Estate Assets which
are unrated or rated less than High Quality, but which are at least "investment
grade" (rated "BBB" or better) or, if not rated, are determined by the Company
to be of comparable credit quality to an investment which is rated "BBB" or
better. The foregoing-described Mortgage-Backed Securities, comprising in the
aggregate not more than 25% of the Company's total assets, are sometimes
referred to herein as "Limited Investment Assets." The Company intends to
structure its portfolio to maintain a minimum weighted average rating (including
the Company's deemed comparable ratings for unrated Mortgage-Backed Securities
based on a comparison to rated Mortgage-Backed Securities with like
characteristics) of its Mortgage-Backed Securities of at least single "A" under
the S&P rating system and at the comparable level under the other rating
systems.
Allocation of the Company's investments among the permitted investment types
may vary from time-to-time based on the evaluation by the Company's Board of
Directors of economic and market trends and the Company's perception of the
relative values available from such types of investments, provided that in no
event will the Company's investment in Limited Investment Assets exceed 25% of
the Company's total assets.
The Company acquires only those Mortgage-Backed Securities which the Company
believes it has the necessary expertise to evaluate and manage, which are
consistent with the Company's balance sheet guidelines and risk management
objectives and which the Company believes can be readily financed. Since the
intention of the Company is generally to hold its Mortgage-Backed Securities
until maturity, the Company generally does not seek to acquire assets whose
investment returns are only attractive in a limited range of scenarios. The
Company believes that future
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interest rates and mortgage prepayment rates are very difficult to predict.
Therefore, the Company seeks to acquire Mortgage-Backed Securities which the
Company believes will provide acceptable returns over a broad range of interest
rate and prepayment scenarios.
The Mortgage-Backed Securities acquired and to be acquired by the Company
consist of (i) Pass-Through Certificates, (ii) CMOs, and (iii) other Mortgage-
Backed Securities, including mortgage derivative securities representing the
right to receive interest only or a disproportionately large amount of interest.
It is expected that the Pass-Through Certificates acquired by the Company for
its investment portfolio will continue to consist primarily of adjustable-rate
Agency Certificates, which include adjustable-rate mortgage participation
certificates issued by FHLMC, mortgage pass-through certificates issued by FNMA,
and fully modified Pass-Through Certificates guaranteed by GNMA (collectively,
"Agency Certificates"). To date, all of the Mortgage-Backed Securities acquired
by the Company have been Agency Certificates. The Company has not and will not
invest in REMIC residuals, other CMO residuals or Mortgage-Backed Securities,
such as inverse floaters, which have imbedded leverage as part of their
structural characteristics.
DESCRIPTION OF MORTGAGE-BACKED SECURITIES
The Mortgage-Backed Securities in which the Company invests provide funds for
mortgage loans made primarily to residential homeowners. These include
securities which represent interests in pools of mortgage loans made by lenders
such as savings and loan institutions, mortgage bankers and commercial banks.
Pools of mortgage loans are assembled for sale to investors (such as the
Company) by various governmental, government-related and private organizations.
Interests in pools of Mortgage-Backed Securities differ from other forms of
traditional debt securities, which normally provide for periodic payments of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, Mortgage-Backed Securities provide for a monthly payment, which
consists of both interest and principal. In effect, these payments are a "pass-
through" of the monthly interest and principal payments made by the individual
borrower on its residential mortgage loans, net of any fees paid to the issuer
or guarantor of such securities. Additional payments result from prepayments of
principal resulting from the sale of the underlying residential property,
refinancing or foreclosure, net of fees or costs which may be incurred. Some
mortgage-backed securities, such as securities issued by GNMA, are described as
"modified pass-through." These securities entitle the holder to receive all
interest and principal payments owed on the mortgage pool, net of certain fees,
regardless of whether or not the mortgagors actually make mortgage payments when
due.
The investment characteristics of pass-through Mortgage-Backed Securities
differ from those of traditional fixed-income securities. The major differences
include the payment of interest and principal on the mortgage-backed securities
on a more frequent schedule, as described above, and the possibility that
principal may be prepaid at any time due to prepayments on the underlying
mortgage loans or other assets. These differences can result in significantly
greater price and yield volatility than is the case with traditional fixed-
income securities.
The occurrences of mortgage prepayments are affected by factors including the
level of interest rates, general economic conditions, the location and age of
the mortgage and other social and demographic conditions. Generally prepayments
on pass-through mortgage-backed securities increase during periods of falling
mortgage interest rates and decrease during periods of rising mortgage interest
rates. Reinvestment of prepayments may occur at higher or lower interest rates
than the original investment, thus affecting the yield of the Company's
investments.
FHLMC CERTIFICATES
FHLMC is a privately owned government-sponsored enterprise created pursuant to
an Act of Congress (Title III of the Emergency Home Finance Act of 1970, as
amended, 12 U.S.C. (S)(S) 1451-1459), on July 24, 1970. The
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principal activity of FHLMC currently consists of the purchase of conventional
Conforming Mortgage Loans or participation interests therein and the resale of
the loans and participations so purchased in the form of guaranteed Mortgage-
Backed Securities. FHLMC guarantees to each holder of FHLMC Certificates the
timely payment of interest at the applicable pass-through rate and ultimate
collection of all principal on the holder's pro rata share of the unpaid
principal balance of the related Mortgage Loans, but does not guarantee the
timely payment of scheduled principal of the underlying Mortgage Loans. The
obligations of FHLMC under its guarantees are solely those of FHLMC and are not
backed by the full faith and credit of the United States. If FHLMC were unable
to satisfy such obligations, distributions to holders of FHLMC Certificates
would consist solely of payments and other recoveries on the underlying Mortgage
Loans and, accordingly, monthly distributions to holders of FHLMC Certificates
would be affected by delinquent payments and defaults on such Mortgage Loans.
FHLMC Certificates may be backed by pools of Single-Family Mortgage Loans or
Multifamily Mortgage Loans. Such underlying Mortgage Loans may have original
terms to maturity of up to 40 years. FHLMC Certificates may be issued under
Cash Programs (composed of Mortgage Loans purchased from a number of sellers) or
Guarantor Programs (composed of Mortgage Loans purchased from one seller in
exchange for participation certificates representing interests in the Mortgage
Loans purchased). FHLMC Certificates may pay interest at a fixed rate or
adjustable rate. The interest rate paid on FHLMC ARM Certificates adjusts
periodically within 60 days prior to the month in which the interest rates on
the underlying Mortgage Loans adjust. The interest rates paid on FHLMC ARM
Certificates issued under FHLMC's standard ARM programs adjust in relation to
the Treasury Index. Other specified indices used in FHLMC ARM programs include
the 11th District Cost of Funds Index published by the Federal Home Loan Bank of
San Francisco, LIBOR and other indices. Interest rates paid on fully-indexed
FHLMC ARM Certificates equal the applicable index rate plus a specified number
of basis points ranging typically from 125 to 250 basis points. In addition,
the majority of series of FHLMC ARM Certificates issued to date have evidenced
pools of Mortgage Loans with monthly, semi-annual or annual interest
adjustments. Adjustments in the interest rates paid are generally limited to an
annual increase or decrease of either 100 or 200 basis points and to a lifetime
cap of 500 or 600 basis points over the initial interest rate. Certain FHLMC
programs include Mortgage Loans which allow the borrower to convert the
adjustable mortgage interest rate to a fixed rate. ARMs which are converted
into fixed-rate Mortgage Loans are repurchased by FHLMC or by the seller of such
loan to FHLMC at the unpaid principal balance thereof plus accrued interest to
the due date of the last adjustable rate interest payment.
FNMA CERTIFICATES
FNMA is a privately owned, federally chartered corporation organized and
existing under the Federal National Mortgage Association Charter Act (12 U.S.C.
(S) 1716 et seq.). FNMA provides funds to the mortgage market primarily by
purchasing home Mortgage Loans from local lenders, thereby replenishing their
funds for additional lending. FNMA guarantees to the registered holder of a
FNMA Certificate that it will distribute amounts representing scheduled
principal and interest (at the rate provided by the FNMA Certificate) on the
Mortgage Loans in the pool underlying the FNMA Certificate, whether or not
received, and the full principal amount of any such mortgage loan foreclosed or
otherwise finally liquidated, whether or not the principal amount is actually
received. The obligations of FNMA under its guarantees are solely those of FNMA
and are not backed by the full faith and credit of the United States. If FNMA
were unable to satisfy such obligations, distributions to holders of FNMA
Certificates would consist solely of payments and other recoveries on the
underlying Mortgage Loans and, accordingly, monthly distributions to holders of
FNMA Certificates would be affected by delinquent payments and defaults on such
Mortgage Loans.
FNMA Certificates may be backed by pools of Single-Family or Multifamily
Mortgage Loans. The original terms to maturities of the Mortgage Loans
generally do not exceed 40 years. FNMA Certificates may pay interest at a fixed
rate or adjustable rate. Each series of FNMA ARM Certificates bears an initial
interest rate and margin tied to an index based on all loans in the related
pool, less a fixed percentage representing servicing compensation and FNMA's
guarantee fee. The specified index used in each such series has included the
Treasury Index, the 11th District Cost of Funds Index published by the Federal
Home Loan Bank of San Francisco, LIBOR and other indices. Interest rates paid
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on fully-indexed FNMA ARM Certificates equal the applicable index rate plus a
specified number of basis points ranging typically from 125 to 250 basis points.
In addition, the majority of series of FNMA ARM Certificates issued to date have
evidenced pools of Mortgage Loans with monthly, semi-annual or annual interest
rate adjustments. Adjustments in the interest rates paid are generally limited
to an annual increase or decrease of either 100 or 200 basis points and to a
lifetime cap of 500 or 600 basis points over the initial interest rate. Certain
FNMA programs include Mortgage Loans which allow the borrower to convert the
adjustable mortgage interest rate of its ARM to a fixed rate. ARMs which are
converted into fixed-rate Mortgage Loans are repurchased by FNMA or by the
seller of such loans to FNMA at the unpaid principal balance thereof plus
accrued interest to the due date of the last adjustable rate interest payment.
Adjustments to the interest rates on FNMA ARM Certificates are typically subject
to lifetime caps and periodic rate or payment caps.
GNMA CERTIFICATES
GNMA is a wholly owned corporate instrumentality of the United States within
the Department of Housing and Urban Development ("HUD"). Section 306(g) of
Title III of the National Housing Act of 1934, as amended (the "Housing Act"),
authorizes GNMA to guarantee the timely payment of the principal of and interest
on certificates which represent an interest in a pool of mortgages insured by
the FHA under the Housing Act or Title V of the Housing Act of 1949, or
partially guaranteed by the VA under the Servicemen's Readjustment Act of 1944,
as amended, or Chapter 37 of Title 38, United States Code and other loans
eligible for inclusion in mortgage pools underlying GNMA Certificates. Section
306(g) of the Housing Act provides that "the full faith and credit of the United
States is pledged to the payment of all amounts which may be required to be paid
under any guaranty under this subsection." An opinion, dated December 12, 1969,
of an Assistant Attorney General of the United States provides that such
guarantees under section 306(g) of GNMA Certificates of the type which may be
purchased or received in exchange by the Company are authorized to be made by
GNMA and "would constitute general obligations of the United States backed by
its full faith and credit."
At present, most GNMA Certificates are backed by Single-Family Mortgage Loans.
The interest rate paid on GNMA Certificates may be fixed rate or adjustable
rate. The interest rate on GNMA Certificates issued under GNMA's standard ARM
program adjusts annually in relation to the Treasury Index. Interest rates paid
on GNMA ARM Certificates typically equal the index rate plus 150 basis points.
Adjustments in the interest rate are generally limited to an annual increase or
decrease of 100 basis points and to a lifetime cap of 500 basis points over the
initial coupon rate.
SINGLE-FAMILY AND MULTIFAMILY PRIVATELY-ISSUED CERTIFICATES
Single-Family and Multifamily Privately-Issued Certificates are Pass-Through
Certificates that are not issued by one of the Agencies and that are backed by a
pool of conventional Single-Family or Multifamily Mortgage Loans, respectively.
Single-Family and Multifamily Privately-Issued Certificates are issued by
originators of, investors in, and other owners of Mortgage Loans, including
savings and loan associations, savings banks, commercial banks, mortgage banks,
investment banks and special purpose "conduit" subsidiaries of such
institutions.
While Agency Certificates are backed by the express obligation or guarantee of
one of the Agencies, as described above, Single-Family and Multifamily
Privately-Issued Certificates are generally covered by one or more forms of
private (i.e.,nongovernmental) credit enhancements. Such credit enhancements
provide an extra layer of loss coverage in the event that losses are incurred
upon foreclosure sales or other liquidations of underlying mortgaged properties
in amounts that exceed the equity holder's equity interest in the property and
result in Realized Losses. Forms of credit enhancements include, but are not
limited to, limited issuer guarantees, reserve funds, private mortgage guaranty
pool insurance, over-collateralization and subordination.
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Subordination is a form of frequently used credit enhancement and
involves the issuance of multiple classes of Senior-Subordinated Mortgage-Backed
Securities. Such classes are structured into a hierarchy of levels for purposes
of allocating Realized Losses and also for defining priority of rights to
payment of principal and interest. Typically, one or more classes of Senior
Securities are created which are rated in one of the two highest rating levels
by one or more nationally recognized rating agencies and which are supported by
one or more classes of Mezzanine Securities and Subordinated Securities that
bear Realized Losses prior to the classes of Senior Securities. Mezzanine
Securities for purposes of this Prospectus will refer to any classes that are
rated below the two highest levels but no lower than a single "B" level under
the S&P rating system (or comparable level under other rating systems) and are
supported by one or more classes of Subordinated Securities which bear Realized
Losses prior to the classes of Mezzanine Securities. For purposes of this
Prospectus, Subordinated Securities will refer to any class that bears the
"first loss" from Realized Losses or that is rated below a single "B" level (or,
if unrated, is deemed by the Company to be below such level based on a
comparison of characteristics of such class with other rated Subordinated
Securities with like characteristics). In some cases, only classes of Senior
Securities and Subordinated Securities are issued. By adjusting the priority of
interest and principal payments on each class of a given series of Senior-
Subordinated Mortgage-Backed Securities, issuers are able to create classes of
Mortgage-Backed Securities with varying degrees of credit exposure, prepayment
exposure and potential total return, tailored to meet the needs of sophisticated
institutional investors.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS PASS-THROUGH SECURITIES
Mortgage-Backed Securities in which the Company may invest may include
collateralized mortgage obligations ("CMOs") and multi-class pass-through
securities. CMOs are debt obligations issued by special purpose entities that
are secured by mortgage-backed certificates, including, in many cases,
certificates issued by government and government-related guarantors, including
GNMA, FNMA and FHLMC, together with certain funds and other collateral. Multi-
class pass-through securities are equity interests in a trust composed of
mortgage loans or other mortgage-backed securities. Payments of principal and
interest on underlying collateral provide the funds to pay debt service on the
CMO or make scheduled distributions on the multi-class pass-through securities.
CMOs and multi-class pass-through securities may be issued by agencies or
instrumentalities of the U.S. Government or by private organizations. The
discussion of CMOs in the following paragraphs is similarly applicable to multi-
class pass-through securities.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specific
coupon rate (which, as discussed below, may be an adjustable rate subject to a
cap) and has a stated maturity or final distribution date. Principal
prepayments on collateral underlying a CMO may cause it to be retired
substantially earlier than the stated maturities or final distribution dates.
Interest is paid or accrues on all classes of a CMO on a monthly, quarterly or
semi-annual basis. The principal and interest on underlying mortgages may be
allocated among the several classes of a series of a CMO in many ways. In a
common structure, payments of principal, including any principal prepayments, on
the underlying mortgages are applied to the classes of the series of a CMO in
the order of their respective stated maturities or final distribution dates, so
that no payment of principal will be made on any class of a CMO until all other
classes having an earlier stated maturity or final distribution date have been
paid in full.
Other types of CMO issues include classes such as parallel pay CMOs, some of
which, such as Planned Amortization Class CMOs ("PAC Bonds"), provide protection
against prepayment uncertainty. Parallel pay CMOs are structured to provide
payments of principal on certain payment dates to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. PAC Bonds generally require payment of a
specified amount of principal on each payment date so long as prepayment speeds
on the underlying collateral fall within a specified range. PAC Bonds are always
parallel pay CMOs with the required principal payment on such securities having
the highest priority after interest has been paid to all classes.
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Other types of CMO issues include Targeted Amortization Class CMOs ("TAC
Bonds"), which are similar to PAC Bonds. While PAC Bonds maintain their
amortization schedule within a specified range of prepayment speeds, TAC Bonds
are generally targeted to a narrow range of prepayment speeds or a specified
prepayment speed. TAC Bonds can provide protection against prepayment
uncertainty since cash flows generated from higher prepayments of the underlying
mortgage-related assets are applied to the various other pass-through tranches
so as to allow the TAC Bonds to maintain their amortization schedule.
CMOs may be subject to certain rights of issuers thereof to redeem such CMOs
prior to their stated maturity dates, which may have the effect of diminishing
the Company's anticipated return on its investment. Privately-Issued Single-
Family and Multifamily CMOs are supported by private credit enhancements similar
to those used for Privately-Issued Certificates and are often issued as Senior-
Subordinated Mortgage-Backed Securities. The Company will only acquire CMOs or
multi-class pass-through certificates that constitute debt obligations or
beneficial ownership in grantor trusts holding Mortgage Loans, or regular
interests in REMICs, or that otherwise constitute Qualified REIT Real Estate
Assets (provided that the Company has obtained a favorable opinion of its tax
advisor or a ruling from the IRS to that effect).
One or more tranches of a CMO may have coupon rates which reset periodically
at a specified increment over an index such as LIBOR. These adjustable rate
tranches, known as "floating rate CMOs", may be backed by fixed or adjustable-
rate mortgages. To date, fixed-rate mortgages have been more commonly utilized
for this purpose. Floating rate CMOs are typically issued with lifetime caps on
the coupon rate thereon. These caps, similar to the caps on adjustable-rate
mortgages described in "Floating Rate Mortgage-Backed Securities" below,
represent a ceiling beyond which the coupon rate on a floating rate CMO may not
be increased regardless of increases in the interest rate index to which the
floating rate CMO is geared.
FLOATING RATE MORTGAGE-BACKED SECURITIES
CMOs in which the Company may invest include floating rate CMOs ("Floaters").
The interest rates on Floaters are reset at periodic intervals to an increment
over some predetermined interest rate index. There are two main categories of
indices: (i) those based on U.S. Treasury securities, and (ii) those derived
from calculated measures such as a cost of funds index or a moving average of
mortgage rates. Commonly utilized indices include the one-year Treasury rate,
the three-month Treasury bill rate, the six-month Treasury bill rate, rates on
long-term Treasury securities, the 11th District Federal Home Loan Bank Costs of
Funds Index, the National Median Cost of Funds, the one-month or three-month
LIBOR, the prime rate of a specific bank, or commercial paper rates. Some
indices, such as the one-year Treasury rate, closely mirror changes in market
interest rate levels. Others, such as the 11th District Home Loan Bank Cost of
Funds Index, tend to lag changes in market rate level. The Company will seek to
diversify its investments in Floaters among a variety of indices and reset
periods so that the Company is not at any one time unduly exposed to the risk of
interest rate fluctuations. In selecting the type of Floaters for investment,
the Company will also consider the liquidity of the market for such Floaters.
The Company believes that Floaters are particularly well-suited to facilitate
its ability to accomplish the Company's investment objective of high current
income, consistent with modest volatility of net asset value, because the value
of the Floaters should remain relatively stable as compared to that of
traditional fixed-rate debt securities paying comparable rates of interest.
While the value of Floaters, like other debt securities, generally varies
inversely with changes in market interest rates (increasing in value during
periods of declining interest rates and decreasing in value during periods of
increasing interest rates), the value of Floaters should generally be more
resistant to price swings than other debt securities because the interest rates
of Floaters move with market interest rates. Accordingly, as interest rates
change, the value of the Company's shares should be more stable than that of
funds which invest primarily in securities backed by fixed-rate mortgages or in
other non-mortgage-backed debt securities, which do not provide for adjustment
in the interest rates thereon in response to change in interest rates.
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Floaters typically have caps, which limit the maximum amount by which the
interest rate may be increased or decreased at periodic intervals or over the
life of the Floater. To the extent that interest rates rise faster than the
allowable caps on Floaters, such Floaters will behave more like fixed-rate
securities. Consequently, interest rate increases in excess of caps can be
expected to cause Floaters to behave more like traditional debt securities than
adjustable-rate securities and, accordingly, to decline in value to a greater
extent than would be the case in the absence of such caps.
Floaters, like other Mortgage-Backed Securities, differ from conventional
bonds in that principal is to be paid back over the life of Floaters rather than
at maturity. As a result, the holder of the Floaters (i.e., the Company)
receives monthly scheduled payments of principal and interest and may receive
unscheduled principal payments representing prepayments on the underlying
mortgages. When the holder reinvests the payments and any unscheduled
prepayments it receives, it may receive a rate of interest on the reinvestment
which is lower than the rate on the existing Floaters. For this reason,
Floaters are less effective than longer-term debt securities as a means of
"locking in" longer-term interest rates.
Floaters, while having less risk of price decline during periods of rapidly
rising rates than certain fixed-rate Mortgage-Backed Securities of comparable
maturities, could have less potential for capital appreciation than such
securities. In addition, to the extent Floaters are purchased at a premium,
mortgage foreclosures and unscheduled principal prepayments will result in some
loss of the holders' principal investment to the extent of the premium paid. On
the other hand, if Floaters are purchased at a discount, an unscheduled
prepayment of principal could increase total return and accelerate the
recognition of income to the Company and, as a result, could increase the amount
of income received by stockholders to the extent that the Company distributes
such income.
OTHER FLOATING RATE INSTRUMENTS
The Company may also invest in structured floating rate notes issued or
guaranteed by government agencies, such as FNMA and FHLMC. Such instruments are
typically structured to reflect an interest rate arbitrage (i.e., the difference
between the agency's cost of funds and the income stream from specified assets
of the agency) and their reset formulas may provide more attractive returns than
other floating rate instruments. The indices used to determine resets are the
same as those referred to under "--Floating Rate Mortgage-Backed Securities"
above.
SUBORDINATED INTERESTS
The Company may acquire Subordinated Interests which are classes of Mortgage-
Backed Securities that are junior to other classes of such series of Mortgage-
Backed Securities in the right to receive payments from the underlying
mortgages. The subordination is for credit enhancement and may be for all
payment failures on the Mortgage Loans securing or underlying such series of
Mortgage-Backed Securities. The subordination will not be limited to those
resulting from certain types of risks, such as those resulting from war,
earthquake or flood, or the bankruptcy of a mortgagor. The subordination may be
for the entire amount of the series of Mortgage-Backed Securities or may be
limited in amount. The Subordinated Interests held by the Company will be part
of its Limited Investment Assets that in the aggregate will not constitute more
than 25% of the Company's total assets.
It is anticipated that substantially all of the Subordinated Interests which
the Company may acquire will be rated at least investment grade by one of the
rating agencies. If not so rated, the Company will establish reserves against
future potential losses in an amount equivalent to the credit enhancement
required to achieve an investment grade credit rating.
Any Subordinated Interests acquired by the Company will be limited in amount
and bear yields which the Company believes are commensurate with the risks
involved. The market for Subordinated Interests is not extensive and may be
illiquid. In addition, the Company's ability to sell Subordinated Interests
will be limited by the REIT
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Provisions of the Code. Accordingly, the Company intends to purchase
Subordinated Interests for investment purposes only. Although publicly offered
Subordinated Interests generally will be rated, the risks of ownership will be
substantially the same as the ownership of unrated Subordinated Interests
because the rating does not address the possibility that the Company might
suffer a lower than anticipated yield or fail to recover its initial investment.
The Company will not purchase any Subordinated Interests that do not qualify as
Qualified REIT Real Estate Assets.
MORTGAGE LOANS
The Company may from time to time invest a small percentage of its assets
directly in Single-Family, Multi-Family or Commercial Mortgage Loans. The
Company expects that substantially all of such Mortgage Loans acquired by it
would be ARMs. The interest rate on an ARM is typically tied to an index (such
as LIBOR or the interest rate on United States Treasury Bills), and is
adjustable periodically at various intervals. Such Mortgage Loans are typically
subject to lifetime interest rate caps and periodic interest rate and/or payment
caps. The acquisition of Mortgage Loans generally involves credit risk. The
Company may obtain credit enhancement to mitigate such risk; however, there can
be no assurances that the Company will able to obtain such credit enhancement or
that such credit enhancement will mitigate the credit risk of the underlying
Mortgage Loans.
CAPITAL INVESTMENT POLICY
ASSET ACQUISITIONS
The Company's Capital Investment Policy provides that at least 75% of the
Company's total assets will be comprised of High Quality Mortgage-Backed
Securities and High Quality Short-Term Investments. The remainder of the
Company's assets (comprising not more than 25% of total assets), may consist of
Mortgage-Backed Securities and other Qualified REIT Real Estate Assets which are
unrated or rated less than High Quality but which are at least "investment
grade" (rated "BBB" or better) or, if not rated, are determined by the Company
to be of comparable credit quality to an investment which is rated "BBB" or
better.
The Company structures its portfolio to maintain a minimum weighted average
rating (including the Company's deemed comparable ratings for unrated Mortgage-
Backed Securities based on a comparison to rated Mortgage-Backed Securities with
like characteristics) of its Mortgage-Backed Securities of at least single "A"
under the S&P rating system and at the comparable level under the other rating
systems. To date, all of the Mortgage-Backed Securities acquired by the Company
have been Agency Certificates which, although not rated, have an implied "AAA"
rating.
The Company intends to acquire only those Mortgage-Backed Securities which the
Company believes it has the necessary expertise to evaluate and manage, which
are readily financed and which are consistent with the Company's balance sheet
guidelines and risk management objectives. Since the Company expects to hold
such assets until maturity, the Company generally does not seek to acquire
assets whose investment returns are only attractive in a limited range of
scenarios. The Company believes that future interest rates and mortgage
prepayment rates are very difficult to predict and, as a result, seeks to
acquire Mortgage-Backed Securities which the Company believes provide acceptable
returns over a broad range of interest rate and prepayment scenarios.
Among the asset choices available to the Company, the Company's policy is to
acquire those Mortgage-Backed Securities which the Company believes generate the
highest returns on capital invested, after considering (i) the amount and nature
of anticipated cash flows from the asset, (ii) the Company's ability to pledge
the asset to secure collateralized borrowings, (iii) the increase in the
Company's capital requirement determined by the Company's Capital Investment
Policy resulting from the purchase and financing of the asset, and (iv) the
costs of financing, hedging, managing and reserving for the asset. Prior to
acquisition, potential returns on capital employed are assessed over the life of
the asset and in a variety of interest rate, yield spread, financing cost,
credit loss and prepayment scenarios.
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Management also gives consideration to balance sheet management and risk
diversification issues. A specific asset which is being evaluated for potential
acquisition is deemed more or less valuable to the Company to the extent it
serves to increase or decrease certain interest rate or prepayment risks which
may exist in the balance sheet, to diversify or concentrate credit risk, and to
meet the cash flow and liquidity objectives management may establish for the
Company's balance sheet from time to time. Accordingly, an important part of the
asset evaluation process is a simulation, using the Company's risk management
model, of the addition of a potential asset and its associated borrowings and
hedges to the balance sheet and an assessment of the impact this potential asset
acquisition would have on the risks in and returns generated by the Company's
balance sheet as a whole over a variety of scenarios.
The Company focuses primarily on the acquisition of adjustable-rate Mortgage-
Backed Securities. The Company has, however, purchased fixed-rate assets and
may continue to do so in the future should management believe that the potential
returns on capital invested, after hedging and all other costs, clearly exceed
the returns available from other assets or if the purchase of such assets would
serve to reduce or diversify the risks of the Company's balance sheet.
Although it has not yet done so, the Company may purchase the stock of
mortgage REITs or similar companies when the Company believes that such
purchases will yield attractive returns on capital employed. When the stock
market valuations of such companies are low in relation to the market value of
their assets, such stock purchases can be a way for the Company to acquire an
interest in a pool of Mortgage-Backed Securities at an attractive price. The
Company does not, however, presently intend to invest in the securities of other
issuers for the purpose of exercising control or to underwrite securities of
other issuers.
The Company may acquire newly-issued Mortgage-Backed Securities, and also will
seek to expand its capital base in order to further increase the Company's
ability to acquire new assets, when the potential returns from new investments
appear attractive relative to the return expectations of stockholders. The
Company may in the future acquire Mortgage-Backed Securities by offering its
debt or equity securities in exchange for such Mortgage-Backed Securities.
The Company generally intends to hold Mortgage-Backed Securities for extended
periods. In addition, the REIT Provisions of the Code limit in certain respects
the ability of the Company to sell Mortgage-Backed Securities. See "Certain
Federal Income Tax Considerations -- General -- Gross Income Tests" and "--
Taxation of the Company." Management may decide to sell assets from time to
time, however, for a number of reasons including, without limitation, to dispose
of an asset as to which credit risk concerns have arisen, to reduce interest
rate risk, to substitute one type of Mortgage-Backed Security for another to
improve yield or to maintain compliance with the 55% requirement under the
Investment Company Act, and generally to re-structure the balance sheet when
management deems such action advisable. Management selects any Mortgage-Backed
Securities to be sold according to the particular purpose such sale will serve.
The Board of Directors has not adopted a policy that would restrict
management's authority to determine the timing of sales or the selection of
Mortgage-Backed Securities to be sold.
The Company does not invest in principal-only interests in Mortgage-Backed
Securities, residual interests, accrual bonds, inverse-floaters, two-tiered
index bonds, cash flow bonds, Mortgage-Backed Securities with imbedded leverage
or Mortgage-Backed Securities that would be deemed unacceptable for
collateralized borrowings, excluding shares in mortgage REITs.
As a requirement for maintaining REIT status, the Company will distribute to
stockholders aggregate dividends equaling at least 95% of its taxable income.
See "Certain Federal Income Tax Considerations." The Company will make
additional distributions of capital when the return expectations of the
stockholders appear to exceed returns potentially available to the Company
through making new investments in Mortgage-Backed Securities. Subject to the
limitations of applicable securities and state corporation laws, the Company can
distribute capital by making purchases of its own capital stock or through
paying down or re-purchasing any outstanding uncollateralized debt obligations.
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The Company's asset acquisition strategy may change over time as market
conditions change and as the Company evolves.
CREDIT RISK MANAGEMENT
The Company has not taken on credit risk to date, but may do so in the future.
In such event, the Company will review credit risk and other risk of loss
associated with each investment and determine the appropriate allocation of
capital to apply to such investment under its Capital Investment Policy. The
Board of Directors will monitor the overall portfolio risk and determine
appropriate levels of provision for loss.
CAPITAL AND LEVERAGE
The Company expects generally to maintain a ratio of debt-to-equity of between
8:1 and 12:1, although the ratio may vary from time to time depending upon
market conditions and other factors deemed relevant by management, including the
composition of the Company's balance sheet, haircut levels required by lenders,
the market value of the Mortgage-Backed Securities in the Company's portfolio
and "Excess Capital Cushion" percentages (as described below) set by the Board
of Directors from time to time. For purposes of calculating this ratio, the
Company's equity is equal to the value of the Company's investment portfolio on
a mark-to-market basis less the book value of the Company's obligations under
repurchase agreements and other collateralized borrowings. At June 30, 1997,
the Company's ratio of debt-to-equity was 10:1.
The Company's goal is to strike a balance between the under-utilization of
leverage, which reduces potential returns to stockholders, and the over-
utilization of leverage, which could reduce the Company's ability to meet its
obligations during adverse market conditions. The Company's Capital Investment
Policy limits management's ability to acquire additional assets during times
when the Company's debt-to-equity ratio exceeds 12:1. In this way, the Company
intends that use of balance sheet leverage will be controlled. The actual
capital base as defined for the purpose of this policy is equal to the market
value of total assets less the book value of total collateralized borrowings.
The actual capital base, as so defined, represents the approximate liquidation
value of the Company and approximates the market value of assets that can be
pledged or sold to meet over-collateralization requirements for the Company's
borrowings. The unpledged portion of the Company's actual capital base is
available to be pledged or sold as necessary to maintain over-collateralization
levels for the Company's borrowings.
Management is prohibited from acquiring additional assets during periods when
the actual capital base of the Company is less than the minimum amount required
under the Capital Investment Policy (except when such asset acquisitions may be
necessary to maintain REIT status or the Company's exemption from the Investment
Company Act). In addition, when the actual capital base falls below the risk-
managed capital requirement, management will be required to submit to the Board
a plan for bringing the actual capital base into compliance with the Capital
Investment Policy guidelines. It is anticipated that in most circumstances this
goal will be achieved over time without overt management action through the
natural process of mortgage principal repayments and increases in the market
values of Mortgage-Backed Securities as their coupon rates adjust upwards to
market levels. Management anticipates that the actual capital base is likely to
exceed the risk-managed capital requirement during periods following new equity
offerings and during periods of falling interest rates and that the actual
capital base could fall below the risk-managed capital requirement during
periods of rising interest rates.
The first component of the Company's capital requirements is the current
aggregate over-collateralization amount or "haircut" the lenders require the
Company to hold as capital. The haircut for each Mortgage-Backed Security is
determined by the lender based on the risk characteristics and liquidity of that
asset. Haircut levels on individual borrowings generally range from 3% for
Agency Certificates to 20% for certain Privately-Issued Certificates, and the
Company anticipates that haircut levels will average 3% to 10% for the Company
as a whole. At June 30, 1997, the weighted average haircut level on the
Company's securities was 3%. Should the market value of the pledged assets
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decline, the Company will be required to deliver additional collateral to the
lenders in order to maintain a constant over-collateralization level on its
borrowings.
The second component of the Company's capital requirement is the "Excess
Capital Cushion." The Excess Capital Cushion is an additional amount of capital
in excess of the haircut maintained by the Company in order to help the Company
meet the demands of the lenders for additional collateral should the market
value of the Company's Mortgage-Backed Securities decline. The aggregate Excess
Capital Cushion equals the sum of liquidity cushion amounts assigned under the
Capital Investment Policy to each of the Company's Mortgage-Backed Securities.
Excess Capital Cushions are assigned to each Mortgage-Backed Security based on
management's assessment of the Mortgage-Backed Security's market price
volatility, credit risk, liquidity and attractiveness for use as collateral by
lenders. The process of assigning Excess Capital Cushions relies on management's
ability to identify and weigh the relative importance of these and other
factors. Consideration is also given to hedges associated with the Mortgage-
Backed Security and any effect such hedges may have on reducing net market price
volatility, concentration or diversification of credit and other risks in the
balance sheet as a whole and the net cash flows that can be expected to arise
from the interaction of the various components of the Company's balance sheet.
The Board of Directors thus reviews on a periodic basis various analyses
prepared by management of the risks inherent in the Company's balance sheet,
including an analysis of the effects of various scenarios on the Company's net
cash flow, earnings, dividends, liquidity and net market value. Should the
Board of Directors determine that the minimum required capital base set by the
Company's Capital Investment Policy is either too low or too high, the Board of
Directors may raise or lower the capital requirement accordingly.
The Capital Investment Policy stipulates that at least 25% of the capital base
maintained to satisfy the Excess Capital Cushion shall be invested in Agency
Certificates, AAA-rated adjustable-rate Mortgage-Backed Securities or assets
with similar or better liquidity characteristics. To date, 100% of the
Company's Mortgaged-Backed Securities are Agency Certificates, though this may
change in the future.
Pursuant to the Company's overall business strategy, a substantial portion of
the Company's borrowings are short-term or variable-rate. The Company's
borrowings are implemented primarily through repurchase agreements (a borrowing
device evidenced by an agreement to sell securities or other assets to a third-
party and a simultaneous agreement to repurchase them at a specified future
date and price, the price difference constituting interest on the borrowing),
but in the future may also be obtained through loan agreements, lines of credit,
Dollar-Roll Agreements (an agreement to sell a security for delivery on a
specified future date and a simultaneous agreement to repurchase the same or a
substantially similar security on a specified future date) and other credit
facilities with institutional lenders and issuance of debt securities such as
commercial paper, medium-term notes, CMOs and senior or subordinated notes. The
Company enters into financing transactions only with institutions that it
believes are sound credit risks and follows other internal policies designed to
limit its credit and other exposure to financing institutions.
It is expected that repurchase agreements will continue to be the principal
financing devices utilized by the Company to leverage its Mortgage-Backed
Securities portfolio. The Company anticipates that, upon repayment of each
borrowing in the form of a repurchase agreement, the collateral will immediately
be used for borrowing in the form of a new repurchase agreement. To date, the
Company has entered into uncommitted facilities with nineteen (19) lenders for
borrowings in the form of repurchase agreements. The Company has not at the
present time entered into any commitment agreements under which the lender would
be required to enter into new repurchase agreements during a specified period of
time, nor does the Company presently plan to have liquidity facilities with
commercial banks. The Company, however, may enter into such commitment
agreements in the future if deemed favorable to the Company. The Company enters
into repurchase agreements primarily with national broker/dealers, commercial
banks and other lenders which typically offer such financing. The Company enters
into collateralized borrowings only with financial institutions meeting credit
standards approved by the Company's Board of Directors, and monitors the
financial condition of such institutions on a regular basis.
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A repurchase agreement, although structured as a sale and repurchase
obligation, acts as a financing under which the Company effectively pledges its
Mortgage-Backed Securities as collateral to secure a short-term loan. Generally,
the other party to the agreement makes the loan in an amount equal to a
percentage of the market value of the pledged collateral. At the maturity of the
repurchase agreement, the Company is required to repay the loan and
correspondingly receives back its collateral. While used as collateral,
Mortgage-Backed Securities continue to pay principal and interest which inure to
the benefit of the Company. In the event of the insolvency or bankruptcy of the
Company, certain repurchase agreements may qualify for special treatment under
the Bankruptcy Code, the effect of which is, among other things, to allow the
creditor under such agreements to avoid the automatic stay provisions of the
Bankruptcy Code and to foreclose on the collateral agreements without delay. In
the event of the insolvency or bankruptcy of a lender during the term of a
repurchase agreement, the lender may be permitted, under applicable insolvency
laws, to repudiate the contract, and the Company's claim against the lender for
damages therefrom may be treated simply as an unsecured creditor. In addition,
if the lender is a broker or dealer subject to the Securities Investor
Protection Act of 1970, or an insured depository institution subject to the
Federal Deposit Insurance Act, the Company's ability to exercise its rights to
recover its securities under a repurchase agreement or to be compensated for any
damages resulting from the lender's insolvency may be further limited by those
statutes. These claims would be subject to significant delay and, if and when
received, may be substantially less than the damages actually suffered by the
Company.
Substantially all of the Company's borrowing agreements require the Company to
deposit additional collateral in the event the market value of existing
collateral declines, which may require the Company to sell assets to reduce the
Company's borrowings. The Company's liquidity management policy is designed to
maintain a cushion of equity sufficient to provide required liquidity to respond
to the effects under its borrowing arrangements of interest rate movements and
changes in market value of its Mortgage-Backed Securities, as described above.
However, a major disruption of the repurchase or other market relied on by the
Company for short-term borrowings would have a material adverse effect on the
Company unless the Company were able to arrange alternative sources of financing
on comparable terms. See "Risk Factors -- Operations Risks -- Risks Associated
with Leverage" and -- Risk of Decrease in Net Interest Income Due to Interest
Rate Fluctuations."
The Company's Bylaws do not limit its ability to incur borrowings, whether
secured or unsecured.
INTEREST RATE RISK MANAGEMENT
To the extent consistent with its election to qualify as a REIT, the Company
follows an interest rate risk management program intended to protect its
portfolio of Mortgage-Backed Securities and related debt against the effects of
major interest rate changes. Specifically, the Company's interest rate risk
management program is formulated with the intent to offset the potential adverse
effects resulting from rate adjustment limitations on its Mortgage-Backed
Securities and the differences between interest rate adjustment indices and
interest rate adjustment periods of its adjustable-rate Mortgage-Backed
Securities and related borrowings. The Company's interest rate risk management
program encompasses a number of procedures, including the following: (i) the
Company attempts to structure its borrowings to have interest rate adjustment
indices and interest rate adjustment periods that, on an aggregate basis,
generally correspond to the interest rate adjustment indices and interest rate
adjustment periods of the adjustable-rate Mortgage-Backed Securities purchased
by the Company, so as to limit any mismatching of such aggregates to a range of
one to six months, and (ii) the Company attempts to structure its borrowing
agreements relating to adjustable-rate Mortgage-Backed Securities to have a
range of different maturities and interest rate adjustment periods (although
substantially all will be less than one year). As a result, the Company expects
to be able to adjust the average maturity/adjustment period of such borrowings
on an ongoing basis by changing the mix of maturities and interest rate
adjustment periods as borrowings come due and are renewed. Through use of these
procedures, the Company intends to minimize any differences between interest
rate adjustment periods of adjustable-rate Mortgage-Backed Securities and
related borrowings that may occur.
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Although it has not done so to date, the Company may purchase from time to
time interest rate caps, interest rate swaps, interest rate collars, caps or
floors, "interest only" Mortgage-Backed Securities and similar instruments to
attempt to mitigate the risk of the cost of its variable rate liabilities
increasing at a faster rate than the earnings on its assets during a period of
rising interest rates or to mitigate prepayment risk. In this way, the Company
may hedge as much of the interest rate risk as management determines is in the
best interests of the stockholders of the Company, given the cost of such
hedging transactions and the need to maintain the Company's status as a REIT.
See "Certain Federal Income Tax Considerations -- General -- Gross Income
Tests." This determination may result in management electing to have the Company
bear a level of interest rate risk that could otherwise be hedged when
management believes, based on all relevant facts, that bearing such risk is
advisable.
The Company seeks to build a balance sheet and undertake an interest rate risk
management program which is likely, in management's view, to enable the Company
to generate positive earnings and maintain an equity liquidation value
sufficient to maintain operations given a variety of potentially adverse
circumstances. Accordingly, the hedging program addresses both income
preservation, as discussed in the first part of this section, and capital
preservation concerns. With regard to the latter, the Company monitors its
"duration." This is the expected percentage change in market value of the
Company's assets that would be caused by a 1% change in short and long term
interest rates. To monitor duration and the related risks of fluctuations in
the liquidation value of the Company's equity, the Company models the impact of
various economic scenarios on the market value of the Company's Mortgage-Backed
Securities, liabilities and interest rate agreements. See "Risk Factors --
Operations Risks -- Risk of Decrease in Net Interest Income Due to Interest
Rate Fluctuations." At June 30, 1997, the Company estimates that the duration
of the Company's assets was less than 1%. The Company believes that the
Company's interest rate risk management program will allow the Company to
maintain operations throughout a wide variety of potentially adverse
circumstances. Nevertheless, in order to further preserve the Company's capital
base (and lower its duration) during periods when management believes a trend of
rapidly rising interest rates has been established, management may decide to
enter into or increase hedging activities and/or sell assets. Each of these
types of actions may lower the earnings and dividends of the Company in the
short term in order to further the objective of maintaining attractive levels of
earnings and dividends over the long term.
The Company may elect to conduct a portion of its hedging operations through
one or more subsidiary corporations which would not be a Qualified REIT
Subsidiary and would be subject to Federal and state income taxes. In order to
comply with the nature of asset tests applicable to the Company as a REIT, the
value of the securities of any such subsidiary held by the Company must be
limited to less than 5% of the value of the Company's total assets as of the end
of each calendar quarter and no more than 10% of the voting securities of any
such subsidiary may be owned by the Company. See "Certain Federal Income Tax
Considerations -- General -- Asset Tests." A taxable subsidiary would not elect
REIT status and would distribute any net profit after taxes to the Company and
its other stockholders. Any dividend income received by the Company from any
such taxable subsidiary (combined with all other income generated from the
Company's assets, other than Qualified REIT Real Estate Assets) must not exceed
25% of the gross income of the Company. See "Certain Federal Income Tax
Considerations -- General -- Gross Income Tests." Before the Company forms any
such taxable subsidiary corporation for its hedging activities, the Company will
obtain an opinion of counsel to the effect that the formation and contemplated
method of operation of such corporation will not cause the Company to fail to
satisfy the nature of assets and sources of income tests applicable to it as a
REIT.
The Company believes that it has developed a cost-effective asset/liability
management program to provide a level of protection against interest rate and
prepayment risks. However, no strategy can completely insulate the Company from
interest rate changes, prepayment risks and defaults by counter-parties.
Further, as noted above, certain of the Federal income tax requirements that the
Company must satisfy to qualify as a REIT limit the Company's ability to fully
hedge its interest rate and prepayment risks. The Company monitors carefully,
and may have to limit, its asset/liability management program to assure that it
does not realize excessive hedging income, or hold hedging assets having excess
value in relation to total assets, which would result in the Company's
disqualification as a REIT or, in the case of excess hedging income, the payment
of a penalty tax for failure to satisfy certain REIT income tests under
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the Code, provided such failure was for reasonable cause. See "Certain Federal
Income Tax Considerations -- General." In addition, asset/liability management
involves transaction costs which increase dramatically as the period covered by
the hedging protection increases. Therefore, the Company may be prevented from
effectively hedging its interest rate and prepayment risks.
PREPAYMENT RISK MANAGEMENT
The Company seeks to minimize the effects of faster or slower than anticipated
prepayment rates through structuring a diversified portfolio with a variety of
prepayment characteristics, investing in Mortgage-Backed Securities with
prepayment prohibitions and penalties, investing in certain Mortgage-Backed
Security structures which have prepayment protections, and balancing assets
purchased at a premium with assets purchased at a discount. Prepayment risk is
monitored by management and the Board of Directors through periodic review of
the impact of a variety of prepayment scenarios on the Company's revenues, net
earnings, dividends, cash flow and net balance sheet market value.
FUTURE REVISIONS IN POLICIES AND STRATEGIES
The Board of Directors has established the investment policies and operating
policies and strategies set forth in this Prospectus. The Board of Directors has
the power to modify or waive such policies and strategies without the consent of
the stockholders to the extent that the Board of Directors determines that such
modification or waiver is in the best interests of stockholders. Among other
factors, developments in the market which affect the policies and strategies
mentioned herein or which change the Company's assessment of the market may
cause the Board of Directors to revise the Company's policies and strategies.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a
party or to which any property of the Company is subject.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
Name Position(s) Held
- ---- ----------------
Michael A.J. Farrell (1) Chairman of the Board, Chief Executive Officer and
Director
Timothy J. Guba President, Chief Operating Officer and Director
Wellington J. St. Claire Vice Chairman of the Board and Director
Kathryn F. Fagan Chief Financial Officer and Treasurer
Jennifer A. Stephens Secretary
Kevin P. Brady (2)(3) Director
Spencer I. Browne (1)(3) Director
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Name Position(s) Held
- ---- ----------------
John S. Grace (3) Director
Jonathan D. Green (2)(3) Director
John A. Lambiase (2)(3) Director
Donnell A. Segalas (1)(3) Director
- -----------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
(3) Independent Director.
Michael A. J. Farrell, age 46, was elected on December 5, 1996 to serve as
Chairman of the Board and Chief Executive Officer of the Company. Since July
1994, he has been the President and CEO of FIDAC. He is a member of the board
of directors of the U.S. Dollar Floating Rate Fund. Prior to founding FIDAC,
from February 1992 to July 1994, Mr. Farrell served as President of Citadel
Funding Corporation ("Citadel"). From April 1990 to January 1992, Mr. Farrell
was a Managing Director for Schroder Wertheim & Co. Inc. in the Fixed Income
Department. In addition to being the former Chairman of the Primary Dealers
Operations Committee of the Public Securities Association (from 1981 through
1985) and its Mortgage Backed Securities Division, he is a former member of the
Executive Committee of its Primary Dealers Division. Prior to his employment
with Schroder Wertheim, Mr. Farrell had been President of L.F. Rothschild
Mortgage Capital, Inc., Vice President of Trading at Morgan Stanley and Co.,
Inc., and Senior Vice President of Merrill Lynch and Co., Inc. Mr. Farrell has
24 years of experience in fixed income trading, management and operations.
Timothy J. Guba, age 39, was elected on December 5, 1996 to serve as
President, Chief Operating Officer and a director of the Company. Mr. Guba
joined FIDAC in March 1995 as a Senior Vice President, to assist FIDAC's
financial institutional clients with securities financing management. From April
1991 to December 1994, Mr. Guba worked as a Vice President at Paine Webber Inc.
in its Taxable Fixed Income Department specializing in Mortgage-Backed
Securities. Mr. Guba was President of JPC Brokers Inc., a subsidiary of
Fundamental Brokers, from 1988 through 1991. He was responsible for a staff of
35 employees and a daily transactional volume of over $300 million in Mortgage-
Backed Securities. Mr. Guba was a Senior Vice President at L.F. Rothschild
Mortgage Capital from 1986 to 1988, specializing in trading of mortgage pass-
through certificates, where he established LF Rothschild as a member in the FNMA
and FHLMC selling groups. Mr. Guba began his career in 1980 at Morgan Guaranty
Trust Company in the Treasurer's Department trading various money market
instruments. Mr. Guba has a BS in Finance and Business Management from Cornell
University.
Wellington J. St. Claire, age 33, was elected on December 5, 1996 to serve as
Vice Chairman of the Board, and a director of the Company with responsibility
for managing the portfolio of the Company. She has been Senior Vice President
of FIDAC from March 1995 to the present and Treasurer since July 1994. From
July 1994 through March 1995 she was a Vice President of FIDAC. Ms. St. Claire
has been the portfolio manager for the Floating Rate Fund since its inception in
August 1994. Prior to joining FIDAC, from March 1992 to July 1994, Ms. St.
Claire had been Vice President responsible for asset selection and financing at
Citadel Funding Corporation. Prior to joining Citadel she had been a trader on
the Mortgage-Backed Securities desk at Schroder Wertheim and Co., Inc. She has
attended the New York Institute of Finance for intense Mortgage-Backed
Securities studies.
Kathryn F. Fagan, age 30, was employed by the Company on March 31, 1997 in the
positions of Chief Financial Officer and Treasurer. From June 1, 1992 to
February 28, 1997, Ms. Fagan was Chief Financial Officer and
53
<PAGE>
Controller of First Federal Savings & Loan Association of Opelousas, Louisiana.
First Federal is a publicly-owned savings and loan which converted to the stock
form of ownership during her employment period. Ms. Fagan's responsibilities at
First Federal included all financial reporting, including reports for internal
use and reports required by the Commission and the Office of Thrift Supervision.
Her duties also included asset/liability management, internal control compliance
and the management of First Federal's investment portfolio. During the period
from September 1988 to May 1992, Ms. Fagan was employed as a bank and savings
and loan auditor by John S. Dowling & Company, a corporation of Certified Public
Accountants. Ms. Fagan is a Certified Public Accountant and has a Masters Degree
in Business Administration.
Jennifer A. Stephens, age 26, was elected on December 5, 1996 to serve as
Secretary of the Company. She joined FIDAC at its inception in July 1994 and
became Vice President in March 1995. Ms. Stephens has been the assistant
portfolio manager for the U.S. Dollar Floating Rate Fund since its inception in
August 1994. She has designed several software systems for FIDAC including
portfolio management systems, mortgage-backed security pricing systems, exposure
reporting systems, and accounting systems. Prior to joining FIDAC, she worked
for Citadel Funding Corporation where she assisted in the management of the
funding of mortgage-backed security portfolios.
Kevin P. Brady, age 42, was elected on January 28, 1997 to serve as a director
of the Company. Mr. Brady is the principal of KPB Associates Inc., an
accounting firm which specializes in corporate taxation. Mr. Brady founded KPB
Associates Inc. in December 1993. From July 1986 through November 1993, Mr.
Brady worked for Price Waterhouse LLP in New York City where he specialized in
international tax structures and financial reporting and held a number of senior
management positions. Prior to joining Price Waterhouse LLP, Mr. Brady worked
in the corporate tax department of Merck & Co. Mr. Brady is a Certified Public
Accountant.
Spencer I. Browne, age 48, was elected on January 28, 1997 to serve as a
director of the Company. Mr. Browne has held various executive and management
positions with several publicly traded companies engaged in businesses related
to the residential and commercial mortgage loan industry . From August 1988
until September 1996, Mr. Browne served as President, Chief Executive Officer
and a director of Asset Investors Corporation ("AIC"), a New York Stock Exchange
traded company he co-founded in 1986. He also served as President, Chief
Executive Officer and a director of Commercial Assets, Inc., an American Stock
Exchange traded company affiliated with AIC, from its formation in October 1993
until September 1996. In addition, from June 1990 until March 1996, Mr. Browne
served as President and a director of M.D.C. Holdings, Inc., a New York Stock
Exchange traded company and the parent company of a major homebuilder in
Colorado.
John S. Grace , age 39, was elected on June 26, 1997 to serve as a director of
the Company. For the past five years, Mr. Grace has been the Chairman of
Sterling Grace Corporation, Co-Chairman of Associated Asset Management, Inc. and
general partner of Anglo American Securities Fund, L.P. Mr. Grace is also a
director of the Cold Spring Harbor Laboratory Association, a genetic research
institute, and a director of Andersen Group, Inc. Mr. Grace has also served as
governor of the Foundation for Advanced Information and Research of Tokyo, a
research center whose membership includes senior executives from Japanese
companies, and as a trustee of the Ford Theater in Washington, D.C.
Jonathan D. Green, age 50, was elected on January 28, 1997 to serve as a
director of the Company. Mr. Green has been the President and Chief Executive
Officer of Rockefeller Center Management Corporation ("RCMC") and Rockefeller
Center Development Corporation ("RCDC"), subsidiaries of The Rockefeller Group
("RGI"), from July 1995 to the present. Mr. Green joined RGI in 1980 as
Assistant Vice President and Real Estate Counsel, was appointed Vice President,
Secretary and General Counsel in 1983, and was elected Chief Corporate Officer
in 1991. As President of RCMC, Mr. Green is responsible for all aspects of RGI's
real estate ownership and management interests in Rockefeller Center in midtown
Manhattan. As President of RCDC, Mr. Green oversees RGI's real estate
development projects including the International Trade Center in Morris County,
New Jersey and Rockefeller Plaza West in midtown Manhattan. Before joining RGI,
Mr. Green was affiliated with the New York City law firm of Thacher, Proffitt &
Wood.
54
<PAGE>
John A. Lambiase, age 57, was elected on January 28, 1997 to serve as a
director of the Company. Mr. Lambiase was Managing Director in Global
Operations at Salomon Brothers from 1985 through his retirement in 1991. Mr.
Lambiase joined Salomon in 1979 as Director of Internal Audit. Mr. Lambiase has
served as Chairman of the Mortgage-Backed Securities Clearance Corporation, a
member of the board of directors of Prudential Home Mortgage and a member of the
Board of the National Securities Clearance Corporation, and was a founding
director and Chairman of the Participation Trust Company. Mr. Lambiase also
served on Salomon's Credit Committee. Prior to joining Salomon, from 1972
through 1979, Mr. Lambiase was President of Loeb Rhodes Wall Street Settlement
Corporation with responsibility for securities clearance of over 130 member
firms. Prior to Loeb Rhodes, Mr. Lambiase had been the Chief Financial Officer
and a General Partner of W.E. Hutton. Mr. Lambiase is a certified public
accountant.
Donnell A. Segalas, age 39, was elected on January 28, 1997 to serve as a
director of the Company. Mr. Segalas is a Senior Partner of Beaconsfield
Capital, L.L.C., a cross border mergers and acquisitions and corporate financial
advisory firm which he co-founded in June 1997. Mr. Segalas is also Managing
Partner of Beaconsfield Partners, L.L.C., a wholly-owned subsidiary of
Beaconsfield Capital, which is engaged in private equity investing in the United
States and Mexico. Prior to his co-founding of Beaconsfield Capital and
Beaconsfield Partners, Mr. Segalas was a Managing Director at Rodman & Renshaw,
Inc. in the Mortgage- Backed Securities Department from 1994 to June 1997. In
December 1995, Mr. Segalas was also given the additional responsibility to
manage Rodman & Renshaw's Structured Finance Group. From 1990 to 1994, Mr.
Segalas served as Senior Vice President in the Mortgage-Backed Securities
Department at Tucker Anthony, Inc., where he co-managed the firm's Structured
Finance Group. Prior to that time, Mr. Segalas had been a Senior Vice President
at Smith Barney, Inc. and Corporate Vice President at Drexel Burnham Lambert.
All directors are elected at each annual meeting of the Company's stockholders
for a term of one year, and hold office until their successors are elected and
qualified. All officers serve at the discretion of the Board of Directors. The
Company will pay an annual director's fee to each Independent Director equal to
$10,000 (assuming consummation of the Offering), a fee of $500 for each meeting
of the Board of Directors attended by each Independent Director (or $250 for any
meeting at which the Independent Director participates by conference telephone
call) and reimbursement of costs and expenses of all directors for attending
such meetings. Directors who are officers of the Company do not receive an
annual director's fee.
The Bylaws of the Company provide that, except in the case of a vacancy, a
majority of the members of the Board of Directors and of any committee of the
Board of Directors will at all times be Independent Directors. Vacancies
occurring on the Board of Directors among the Independent Directors will be
filled by a vote of a majority of the directors, including a majority of the
Independent Directors.
The Articles of Incorporation of the Company provide for the indemnification
of the directors and officers of the Company to the fullest extent permitted by
Maryland law. See "Description of Capital Stock -- Indemnification." The
Articles of Incorporation of the Company also provide that the personal
liability of any director or officer of the Company to the Company or its
stockholders for money damages is limited to the fullest extent allowed by the
statutory or decisional law of the State of Maryland as amended or interpreted.
See "Description of Capital Stock -- Limitation of Liability."
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
The Company has entered into Employment Agreements with Mr. Farrell, Mr. Guba
and Ms. St. Claire. See "-- Employment Agreements." The Employment Agreements
provide for annual salaries to Mr. Farrell, Mr. Guba and Ms. St. Claire based
upon the book value of the Company. Mr. Farrell's Employment Agreement provides
for an annual salary equal to .20% of the book value of the Company, subject to
a maximum per annum amount of $250,000; Mr. Guba's and Ms. St. Claire's
Employment Agreements provide for annual salaries equal to .17% of the book
value of
55
<PAGE>
the Company, subject to a maximum per annum amount of $200,000. The Company's
"book value" is defined in the Employment Agreements as the aggregate amounts
reported on the Company's balance sheet as "Stockholders' Equity", excluding any
adjustments for valuation reserves (i.e., changes in the value of the Company's
portfolio of investments as a result of mark-to-market valuation changes). Base
salary is determined quarterly by the Board of Directors and upon the raising of
additional equity. The maximum salary caps may be raised at the discretion of
the Compensation Committee. Base salary can also be lowered at management's
discretion based upon the Company's cash flow needs. In addition, the Board of
Directors has established a bonus incentive compensation plan for executive
officers of the Company. This program permits the Board of Directors, in its
discretion, to award cash bonuses annually to executive officers of the Company.
On January 2, 1997, the Company granted to each of Mr. Farrell, Mr. Guba and
Ms. St. Claire incentive stock options to purchase 66,750 shares of Common Stock
at an exercise price of $4.00 per share, which options will vest in four equal
installments over a period of four years from the date of grant, subject to the
approval of the Board in its discretion each year. Any options which have not
vested during the four year period commencing from the date of grant will vest
automatically on the fourth anniversary of the date of grant. On January 2,
1997, the Company also granted to other employees of the Company incentive stock
options to purchase, in the aggregate, 8,000 shares of Common Stock at an
exercise price of $4.00 per share, subject to the vesting provisions described
in this paragraph.
On January 21, 1997, the Company granted to each of Mr. Farrell, Mr. Guba and
Ms. St. Claire incentive stock options to purchase, at an exercise price of
$10.00 per share, a number of shares equal to the product of (i) 2% and (ii) the
number of shares of Common Stock sold in the Private Placement in excess of
3,000,000 which, upon consummation of the Private Placement on February 18,
1997, resulted in the grant to each of them of options to purchase 12,000 shares
of Common Stock. Such options are subject to the same vesting provisions
described in the preceding paragraph.
All of the foregoing options were granted pursuant to the Company's Long-Term
Stock Incentive Plan (the "Incentive Plan"). The Incentive Plan also provides
for the award of options to directors who are not officers or employees of the
Company upon their appointment to the Board of Directors and on June 26 of each
year. The Company may, from time to time, grant additional stock options and
other incentive compensation awards to some or all of the Company's executive
officers and employees pursuant to the Incentive Plan or such other incentive
compensation plan which may be adopted by the Company. See "-- Long-Term Stock
Incentive Plan."
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Mr. Farrell, Mr. Guba
and Ms. St. Claire. Each employment agreement provides for a term through
December 31, 1999 and will be automatically extended for an additional year at
the end of each year of the employment agreement, unless either party provides a
prescribed prior written notice to the contrary. Each employment agreement
provides for the initial annual base salary set forth under the caption "--
Compensation of Directors and Executive Officers" and for participation by the
subject officer in the bonus incentive compensation plan. Each employment
agreement provides for the subject officer to receive his or her base salary and
bonus compensation to the date of the termination of employment by reason of
death, disability or resignation and to receive base compensation to the date of
the termination of employment by reason of a termination of employment for cause
as defined in the employment agreement. Each employment agreement also provides
for the subject officer to receive, in the event that the Company terminates the
subject officer's employment without cause, or if the subject officer resigns
for "good reason" (as defined in the employment agreement, including the
occurrence of a "Change of Control" of the Company as defined in the employment
agreement), an amount, 50% payable immediately and 50% payable in monthly
installments over the succeeding twelve months, equal to three times the greater
of such officer's combined maximum salary base and actual bonus compensation for
the preceding fiscal year or the average for the three preceding years of such
officer's combined actual base salary and bonus compensation, subject in each
case to a maximum amount of 1% of the Company's book equity value (exclusive of
valuation adjustments) and a minimum amount of $250,000. Section 280G of the
Code may limit the deductibility of such payments by the Company for
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<PAGE>
Federal income tax purposes. Each employment agreement also contains a "non-
compete" provision prohibiting the subject officer from managing, controlling,
participating in or operating a competing REIT for a period of one year
following termination of employment following the Company's termination of the
subject officer without cause or resignation of the subject officer for "good
reason" (including a "Change of Control"). Providing services to FIDAC and its
customers is expressly excluded from operation of the "non-compete" provision.
In addition, all outstanding options and Awards (see "-- Long-Term Stock
Incentive Plan" below) granted to the subject officer under the Incentive Plan
shall immediately vest upon his or her termination without cause or termination
for "good reason" (including upon a "Change of Control"). "Change of Control"
for purposes of the agreements would include a merger or consolidation of the
Company, a sale of all or substantially all of the assets of the Company,
changes in the identity of a majority of the members of the Board of Directors
of the Company (other than due to the death, disability or age of a director) or
acquisitions of more than 9.8% of the combined voting power of the Company's
capital stock, subject to certain limitations. Each agreement requires that the
subject officer act in accordance with provisions of Maryland law relating to
corporate opportunities as described under the caption "-- Certain
Relationships; Conflicts of Interest."
LONG-TERM STOCK INCENTIVE PLAN
The Company has adopted the Incentive Plan to provide officers, directors and
other key employees and consultants of the Company with additional incentives
to exert their best efforts on behalf of the Company, to increase their
proprietary interest in the success of the Company, to award outstanding
performance, and to attract and retain executive personnel of outstanding
ability. The effective date of the Incentive Plan was January 2, 1997.
Awards under the Incentive Plan to officers and other key employees of, and
consultants to, the Company may be granted by the Compensation Committee of the
Board of Directors, which will administer the Incentive Plan. Awards under the
Incentive Plan may include: (i) options to purchase shares of Common Stock,
including incentive stock options, non-qualified stock options or both, which
options may contain automatic reload features; (ii) stock appreciation rights,
whether in conjunction with the grant of stock options or independent of such
grant, or stock appreciation rights that are only exercisable in the event of a
change in control of the Company (as defined in the Incentive Plan) or upon
other events; (iii) restricted stock, in which Common Stock is granted to
participants subject to restrictions on transferability and other restrictions,
which lapse over time; (iv) deferred stock, in which delivery of Common Stock
occurs upon expiration of a deferral period; (v) bonus stock, consisting of a
right to receive Common Stock in an amount determined with reference to a fixed
bonus amount; (vi) dividend equivalents, consisting of a right to receive cash,
other awards, or other property equal in value to dividends paid with respect to
a specified number of shares of Common Stock, or other periodic payments; or
(vii) other awards not otherwise provided for, the value of which are based in
whole or in part upon the value of the Common Stock. The Compensation Committee
is composed of two Independent Directors and Michael Farrell.
The Incentive Plan also provides that each person who becomes a director, but
who is not an officer or employee of the Company, upon appointment to the Board
of Directors will receive a non-discretionary automatic grant of non-qualified
stock options for the purchase of 5,000 shares of Common Stock, which options
shall vest in four equal installments over a period of four years from the date
of grant. Accordingly, on January 28, 1997, firm non-employee directors of the
Company were each granted options to purchase 5,000 shares of Common Stock at an
exercise price of $10.00 per share, which options will vest in four equal
installments over a four-year period from the date of grant and on June 26,
1997, a newly-appointed director was granted options to purchase 5,000 shares of
Common Stock at an exercise price of $10.00 per share, which options also vest
in four equal installments over a four-year period. In addition, each non-
employee director is entitled to receive on June 26 of each year that he or she
serves as a director of the Company options to purchase an additional 1,250
shares of Common Stock, which options shall vest on the date of grant.
Accordingly, on June 26, 1997, the six non-employee directors of the Company
were granted options to purchase an aggregate of 7,500 shares of Common Stock at
an exercise price of $10.00 per share. The exercise price for each share
of Common Stock subject to the non-employee directors' options is equal to the
fair market value of the Common Stock on the date the option is granted.
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<PAGE>
The flexible terms of the Incentive Plan are intended, among other things, to
permit the Compensation Committee of the Board of Directors, which administers
the Incentive Plan, to impose performance conditions with respect to any award
to officers and key employees, thereby requiring forfeiture of all or a part of
any award if performance objectives are not met, or linking the time of
exercisability or settlement of an award to the achievement of performance
conditions. Awards granted under the Incentive Plan are generally not
assignable or transferable except by the laws of descent and distribution.
The Compensation Committee has the authority under the Incentive Plan, among
other things, to: (i) select the officers and other key employees and
consultants entitled to receive awards under the Incentive Plan; (ii) determine
the form of awards, or combinations thereof, and whether such awards are to
operate on a tandem basis or in conjunction with other awards; (iii) determine
the number of shares of Common Stock or rights covered by an award; and (iv)
determine the terms and conditions of any awards granted under the Incentive
Plan, including, any restrictions or limitations on transfer, any vesting
schedules or the acceleration thereof, and any forfeiture or termination
provisions (or waivers thereof) including, but not limited to, in connection
with a determination that an Incentive Plan participant has been terminated for
cause (as defined in the Incentive Plan). Other than with respect to the grant
of non-discretionary stock options to non-employee directors as described above,
the exercise price at which shares of Common Stock may be purchased pursuant to
the grant of stock options under the Incentive Plan is required to be determined
by the Compensation Committee at the time of grant in its discretion, which
discretion includes the ability to set an exercise price that is below the fair
market value of the shares of Common Stock covered by such grant at the time of
grant. In addition, unless otherwise provided by the Compensation Committee in
an award agreement, all restrictions relating to the continued performance of
services and/or the achievement of performance objectives will immediately lapse
upon a change in control of the Company.
Subject to anti-dilution provisions for stock splits, stock dividends and
similar events, the total number of shares of Common Stock that are reserved and
available for issuance under the Incentive Plan is the greater of 500,000 or 5%
of the total number of shares of Common Stock outstanding on a fully diluted
basis, assuming, if applicable, the conversion of all warrants and convertible
securities into Common Stock. No awards may be granted under the Incentive Plan
to any person who, assuming exercise or settlement of all options and rights
held by such person, would own or be deemed to own more than 9.8% in number of
shares or value of any class of capital stock of the Company.
The Incentive Plan may be amended, altered, suspended, discontinued, or
terminated by the Board of Directors without stockholder approval unless such
approval is required by law or regulation or under the rules of any stock
exchange or automated quotation system on which the Common Stock is then listed
or quoted.
INVOLVEMENT OF OFFICERS IN CERTAIN LEGAL PROCEEDINGS
On November 15, 1994, Citadel Funding Corporation ("Citadel") and certain of
its principals, including Michael A. J. Farrell (the "respondents"), entered
into a Decision and Order of Acceptance of Respondents' Offer of Settlement (the
"DBCC Settlement") with the National Association of Securities Dealers, Inc.
District Business Conduct Committee for District No. 3 (the "DBCC"), pursuant to
which the respondents consented to censure, a fine of $150,000 jointly and
severally among the respondents and a thirty calendar day suspension of Mr.
Farrell from being associated with any member of the National Association of
Securities Dealers. The DBCC had alleged in its complaint against the
respondents that Citadel had failed to maintain the minimum net capital required
by Commission Rule 15c3-1 and that Mr. Farrell had acted in a capacity which
required registration as a general securities principal prior to his
qualification as such a principal. The disputed net capital issue involved a
determination as to whether Citadel was acting as agent or principal in certain
transactions and, consequently, whether Citadel was required to maintain capital
against such amounts.
In a statement of mitigating circumstances submitted to the DBCC, respondents
stated that the violations alleged in the DBCC complaint involved complex and
highly technical provisions of the Commission's net capital rule
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<PAGE>
and that Citadel had acted in reliance upon an opinion from the accounting firm
which it had retained that the transactions in question were not principal
transactions. The respondents further stated that no customer suffered any harm
as a result of any of the violations alleged by the DBCC and that none of the
respondents obtained any monetary benefit as a result of the alleged violations.
Subsequent to the DBCC Settlement, the respondents and certain other principals
of Citadel entered into a settlement agreement whereby the accounting firm which
had provided the opinion agreed to pay a cash settlement to such respondents and
principals.
CERTAIN RELATIONSHIPS; CONFLICTS OF INTEREST
Michael Farrell, Chairman of the Board and Chief Executive Officer of the
Company, Timothy Guba, President and Chief Operating Officer of the Company,
Wellington St. Claire, Vice Chairman of the Board of the Company, and Jennifer
A. Stephens, Secretary of the Company, are actively involved in the management
of FIDAC. FIDAC is a registered investment adviser which, at June 30, 1997,
managed, assisted in managing or supervised approximately $500 million in gross
assets for a wide array of clients, of which, at such date, approximately $250
million was managed on a discretionary basis. Michael Farrell is a member of
the Boards of Directors of the Floating Rate Fund. FIDAC is the investment
adviser to the Floating Rate Fund. The executive officers of the Company named
above have performed and will continue to perform such services for FIDAC, such
institutional clients and the Floating Rate Fund; however, such officers intend
to continue to devote a majority of their time to the business of the Company.
These responsibilities may create conflicts of interest if such members of
management are presented with corporate opportunities that may benefit both the
Company and the Floating Rate Fund and other clients for whom FIDAC acts as an
investment adviser. In the event that an investment opportunity arises, such
investment will be allocated to the Company or another entity by determining the
entity or account for which such investment is most suitable. In making such
determination, management will consider the investment strategy and guidelines
of each entity or account with respect to acquisition of assets, leverage,
liquidity and other factors which management shall determine appropriate.
Generally, under Maryland corporate law, a director of a corporation would be
required to first offer to the Company corporate opportunities learned of solely
as a result of his or her service as a member of the Board of Directors.
Maryland law provides further that in order for a contract or other transaction
between a corporation and any of its directors or in which a director has a
material financial interest not to be void or voidable: (i) the contract or
transaction must be fair and reasonable to the corporation; or (ii) the fact of
such interest must be disclosed or known to (a) the board or committee that
authorizes, approves or ratifies the contract or transaction and such
authorization, approval or ratification must be by a vote of the majority of
disinterested directors or (b) the stockholders entitled to vote and the
contract or transaction is authorized, approved and ratified by a majority of
the votes cast by disinterested stockholders entitled to vote.
The Company's policy is that the approval of the Board of Directors (with any
interested director abstaining) is required for any director, officer, security
holder or affiliate of the Company (a) to engage for their own account in
realizing upon a corporate opportunity learned of solely as a result of their
service to or representation of the Company or (b) to have any direct or
indirect pecuniary interest in any investment to be acquired or disposed of by
the Company or in any transaction to which the Company is a party or has an
interest.
The Company shares with FIDAC office space and certain office expenses, such
as lease payments, utilities charges and ancillary services performed by office
personnel, at cost on a pro rata basis based on the relative use of such
facilities and services by the Company and FIDAC. The Independent Directors
will periodically review leases and other arrangements with FIDAC to ensure that
such arrangements are on an arm's-length basis and to ensure compliance with the
REIT Provisions of the Code.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information as of July 31, 1997 (after
giving effect to the Direct Offering), and as adjusted to reflect the sale of
Common Stock being offered hereby, relating to the beneficial ownership of the
Common Stock by (i) all persons known by the Company to beneficially own more
than 5% of the outstanding shares of the Common Stock, (ii) each executive
officer and director of the Company and (iii) all officers and directors of the
Company as a group. The following table also sets forth the number of Shares to
be sold by each Selling Stockholder.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP OF BENEFICIAL OWNERSHIP OF
COMMON STOCK COMMON STOCK
BEFORE OFFERING AFTER OFFERING
---------------------------- ----------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES PERCENT SHARES PERCENT
- ------------------------------------------------- ---------------- ---------- ---------------- ----------
<S> <C> <C> <C> <C>
Michael A.J. Farrell
Annaly Mortgage Management, Inc.
1500 Harbor Blvd.
Weehawken, NJ 07087............................. 45,000 1.2% 45,000 *
Timothy J. Guba
Annaly Mortgage Management, Inc.
1500 Harbor Blvd.
Weehawken, NJ 07087............................. 25,300 * 25,300 *
Wellington J. St. Claire
Annaly Mortgage Management, Inc.
1500 Harbor Blvd.
Weehawken, NJ 07087............................. 23,000 * 23,000 *
Kathryn F. Fagan
Annaly Mortgage Management, Inc.
1500 Harbor Blvd.
Weehawken, NJ 07087.............................. 1,000 * 1,000 *
Kevin P. Brady
KPB Associates
12 Macatom Drive
Cranford, NJ 07016-1632......................... 2,750(1) * 2,750(1) *
Spencer I. Browne
World Trade Center
1675 Broadway
Suite 2100
Denver, CO 80202................................ 8,750(1) * 8,750(1) *
John S. Grace
55 Brookville Road
P.O. Box 163
Glen Head, NY 11545-0163........................ 126,250(1)(2) 3.3% 126,250(1)(2) 1.3%
Jonathan D. Green
Rockefeller Group
1230 Avenue of the Americas
5th Floor
New York, NY 10017.............................. 3,750(1) * 3,750(1) *
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP OF BENEFICIAL OWNERSHIP OF
COMMON STOCK COMMON STOCK
BEFORE OFFERING AFTER OFFERING
---------------------------- ----------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES PERCENT SHARES PERCENT
- ------------------------------------------------- ---------------- ---------- ---------------- ----------
<S> <C> <C> <C> <C>
John A. Lambiase
1489 Sweetbay Circle
Palm City, FL 34990............................. 11,250(1) * 11,250(1) *
Donnell A. Segalas
Village Road
New Vernon, NJ 07976............................. 6,250(1) * 6,250(1) *
Zweig-DiMenna Associates LLC
900 Third Avenue
30th Floor
New York, NY 10022.............................. 205,000(3) 5.4%
Frorer Partners, L.P.
419 Hilbrook Road
Bryn Mawr, PA 19010(4).......................... 250,000 6.6%
Eaton Vance Total Return Portfolio
24 Federal Street
Boston, MA 02110-2512(5)........................ 350,000 9.3%
Bay Pond Partners, L.P.
c/o Wellington Management
75 State Street
19th Floor
Boston, MA 02109................................ 304,500 8.1%
Loews Corporation
667 Madison Avenue
7th Floor
New York, NY 10021-8087......................... 270,000 7.2%
Kramer Spellman, L.P.
2050 Center Avenue
Suite 300
Fort Lee, NJ 07024.............................. 350,000(6) 9.3%
Boston Provident Partners, L.P.
c/o Kramer Spellman, L.P.
2050 Center Avenue
Suite 300
Fort Lee, NJ 07024............................... 210,000(6) 5.6%
All Executive Officers and Directors as a Group
(10 persons).................................... 253,300(1)(2) 6.7% 253,300(1)(2) 2.5%
</TABLE>
_____________
* Represents beneficial ownership of less than one percent of the Common Stock.
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(1) Includes 1,250 shares of Common Stock subject to vested options granted
under the Company's Incentive Plan to each of the following non-employee
directors of the Company: Kevin P. Brady; Spencer I. Browne; John S. Grace;
Jonathan D. Green; John A. Lambiase and Donnell A. Segalas.
(2) Includes 35,000 shares held by Sterling Grace Capital Management, L.P., as
to which Mr. Grace may be deemed to have sole voting and dispositive power,
and 35,000 shares held by Anglo-American Securities Fund, L.P., 20,000
shares held by Drake Associates, L.P. and 10,000 shares held by Diversified
Long Term Growth Fund, L.P., as to which Mr. Grace may be deemed to have
shared voting and dispositive power. Mr. Grace disclaims beneficial
ownership of all shares held by such limited partnerships in excess of his
pecuniary interest.
(3) Includes 133,000 shares of Common Stock held by Zweig-DiMenna Partners, L.P.
("ZD Partners") and 72,000 shares of Common Stock held by Zweig-DiMenna
Special Opportunities, L.P. ("ZD Opportunities"). Zweig-DiMenna Associates
LLC ("ZD Associates") is the general partner of ZD Partners and ZD
Opportunities. ZD Associates may be deemed to be affiliated with Zweig-
DiMenna International Managers, Inc. which acts as investment manager to
Zweig-DiMenna International Ltd. ("ZD International"). ZD International also
owns 145,000 shares of Common Stock. Each entity disclaims beneficial
ownership of all shares in excess of its pecuniary interest.
(4) The general partners of Frorer Partners, L.P. are Frorer Capital Management,
Inc. and Peter H. Frorer. Each general partner disclaims beneficial
ownership in excess of its pecuniary interest.
(5) Eaton Vance Total Return Portfolio is a mutual fund managed by Eaton Vance
Management.
(6) Kramer Spellman, L.P. serves as general partner to investment partnerships,
including Boston Provident Partners, L.P., and as discretionary investment
manager to managed accounts which, in the aggregate, own 350,000 shares of
Common Stock of the Company. 210,000 of these 350,000 shares are owned by
Boston Provident Partners, L.P. Orin S. Kramer and Jay Spellman are the
general partners of Kramer, Spellman, L.P. Kramer Spellman, L.P. and Messrs.
Kramer and Spellman disclaim beneficial ownership of all shares held by any
entity in excess of their respective pecuniary interests.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion summarizes certain Federal income tax considerations
to the Company and the purchasers of the Common Stock. This discussion is based
on existing Federal income tax law, which is subject to change, possibly
retroactively. This discussion does not discuss all aspects of Federal income
taxation which may be relevant to a particular investor in light of its personal
investment circumstances or to certain types of investors subject to special
treatment under the Federal income tax laws (including financial institutions,
insurance companies, broker-dealers and, except to the extent discussed below,
tax-exempt entities and foreign taxpayers) and it does not discuss any aspects
of state, local or foreign tax law. This discussion assumes that investors will
hold their Common Stock as a "capital asset" (generally, property held for
investment) under the Code. Prospective investors are advised to consult their
tax advisors as to the specific tax consequences of purchasing, holding and
disposing of the Common Stock, including the application and effect of Federal,
state, local and foreign income and other tax laws.
The Company will elect to become subject to tax as a REIT, for Federal income
tax purposes, commencing with the taxable year ending December 31, 1997. The
Board of Directors of the Company currently expects that the Company will
continue to operate in a manner that will permit the Company to maintain its
qualification as a REIT for the taxable year ending December 31, 1997, and in
each taxable year thereafter. This treatment will permit the Company to deduct
dividend distributions to its stockholders for Federal income tax purposes, thus
effectively eliminating the "double taxation" that generally results when a
corporation earns income and distributes that income to its stockholders in the
form of dividends.
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In the opinion of Morgan, Lewis & Bockius LLP, special tax counsel to the
Company, the Company will meet the requirements for qualification as a REIT
under the Code commencing with the Company's taxable year ending December 31,
1997, and the Company's current and contemplated method of operation described
in this Prospectus and as represented by the Company will enable it to continue
to satisfy the requirements for such qualification. This opinion is based on
various assumptions relating to the organization and operation of the Company
and is conditioned upon certain representations made by the Company as to
certain factual matters. The continued qualification and taxation of the Company
as a REIT will depend upon the Company's ability to meet, on a continuing basis,
distribution levels and diversity of stock ownership, and the various
qualification tests imposed by the Code as discussed below. This opinion is
based on the law existing and in effect on the date hereof which is subject to
change, possibly retroactively.
There can be no assurance, however, that the Company will qualify as a REIT
in any particular taxable year, given the highly complex nature of the rules
governing REITs, the ongoing importance of factual determinations and the
possibility of future changes in the circumstances of the Company. If the
Company were not to qualify as a REIT in any particular year, it would be
subject to Federal income tax as a regular, domestic corporation, and its
stockholders would be subject to tax in the same manner as stockholders of such
corporation. In this event, the Company could be subject to potentially
substantial income tax liability in respect of each taxable year that it fails
to qualify as a REIT, and the amount of earnings and cash available for
distribution to its stockholders could be significantly reduced or eliminated.
The following is a brief summary of certain technical requirements that the
Company must meet on an ongoing basis in order to qualify, and remain qualified,
as a REIT under the Code:
STOCK OWNERSHIP TESTS
(i) The capital stock of the Company must be transferable, (ii) the capital
stock of the Company must be held by at least 100 persons during at least 335
days of a taxable year of 12 months (or during a proportionate part of a taxable
year of less than 12 months), and (iii) no more than 50% of the value of such
capital stock may be owned, directly or indirectly, by five or fewer individuals
(as defined in the Code to include certain entities) at any time during the last
half of the taxable year. Tax-exempt entities, other than private foundations
and certain unemployment compensation trusts, are generally not treated as
individuals for these purposes. The requirements of items (ii) and (iii) above
are not applicable to the first taxable year for which an election to be taxed
as a REIT is made. However, these stock ownership requirements must be
satisfied in the Company's second taxable year and in each subsequent taxable
year. The Articles of Incorporation provide restrictions regarding the transfer
of the Company's shares in order to aid in meeting the stock ownership
requirements. See "Description of Capital Stock -- Restrictions on Ownership and
Transfer."
ASSET TESTS
The Company must generally meet the following asset tests (the "REIT Asset
Tests") at the close of each quarter of each taxable year:
(a) at least 75% of the value of the Company's total assets must consist of
Qualified REIT Real Estate Assets, government securities, cash and cash items
(the "75% Asset Test"); and
(b) the value of securities held by the Company but not taken into account
for purposes of the 75% Asset Test must not exceed (i) 5% of the value of the
Company's total assets in the case of securities of any one issuer, or (ii) 10%
of the outstanding voting securities of any such issuer.
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At June 30, 1997, 100% of the Company's assets were Qualified REIT Real
Estate Assets. The Company expects that substantially all of its assets will
continue to be Qualified REIT Real Estate Assets. In addition, the Company does
not expect that the value of any security of any one entity would ever exceed 5%
of the Company's total assets, and the Company does not expect to own more than
10% of any one issuer's voting securities.
The Company monitors closely the purchase, holding and disposition of its
assets in order to comply with the REIT Asset Tests. In particular, the Company
intends to limit and diversify its ownership of any assets not qualifying as
Qualified REIT Real Estate Assets to less than 25% of the value of the Company's
assets and to less than 5%, by value, of any single issuer. If it is anticipated
that these limits would be exceeded, the Company intends to take appropriate
measures, including the disposition of non-qualifying assets, to avoid exceeding
such limits.
GROSS INCOME TESTS
The Company must generally meet the following gross income tests (the "REIT
Gross Income Tests") for each taxable year:
(a) at least 75% of the Company's gross income must be derived from certain
specified real estate sources including interest income and gain from the
disposition of Qualified REIT Real Estate Assets or "qualified temporary
investment income" (i.e., income derived from "new capital" within one year of
the receipt of such capital) (the "75% Gross Income Test");
(b) at least 95% of the Company's gross income for each taxable year must be
derived from sources of income qualifying for the 75% Gross Income Test,
dividends, interest, and gains from the sale of stock or other securities
(including certain interest rate swap and cap agreements entered into to hedge
variable rate debt incurred to acquire Qualified REIT Real Estate Assets) not
held for sale in the ordinary course of business (the "95% Gross Income Test");
and
(c) less than 30% of the Company's gross income is derived from the sale of
Qualified REIT Real Estate Assets held for less than four years, stock or
securities held for less than one year (including certain interest rate swap and
cap agreements entered into to hedge variable rate debt incurred to acquire
Qualified Real Estate Assets) and certain "dealer" property (the "30% Gross
Income Test").
The Company intends to maintain its REIT status by carefully monitoring its
income, including income from hedging transactions and sales of Mortgage-Backed
Securities, to comply with the REIT Gross Income Tests. In particular, the
Company will treat income generated by its interest rate caps and other hedging
instruments as non-qualifying income for purposes of the 95% Gross Income Test
unless it receives advice from its tax advisor that such income constitutes
qualifying income for purposes of such test. Under certain circumstances, for
example, (i) the sale of a substantial amount of Mortgage-Backed Securities to
repay borrowings in the event that other credit is unavailable or (ii) an
unanticipated decrease in the qualifying income of the Company which may result
in the non-qualifying income exceeding 5% of gross income or a breach of the 30%
Gross Income Test, the Company may be unable to comply with certain of the REIT
Gross Income Tests. See "--Taxation of the Company" for a discussion of the tax
consequences of failure to comply with the REIT Provisions of the Code.
PENDING LEGISLATION
Under legislation which has passed both houses of Congress, the 30% Gross
Income Test would be repealed, facilitating disposition of Qualified REIT Real
Estate Assets or other stock or securities held by the Company. In addition, the
categories of hedges of the Company's liabilities (incurred to acquire Qualified
REIT Real Estate Assets) which may produce income or gain on sale qualifying
under the 95% Gross Income Test would be expanded to include options, futures
contracts, forward rate agreements
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or similar financial instruments. However, hedges of the Company's Qualified
REIT Real Estate Assets themselves would still not produce income qualifying
under either the 95% Gross Income Test or the 75% Gross Income Test, limiting
the Company's ability to hedge its interest rate and prepayment risks. This
legislation would be effective for taxable years of the Company beginning after
the date of enactment.
DISTRIBUTION REQUIREMENT
The Company must generally distribute to its stockholders an amount equal to
at least 95% of the Company's REIT taxable income before deductions of dividends
paid and excluding net capital gain.
TAXATION OF THE COMPANY
In any year in which the Company qualifies as a REIT, the Company will
generally not be subject to Federal income tax on that portion of its REIT
taxable income or capital gain which is distributed to its stockholders. The
Company will, however, be subject to Federal income tax at normal corporate
income tax rates upon any undistributed taxable income or capital gain.
Notwithstanding its qualification as a REIT, the Company may also be subject
to tax in certain other circumstances. If the Company fails to satisfy either
the 75% or the 95% Gross Income Test, but nonetheless maintains its
qualification as a REIT because certain other requirements are met, it will
generally be subject to a 100% tax on the greater of the amount by which the
Company fails either the 75% or the 95% Gross Income Test. The Company will also
be subject to a tax of 100% on net income derived from any "prohibited
transaction," and if the Company has (i) net income from the sale or other
disposition of "foreclosure property" which is held primarily for sale to
customers in the ordinary course of business or (ii) other non-qualifying income
from foreclosure property, it will be subject to Federal income tax on such
income at the highest corporate income tax rate. In addition, if the Company
fails to distribute during each calendar year at least the sum of (i) 85% of its
REIT ordinary income for such year and (ii) 95% of its REIT capital gain net
income for such year, the Company would be subject to a 4% Federal excise tax on
the excess of such required distribution over the amounts actually distributed
during the taxable year, plus any undistributed amount of ordinary and capital
gain net income from the preceding taxable year. The Company may also be subject
to the corporate alternative minimum tax, as well as other taxes in certain
situations not presently contemplated.
If the Company fails to qualify as a REIT in any taxable year and certain
relief provisions of the Code do not apply, the Company would be subject to
Federal income tax (including any applicable alternative minimum tax) on its
taxable income at the regular corporate income tax rates. Distributions to
stockholders in any year in which the Company fails to qualify as a REIT would
not be deductible by the Company, nor would they generally be required to be
made under the Code. Further, unless entitled to relief under certain other
provisions of the Code, the Company would also be disqualified from re-electing
REIT status for the four taxable years following the year during which it became
disqualified.
The Company intends to monitor on an ongoing basis its compliance with the
REIT requirements described above. In order to maintain its REIT status, the
Company will be required to limit the types of assets that the Company might
otherwise acquire, or hold certain assets at times when the Company might
otherwise have determined that the sale or other disposition of such assets
would have been more prudent.
TAXABLE SUBSIDIARIES
Hedging activities and the creation of Mortgage-Backed Securities through
securitization may be done through a taxable subsidiary of the Company. The
Company and one or more other entities may form and capitalize one or more
taxable subsidiaries. In order to ensure that the Company would not violate the
more than 10% voting stock of a single issuer limitation described above, the
Company would own only nonvoting preferred and common stock and the other
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entities would own all of the voting common stock. The value of the Company's
investment in such a subsidiary must also be limited to less than 5% of the
value of the Company's total assets at the end of each calendar quarter so that
the Company can also comply with the 5% of value, single issuer asset limitation
described above under -- General -- Asset Tests." The taxable subsidiary would
not elect REIT status and would distribute only net after-tax profits to its
stockholders, including the Company. Before the Company engages in any hedging
or securitization activities or forms any such taxable subsidiary corporation,
the Company will obtain an opinion of its tax advisor to the effect that such
activities or the formation and contemplated method of operation of such
corporation will not cause the Company to fail to satisfy the REIT Asset and
REIT Gross Income Tests.
TAXATION OF STOCKHOLDERS; COMMON STOCK
Distributions (including constructive distributions) made to holders of
Common Stock, other than tax-exempt entities, will generally be subject to tax
as ordinary income to the extent of the Company's current and accumulated
earnings and profits as determined for Federal income tax purposes. If the
amount distributed exceeds a stockholder's allocable share of such earnings and
profits, the excess will be treated as a return of capital to the extent of the
stockholder's adjusted basis in the Common Stock, which will reduce the
stockholder's basis in the Common Stock but not be subject to tax, and
thereafter as a gain from the sale or exchange of a capital asset.
Distributions designated by the Company as capital gain dividends will
generally be subject to tax as long-term capital gain to stockholders, to the
extent that the distribution does not exceed the Company's actual net capital
gain for the taxable year. Distributions by the Company, whether characterized
as ordinary income or as capital gain, are not eligible for the corporate
dividends received deduction. In the event that the Company realizes a loss for
the taxable year, stockholders will not be permitted to deduct any share of that
loss. Further, if the Company (or a portion of its assets) were to be treated as
a taxable mortgage pool, any "excess inclusion income" that is allocated to a
stockholder would not be allowed to be offset by a net operating loss of such
stockholder. See "Risk Factors -- Legal and Other Risks --Taxable Mortgage Pool
Risk; Increased Taxation." Future Treasury Department regulations may require
that the stockholders take into account, for purposes of computing their
individual alternative minimum tax liability, certain tax preference items of
the Company.
Dividends declared during the last quarter of a taxable year and actually
paid during January of the following taxable year are generally treated as if
received by the stockholder on December 31 of the taxable year in which declared
and not on the date actually received. In addition, the Company may elect to
treat certain other dividends distributed after the close of the taxable year as
having been paid during such taxable year, but stockholders will be treated as
having received such dividend in the taxable year in which the distribution is
actually made.
Upon a sale or other disposition of the Common Stock, a stockholder will
generally recognize a capital gain or loss in an amount equal to the difference
between the amount realized and the stockholder's adjusted basis in such stock,
which gain or loss will be long-term if the stock has been held for more than
one year. Any loss on the sale or exchange of a share of Common Stock held by a
stockholder for six months or less will generally be treated as a long-term
capital loss to the extent of any long-term capital gain dividends received by
such stockholder with respect to such share of its stock.
The Company is required under Treasury Department regulations to demand
annual written statements from the record holders of designated percentages of
its capital stock disclosing the actual and constructive ownership of such stock
and to maintain permanent records showing the information it has received as to
the actual and constructive ownership of such stock and a list of those persons
failing or refusing to comply with such demand.
In any year in which the Company does not qualify as a REIT, distributions
made to its stockholders would be taxable in the same manner discussed above,
except that no distributions could be designated as capital gain dividends,
distributions would be eligible for the corporate dividends received deduction,
the excess inclusion income rules would
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not apply to the stockholders, and stockholders would not receive any share of
the Company's tax preference items. In such event, however, the Company could be
subject to potentially substantial Federal income tax liability, and the amount
of earnings and cash available for distribution to its stockholders could be
significantly reduced or eliminated.
TAXATION OF TAX-EXEMPT ENTITIES
Subject to the discussion below regarding a "pension-held REIT," a tax-
exempt stockholder is generally not subject to tax on distributions from the
Company or gain realized on the sale of the Common Stock, provided that such
stockholder has not incurred indebtedness to purchase or hold its Common Stock,
that its shares are not otherwise used in an unrelated trade or business of such
stockholder, and that the Company, consistent with its present intent, does not
hold a residual interest in a REMIC that gives rise to "excess inclusion" income
as defined under section 860E of the Code. If the Company were to be treated as
a "taxable mortgage pool," however, a substantial portion of the dividends paid
to a tax-exempt stockholder may be subject to tax as UBTI. Although the Company
does not believe that the Company, or any portion of its assets, will be treated
as a taxable mortgage pool, no assurance can be given that the IRS might not
successfully maintain that such a taxable mortgage pool exists. See "Risk
Factors -- Legal and Other Risks --Taxable Mortgage Pool Risk; Increased
Taxation."
If a qualified pension trust (i.e., any pension or other retirement trust
that qualifies under section 401(a) of the Code) holds more than 10% by value of
the interests in a "pension-held REIT" at any time during a taxable year, a
substantial portion of the dividends paid to the qualified pension trust by such
REIT may constitute UBTI. For these purposes, a "pension-held REIT" is any REIT
(i) that would not have qualified as a REIT but for the provisions of the Code
which look through qualified pension trust stockholders to the qualified pension
trust's beneficiaries in determining ownership of stock of the REIT and (ii) in
which at least one qualified pension trust holds more than 25% by value of the
interests of such REIT or one or more qualified pension trusts (each owning more
than a 10% interest by value in the REIT) hold in the aggregate more than 50% by
value of the interests in such REIT. Assuming compliance with the Ownership
Limit provisions described in "Description of Capital Stock -- Restrictions on
Ownership and Transfer," it is unlikely that pension plans will accumulate
sufficient stock to cause the Company to be treated as a pension-held REIT.
Distributions to certain types of tax-exempt stockholders exempt from
Federal income taxation under sections 501 (c) (7), (c) (9), (c) (17), and (c)
(20) of the Code may also constitute UBTI, and such prospective investors should
consult their tax advisors concerning the applicable "set aside" and reserve
requirements.
STATE AND LOCAL TAXES
The Company and its stockholders may be subject to state or local taxation
in various jurisdictions, including those in which it or they transact business
or reside. The state and local tax treatment of the Company and its stockholders
may not conform to the Federal income tax consequences discussed above.
Consequently, prospective stockholders should consult their own tax advisors
regarding the effect of state and local tax laws on an investment in the Common
Stock.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS APPLICABLE TO FOREIGN
HOLDERS
The following discussion summarizes certain United States Federal tax
consequences of the acquisition, ownership and disposition of the Common Stock
by a purchaser of the Common Stock that, for United States Federal income tax
purposes, is not a "United States person" (a "Non-United States Holder"). For
purposes of this discussion, a "United States person" means: a citizen or
resident of the United States; a corporation, partnership, or other entity
created or organized in the United States or under the laws of the United States
or of any political subdivision thereof; or an estate or trust whose income is
includible in gross income for United States Federal income tax purposes
regardless of its source. This discussion does not consider any specific facts
or circumstances that may apply to a particular Non-
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United States Holder. Prospective investors are urged to consult their tax
advisors regarding the United States Federal tax consequences of acquiring,
holding and disposing of Common Stock, as well as any tax consequences that may
arise under the laws of any foreign, state, local or other taxing jurisdiction.
DIVIDENDS
Dividends paid by the Company out of earnings and profits, as determined for
United States Federal income tax purposes, to a Non-United States Holder will
generally be subject to withholding of United States Federal income tax at the
rate of 30%, unless reduced or eliminated by an applicable tax treaty or unless
such dividends are treated as effectively connected with a United States trade
or business. Distributions paid by the Company in excess of its earnings and
profits will be treated as a tax-free return of capital to the extent of the
holder's adjusted basis in his Common Stock, and thereafter as gain from the
sale or exchange of a capital asset as described below. If it cannot be
determined at the time a distribution is made whether such distribution will
exceed the earnings and profits of the Company, the distribution will be subject
to withholding at the same rate as dividends. Amounts so withheld, however, will
be refundable or creditable against the Non-United States Holder's United States
Federal tax liability if it is subsequently determined that such distribution
was, in fact, in excess of the earnings and profits of the Company. If the
receipt of the dividend is treated as being effectively connected with the
conduct of a trade or business within the United States by a Non-United States
Holder, the dividend received by such holder will be subject to the United
States Federal income tax on net income that applies to United States persons
generally (and, with respect to corporate holders and under certain
circumstances, the branch profits tax).
GAIN ON DISPOSITION
A Non-United States Holder will generally not be subject to United States
Federal income tax on gain recognized on a sale or other disposition of the
Common Stock unless (i) the gain is effectively connected with the conduct of a
trade or business within the United States by the Non-United States Holder, (ii)
in the case of a Non-United States Holder who is a nonresident alien individual
and holds the Common Stock as a capital asset, such holder is present in the
United States for 183 or more days in the taxable year and certain other
requirements are met, or (iii) the Non-United States Holder is subject to tax
under the FIRPTA rules discussed below. Gain that is effectively connected with
the conduct of a trade or business within the United States by a Non-United
States Holder will be subject to the United States Federal income tax on net
income that applies to United States persons generally (and, with respect to
corporate holders and under certain circumstances, the branch profits tax) but
will not be subject to withholding. Non-United States Holders should consult
applicable treaties, which may provide for different rules.
The Company does not expect to hold assets that would be treated as "United
States real property interests" under the provisions of the Foreign Investment
in Real Property Tax Act of 1980 ("FIRPTA"). Therefore, the FIRPTA provisions
relating to certain distributions to foreign persons and to certain gains
realized by foreign persons on the sale of stock should not apply to non-United
States Holders of the Common Stock.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Under temporary United States Treasury regulations, United States
information reporting requirements and backup withholding tax will generally not
apply to dividends paid on the Common Stock to a Non-United States Holder at an
address outside the United States. Payments by a United States office of a
broker of the proceeds of a sale of the Common Stock is subject to both backup
withholding at a rate of 31% and information reporting unless the holder
certifies its Non-United States Holder status under penalties of perjury or
otherwise establishes an exemption. Information reporting requirements (but not
backup withholding) will also apply to payments of the proceeds of sales of the
Common Stock by foreign offices of United States brokers, or foreign brokers
with certain types of relationships to the United States, unless the broker has
documentary evidence in its records that the holder is a Non-United States
Holder and certain other conditions are met, or the holder otherwise establishes
an exemption.
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Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be refunded or credited against the Non-United
States Holder's United States Federal income tax liability, provided that the
required information is furnished to the Internal Revenue Service.
These information reporting and backup withholding rules are under review by
the United States Treasury and their application to the Common Stock could be
changed by future regulations.
ERISA CONSIDERATIONS
The following is a summary of material considerations arising under the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the
prohibited transaction provisions of Section 4975 of the Code that may be
relevant to a prospective purchaser of the Shares. The discussion does not
purport to deal with all aspects of ERISA or Section 4975 of the Code that may
be relevant to particular stockholders (including plans subject to Title I of
ERISA, other retirement plants and IRAs subject to the prohibited transaction
provisions of Section 4975 of the Code, and governmental plans or church plans
that are exempt from ERISA and Section 4975 of the Code but that may be subject
to state law requirements) in light of their particular circumstances.
The discussion is based on current provisions of ERISA and the Code,
existing and currently proposed regulations under ERISA and the Code, the
legislative history of ERISA and the Code, existing administrative rulings of
the Department of Labor ("DOL") and reported judicial decisions. No assurance
can be given that legislative, judicial, or administrative changes will not
affect the accuracy of any statements herein with respect to transactions
entered into or contemplated prior to the effective date of such changes.
A FIDUCIARY MAKING THE DECISION TO INVEST IN SHARES ON BEHALF OF A
PROSPECTIVE PURCHASER THAT IS AN EMPLOYEE BENEFIT PLAN, A TAX-QUALIFIED
RETIREMENT PLAN OR AN IRA SHOULD CONSULT ITS OWN LEGAL ADVISOR REGARDING THE
SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975 OF THE CODE AND STATE
LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP OR SALE OF THE COMMON STOCK BY SUCH
PLAN OR IRA.
EMPLOYEE BENEFIT PLANS, TAX-QUALIFIED RETIREMENT PLANS AND IRAS
Each fiduciary of a pension, profit-sharing, retirement or other employee
benefit plan (a "Plan") subject to Title I of ERISA should consider carefully
whether an investment in Shares is consistent with the fiduciary's fiduciary
responsibilities under ERISA. In particular, the fiduciary requirements of Part
4 of Title I of ERISA require a Plan's investment to be (i) prudent and in the
best interests of the Plan, its participants and its beneficiaries, (ii)
diversified in order to minimize the risk of large losses, unless it is clearly
prudent not to do so, and (iii) authorized under the terms of the Plan's
governing documents (provided the documents are consistent with ERISA). In
determining whether an investment in all Shares is prudent for purposes of
ERISA, the appropriate fiduciary of a Plan should consider all of the facts and
circumstances, including whether the investment is reasonably designed, as a
part of the Plan's portfolio for which the fiduciary has investment
responsibility, to meet the objectives of the Plan, taking into consideration
the risk of loss and opportunity for gain (or other return) from the investment
and the diversification, cash flow and funding requirements of the Plan's
portfolio. A fiduciary also should take into account the nature of the
Company's business, the management of the Company, the length of the Company's
operating history and the fact that certain investment assets may not have been
identified yet.
The fiduciary of an IRA or of a qualified retirement plan not subject to
Title I of ERISA because it is a governmental or church plan or because it does
not cover common law employees (a "Non-ERISA Plan") should
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consider that such an IRA or Non-ERISA Plan may only make investments that are
authorized by the appropriate governing documents and under applicable state
law.
Fiduciaries of Plans and persons making the investment decision for an IRA
or other Non-ERISA Plan should consider the application of the prohibited
transaction provisions of ERISA and the Code in making their investment
decision. A "party in interest" or "disqualified person" with respect to a Plan
or with respect to a Plan or IRA subject to Code Section 4975 is subject to (i)
an initial 10% excise tax on the amount involved in any prohibited transaction
involving the assets of the Plan or IRA and (ii) an excise tax equal to 100% of
the amount involved if any prohibited transaction is not corrected. If the
disqualified person who engages in the transaction is the individual on behalf
of whom an IRA is maintained (or his beneficiary), the IRA will lose its tax-
exempt status and its assets will be deemed to have been distributed to such
individual in a taxable distribution (and no excise tax will be imposed) on
account of the prohibited transaction. In addition, a fiduciary who permits a
Plan to engage in a transaction that the fiduciary knows or should know is a
prohibited transaction may be liable to the Plan for any loss the Plan incurs as
a result of the transaction or for any profits earned by the fiduciary in the
transaction.
STATUS OF THE COMPANY UNDER ERISA
The following section discusses certain principles that apply in determining
whether the fiduciary requirements of ERISA and the prohibited transaction
provisions of ERISA and the Code apply to an entity because one or more
investors in the equity interests of the entity is a Plan or is a Non-ERISA Plan
or IRA subject to Section 4975 of the Code. A Plan fiduciary also should
consider the relevance of those principles to ERISA's prohibition on improper
dele gation of control over or responsibility for "plan assets" and ERISA's
imposition of co-fiduciary liability on a fiduciary who participates in, permits
(by action or inaction) the occurrence of, or fails to remedy a known breach by
another fiduciary.
If the assets of the Company are deemed to be "plan assets" under ERISA, (i)
the prudence standards and other provisions of Part 4 of Title I of ERISA would
be applicable to any transactions involving the Company's assets, (ii) persons
who exercise any authority over the Company's assets, or who provide investment
advice to the Company, would (for purposes of the fiduciary responsibility
provisions of ERISA) be fiduciaries of each Plan that acquires Common Stock,
and transactions involving the Company's assets undertaken at their direction or
pursuant to their advice might violate their fiduciary responsibilities under
ERISA, especially with regard to conflicts of interest, (iii) a fiduciary
exercising investment discretion over the assets of a Plan to cause it to
acquire or hold the Shares could be liable under Part 4 of Title I of ERISA for
transactions entered into by the Company that do not conform to ERISA standards
of pru dence and fiduciary responsibility, and (iv) certain transactions that
the Company might enter into in the ordinary course of its business and
operations might constitute "prohibited transactions" under ERISA and the Code.
Regulations of the DOL defining "plan assets" (the "Plan Asset Regulations")
generally provide that when a Plan or Non-ERISA Plan or IRA acquires a security
that is an equity interest in an entity and the security is neither a "public-
offered security" nor a security issued by an investment company registered
under the Investment Company Act of 1940, the Plan's or IRA's assets include
both the equity interest and an undivided interest in each of the underlying
assets of the issuer of such equity interest, unless one or more exceptions
specified in the Plan Asset Regulations are satisfied.
The Plan Asset Regulations define a publicly-offered security as a security
that is "widely-held," "freely transferable," and either part of a class of
securities under the Exchange Act, or sold pursuant to an effective registration
statement under the Securities Act (provided the securities are registered under
the Exchange Act within 120 days after the end of the fiscal year of the issuer
during which the offering occurred). The Shares are being sold in an offering
registered under the Securities Act and will be registered under the Exchange
Act. The Plan Asset Regulations provide that a security is "widely held" only
if it is part of a class of securities that is owned by 100 or more investors
independent of the issuer and of one another. A security will not fail to be
widely held because the number of independent investors
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falls below 100 subsequent to the initial public offering as a result of events
beyond the issuer's control. The Company anticipates that upon completion of the
Offering, the Common Stock will be "widely held."
The Plan Asset Regulations provide that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The Plan Asset Regulations further provide
that where a security is part of an offering in which the minimum investment is
$10,000 or less (as is the case with the Offering), certain restrictions
ordinarily will not, alone or in combination, affect a finding that such
securities are freely transferable. Generally, the restrictions on transfer
enumerated in the Plan Asset Regulations as not affecting that finding include,
among others: (i) any restriction on or prohibition against any transfer or
assignment that would result in the termination or reclassification of an entity
for federal or state tax purposes, or that otherwise would violate any federal
or state law or court order, (ii) any requirement that advance notice of a
transfer or assignment be given to the issuer, (iii) any administrative
procedure that establishes an effective date, or an event (such as completion of
an offering), prior to which a transfer or assignment will not be effective, and
(iv) limitation or restriction on transfer or assignment that is not imposed by
the issuer or a person acting on behalf of the issuer. The Company believes that
the restrictions imposed under the Articles of Incorporation on the transfer of
the Company's stock will not result in the failure of the Shares to be "freely
transferable." However, no assurance can be given that the DOL or the Treasury
Department will not reach a contrary conclusion.
Assuming that the Common Stock will be "widely held" and that no other facts
and circumstances other than those referred to in the preceding paragraph exist
that restrict transferability of the Shares, the Shares should be publicly
offered securities and the assets of the Company should not be deemed to be
"plan assets" of any Plan, IRA or Non-ERISA Plan that invests in the Shares.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock. Assuming the sale by the Company of 6,250,000 Shares in the
Offering, 10,017,800 shares of Common Stock will be outstanding upon
consummation of the Offering.
COMMON STOCK
VOTING
Each holder of Common Stock is entitled to one vote for each share held of
record on each matter submitted to a vote of holders of Common Stock of the
Company. The Company's Articles of Incorporation do not provide for cumulative
voting and, accordingly, the holders of a majority of the outstanding shares of
Common Stock have the power to elect all directors to be elected each year.
The Company's bylaws provide that annual meetings of the stockholders of the
Company are to be held each calendar year on such date as shall be determined by
the Board of Directors or the President, and special meetings may be called by a
majority of the Board of Directors, by the Chairman of the Board of Directors,
by a majority of the Independent Directors, by the President or generally by
stockholders entitled to cast at least 25% of the votes which all stockholders
are entitled to cast at the meeting. The Articles of Incorporation of the
Company may be amended in accordance with Maryland law, subject to certain
limitations set forth in the Articles of Incorporation.
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DIVIDENDS; LIQUIDATION; OTHER RIGHTS
The holders of shares of Common Stock are entitled to receive dividends
when, as, and if declared by the Board of Directors out of funds legally
available therefor. The right of holders of Common Stock to receive dividends
shall be subject and subordinate to the rights of holders of preferred stock or
other senior stock as may be authorized by the Company. In the event of
liquidation, dissolution or winding up of the Company, the holders of Common
Stock will share ratably in all assets of the Company remaining after the
payment of liabilities and the payment of all liquidation and other preference
amounts to holders of such classes of preferred stock or other senior stock as
may be authorized by the Company. There are no preemptive or other subscription
rights, conversion rights, or redemption or sinking fund provisions with respect
to shares of Common Stock.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
In order that the Company may meet the requirements for qualification as a
REIT, the Articles of Incorporation prohibit any person from acquiring or
holding, directly or constructively, ownership of a number of shares of capital
stock in excess of 9.8% (the "Ownership Limit") of the outstanding shares. See
"Certain Federal Income Tax Considerations -- General -- Stock Ownership Tests."
For this purpose the term "ownership" generally means either direct ownership or
constructive ownership in accordance with the constructive ownership provisions
of section 544 of the Code.
The constructive ownership provisions of section 544 of the Code, generally
attribute ownership of securities owned by a corporation, partnership, estate or
trust proportionately to its stockholders, partners or beneficiaries; attribute
ownership of securities owned by family members to other members of the same
family; and set forth rules as to when securities constructively owned by a
person are considered to be actually owned for the application of such
attribution provisions (i.e., "reattribution"). For purposes of determining
whether a person holds or would hold capital stock in excess of the Ownership
Limit, a person will thus be treated as owning not only shares of capital stock
actually owned, but also any shares of capital stock attributed to such person
under the attribution rules described above. Accordingly, a person who
individually owns less than 9.8% of the shares outstanding may nevertheless be
in violation of the Ownership Limit.
Any transfer of shares of capital stock that would result in
disqualification of the Company as a REIT or that would (a) create a direct or
constructive ownership of shares of capital stock in excess of the Ownership
Limit, or (b) from and after the One Hundred Stockholder Date, result in the
shares of capital stock being beneficially owned (within the meaning of section
856(a) of the Code) by fewer than 100 persons (determined without reference to
any rules of attribution), or (c) result in the Company being "closely held"
within the meaning of section 856(h) of the Code, will be null and void, and the
intended transferee (the "purported transferee") will acquire no rights to such
shares. The foregoing restrictions on transferability and ownership will not
apply if the Board of Directors determines that it is no longer in the best
interests of the Company to continue to qualify as a REIT.
Any purported transfer of shares of capital stock that would result in a
purported transferee owning (directly or constructively) shares of capital stock
in excess of the Ownership Limit (except as otherwise waived by the Board of
Directors as set forth below) due to the unenforceability of the transfer
restrictions set forth above will constitute "Excess Securities." Excess
Securities be transferred by operation of law to a trust to be established by
the Company for the exclusive benefit of a charitable organization, until such
time as the trustee of the trust, which shall be a banking institution
designated as trustee by the Company which is unaffiliated with either the
Company or the purported transferee, retransfers the Excess Securities. While
the Excess Securities are held in trust, the purported transferee will not be
entitled to vote or to share in any dividends or other distributions with
respect to such securities. Subject to the Ownership Limit, Excess Securities
may be transferred by the trust to any person (if such transfer would not result
in Excess Securities) at a price not to exceed the price paid by the purported
transferee (or, if no consideration was paid
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by the purported transferee, the fair market value of the Excess Securities on
the date of the purported transfer), at which point the Excess Securities will
automatically cease to be Excess Securities.
From and after a purported transfer of Excess Securities, the purported
transferee shall cease to be entitled to distributions, voting rights and other
benefits with respect to such shares of the capital stock except the right to
payment of the purchase price for the shares of capital stock or the retransfer
of securities as provided above. Any dividend or distribution paid to a
purported transferee on Excess Securities prior to the discovery by the Company
that such shares of capital stock have been transferred in violation of the
provisions of the Company's Articles of Incorporation shall be repaid to the
Company upon demand. If the foregoing transfer restrictions are determined to
be void, invalid or unenforceable by a court of competent jurisdiction, then the
purported transferee of any Excess Securities may be deemed, at the option of
the Company, to have acted as an agent on behalf of the Company in acquiring
such Excess Securities and to hold such Excess Securities on behalf of the
Company.
All certificates representing shares of capital stock will bear a legend
referring to the restrictions described above.
Any person who acquires shares in violation of the Articles of
Incorporation, or any person who is a purported transferee such that Excess
Securities results, must immediately give written notice or, in the event of a
proposed or attempted transfer that would be void as set forth above, give at
least 15 days prior written notice to the Company of such event and shall
provide to the Company such other information as the Company may request in
order to determine the effect, if any, of such transfer on the Company's status
as a REIT. In addition, every record owner of more than 5.0% (during any period
in which the number of stockholders of record is 2,000 or more) or 1.0% (during
any period in which the number of stockholders of record is greater than 200 but
less than 2,000) or 1/2% (during any period in which the number of stockholders
is 200 or less) of the number or value of the outstanding shares of capital
stock of the Company must give an annual written notice to the Company by
January 31, stating the name and address of the record owner, the number of
shares held and describing how such shares are held. Further, each stockholder
shall upon demand be required to disclose to the Company in writing such
information with respect to the direct and constructive ownership of shares of
capital stock as the Board of Directors deems reasonably necessary to comply
with the REIT Provisions of the Code, to comply with the requirements of any
taxing authority or governmental agency or to determine any such compliance.
Subject to certain limitations, the Board of Directors may increase or
decrease the Ownership Limit. In addition, to the extent consistent with the
REIT Provisions of the Code, the Board of Directors has the right, pursuant to
the Company's Articles of Incorporation, to waive the Ownership Limit for and at
the request of a purchaser of the Company's Common Stock. In connection with
any such waiver, the Company may require that the stockholder requesting such a
waiver enter into an agreement with the Company providing for the repurchase by
the Company of shares from the stockholder under certain circumstances to ensure
compliance with the REIT Provisions of the Code. Such repurchase would be at
fair market value as set forth in the agreement between the Company and such
stockholder. The consideration received by the stockholder in such repurchase
might be characterized as the receipt by the stockholder of a dividend from the
Company, and any stockholder entering into such an agreement with the Company
should consult its tax advisor in connection with its entering into such an
agreement. At present, the Company does not intend to waive the Ownership Limit
for any purchaser of shares of the Company's Common Stock.
The provisions described above may inhibit market activity and the resulting
opportunity for the holders of the Company's capital stock to receive a premium
for their shares that might otherwise exist in the absence of such provisions.
Such provisions also may make the Company an unsuitable investment vehicle for
any person seeking to obtain ownership of more than 9.8% of the outstanding
shares of capital stock.
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INDEMNIFICATION
The Company's Articles of Incorporation obligate the Company to indemnify
its directors and officers and to pay or reimburse expenses for such individuals
in advance of the final disposition of a proceeding to the maximum extent
permitted from time to time by Maryland law. The Corporations and Associations
Article of the Annotated Code of Maryland (the "Maryland General Corporation
Law") permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities, unless it is established that (a) the act or omission of the
director or officer was material to the matter giving rise to the proceeding and
(i) was committed in bad faith, or (ii) was the result of active and deliberate
dishonesty, or (b) the director or officer actually received an improper
personal benefit in money, property or services, or (c) in the case of any
criminal proceeding, the director or officer had reasonable cause to believe
that the act or omission was unlawful.
LIMITATION OF LIABILITY
The Maryland General Corporation Law permits the charter of a Maryland
corporation to include a provision limiting the liability of its directors and
officers to the corporation and its stockholders for money damages, except to
the extent that (i) it is proved that the person actually received an improper
benefit or profit in money, property or services, or (ii) a judgment or other
final adjudication is entered in a proceeding based on a finding that the
person's action, or failure to act, was the result of active and deliberate
dishonesty and was material to the cause of action adjudicated in the
proceeding. The Company's Articles of Incorporation contain a provision
providing for elimination of the liability of its directors and officers to the
Company or its stockholders for money damages to the maximum extent permitted by
Maryland law from time to time.
CONTROL SHARE ACQUISITIONS
The Maryland General Corporation Law provides that "control shares" of a
corporation acquired in a "control share acquisition" have no voting rights
except to the extent approved by a vote of two-thirds of the votes entitled to
be cast on the matter, excluding shares of stock owned by the acquiror or by
officers or directors who are employees of the corporation. "Control shares" are
voting shares of stock which, if aggregated with all other shares of stock
previously acquired by such a person, would entitle the acquiror to exercise
voting power in electing directors within one of the following ranges of voting
power: (i) one-fifth or more but less than one-third, (ii) one-third or more but
less than a majority, or (iii) a majority or more of all voting power. "Control
shares" do not include shares of stock the acquiring person is then entitled to
vote as a result of having previously obtained stockholder approval. A "control
share acquisition" means, subject to certain exceptions, the acquisition of,
ownership of, or the power to direct the exercise of voting power with respect
to, control shares.
A person who has made or proposes to make a "control share acquisition,"
upon satisfaction of certain conditions (including an undertaking to pay
expenses), may compel the Board of Directors to call a special meeting of
stockholders to be held within 50 days of demand to consider the voting rights
of the shares. If no request for a meeting is made, the corporation may itself
present the question at any stockholders' meeting. If voting rights are not
approved at the meeting or if the acquiring person does not deliver an acquiring
person statement as permitted by the statute, then, subject to certain
conditions and limitations, the corporation may redeem any or all of the
"control shares" (except those for which voting rights have previously been
approved) for fair value determined, without regard to voting rights, as of the
date of the last control share acquisition or of any meeting of stockholders at
which the voting rights of such shares are considered and not approved. If
voting rights for "control shares" are approved at a stockholders meeting and
the acquiror becomes entitled to vote a majority of the shares entitled to vote,
all other stockholders may exercise appraisal rights. The fair value of the
stock as determined for purposes of such appraisal rights may not be less than
the highest
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price per share paid in the control share acquisition, and certain limitations
and restrictions otherwise applicable to the exercise of dissenters' rights do
not apply in the context of "control share acquisitions."
The "control share acquisition" statute does not apply to stock acquired in
a merger, consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions approved or exempted by a provision of the
Articles of Incorporation or bylaws of the corporation adopted prior to the
acquisition of the shares.
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services, L.L.C., 450 West 33rd Street, 15th Floor,
New York, New York 10001 (telephone number : (800) 851-9677), is the transfer
agent and registrar with respect to the Common Stock of the Company (the
"Transfer Agent").
COMMON STOCK AVAILABLE FOR FUTURE SALE
Following the closing of the Offering (and assuming that the Underwriters'
over-allotment option is not exercised), the Company will have outstanding (or
reserved for issuance upon exercise of outstanding options) 10,366,300 shares of
Common Stock, which include (i) 6,250,000 Shares being offered by the Company
hereby, (ii) 3,600,000 shares of Common Stock sold in the Private Placement,
(iii) 87,800 shares of Common Stock sold to certain directors, officers and
employees of the Company in the Direct Offering (the "Direct Offering Shares"),
(iv) 80,000 shares of Common Stock issued to founders of the Company (the
"Founders' Shares") and (v) 348,500 shares of Common Stock reserved for issuance
upon the exercise of outstanding options. The Common Stock issued in the
Offering will be freely tradeable by persons other than "affiliates" of the
Company (as defined under Rule 144 promulgated under the Securities Act) without
restriction under the Securities Act, subject to certain limitations on
ownership set forth in the Articles of Incorporation. See "Description of
Capital Stock -- Restrictions on Ownership and Transfer."
Private Placement Shares not being included in the Offering, the Direct
Offering Shares and the Founders' Shares are "restricted" securities within the
meaning of Rule 144 and may not be sold in the absence of registration under the
Securities Act unless an exemption from registration is available, including
exemptions contained in Rule 144. As described below, the Company has granted
certain holders registration rights with respect to their shares of Common
Stock.
In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of acquisition of restricted shares from the Company
or any affiliate of the Company, as that term is defined under Rule 144, the
holder thereof is entitled to sell within any three-month period a number of
shares that does not exceed the greater of 1% of the then outstanding Common
Stock or the average weekly trading volume of the Common Stock during the four
calendar weeks preceding the date on which notice of the sale is filed with the
Commission. Sales under Rule 144 also are subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. If two years have elapsed since the date of
acquisition of restricted shares from the Company or from any affiliate of the
Company, and the holder thereof is deemed not to have been an affiliate of the
Company at any time during the three months preceding a sale, such person would
be entitled to sell such shares in the public market under Rule 144(k) without
regard to the volume limitations, manner of sale provisions, public information
requirements or notice requirements. Certain Private Placement Shares are also
presently available for resale, under certain conditions, to institutional
"accredited investors" within the meaning of Regulation D under the Securities
Act, "qualified institutional buyers" within the meaning of Rule 144A under the
Securities Act, and to persons who are not "U.S. persons" within the meaning of
Regulation S under the Securities Act. The directors, officers and employees of
the Company have agreed not to sell any shares of Common Stock held by them for
a period of 180 days following the closing of the Offering without the consent
of the Representatives.
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As of August 5, 1997, options to purchase 348,500 shares of Common Stock
were outstanding, of which options to purchase 7,500 shares are currently
exercisable; options to purchase 275,000 shares vest in four equal installments
on January 2, 1998, 1999, 2000 and 2001; options to purchase 36,000 shares vest
in four equal installments on January 21, 1998, 1999, 2000 and 2001; options to
purchase 25,000 shares vest in four equal installments on January 28, 1998,
1999, 2000 and 2001; and an option to purchase 5,000 shares vests in four equal
installments on June 26, 1998, 1999, 2000 and 2001. None of the shares of
Common Stock underlying the outstanding stock options has been registered under
the Securities Act.
No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price prevailing from time to time. Sales of substantial amounts of Common
Stock, or the perception that such sales could occur, may affect adversely
prevailing market prices of the Common Stock.
REGISTRATION RIGHTS
Pursuant to a Registration Rights Agreement entered into between the Company
and Friedman, Billings, Ramsey & Co., Inc., as initial purchaser, in connection
with the Company's Private Placement, holders of Private Placement Shares are
entitled to certain rights with respect to registration of the Private Placement
Shares under the Securities Act. Such holders are entitled to include Private
Placement Shares held by them in either of the Company's first two registered
securities offerings (other than in connection with a merger or pursuant to a
registration statement on Form S-8, S-4 or a comparable registration statement),
subject to certain conditions, including the right of the Company to exclude
such Private Placement Shares from a registered offering if the managing
underwriter advises the Company that in its opinion the number of securities
requested to be included in the offering exceeds the number that can be sold in
such offering.
In addition, if the Company has registered securities under the Securities
Act on two separate occasions and, on either occasion, the Private Placement
Shares were excluded from such offering, holders of greater than 50% of the
restricted Private Placement Shares have the right, on one occasion, to require
the Company to prepare and file with the Commission a registration statement and
such other documents as may be necessary so as to permit a public offering and
sale of the restricted Private Placement Shares.
The foregoing registration rights are not applicable in the event that
holders of Private Placement Shares who are not affiliated with the Company are
able to resell all of such shares without restrictions on transfer in accordance
with Rule 144 of the Securities Act or any other applicable exemption.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
(the "Underwriting Agreement") among the Company, the Selling Stockholders and
Friedman, Billings, Ramsey & Co., Inc. ("FBR"), Sutro & Co. Incorporated and
Tucker Anthony Incorporated as representatives (in such capacity, the
"Representatives") for each of the underwriters named below (the
"Underwriters"), the Company and the Selling Stockholders have agreed to sell,
and each of the Underwriters has severally agreed to purchase the number of
Shares offered hereby set forth below opposite its name.
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Underwriters Number of Shares
- ------------ ----------------
Friedman, Billings, Ramsey & Co., Inc..................
Sutro & Co. Incorporated...............................
Tucker Anthony Incorporated............................
Total..................................................
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to purchase all the Shares offered hereby if any are
purchased.
The Underwriters, through the Representatives, have advised the Company that
they propose initially to offer the Shares to the public at the public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such offering price less a concession not to exceed $_________ per share of
Common Stock. The Underwriters may allow and such dealers may reallow a
concession not to exceed $_________ per share of Common Stock to certain other
dealers. After the Shares are released for sale to the public, the offering
price and other selling terms may be changed by the Underwriters. The Shares
are offered subject to receipt and acceptance by the Underwriters, and to
certain other conditions, including the right to reject orders in whole or in
part.
The Company has granted to the Underwriters an option exercisable during a
30-day period after the date hereof to purchase, at the initial offering price
less underwriting discounts and commissions, up to an additional 937,500 Shares
of Common Stock for the sole purpose of covering over-allotments, if any. To
the extent that the Underwriters exercise such option, each of the Underwriters
will have a firm commitment, subject to certain conditions, to purchase a number
of the additional shares of Common Stock proportionate to such Underwriter's
initial commitment as shown in the foregoing table.
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain civil liabilities, including liabilities
under the Securities Act, or to contribute to payments the Underwriters may be
required to make in respect thereof.
In connection with the Offering, the Company has agreed to reimburse FBR for
up to $75,000 of the fees and expenses of legal counsel to the Underwriters.
Additionally, the Company has agreed to grant to FBR for a period of one year
the right of first refusal to act as exclusive or lead underwriter or placement
agent in connection with public or private offerings of securities or
securitizations by the Company, and as exclusive financial advisor in connection
with any merger or sale of substantially all of the assets of the Company. Fees
to be paid to FBR in connection with any such transaction would be subject to
mutual agreement between the Company and FBR and consistent with customary fees
paid in similar transactions.
FBR served as the initial purchaser in connection with the Private Placement
for which it received an initial purchaser's discount equal to $2,520,000.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price will be determined by negotiation between the
Company and the Representatives. Among the factors to be considered in making
such determination will be the history of, and the prospects for, the industry
in which the Company competes, an assessment of the skills of the Company's
management and the Company's prospects for future earnings, the general
conditions of the economy and the securities market and the prices of offerings
by similar issuers. However, there can
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be no assurance that the price at which the shares of Common Stock will sell in
the public market after the Offering will not be lower than the price at which
they are sold by the Underwriters.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales of the Shares offered hereby to any accounts over which
they exercise discretionary authority.
Until the distribution of the Shares is completed, rules of the Commission
may limit the ability of the Underwriters and certain selling group members to
bid for or purchase the Common Stock. As an exception to these rules, the
Representatives are permitted to engage in certain transactions that stabilize
the price of the Common Stock. Such transactions consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the Representatives may
reduce that short position by purchasing Common Stock in the open market. The
Representatives may also elect to reduce any short position by exercising all or
part of the over-allotment option described above.
The Representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
Common Stock in the open market to reduce the Underwriters' short position or to
stabilize the price of the Common Stock, they may reclaim the amount of the
selling concession from the Underwriters and selling group members who sold
those shares of Common Stock as part of the Offering.
In general, purchases of securities for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
The Company and the Company's directors and executive officers have agreed
not to offer, sell or contract to sell or otherwise dispose of any Common Stock
of the Company without the prior consent of the Representatives for a period of
180 days from the date of this Prospectus.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the Shares will be
passed on for the Company by Morgan, Lewis & Bockius LLP, New York, New York.
Certain legal matters will be passed on for the Underwriters by Andrews & Kurth
L.L.P., Washington, D.C.
EXPERTS
The Balance Sheet of the Company at June 30, 1997, and the Statements of
Operations, Stockholders' Equity and Cash Flows for the period from February 18,
1997 (commencement of operations) to June 30, 1997, included in this Prospectus
have been included herein in reliance on the report of Deloitte & Touche LLP,
independent certified public accountants, given on the authority of that firm as
experts in accounting and auditing.
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ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-11 (File No. 333-_________) under the Securities Act with respect to the
Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits thereto.
For further information with respect to the Company and the Common Stock,
reference is hereby made to such Registration Statement and the exhibits
thereto. Statements contained in this Prospectus as to the contents of any
contract or other document are not necessarily complete and, in each instance,
reference is made to the copy of such contract or document filed as an exhibit
to the Registration Statement, each such statement being qualified in all
respects by such reference. Copies of the Registration Statement, including
all exhibits thereto, can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, Room 1400, Chicago,
Illinois 60606 and at 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of such material can be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, Washington, D.C. 20549, at
prescribed rates. The Commission also maintains a web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission, including the Company.
The address of the Commission's website is http://www.sec.gov.
The Company intends to furnish to its stockholders annual reports containing
audited financial statements and an opinion thereon expressed by the Company's
independent auditors as well as quarterly reports for the first three fiscal
quarters of each fiscal year containing unaudited condensed financial
statements.
GLOSSARY
As used in this Prospectus, the capitalized and other terms listed below
have the meanings indicated.
"Accredited Investor" has the meaning set forth in Rule 501(a)(1), (2), (3)
or (7) under the Securities Act.
"Agency" means GNMA, FNMA or FHLMC.
"Agency Certificates" means GNMA Certificates, FNMA Certificates and FHLMC
Certificates.
"amortized cost" means, with respect to Mortgage-Backed Securities, the
purchase price as adjusted for subsequent amortization of discount or premium
and for principal repayments.
"ARM" means a Mortgage Loan or any mortgage loan underlying a Mortgage-
Backed Security that features adjustments of the underlying interest rate at
predetermined times based on an agreed margin to an established index. An ARM is
usually subject to periodic interest rate and/or payment caps and a lifetime
interest rate cap.
"ARM Certificate" means an adjustable-rate Pass-Through Certificate.
"Articles of Incorporation" means the Company's Articles of Incorporation,
as amended and restated by the Company's Articles of Amendment and Restatement,
filed with the State of Maryland.
"Bankruptcy Code" means Title 11 of the United State Code, entitled
"Bankruptcy."
"Board" or "Board of Directors" means the Board of Directors of the Company.
"Capital Investment Policy" means the policy established by the Company,
including a majority of the Independent Directors, establishing guidelines for
management relating to asset acquisitions, credit risk management,
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capital and leverage, interest rate risk management and prepayment risk
management, as more fully described under "Business Strategy--Capital Investment
Policy."
"capital stock" means the Common Stock and any additional classes of capital
stock authorized by the Board of Directors in the future.
"carrying value" means the value placed on an asset or liability for balance
sheet presentation purposes. With respect to Mortgage-Backed Securities and
interest rate cap agreements, the carrying value equals management's estimate of
the bid-side market value of that asset. Management will generally base its
estimate on the lowest of third-party bid-side indications of market value
obtained on a regular basis from firms making a market in or lending against
such assets. With respect to all other balance sheet items, carrying value
equals amortized cost.
"CD Rate" means the weekly average of secondary market interest rates on
six-month negotiable certificates of deposit, as published by the Federal
Reserve Board in its Statistical Release H.15(519), Selected Interest Rates.
"Citadel" means Citadel Funding Corporation, a dissolved Colorado
corporation.
"CMOs" or "Collateralized Mortgage Obligations" means adjustable- or fixed-
rate debt obligations (bonds) that are collateralized by Mortgage Loans or
mortgage certificates. CMOs are structured so that principal and interest
payments received on the collateral are sufficient to make principal and
interest payments on the bonds. Such bonds may be issued by United States
government sponsored entities or private issuers in one or more classes with
fixed or adjustable interest rates, maturities and degrees of subordination
which are characteristics designed for the investment objectives of different
bond purchasers.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Mortgage Loans" means Mortgage Loans secured by commercial
property.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's shares of Common Stock, par value $0.01
per share.
"Company" means Annaly Mortgage Management, Inc., a Maryland corporation.
"Conforming Mortgage Loans" means Single-Family Mortgage Loans that either
comply with requirements for inclusion in credit support programs sponsored by
FHLMC or FNMA or are FHA or VA Loans.
"coupon rate" means, with respect to Mortgage-Backed Securities, the
annualized cash interest income actually received from the asset, expressed as a
percentage of the face value of the asset.
"CPR" means an assumed rate of prepayment for the Company's Mortgage-Backed
Securities, expressed as an annual rate of prepayment relative to the
outstanding principal balance of the Company's Mortgage-Backed Securities. CPR
does not purport to be either a historical description of the prepayment
experience of the Company's Mortgage-Backed Securities or a prediction of the
anticipated rate of prepayment of the Company's Mortgage-Backed Securities.
"DBCC" means the National Association of Securities Dealers, Inc. District
Business Conduct Committee for District No. 3.
"DBCC Settlement" means the Decision and Order of Acceptance of Respondents'
Offer of Settlement dated November 15, 1994 entered into by Citadel and certain
of its principals with the DBCC.
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"Direct Offering" means the Company's sale on July 31, 1997 of an aggregate
of 87,800 shares of Common Stock to certain directors, officers and employees of
the Company.
"Direct Offering Shares" means the 87,800 shares of Common Stock sold to
certain directors, officers and employees of the Company in the Direct Offering.
"DOL" means the Department of Labor.
"Dollar-Roll Agreement" means an agreement to sell a security for delivery
on a specified future date and a simultaneous agreement to repurchase the same
or a substantially similar security (with the same coupon and original maturity
periods) on a specified future date.
"duration" means the expected percentage change in the market value of the
Company's assets that would be caused by a 1% change in short and long term
interest rates.
"efficiency ratio" means general and administrative expenses as a percentage
of net interest income.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Plan" means a pension, profit-sharing, retirement or other employee
benefit plan which is subject to Title I of ERISA.
"Excess Securities" means shares of capital stock representing ownership,
directly or constructively, in excess of 9.8%, in number of shares or value, of
any class of shares of the outstanding capital stock (except as otherwise waived
by the Board of Directors).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Excess Capital Cushion" is a term defined in the Company's Capital
Investment Policy. It represents a portion of the capital the Company is
required to maintain as part of this policy in order to continue to make asset
acquisitions. The Excess Capital Cushion is that part of the required capital
base which is in excess of the Company's haircut requirements
"face value" means, with respect to Mortgage-Backed Securities, the
outstanding principal balance of Mortgage Loans or Mortgage-Backed Securities
comprising the Mortgage-Backed Securities. In the absence of credit losses, the
face value equals the sum of the principal repayments that will be received by
the Company over the life of the Mortgage-Backed Security.
"FBR" means Friedman, Billings, Ramsey & Co., Inc.
"Federal Reserve Board" means the Board of Governors of the Federal Reserve
System.
"Fed Funds Rate" means the interest rate charged by banks with excess
reserves at a Federal Reserve System district bank to banks needing overnight
loans to meet reserve requirements.
"FHA" means the United States Federal Housing Administration.
"FHA Loans" means Mortgage Loans insured by the FHA.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
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"FHLMC ARM Certificates" means adjustable-rate FHLMC Certificates.
"FHLMC Certificates" means mortgage participation certificates issued by
FHLMC, either in certificated or book-entry form.
"FIDAC" means Fixed Income Discount Advisory Company, a Delaware
corporation.
"Floaters" means adjustable-rate CMOs.
"Floating Rate Fund" means the U.S. Dollar Floating Rate Fund, Ltd., a
British Virgin Islands corporation and an open-end investment company.
"FNMA" means the Federal National Mortgage Association.
"FNMA ARM Certificates" means adjustable-rate FNMA Certificates.
"FNMA Certificates" means mortgage pass-through certificates issued by FNMA,
either in certificated or book-entry form.
"Founders' Shares" means the 80,000 shares of Common Stock issued to
founders of the Company in December 1996.
"fully-indexed rate" means, with respect to ARMs, the rate that would be
paid by the borrower ("gross") or received by the Company as owner of the
Mortgage Asset ("net") if the coupon rate on the ARM were able to adjust
immediately to a market rate without being subject to adjustment periods,
periodic caps, or life caps. It is equal to the current yield of the ARM index
plus the gross or net margin.
"GAAP" means generally accepted accounting principles.
"GNMA" means the Government National Mortgage Association.
"GNMA ARM Certificates" means adjustable-rate GNMA Certificates.
"GNMA Certificates" means fully modified pass-through mortgage-backed
certificates guaranteed by GNMA and issued either in certificated or book-entry
form.
"gross margin" means, with respect to ARMs, the coupon rate to be paid by
the borrower. The term "gross" is used to differentiate payments made by the
borrower with the lower "net" payments actually received by the Company after
the acquisition of a Mortgage Asset. The difference between the gross margin and
the net margin reflects loan servicing fees and other pre-determined contractual
deductions. The fully-indexed gross coupon rate equals the current yield on the
ARM index (six month LIBOR, one year Treasury, etc.) plus the gross margin. The
actual coupon rate paid by the borrower may be lower than the fully-indexed
gross rate at the initiation of the loan if originated at a "teaser rate" or
during periods of rising interest rates due to the limitations of the ARM
adjustment schedule and the periodic and life caps. If so, the coupon rate paid
by the borrower would move towards the fully-indexed gross rate over time.
"haircut" means the over-collateralization amount required by a lender in
connection with a collateralized borrowing.
"High Quality" means (i) securities which are rated within one of the two
highest rating categories by at least one of the nationally recognized rating
agencies, (ii) securities that are unrated but are guaranteed by the United
States
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government or an agency of the United States government, or (iii) securities
that are unrated or whose ratings have not been updated but are determined to be
of comparable quality to rated High Quality Mortgage-Backed Securities on the
basis of credit enhancement features that meet the High Quality credit criteria
approved by the Company's Board of Directors.
"Housing Act" means the National Housing Act of 1934, as amended.
"HUD" means the Department of Housing and Urban Development.
"Incentive Plan" means the Company's Long-Term Stock Incentive Plan.
"Independent Director" means a director of the Company who is not an officer
or employee of the Company.
"interest-only strip," "interest only security" or "IO" means a type of
Mortgage-Backed Security which receives a portion of the interest payments from
an underlying pool of mortgage loans but will receive little or no principal
payments and hence will have little or no face value. The market value and yield
of an IO are unusually sensitive to the prepayment rates experienced on and
anticipated for the underlying pool of mortgage loans. The market values and
yields of IOs may increase as interest rates increase and, in certain
conditions, IOs may act in a counter-cyclical manner as compared to other
Mortgage-Backed Securities.
"interest rate adjustment indices" means, in the case of Mortgage-Backed
Securities, any of the objective indices based on the market interest rates of a
specified debt instrument (such as United States Treasury Bills in the case of
the Treasury Index and United States dollar deposits in London in the case of
LIBOR) or based on the average interest rate of a combination of debt
instruments (such as the 11th District Cost of Funds Index), used as a reference
base to reset the interest rate for each adjustment period on the Mortgage
Asset, and in the case of borrowings, is used herein to mean the market interest
rates of a specified debt instrument (such as repurchase agreements for
Mortgage-Backed Securities) as well as any of the objective indices described
above that are used as a reference base to reset the interest rate for each
adjustment period under the related borrowing instrument.
"interest rate adjustment period" means, in the case of Mortgage-Backed
Securities, the period of time set forth in the debt instrument that determines
when the interest rate is adjusted and, with respect to borrowings, is used to
mean the term to maturity of a short-term, fixed-rate debt instrument (such as a
30-day repurchase agreement) as well as the period of time set forth in a long-
term, adjustable-rate debt instrument that determines when the interest rate is
adjusted.
"interest rate agreement" means an agreement, such as an interest rate swap
cap, collar or floor, entered into for the purpose of hedging risks associated
with changes in interest rates..
"Investment Company Act" means the Investment Company Act of 1940, as
amended.
"IRS" means the United States Internal Revenue Service.
"LIBOR" means the London Interbank Offered Rate as it may be defined, and
for a period of time specified, in a Mortgage-Backed Security or borrowing of
the Company.
"lifetime interest rate cap" or "life cap" means in the case of a Mortgage
Loan that is an ARM, the maximum coupon rate that may accrue during any period
over the term of such Mortgage Loan as stated in the governing instruments
evidencing such Mortgage Loan, and in the case of a Mortgage-Backed Security
evidencing ARMs, the maximum weighted average coupon rate that may accrue during
any period over the term of such Mortgage-Backed Security as stated in the
governing instruments thereof.
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"Limited Investment Assets" means assets of the Company, comprising not more
than 25% of total assets, which are unrated or rated less than High Quality.
"Maryland General Corporation Law" means the Corporations and Associations
Article of the Annotated Code of Maryland.
"Mezzanine Securities" means Mortgage-Backed Securities rated below the two
highest levels but no lower than a single "B" level under the S&P rating system
(or comparable level under other rating systems) which are supported by one or
more classes of Subordinated Securities which bear Realized Losses prior to the
classes of Mezzanine Securities.
"Mortgage Loans" means Single-Family Mortgage Loans, Multifamily Mortgage
Loans and Commercial Mortgage Loans.
"Mortgage-Backed Securities" means (i) Pass-Through Certificates, and (ii)
CMOs.
"Multifamily Mortgage Loans" means Mortgage Loans secured by multifamily (in
excess of four units) residential property.
"Multifamily Privately-Issued Certificates" means Privately-Issued
Certificates evidencing ownership interests in a pool of Multifamily Mortgage
Loans.
"Multifamily CMOs" means CMOs that are collateralized by Multifamily
Mortgage Loans.
"net margin" is part of the calculation of the coupon rate to be received by
the Company as owner of an ARM. The term "net" is used to differentiate payments
actually received by the Company from a Mortgage Asset from the higher "gross"
payment made by the borrower. The difference between the gross margin and the
net margin reflects loan servicing fees and other pre-determined contractual
deductions. The fully-indexed net rate equals the current yield on the ARM index
(six month LIBOR, one year Treasury, etc.) plus the net margin. The actual
coupon rate received by the Company may be lower than the fully-indexed net rate
at the initiation of the loan if originated at a "teaser rate" or during periods
of rising interest rates due to the limitations of the ARM adjustment schedule
and the periodic and life caps. If so, the coupon rate received by the Company
would move towards the fully-indexed net coupon rate over time.
the "95% Gross Income Test" means the requirement for each taxable year that
at least 95% of the Company's gross income for each taxable year must be derived
from sources of income qualifying for the 75% Gross Income Test, dividends,
interest, and gains from the sale of stock or other securities (including
certain interest rate swap and cap agreements entered into to hedge variable
rate debt incurred to acquire Qualified REIT Real Estate Assets) not held for
sale in the ordinary course of business.
"Non-ERISA Plan" means a Plan that does not cover common law employees.
"Non-United States Holder" means a purchaser of the Common Stock that, for
United States Federal income tax purposes, is not a "United States person."
the "Offering" or this "Offering" means the offering of Common Stock covered
by this Prospectus.
the "Offering Price" means the price per share of Common Stock in the
Offering.
"One Hundred Stockholder Date" means the earlier of (i) January 1, 1998 and
(ii) the date of closing of the sale of Shares pursuant to the Offering.
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"Ownership Limit" means 9.8% of the outstanding shares of capital stock, as
may be increased or reduced by the Board of Directors of the Company.
"Pass-Through Certificates" means securities (or interests therein),
including Agency Certificates and Privately-Issued Certificates, evidencing
undivided ownership interests in a pool of Mortgage Loans, the holders of which
receive a "pass-through" of the principal and interest paid in connection with
the underlying Mortgage Loans in accordance with the holders' respective,
undivided interests in the pool.
"period ended June 30, 1997" means the period from the commencement of
operations by the Company on February 18, 1997 through June 30, 1997.
"periodic interest rate cap" or "periodic cap" means, with respect to ARMs,
the maximum change in the coupon rate permissible under the terms of the loan at
each coupon adjustment date. Periodic caps limit both the speed by which the
coupon rate can adjust upwards in a rising interest rate environment and the
speed by which the coupon rate can adjust downwards in a falling rate
environment.
"Plan" means a pension, profit-sharing, retirement or other employee benefit
plan which is subject to ERISA.
"Plan Asset Regulations" means regulations of the DOL defining "plan
assets."
"Private Placement" means the sale by the Company on February 18, 1997 of
3,600,000 shares of Common Stock in an offering exempt from registration under
the Securities Act and state securities laws.
"Private Placement Shares" means the 3,600,000 shares of Common Stock issued
by the Company in the Private Placement.
"Privately-Issued Certificates" means privately-issued Pass-Through
Certificates issued by a third party issuer which is not an Agency Certificate.
"Prospectus" means this Prospectus.
"PTE" means a U.S. Department of Labor Prohibited Transaction Exemption.
"purported transferee" means the intended transferee in connection with any
transfer of shares of capital stock that would result in disqualification of the
Company as a REIT or that would (a) create a direct or constructive ownership
of shares of stock in excess of the Ownership Limit, (b) result in the shares of
stock being beneficially owned (within the meaning section 856(a) of the Code)
by fewer than 100 persons (determined without reference to any rules of
attribution), or (c) result in the Company being "closely held" within the
meaning of section 856(h) of the Code.
"Qualified Institutional Buyer" has the meaning set forth in Rule 144A under
the Securities Act.
"Qualified REIT Real Estate Assets" means Pass-Through Certificates,
Mortgage Loans, Agency Certificates, and other assets of the type described in
section 856(c) (6)(B) of the Code.
"Qualified REIT Subsidiary" means a corporation whose stock is entirely
owned by the REIT at all times during such corporation's existence.
"Qualifying Interests" means "mortgages and other liens on and interests in
real estate," as defined in section 3(c)(5)(C) under the Investment Company Act.
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"rating" means (i) the rating assigned to an asset by one or more of the
four nationally recognized rating agencies as adjusted to the rating scale under
the S&P rating system, (ii) in the case of assets rated differently by such
rating agencies, the rating deemed by management to most appropriately reflect
such asset's credit quality or (iii) for unrated assets, the Company's deemed
comparable rating.
"Realized Losses" means losses incurred in respect of Mortgage-Backed
Securities upon foreclosure sales and other liquidations of underlying mortgaged
properties that result in failure to recover all amounts due on the loans
secured thereby.
"Regulation D" means Regulation D (Rules 501-506) promulgated under the
Securities Act.
"Regulation S" means Regulation S (Rules 901-904) promulgated under the
Securities Act.
a "REIT" means a Real Estate Investment Trust.
"REIT Provisions of the Code" means sections 856 through 860 of the Code.
"REMIC" means Real Estate Mortgage Investment Conduit.
"Representatives" means Friedman, Billings, Ramsey & Co., Inc., Sutro & Co.
Incorporated and Tucker Anthony Incorporated, as the representatives for the
Underwriters in connection with the Offering.
"repurchase agreement" means a borrowing device evidenced by an agreement to
sell securities or other assets to a third-party and a simultaneous agreement to
repurchase them at a specified future date and price, the price difference
constituting the interest on the borrowing.
"residuals" means the right to receive the remaining or residual cash flows
from a pool of Mortgage Loans or Mortgage-Backed Securities after distributing
required amounts to the holders of interests in or obligations backed by such
loans or securities and after payment of any required pool expenses.
"Rule 144" means Rule 144 under the Securities Act.
"Rule 144A" means Rule 144A under the Securities Act.
"S&P" means Standard & Poor's Corporation, a New York corporation.
"Securities Act" means the Securities Act of 1933, as amended.
"Selling Stockholders" means stockholders of the Company who are offering
Shares for sale to the public in the Offering.
"Senior Securities" means a class of Mortgage-Backed Security that has a
prior right to receive principal and/or interest from the underlying pool of
Mortgage Loans.
"Senior-Subordinated Mortgage-Backed Securities" means a series of Pass-
Through Certificates or CMOs in which one or more classes have a prior right to
receive principal and/or interest payments from the underlying pool of Mortgage
Loans.
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the "75% Asset Test" at the close of each quarter of each taxable year means
the requirement that at least 75% of the value of the Company's total assets
must consist of Qualified REIT Real Estate Assets, government securities, cash
and cash items.
the "75% Gross Income Test" means the requirement for each taxable year that
at least 75% of the Company's gross income must be derived from certain
specified real estate sources including interest income and gain from the
disposition of Qualified REIT Real Estate Assets or "qualified temporary
investment income" (i.e., income derived from "new capital" within one year of
the receipt of such capital).
"Shares" means the _________ shares of Common Stock being offered pursuant
to the Offering.
"Short-Term Investments" means the short-term bank certificates of deposit,
short-term United States treasury securities, short-term United States
government agency securities, commercial paper, reverse repurchase agreements,
short-term CMOs, short-term asset-backed securities and other similar types of
short-term investment instruments, all of which will have maturities or average
durations of less than one year.
"Single-Family Mortgage Loans" means Mortgage Loans secured by single-family
(one- to four-units) residential property.
"Single-Family Privately-Issued Certificates" means Privately-Issued
Certificates evidencing ownership interests in a pool of Single-Family Mortgage
Loans.
"Single-Family CMOs" means CMOs that are collateralized by Single-Family
Mortgage Loans.
"Subordinated Interests" means a class of Mortgage-Backed Securities that is
subordinated to one or more other classes of Mortgage-Backed Securities, all of
which classes share the same collateral.
"Subordinated Securities" means any class that bears the "first loss" from
Realized Losses or that is rated below a single "B" level (or, if unrated, is
deemed by the Company to be below such level).
"Tax-Exempt Entity" means a qualified pension, profit-sharing or other
employee retirement benefit plan, Keogh plans, bank commingled trust funds for
such plans, individual retirement accounts and other similar entities intended
to be exempt from Federal income taxation.
the "30% Gross Income Test" is the requirement for each taxable year that
less than 30% of the Company's gross income is derived from the sale of
Qualified REIT Real Estate Assets held for less than four years, stock or
securities held for less than one year (including certain interest rate swap and
cap agreements entered into to hedge variable rate debt incurred to acquire
Qualified Real Estate Assets) and certain "dealer" property.
"Transfer Agent" means ChaseMellon Shareholder Services, LLC, acting as
transfer agent and registrar with respect to the Common Stock of the Company.
"Treasury Department" means the United States Department of the Treasury.
"Treasury Index" means the weekly average yield of the benchmark U.S.
Treasury securities, as published by the Board of Governors of the Federal
Reserve System.
"UBTI" means "unrelated business taxable income" as defined in section 512
of the Code.
"Underwriters" means the underwriters named in this Prospectus acting as
underwriters in the Offering.
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"Underwriting Agreement" means the Underwriting Agreement among the Company,
the Selling Stockholders and the Representatives on behalf of the Underwriters.
"United States person" means a citizen or resident of the United States; a
corporation, partnership, or other entity created or organized in the United
States or under the laws of the United States or of any political subdivision
thereof; or an estate or trust whose income is includible in gross income for
United States Federal income tax purposes regardless of its source.
"VA" means the United States Department of Veterans Affairs.
"VA Loans" means Mortgage Loans partially guaranteed by the VA under the
Servicemen's Readjustment Act of 1944, as amended.
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ANNALY MORTGAGE MANAGEMENT, INC.
INDEX TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORT F-2
FINANCIAL STATEMENTS:
Balance Sheet - June 30, 1997 F-3
Statement of Operations for the period
February 18, 1997
(Commencement of Operations) through F-4
June 30, 1997
Statement of Stockholders' Equity for
the period February 18, 1997
(Commencement of Operations) through F-5
June 30, 1997
Statement of Cash Flows for the period
February 18, 1997
(Commencement of Operations) through F-6
June 30, 1997
Notes to Financial Statements F-7 - F-11
F-1
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INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Annaly Mortgage Management, Inc.
We have audited the accompanying balance sheet of Annaly Mortgage Management,
Inc. as of June 30, 1997, and the related statements of operations,
stockholders' equity and cash flows for the period February 18, 1997
(commencement of operations) through June 30, 1997. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at June 30, 1997 and the results
of its operations and its cash flows for the period February 18, 1997
(commencement of operations) through June 30, 1997 in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
New York, New York
July 31, 1997
F-2
<PAGE>
ANNALY MORTGAGE MANAGEMENT, INC.
BALANCE SHEET
JUNE 30, 1997
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<TABLE>
<CAPTION>
<S> <C>
ASSETS:
CASH AND CASH EQUIVALENTS $ 28,005
RECEIVABLE FOR MORTGAGE-BACKED
SECURITIES SOLD 31,885,170
MORTGAGE-BACKED SECURITIES - Net 364,367,237
ACCRUED INTEREST RECEIVABLE 1,945,577
OTHER ASSETS 10,195
------------
TOTAL ASSETS $398,236,184
============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Repurchase agreements $326,987,090
Payable for Mortgage-Backed Securities purchased 35,060,243
Accrued interest payable 2,404,224
Dividends payable 938,400
Accounts payable 27,634
------------
Total liabilities 365,417,591
============
STOCKHOLDERS' EQUITY:
Common stock: par value $.01 per share;
100,000,000 authorized, 3,680,000
shares issued and outstanding 36,800
Additional paid-in capital 32,955,104
Unrealized losses on Mortgage-Backed Securities (298,761)
Retained earnings 125,450
------------
Total stockholders' equity 32,818,593
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $398,236,184
============
</TABLE>
See notes to financial statements.
F-3
<PAGE>
ANNALY MORTGAGE MANAGEMENT, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD FEBRUARY 18,1997 (COMMENCEMENT OF OPERATIONS) THROUGH
JUNE 30,1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
INTEREST INCOME:
Mortgage-Backed Securities $6,478,162
Money market account 30,745
----------
Total interest income 6,508,907
INTEREST EXPENSE:
Repurchase agreements 5,148,817
----------
NET INTEREST INCOME 1,360,090
GAIN ON SALE OF MORTGAGE-BACKED SECURITIES 229,865
GENERAL AND ADMINISTRATIVE EXPENSES 249,896
----------
NET INCOME $1,340,059
==========
NET INCOME PER SHARE $0.36
==========
AVERAGE NUMBER OF SHARES OUTSTANDING 3,680,000
==========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
ANNALY MORTGAGE MANAGEMENT, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON ADDITIONAL
STOCK PAID-IN UNREALIZED RETAINED
PAR VALUE CAPITAL LOSS EARNINGS TOTAL
-------- ----------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE,
FEBRUARY 18, 1997 $ 800 $ 11,200 $ - $ (209) $ 11,791
Issuance of common stock 36,000 32,943,904 - - 32,979,904
Available for sale securities -
Fair value adjustment - - (298,761) - (298,761)
Net income - - - 1,340,059 1,340,059
Dividends declared -
$0.33 per share - - - (1,214,400) (1,214,400)
------- ----------- ---------- ----------- -------------
BALANCE, JUNE 30, 1997 $36,800 $32,955,104 $(298,761) $ 125,450 $32,818,593
======= =========== ========== =========== =============
</TABLE>
See notes to financial statements.
F-5
<PAGE>
ANNALY MORTGAGE MANAGEMENT, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FEBRUARY 18,1997 (COMMENCEMENT OF OPERATIONS) THROUGH
JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,340,059
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of mortgage premiums and discounts, net 622,679
Gain on sale of Mortgage-Backed Securities (229,865)
Increase in accrued interest receivable (1,945,577)
Increase in other assets (8,745)
Increase in accrued interest payable 2,404,224
Increase in accrued expenses and other liabilities 27,414
------------
Net cash provided by operating activities 2,210,189
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Mortgage-Backed Securities (418,416,100)
Proceeds from sale of Mortgage-Backed Securities 42,872,029
Principal payments on Mortgage-Backed Securities 13,660,333
Purchase of furniture (1,451)
------------
Net cash used in investing activities (361,885,189)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements 785,260,090
Principal payments on repurchase agreements (458,273,000)
Net proceeds from private placement equity offering 32,979,904
Dividends paid (276,000)
------------
Net cash provided by financing activities 359,690,994
------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 15,994
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,011
------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 28,005
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 2,744,593
============
NONCASH FINANCING ACTIVITIES:
Unrealized losses on available-for-sale securities $ 298,761
============
Dividends declared, not yet paid $ 938,400
============
</TABLE>
See notes to financial statements.
F-6
<PAGE>
ANNALY MORTGAGE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FEBRUARY 18, 1997 (COMMENCEMENT OF OPERATIONS)
THROUGH JUNE 30, 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Annaly Mortgage Management, Inc. (the "Company") was incorporated in Maryland
on November 25, 1996. The Company commenced its operations of purchasing and
managing an investment portfolio of primarily adjustable-rate Mortgage-Backed
Securities on February 18, 1997, upon receipt of the net proceeds from the
private placement of equity capital (see Note 5).
A summary of the Company's significant accounting policies follows:
CASH AND CASH EQUIVALENTS - Cash and cash equivalents includes cash on hand
and money market funds. The carrying amounts of cash equivalents approximates
their value.
MORTGAGE-BACKED SECURITIES - The Company invests primarily in mortgage pass-
through certificates, collateralized mortgage obligations and other mortgage-
backed securities representing interests in or obligations backed by pools of
mortgage loans (collectively, "Mortgage-Backed Securities").
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities ("SFAS 115"), requires the Company
to classify its investments as either trading investments, available-for-sale
investments or held-to-maturity investments. Although the Company generally
intends to hold most of its Mortgage-Backed Securities until maturity, it
may, from time to time, sell any of its Mortgage-Backed Securities as part of
its overall management of its balance sheet. Accordingly, this flexibility
requires the Company to classify all of its Mortgage-Backed Securities as
available-for-sale. All assets classified as available-for-sale are reported
at fair value, with unrealized gains and losses excluded from earnings and
reported as a separate component of stockholder's equity.
Unrealized losses on Mortgage-Backed Securities that are considered other
than temporary, as measured by the amount of decline in fair value
attributable to factors other than temporary, are recognized in income and
the cost basis of the Mortgage-Backed Securities is adjusted.
Interest income is accrued based on the outstanding principal amount of the
Mortgage-Backed Securities and their contractual terms. Premiums and
discounts associated with the purchase of the Mortgage-Backed Securities are
amortized into interest income over the lives of the securities using the
effective yield method.
Mortgage-Backed Securities transactions are recorded on the date the
securities are purchased or sold. Purchases of newly issued securities are
recorded when all significant uncertainties regarding the characteristics of
the securities are removed, generally shortly before settlement date.
Realized gains and losses on Mortgage-Backed Securities transactions are
determined on the specific identification basis.
Credit Risk - At June 30, 1997, the Company has limited is exposure to credit
losses on its portfolio of Mortgage-Backed Securities by only purchasing
securities from Federal Home Loan Mortgage Corporation ("FHLMC"), Federal
National Mortgage Association ("FNMA"), or Government National Mortgage
Association ("GNMA").
F-7
<PAGE>
The payment of principal and interest on the FHLMC and FNMA Mortgage-Backed
Securities are guaranteed by those respective agencies and the payment of
principal and interest on the GNMA Mortgage-Backed Securities are backed by
the full-faith-and-credit of the U.S. government. At June 30, 1997, all of
the Company's Mortgage-Backed Securities have an implied "AAA" rating.
Income Taxes - The Company has elected to be taxed as a Real Estate
Investment Trust ("REIT") and intends to comply with the provisions of the
Internal Revenue Code of 1986, as amended (the "Code") with respect thereto.
Accordingly, the Company will not be subjected to federal income tax to the
extent of its distributions to shareholders and as long as certain asset,
income and stock ownership tests are met.
Net Income Per Share - Net income per share is computed by dividing net
income by the weighted average number of common shares and common share
equivalents (e.g., stock options), if dilutive, outstanding during the
period. The Company had no dilutive common stock equivalents outstanding
during the period.
Use Of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles 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. Actual results could differ from those
estimates.
2. MORTGAGE-BACKED SECURITIES
The following table pertains to the Company's Mortgage-Backed Securities
classified as available-for-sale as of June 30, 1997, which are carried at
their fair value:
<TABLE>
<CAPTION>
FEDERAL FEDERAL GOVERNMENT
HOME LOAN NATIONAL NATIONAL TOTAL
MORTGAGE MORTGAGE MORTGAGE MORTGAGE
MORTGAGE-BACKED SECURITIES CORPORATION ASSOCIATION ASSOCIATION ASSETS
<S> <C> <C> <C> <C>
Mortgage-Backed Securities,
gross $29,076,869 $240,120,747 $85,130,964 $354,328,580
Unamortized discount (2,399) - - (2,399)
Unamortized premium 674,285 7,573,379 2,092,153 10,339,817
----------- ------------ ----------- ------------
Amortized cost 29,748,755 247,694,126 87,223,117 364,665,998
Gross unrealized gains 20,475 339,916 77,792 438,183
Gross unrealized losses (101,590) (401,427) (233,927) (736,944)
----------- ------------ ----------- ------------
Estimated fair value $29,667,640 $247,632,615 $87,066,982 $364,367,237
=========== ============ =========== ============
</TABLE>
At June 30, 1997, all investments in Mortgage-Backed Securities consist of
securities backed by mortgage loans secured by single-family residential
housing. All of the securities acquired, as of June 30, 1997, are securitized
by either FHLMC, FNMA or GNMA. The original maturity of 87% of the Mortgage-
Backed Securities is over a period of thirty years; the actual maturity is
subject to change based on the prepayments of the underlying mortgage loans.
F-8
<PAGE>
The adjustable rate Mortgage-Backed Securities are limited by periodic caps
(generally interest rate adjustments are limited to no more than 1% every
six months) and lifetime caps. At June 30, 1997, the weighted average
lifetime cap was 11%.
During the period ended June 30, 1997, the Company realized $229,865 in gains
from sales of Mortgage-Backed Securities. There were no losses on sales of
Mortgage-Backed Securities during the period.
3. REPURCHASE AGREEMENTS
The Company has entered into repurchase agreements to finance most of its
Mortgage-Backed Securities. The repurchase agreements are secured by the
market value of the Company's Mortgage-Backed Securities and bear interest
rates that have historically moved in close relationship to LIBOR.
As of June 30, 1997, the Company had outstanding $326,987,090 of repurchase
agreements with a weighted average borrowing rate of 5.64% and a weighted
average remaining maturity of 20 days. At June 30, 1997, Mortgage-Backed
Securities actually pledged had an estimated fair value of $364,367,237.
At June 30, 1997, the repurchase agreements had the following remaining
maturities:
<TABLE>
<S> <C>
Within 30 Days $281,097,090
30 to 90 days 45,890,000
------------
$326,987,090
============
</TABLE>
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments at June 30, 1997. FASB Statement No.
107, Disclosures About Fair Value of Financial Instruments, 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, other than in
a forced or liquidation sale:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
<S> <C> <C>
Mortgage-Backed Securities $364,665,999 $364,367,237
</TABLE>
The fair values of the Company's Mortgage-Backed Securities are based on
market prices provided by certain dealers who make markets in these financial
instruments. The fair values reported reflect estimates and may not
necessarily be indicative of the amounts the Company could realize in a
current market exchange. Cash and cash equivalents, interest receivable,
repurchase agreements and other liabilities are reflected in the financial
statements at their amortized cost, which approximates their fair value
because of the short-term nature of these instruments.
5. COMMON STOCK
During the period the Company completed a private placement of equity
capital. The Company received net proceeds of $32,979,904 from an issuance
of 3,600,000 shares of common stock.
During the Company's period ending June 30, 1997, the Company declared
dividends to shareholders totaling $.33 per share, of which $.075 was paid
during the period and $.255 was paid on July 23, 1997.
F-9
<PAGE>
For Federal income tax purposes, $.06 of the dividend was long-term capital
gains and all other dividends paid for the period are ordinary income to the
Company's stockholders.
6. LONG-TERM STOCK INCENTIVE PLAN
The Company has adopted a Long-Term Stock Incentive Plan for executive
officers, key employees and nonemployee directors (the "Incentive Plan"). The
Incentive Plan authorizes the Compensation Committee of the Board of
Directors to grant awards, including incentive stock options as defined under
section 422 of the Code ("ISOs") and options not so qualified ("NQSOs"). The
Incentive Plan authorizes the granting of options or other awards for an
aggregate of the greater of 500,000 shares or 5% of the outstanding shares of
the Company's common stock.
The Company adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost for the Incentive Plan has been determined
based on the fair value at the grant date for awards consistent with the
provisions of SFAS No. 123. For the Company's pro forma net earnings, the
compensation cost will be amortized over the four year vesting period of the
options. The Company's net earnings per share would have been reduced to the
pro forma amounts indicated below:
<TABLE>
<S> <C>
Net earnings - as reported $1,340,059
Net earnings - pro forma 1,249,978
Earnings per share - as reported $0.36
Earnings per share - pro forma $0.34
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in the period ended June 30, 1997: dividend yield
of 10%; expected volatility of 25%; risk-free interest rate of 6.07%; and
expected lives of four years.
Information regarding options is as follows:
Weighted
Average
Exercise
Shares Price
Granted (311,000 ISOs, 37,500 NQSOs) 348,500 $ 6.42
Exercised - -
Expired - -
-------- ---------
Outstanding, end of period 348,500 $ 6.42
======== =========
Weighted average fair value per share of
options granted during the period $ 2.07
========
F-10
<PAGE>
The following table summarizes information about stock options outstanding:
Options Outstanding
------------------------------
Weighted
Average Weighted
Remaining Average
Range of Options Contractual Exercise
Exercise Prices Outstanding Life (Yrs.) Price
$ 4.00 208,250 4.0 $ 4.00
10.00 140,250 3.8 10.00
---------- ---------
$4.00-$10.00 348,500 3.9 $ 6.42
============ ========= ==== ======
The vesting for the options is as follows: 7,500 options vested as of June
26, 1997. The remainder of the options will vest in four equal annual
installments from 1998 through 2001.
7. SUBSEQUENT EVENT
The Company raised additional capital on July 31, 1997 upon the consummation
of the sale of an aggregate of 87,800 shares, totaling $878,000, of Common
Stock to directors, officers and employees of the Company.
8. SUMMARIZED QUARTERLY RESULTS (UNAUDITED)
The following is a presentation of the quarterly results of operations.
Period Ended
March 31, June 30,
1997 1997
Interest income from Mortgage-Backed
Securities and cash $1,060,692 $5,448,215
Interest expense on repurchase
agreements 713,120 4,435,697
---------- ----------
Net interest income 347,572 1,012,518
Gain on sale of Mortgage-Backed Securities - 229,865
General and administrative expenses 64,047 185,849
--------- ---------
Net income $ 283,525 $1,056,534
========= ==========
Net income per share $0.08 $0.28
===== =====
Average number of shares outstanding 3,680,000 3,680,000
========== =========
******
F-11
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY, THE SELLING STOCKHOLDERS OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE SHARES OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES
OFFERED HEREBY IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR
THAT THERE HAS NOT BEEN A CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF.
________________________________
SUMMARY TABLE OF CONTENTS
<TABLE>
<CAPTION>
- ---------------------------------------------------------
PAGE
- ----------------------------------------------------
<S> <C>
Prospectus Summary.................................. 4
Risk Factors........................................ 11
The Company......................................... 23
Use of Proceeds..................................... 23
Capitalization...................................... 24
Distribution Policy................................. 25
Dilution............................................ 25
Selected Financial Data............................. 27
Management's Discussion and Analysis
of Financial Condition and Results of Operations.. 28
Business Strategy................................... 38
Management.......................................... 52
Principal and Selling Stockholders.................. 60
Certain Federal Income Tax Considerations........... 62
ERISA Considerations................................ 69
Description of Capital Stock........................ 71
Common Stock Available for Future Sale.............. 75
Underwriting........................................ 76
Legal Matters....................................... 78
Experts............................................. 78
Additional Information.............................. 78
Glossary............................................ 79
Index to Financial Statements....................... F-1
</TABLE>
UNTIL ________, 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
______________________ SHARES
[LOGO]
ANNALY MORTGAGE
MANAGEMENT, INC.
COMMON STOCK
PROSPECTUS
FRIEDMAN, BILLINGS, RAMSEY
& CO., INC.
SUTRO & CO. INCORPORATED
TUCKER ANTHONY INCORPORATED
____________, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31.OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses expected to be incurred in connection with the issuance and
distribution of the securities being registered are as set forth below. All
such expenses, except for the Securities Exchange Commission ("SEC" or the
"Commission") registration fee, the NASD filing fee and the Nasdaq National
Market listing fee, are estimated:
SEC Registration.................... $27,225.38
NASD Filing Fee..................... $ 9,484.38
Nasdaq National Market Listing Fee.. $30,468.75
Legal Fees and Expenses............. $ *
Accounting Fees and Expenses $ *
Blue Sky Qualification Fees and
Expenses (including counsel fees) $ *
Printing Fees $ *
Transfer Agent and Registrar Fees $ *
Miscellaneous $ *
----------
Total $ *
==========
_______________
*To be completed by amendment.
ITEM 32.SALES TO SPECIAL PARTIES.
On July 31, 1997, the Registrant sold 87,800 shares of Common Stock to
certain directors, officers and employees of the Company at a price of $10.00
per share of Common Stock or $878,000 in the aggregate. The foregoing shares
were sold without registration under the Securities Act of 1933, as amended, in
reliance on the exemption provided by Section 4(2) thereof.
ITEM 33.RECENT SALES OF UNREGISTERED SECURITIES.
On December 10, 1996, the Registrant issued 20,000 shares of Common Stock
to each of Timothy J. Guba and Wellington St. Claire in exchange for an
aggregate cash purchase price of $3,000 paid by each of them. On December 17,
1996, the Registrant issued 20,000 shares to Michael A.J. Farrell in exchange
for an aggregate cash purchase price of $3,000. On December 18, 1996, the
Registrant issued 20,000 shares to the Bellfiore Trust in exchange for an
aggregate cash purchase price of $3,000. The foregoing shares of Common Stock
were sold without registration under the Securities Act of 1933, as amended (the
"Securities Act"), in reliance on the exemption provided by Section 4(2)
thereof.
On February 18, 1997, the Registrant sold an aggregate of 3,600,000 shares
of Common Stock to purchasers who were either "Qualified Institutional Buyers"
(as defined in Rule 144A under the Securities Act), or institutional "accredited
investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities
Act), or to purchasers who were not U.S. persons (as defined in Regulation S
under the Securities Act) pursuant to offers and sales that occurred outside the
United States within the meaning of Regulation S under the Securities Act. The
foregoing shares of Common Stock were sold without registration under the
Securities Act in reliance on the exemptions provided by Sections 4(1) and 4(2)
thereof and Rule 144A, Regulation D and Regulation S thereunder. The purchasers
in the offering paid $10.00 per share of Common Stock or $36,000,000 in the
aggregate. The shares of Common Stock were sold initially to Friedman,
Billings, Ramsey & Co., Inc., as the initial purchaser in the offering (the
"Initial Purchaser"), for a purchase price of $9.30 per share, or $33,480,000 in
the aggregate, and resold by the Initial Purchaser to the purchasers in the
offering. The Initial Purchaser's discount in the offering was $.70 per share,
or $2,520,000 in the aggregate.
On July 31, 1997, the Registrant sold 87,800 shares of Common Stock to
certain directors and officers of the Company at a price of $10.00 per share of
Common Stock or $878,000 in the aggregate. The foregoing shares were sold
without registration under the Securities Act in reliance on the exemption
provided by Section 4(2) thereof.
II-1
<PAGE>
ITEM 34.INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 2-418 of the Corporations and Associations Article of the Annotated
Code of Maryland (the "Maryland General Corporation Law") provides that a
Maryland corporation may indemnify any director of the corporation and any
person who, while a director of the corporation, is or was serving at the
request of the corporation as director, officer, partner, trustee, employee, or
agent of another foreign or domestic corporation, partnership, joint venture,
trust, or other enterprise or employee benefit plan, is made a party to any
proceeding by reason of service in that capacity unless it is established that
the act or omission of the director was material to the matter giving rise to
the proceeding and was committed in bad faith or was the result of active and
deliberate dishonesty; or the director actually received an improper personal
benefit in money, property or services; or, in the case of any criminal
proceeding, the director had reasonable cause to believe that the act or
omission was unlawful. Indemnification may be against judgments, penalties,
fines, settlements, and reasonable expenses actually incurred by the director in
connection with the proceeding, but if the proceeding was one by or in the right
of the corporation, indemnification may not be made in respect of any proceeding
in which the director shall have been adjudged to be liable to the corporation.
Such indemnification may not be made unless authorized for a specific proceeding
after a determination has been made, in the manner prescribed by the law, that
indemnification is permissible in the circumstances because the director has met
the applicable standard of conduct. On the other hand, the director must be
indemnified for expenses if he has been successful in the defense of the
proceeding or as otherwise ordered by a court. The law also prescribes the
circumstances under which the corporation may advance expenses to, or obtain
insurance or similar protection for, directors.
The law also provides for comparable indemnification for corporate officers
and agents.
The Registrant's Articles of Incorporation provide that its directors and
officers shall, and its agents in the discretion of the Board of Directors may,
be indemnified to the fullest extent required or permitted from time to time by
the laws of Maryland.
The Maryland General Corporation Law permits the charter of a Maryland
corporation to include a provision limiting the liability of its directors and
officers to the corporation and its stockholders for money damages except to the
extent that (i) it is proved that the person actually received an improper
benefit or profit in money, property or services for the amount of the benefit
or profit in money, property or services actually received, or (ii) a judgment
or other final adjudication is entered in a proceeding based on a finding that
the person's action, or failure to act, was the result of active and deliberate
dishonesty and was material to the cause of action adjudicated in the
proceeding. The Company's Articles of Incorporation contain a provision
providing for elimination of the liability of its directors and officers to the
Company or its stockholders for money damages to the maximum extent permitted by
Maryland law from time to time.
Policies of insurance may be obtained and maintained by the Company under
which its directors and officers will be insured, within the limits and subject
to the limitations of the policies, against certain expenses in connection with
the defense of, and certain liabilities which might be imposed as a result of,
actions, suits or proceedings to which they are parties by reason of being or
having been such directors of officers.
ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Not applicable.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements:
The financial statements of the Registrant at June 30, 1997, and for the
period from February 18, 1997 (commencement of operations) through June 30,
1997, are included in the Prospectus. All schedules are omitted because they
are not applicable or not required.
(b) Exhibits:
1.1 Form of Underwriting Agreement/*/
3.1 Articles of Incorporation of the Registrant
II-2
<PAGE>
3.2 Articles of Amendment and Restatement of the Articles of Incorporation of
the Registrant
3.3 Bylaws of the Registrant, as amended
4.1 Specimen Common Stock Certificate/*/
5.1 Opinion of Morgan, Lewis & Bockius LLP (including consent of such firm)/*/
8.1 Opinion of Morgan, Lewis & Bockius LLP, as to certain tax matters
(including consent of such firm)/*/
10.1 Purchase Agreement, dated February 12, 1997, between the Registrant and
Friedman, Billings, Ramsey & Co., Inc. ("FBR")
10.2 Registration Rights Agreement, dated February 12, 1997, between the
Registrant and FBR
10.3 Long-Term Stock Incentive Plan
10.4 Employment Agreement, effective as of January 27, 1997, between the Company
and Michael A.J. Farrell
10.5 Employment Agreement, effective as of January 27, 1997, between the Company
and Timothy J. Guba
10.6 Employment Agreement, effective as of January 27, 1997, between the Company
and Wellington J. St. Claire
10.7 Form of Master Repurchase Agreement
10.8 Form of Purchase Agreement between the Company and the purchasers in the
Direct Offering
23.1 Consent of Morgan, Lewis & Bockius LLP (included in Exhibits 5.1 and 8.1)
23.2 Consent of Deloitte & Touche L.L.P.
24.1 Power of Attorney (included on page II-4)
________________________
/*/ To be filed by amendment.
ITEM 37. UNDERTAKINGS
The Registrant hereby undertakes to provide to the Underwriters specified
in the Underwriting Agreement at the closing certificates in such denominations
and registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant, pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to court of appropriate
jurisdiction in the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that: (1) for purposes of
determining any liability under the Securities Act, the information omitted from
the form of Prospectus filed as part of this Registration Statement in reliance
upon Rule 430A and contained in a form of Prospectus filed by the Registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this Registration Statement as of the time it was declared
effective; and (2) for the purpose of determining liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall be
deemed to be a new Registration Statement relating to the securities offered
therein and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of ___________, State of _________ on the _____ day of
____________, 1997.
ANNALY MORTGAGE
MANAGEMENT, INC.
By:/s/ MICHAEL A. J. FARRELL
------------------------------------
Michael A. J. Farrell
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below appoints Michael A. J. Farrell,
Timothy J. Guba and Wellington J. St. Claire, any of whom may act without the
joinder of the other, as his or her true and lawful attorney-in-fact and agent
with full power of substitution and resubstitution, for him or her and in his or
her name, place and stead, in any and all capacities to sign any and all
amendments (including post-effective amendments) to this Registration Statement,
and to file the same, with all exhibits thereto and all other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary to be done, as fully to all
intents and purposes as he she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or their substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ ----------------------------------------------- ------
<S> <C> <C>
/s/ KEVIN P. BRADY Director , 1997
- ----------------------
Kevin P. Brady
/s/ SPENCER I. BROWNE Director , 1997
- ----------------------
Spencer I. Bowne
/s/ KATHRYN F. FAGAN Chief Financial Officer and Treasurer , 1997
- ---------------------- (principal financial and accounting officer)
Kathryn F. Fagan
/s/ MICHAEL A.J. FARRELL Chairman of the Board, Chief Executive Officer , 1997
- ---------------------- and Director (principal executive officer)
Michael A. J. Farrell
/s/ JOHN S. GRACE Director , 1997
- ----------------------
John S. Grace
/s/ JONATHAN D. GREEN Director , 1997
- ----------------------
Jonathan D. Green
/s/ TIMOTHY J. GUBA President, Chief Operating Officer and Director , 1997
- ----------------------
Timothy J. Guba
/s/ JOHN A. LAMBIASE Director , 1997
- ----------------------
John A. Lambiase
/s/ DONNELL A. SEGALAS Director , 1997
- ----------------------
Donnell A. Segalas
/s/ WELLINGTON J. ST. CLAIRE Vice Chairman of the Board and Director , 1997
- ----------------------------
Wellington J. St. Claire
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Document Page Number
- ----------- ----------------------- -----------
1.1 Form of Underwriting Agreement/*/
3.1 Articles of Incorporation of the Registrant
3.2 Articles of Amendment and Restatement of the Articles of Incorporation of
the Registrant
3.3 Bylaws of the Registrant, as amended
4.1 Specimen Common Stock Certificate/*/
5.1 Opinion of Morgan, Lewis & Bockius LLP (including consent of such
firm)/*/
8.1 Opinion of Morgan, Lewis & Bockius LLP, as to certain tax matters
(including consent of such firm)/*/
10.1 Purchase Agreement, dated February 12, 1997, between the Registrant and
Friedman, Billings, Ramsey & Co., Inc. ("FBR")
10.2 Registration Rights Agreement, dated February 12, 1997, between the
Registrant and FBR
10.3 Long-Term Stock Incentive Plan
10.4 Employment Agreement, effective as of January 27, 1997, between the
Company and Michael A.J. Farrell
10.5 Employment Agreement, effective as of January 27, 1997, between the
Company and Timothy J. Guba
10.6 Employment Agreement, effective as of January 27, 1997, between the
Company and Wellington J. St. Claire
10.7 Form of Master Repurchase Agreement
10.8 Form of Purchase Agreement between the Company and the purchasers in the
Direct Offering
23.1 Consent of Morgan, Lewis & Bockius LLP (included in Exhibits 5.1 and 8.1)
23.2 Consent of Deloitte & Touche L.L.P.
24.1 Power of Attorney (included on page II-4)
________________________
* To be filed by amendment.
II-5
<PAGE>
EXHIBIT 3.1
ARTICLES OF INCORPORATION
-------------------------
OF
--
ANNALY MORTGAGE MANAGEMENT, INC.
--------------------------------
ARTICLE I
The undersigned, Jacqueline D. Andersen, whose address is 32 South
Street, Baltimore, Maryland 21202, being at least eighteen (18) years of age,
does hereby act as an incorporator, under and by virtue of the General Laws of
the State of Maryland authorizing the formation of corporations, and with the
intention of forming a corporation, does hereby form a corporation under the
General Laws of the State of Maryland.
ARTICLE II
The name of the corporation (which is hereinafter called the "Corporation")
is:
Annaly Mortgage Management, Inc.
ARTICLE III
The purpose for which the Corporation is formed is to transact any or all
lawful business, not required to be specifically stated in these Articles, for
which corporations may be incorporated under the Maryland General Corporation
Law, as amended from time to time.
ARTICLE IV
The present address of the principal office of the Corporation in the State
of Maryland is:
The Corporation Trust Incorporated
32 South Street
Baltimore, Maryland 21202
<PAGE>
ARTICLE V
The name and address of the resident agent of the Corporation in the
State of Maryland are:
The Corporation Trust Incorporated
32 South Street
Baltimore, Maryland 21202
Said resident agent is a Maryland corporation actually residing in the State of
Maryland.
ARTICLE VI
A. The total number of shares of stock of all classes which the
Corporation has authority to issue is one hundred million (100,000,000) shares
of capital stock, par value one cent ($0.01) per share, amounting in aggregate
par value to one million dollars ($1,000,000). All of such shares are initially
classified as "Common Stock." The Board of Directors may classify and
reclassify any unissued shares of Common Stock by setting or changing in any one
or more respects the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications or terms or conditions
of redemption of such shares of stock.
B. The following is a description of the preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption of the Common Stock of the
Corporation.
(1) Each share of Common Stock shall have one vote, and, except as
otherwise provided in respect of any class of capital stock hereafter classified
or reclassified, the exclusive voting power for all purposes shall be vested in
the holders of the Common Stock.
(2) Subject to the provisions of law and any preferences of any class
of capital stock hereafter classified or reclassified, dividends, including
dividends payable in shares of the Corporation's stock, may be paid on the
Common Stock of the Corporation at such time and in such amounts as the Board of
Directors may deem advisable.
(3) In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the holders of the Common Stock
shall be entitled, after payment or provision for payment of the debts and other
liabilities of the Corporation and the amount to which the holders of any class
of capital stock hereafter classified or reclassified having a preference on
distributions in the liquidation, dissolution or winding up of the Corporation,
shall be entitled, together with the holders of any other class of capital stock
hereafter classified or reclassified not having a preference on distributions in
the liquidation,
2
<PAGE>
dissolution or winding up of the Corporation, to share ratably in the remaining
net assets of the Corporation.
C. Subject to the foregoing, the power of the Board of Directors to
classify and reclassify any of the shares of capital stock shall include,
without limitation, subject to the provisions of the charter, authority to
classify or reclassify any unissued shares of such capital stock into a class or
classes of preferred stock, preference stock, special stock, or other stock, and
to divide and classify shares of any class into one or more series of such
class, by determining, fixing or altering one or more of the following:
(1) The distinctive designation of such class or series and the number
of shares to constitute such class or series; provided that, unless otherwise
prohibited by the terms of such or any other class or series, the number of
shares of any class or series may be decreased by the Board of Directors in
connection with any classification or reclassification of unissued shares and
the number of shares of such class or series may be increased by the Board of
Directors in connection with any such classification or reclassification, and
any shares of any class or series which have been redeemed, purchased, otherwise
acquired or converted into shares of Common Stock or any other class or series
shall become part of the authorized capital stock and be subject to
classification and reclassification as provided in this subparagraph.
(2) Whether or not and, if so, the rates, amounts and times at which,
and the conditions under which, dividends shall be payable on shares of such
class or series, whether any such dividends shall rank senior or junior to or on
a parity with the dividends payable on any other class or series of capital
stock, and the status of any such dividends as cumulative, cumulative to a
limited extent or noncumulative and as participating or nonparticipating.
(3) Whether or not shares of such class or series shall have voting
rights in addition to any voting rights provided by law and, if so, the terms of
such voting rights.
(4) Whether or not shares of such class or series shall have
conversion or exchange privileges and, if so, the terms and conditions thereof,
including provision for adjustment of the conversion or exchange rate in such
events or at such times as the Board of Directors shall determine.
(5) Whether or not shares of such class or series shall be subject to
redemption and, if so, the terms and conditions of such redemption, including
the date or dates upon or after which they shall be redeemable and the amount
per share payable in case of redemption, which amount may vary under different
conditions and at different redemption dates; and whether or not there shall be
any sinking fund or purchase account in respect thereof, and if so, the terms
thereof.
3
<PAGE>
(6) The rights of the holders of shares of such class or series upon
the liquidation, dissolution or winding up of the affairs of, or upon any
distribution of the assets of, the Corporation, which rights may vary depending
upon whether such liquidation, dissolution or winding up is voluntary or
involuntary and, if voluntary, may vary at different dates, and whether such
rights shall rank senior or junior to or on a parity with such rights of any
other class or series of capital stock.
(7) Whether or not there shall be any limitations applicable, while
shares of such class or series are outstanding, upon the payment of dividends or
making of distributions on, or the acquisition of, or the use of moneys for
purchase or redemption of, any capital stock of the Corporation, or upon any
other action of the Corporation, including action under this subparagraph, and,
if so, the terms and conditions thereof.
(8) Any other preferences, rights, restrictions, including
restrictions on transferability, and qualifications of shares of such class or
series, not inconsistent with law and the Charter.
D. For the purposes hereof and of any Articles Supplementary hereto
providing for the classification or reclassification of any shares of capital
stock or of any other charter document of the Corporation (unless otherwise
provided in any such Articles or document), any class or series of capital stock
of the Corporation shall be deemed to rank:
(1) prior to another class or series either as to dividends or upon
liquidation, if the holders of such class or series shall be entitled to the
receipt of dividends or of amounts distributable on liquidation, dissolution or
winding up, as the case may be, in preference or priority to holders of such
other class or series;
(2) on a parity with another class or series either as to dividends or
upon liquidation, whether or not the dividend rates, dividend payment dates or
redemption or liquidation price per share thereof be different from those of
such others, if the holders of such class or series of stock shall be entitled
to receipt of dividends or amounts distributable upon liquidation, dissolution
or winding up, as the case may be, in proportion to their respective dividend
rates or redemption or liquidation prices, without preference or priority over
the holders of such other class or series; and
(3) junior to another class or series either as to dividends or upon
liquidation, if the rights of the holders of such class or series shall be
subject or subordinate to the rights of the holders of such other class or
series in respect of the receipt of dividends or the amounts distributable upon
liquidation, dissolution or winding up, as the case may be.
4
<PAGE>
ARTICLE VII
The number of Directors of the Corporation shall be three (3), which
number may be increased or decreased pursuant to the by-laws of the Corporation,
but shall never be less than the minimum number permitted by the General Laws of
the State of Maryland now or hereafter in force. The names of the directors who
shall act until the first annual meeting or until their successors are duly
chosen and qualified are:
Michael A. J. Farrell
Timothy J. Guba
Wellington J. St. Claire
ARTICLE VIII
Except as may otherwise be provided by the Board of Directors of the
Corporation, no holder of any shares of the stock of the Corporation shall have
any preemptive or preferential right to purchase, subscribe for, or otherwise
acquire any shares of stock of the Corporation of any class now or hereafter
authorized, or any securities exchangeable for or convertible into such shares,
or any warrants or other instruments evidencing rights or options to subscribe
for, purchase or otherwise acquire such shares.
ARTICLE IX
The Corporation shall indemnify (A) its directors and officers,
whether serving the Corporation or at its request any other entity, to the full
extent required or permitted by the General Laws of the State of Maryland now or
hereafter in force, including the advance of expenses under the procedures and
to the full extent permitted by law and (B) other employees and agents to such
extent as shall be authorized by the Board of Directors or the Corporation's By-
Laws and be permitted by law. The foregoing rights of indemnification shall not
be exclusive of any other rights to which those seeking indemnification may be
entitled. The Board of Directors may take such action as is necessary to carry
out these indemnification provisions and is expressly empowered to adopt,
approve and amend from time to time such By-Laws, resolutions or contracts
implementing such provisions or such further indemnification arrangements as may
be permitted by law. No amendment of the charter of the Corporation or repeal
of any of its provisions shall limit or eliminate the right to indemnification
provided hereunder with respect to acts or omissions occurring prior to such
amendment or repeal.
5
<PAGE>
ARTICLE X
To the fullest extent permitted by Maryland statutory or decisional
law, as amended or interpreted, no director or officer of this Corporation shall
be personally liable to the Corporation or its stockholders for money damages.
No amendment of the Charter of the Corporation or repeal of any of its
provisions shall limit or eliminate the benefits provided to directors and
officers under this provision with respect to any act or omission which occurred
prior to such amendment or repeal.
ARTICLE XI
Section 1. Definitions. For the purposes of this Article XI, the
-----------
following terms shall have the following meanings:
"Beneficial Ownership" shall mean ownership of Capital Stock by a
Person either directly or constructively through the application of section 544
of the Code, as modified by sections 856(h)(l)(B) and 856(h)(3)(A) of the Code
and determined without respect to whether such ownership has the effect of
meeting the stock ownership requirement of section 542(a)(2) of the Code. The
terms "Beneficial Owner," "Beneficially Owning," "Beneficially Own" and
"Beneficially Owned" shall have the correlative meanings.
"Beneficiary" shall mean the beneficiary of the Trust as determined
pursuant to Section 9 of this Article XI.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Capital Stock" shall mean stock that is either Common Stock,
Preferred Stock or any other class of capital stock of the Corporation
classified or reclassified pursuant to Article VI or this Article XI.
"Excess Securities" shall have the meaning set forth in Section 4 of
this Article XI.
"Initial Public Offering" shall mean the sale of shares of Common
Stock pursuant to the Corporation's first effective registration statement for
such Common Stock filed under the Securities Act of 1933, as amended.
"Market Price" for any class of Capital Stock shall mean the last
reported sales price reported on the New York Stock Exchange of such Capital
Stock, on the trading day immediately preceding the relevant date, or if not
then traded on the New York Stock Exchange,
6
<PAGE>
the last reported sales price of such Capital Stock on the trading day
immediately preceding the relevant date as reported on any exchange or quotation
system over which such Capital Stock may be traded, or if not then traded over
any exchange or quotation system, then the market price of the Capital Stock on
the relevant date as determined in good faith by the Board of Directors of the
Corporation.
"NYSE" shall mean the New York Stock Exchange.
"Ownership Limit" shall mean the Beneficial Ownership of 9.8%, in
number of shares or value, of each class of outstanding Capital Stock of the
Corporation, and after adjustment as set forth in Section 11 of this Article XI,
shall mean such greater or lesser percentage of the outstanding Capital Stock as
so adjusted. The number and value of shares of the outstanding Capital Stock of
the Corporation shall be determined by the Board of Directors in good faith,
which determination shall be conclusive for all purposes hereof.
"Person" shall mean an individual, corporation, partnership, estate,
trust (including a trust qualified under section 401(a) or 501(c)(17) of the
Code), a portion of a trust permanently set aside for or to be used exclusively
for the purposes described in section 642(c) of the Code, association, private
foundation within the meaning of section 509(a) of the Code, joint stock company
or other entity; but does not include an underwriter which participated in a
public offering or private placement of Capital Stock for a period of 90 days
following the purchase by such underwriter of such Capital Stock.
"Purported Transferee" shall mean, with respect to any purported
Transfer which results in Excess Securities, the purported transferee who would
have acquired shares of Capital Stock, if such Transfer had been valid under
Section 2 of this Article XI.
"REIT" shall mean a real estate investment trust as defined under
section 856 of the Code.
"Restriction Termination Date" shall mean the first day of the taxable
year as to which the Board of Directors of the Corporation determines that it is
no longer in the best interests of the Corporation to attempt to, or continue
to, qualify as a REIT.
"Transfer" shall mean any sale, transfer, gift, assignment, devise or
other disposition of Capital Stock (including (a) the granting of any option or
entering into any agreement for the sale, transfer or other disposition of
Capital Stock, (b) the sale, transfer, assignment or other disposition of any
securities or rights convertible into or exchangeable for Capital Stock, but
excluding the actual conversion or exchange of such securities or rights into
Capital Stock and (c) any transfer or other disposition of any interest in
Capital Stock as a result of a change in the martial status of the holder
thereof), whether voluntary or involuntary, whether of record or beneficially
and whether by operation of law or otherwise. The terms "Transfers" and
"Transferred" shall have the correlative meanings.
7
<PAGE>
"Trust" shall mean the trust created pursuant to Section 6 of this
Article XI.
"Trustee" shall mean a banking institution designated by the
Corporation as trustee for the Trust that is unaffiliated with either the
Corporation or the Purported Transferee.
Section 2. Ownership Limitation.
--------------------
(A) Except as provided in Section 12 of this Article XI, from the
earlier of (x) the date of the Initial Public Offering or (y) January 1, 1998,
and until the Restriction Termination Date, no Person shall Beneficially Own any
class of shares of the outstanding Capital Stock in excess of the Ownership
Limit.
(B) Except as provided in Section 12 of this Article XI, from the
earlier of (x) the date of the Initial Public Offering or (y) January 1, 1998,
and until the Restriction Termination Date, any Transfer that, if effective,
would result in any Person Beneficially Owning any class of Capital Stock in
excess of the Ownership Limit shall be void ab initio as to the Transfer of such
shares of Capital Stock representing Beneficial Ownership of shares of any class
of Capital Stock in excess of the Ownership Limit; and the intended transferee
shall acquire no rights in such shares of Capital Stock.
(C) Except as provided in Section 12 of this Article XI, from the
earlier of (x) the date of the Initial Public Offering or (y) January 1, 1998,
and until the Restriction Termination Date, any Transfer that, if effective,
would result in the Capital Stock being beneficially owned (as provided in
section 856(a) of the Code) by less than 100 Persons (determined without
reference to any rules of attribution) shall be void ab initio as to the
Transfer of such shares of Capital Stock which would be otherwise beneficially
owned (as provided in section 856(a) of the Code) by the intended transferee;
and the intended transferee shall acquire no rights in such shares of Capital
Stock.
(D) From the earlier of (x) the date of the Initial Public Offering
or (y) January 1, 1998, and until the Restriction Termination Date, any Transfer
that, if effective, would result in the Corporation being "closely held" within
the meaning of section 856(h) of the Code shall be void ab initio as to the
Transfer of such shares of Capital Stock which would cause the Corporation to be
"closely held" within the meaning of section 856(h) of the Code; and the
intended transferee shall acquire no rights in such shares of Capital Stock.
(E) Until the Restriction Termination Date, any Transfer that, if
effective, would result in disqualification of the Corporation as a REIT shall
be void ab initio as to the Transfer of such shares of Capital Stock; and the
intended transferee shall acquire no rights in such shares of Capital Stock.
8
<PAGE>
(F) Nothing contained herein shall impair the settlement of
transactions entered into on the facilities of the NYSE or any other exchange or
quotation system on which shares of Capital Stock are traded.
Section 3. Prevention of Transfer. If the Board of Directors or
----------------------
its designee shall at any time determine in good faith that a purported Transfer
has taken place in violation of Section 2 of this Article XI (whether or not
such Transfer is a result of a transaction entered into through the facilities
of the NYSE or any other exchange or quotation system on which shares of Capital
Stock are traded) or that a Person intends to acquire or Transfer or has
attempted to acquire or Transfer Beneficial Ownership of Capital Stock of the
Corporation in violation of Section 2, the Board of Directors or its designee
shall take such action as it deems advisable to refuse to give effect to or to
prevent such Transfer, including, but not limited to, refusing to give effect to
such Transfer on the books of the Corporation or instituting proceedings to
enjoin such Transfer; provided, however, that any purported Transfers in
-------- -------
violation of this Article XI shall automatically result in the designation and
treatment described in this Article XI, irrespective of any action (or non-
action) by the Board of Directors.
Section 4. Excess Securities. If at any time after the earlier of
-----------------
(x) the date of the Initial Public Offering or (y) January 1, 1998 and before
the Restriction Termination Date there is a purported Transfer or other change
in the capital structure of the Corporation such that (x) any Person would
Benefically Own Capital Stock in excess of the applicable Ownership Limit and
(y) any provision of Section 2 of this Article XI or any application of such
provision is determined to be void, invalid, or unenforceable by any court
having jurisdiction over the issue, then, except as otherwise provided in
Section 12 of this Article XI, such shares of Capital Stock representing
Beneficial Ownership of shares of Capital Stock in excess of such Ownership
Limit (rounded up to the nearest whole share) shall constitute "Excess
Securities" and be treated as provided in this Article XI. Such designation and
treatment shall be effective as of the close of business on the business day
prior to the date of the purported Transfer or change in capital structure;
provided, however, subject to the provisions of Section 12, shares of Capital
- -------- -------
Stock held by an underwriter in a public offering or private placement of
shares, or in a transaction involving the issuance of shares by the Corporation
in which the Board of Directors determines that the underwriter or other person
or party initially acquiring such shares will make a timely distribution of such
shares to or among other holders such that, following such distribution, none of
such securities will be Excess Securities, shall not constitute Excess
Securities.
Section 5. Notice to Corporation. Any Person who acquires shares of
---------------------
Capital Stock in violation of Section 2 of this Article XI, or any Person who is
a Purported Transferee such that Excess Securities results under Section 4 of
this Article XI, shall immediately give written notice or, in the event of a
proposed or attempted Transfer that would violate Section 2 of this Article XI,
give at least 15 days prior written notice to the Corporation of such event and
shall provide to the Corporation such other information as the Corporation may
request in order to determine the effect, if any, of such Transfer on the
Corporation's status as a REIT.
9
<PAGE>
Section 6. Trust for Excess Securities. All Excess Securities shall
---------------------------
be transferred by operation of law to the Trustee of a Trust for the benefit of
such Beneficiary or Beneficiaries to whom an interest in such Excess Securities
may later be transferred pursuant to Section 9 of this Article XI. Excess
Securities that constitute Capital Stock so held in trust shall be issued and
outstanding stock of the Corporation. The Purported Transferee shall have no
rights in any Excess Securities.
Section 7. No Distribution for Excess Securities. The Trustee, as
-------------------------------------
holder of Excess Securities, shall pay any distributions (including dividends or
distributions upon liquidation, dissolution or winding up) to the Beneficiary.
Any dividend or distribution paid prior to the discovery by the Corporation that
the shares of Capital Stock have been purportedly Transferred so as to be deemed
Excess Securities shall be paid to the Trust for the exclusive benefit of the
Beneficiary.
Section 8. No Voting or Exercise Rights for Excess Securities. The
--------------------------------------------------
Trustee, as holder of Excess Securities, shall not be entitled to vote on any
matter and shall not be entitled to exercise or convert any such securities into
shares of Capital Stock.
Section 9. Transfer of Excess Securities. The Trustee shall
-----------------------------
designate as beneficiary an organization described in sections 170(b)(1)(A) or
170(c) of the Code (a "Beneficiary") of an interest in the Trust (representing
the number of shares (as the case may be) of Excess Securities held by the Trust
attributable to a purported Transfer that resulted in the Excess Securities),
provided, the Excess Securities held in the Trust would not be Excess Securities
in the hands of such Beneficiary. The Trust may transfer shares of Excess
Securities if such shares of Capital Stock do not constitute Excess Securities
in the hands of the new owner. Upon such a transfer, the Purported Transferee
shall receive a price for such Excess Securities equal to the lesser of (i) the
price per share such Purported Transferee paid for the Capital Stock in the
purported Transfer that resulted in the Excess Securities (or, if the Purported
Transferee did not give value for such Excess Securities (through a gift, devise
or other transaction), a price per share equal to the Market Price for the
shares of the Excess Securities on the date of the purported Transfer that
resulted in the Excess Securities), or (ii) the price per share for the Excess
Securities received by the Trust from the sale or other disposition of the
Excess Securities to the new owner.
If any of the foregoing restrictions on transfer of Excess Securities
are determined to be void, invalid or unenforceable by any court of competent
jurisdiction, then the Purported Transferee may be deemed, at the option of the
Corporation, to have acted as an agent of the Corporation in acquiring such
Excess Securities and to hold such Excess Securities on behalf of the
Corporation.
Section 10. Information for Corporation. Until the Restriction
---------------------------
Termination Date:
10
<PAGE>
(A) Every record owner of more than 5.0% (during any period in which
the number of stockholders of record is 2,000 or more) or 1% (during any period
in which the number of stockholders of record is greater than 200 but less than
2,000) or 1/2% (during any period in which the number of stockholders is 200 or
less) of the number or value of the outstanding shares of Capital Stock of the
Corporation shall, within 30 days after December 31 of each year, give written
notice to the Corporation stating the name and address of such record owner, the
number of shares Beneficially Owned, and a description of how such shares are
held. Each such record owner shall also provide to the Corporation such
additional information as the Corporation may reasonably request in order to
determine the effect, if any, of such Beneficial Ownership on the Corporation's
status as a REIT.
(B) Each Person who is a Beneficial Owner of Capital Stock and each
Person (including the stockholder of record) who is holding Capital Stock for a
Beneficial Owner shall provide to the Corporation such information that the
Corporation may reasonably request in order to determine the Corporation's
status as a REIT, to comply with the requirements of any taxing authority or
governmental agency, or to determine any such compliance.
Section 11. Increase in Ownership Limit. The Board of Directors may
---------------------------
from time to time increase or decrease the Ownership Limit; provided, however,
-------- -------
that:
(A) Any decrease may be made prospectively as to subsequent holders
(other than a decrease as a result of a retroactive change in existing law, in
which case such decrease shall be effective immediately);
(B) The Ownership Limit may not be increased if, after giving effect
to such increase, five Beneficial Owners of Common Stock could Beneficially Own,
in the aggregate, more than 50.0% in value of the shares of Capital Stock then
outstanding; and
(C) Prior to the modification of the Ownership Limit the Board of
Directors of the Corporation may require such opinions of counsel, affidavits,
undertakings or agreements as it may deem necessary or advisable in order to
determine or ensure the Corporation's status as a REIT.
Section 12. Waivers by Board. The Board of Directors, upon receipt
----------------
of a ruling from the Internal Revenue Service or an opinion of counsel or other
evidence satisfactory to the Board of Directors and upon at least 15 days
written notice from a transferee prior to the proposed Transfer which, if
consummated, would result in the intended transferee owning shares in excess of
the Ownership Limit and upon such other conditions as the Board of Directors may
direct, may waive the Ownership Limit with respect to such transferee.
Section 13. Legend. All certificates for shares of Capital Stock
------
shall bear a legend referencing the restrictions on ownership and transfer as
set forth in these Articles of Incorporation.
11
<PAGE>
Section 14. Other Action by Board. Subject to Section 2(F) of this
---------------------
Article XI, nothing contained in this Article XI shall limit the authority of
the Board of Directors to take such other action as it deems necessary or
advisable to preserve the Corporation's status as a REIT.
Section 15. Ambiguities. Subject to Section 2(F) of this Article XI,
-----------
in the case of an ambiguity in the application of any of the provisions of this
Article XI, including any definition contained in Section 1, the Board of
Directors shall have the power to determine the application of the provisions of
this Article XI with respect to any situation based on the facts known to it.
Section 16. Severability. If any provisions of this Article XI or
------------
any application of any such provision is determined to be void, invalid or
unenforceable by any court having jurisdiction over the issue, the validity and
enforceability of the remaining provisions shall be affected only to the extent
necessary to comply with the determination of such court.
ARTICLE XII
The Corporation hereby expressly elects not to be governed by the
provisions of Section 3-602 of the Maryland General Corporation Law.
ARTICLE XIII
Notwithstanding any provision of law requiring the authorization of
any action by a greater proportion than a majority of the total number of shares
of all classes of capital stock or of the total number of shares of any class of
capital stock, such action shall be valid and effective if authorized by the
affirmative vote of the holders of a majority of the total number of shares of
all classes outstanding and entitled to vote thereon, except as otherwise
provided in the charter.
ARTICLE XIV
The Board of Directors is hereby empowered to authorize the issuance
from time to time of shares of its stock of any class, whether now or hereafter
authorized, or securities convertible into shares of its stock of any class or
classes, whether now or hereafter authorized, for such consideration as may be
deemed advisable by the Board of Directors and without any action by the
stockholders.
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<PAGE>
ARTICLE XV
The Corporation reserves the right from time to time to make any
amendments of its charter which may now or hereafter be authorized by law,
including any amendments changing the terms or contract rights, as expressly set
forth in its charter, or any of its outstanding stock by classification,
reclassification or otherwise.
ARTICLE XVI
The enumeration and definition of particular powers of the Board of
Directors included in the foregoing Articles shall in no way be limited or
restricted by reference to or inference from the terms of any other Article of
the charter of the Corporation, or construed as or deemed by inference or
otherwise in any manner to exclude or limit any powers conferred upon the Board
of Directors under the General Laws of the State of Maryland now or hereafter in
force.
ARTICLE XVII
The duration of the Corporation shall be perpetual.
IN WITNESS WHEREOF, I have signed these Articles of Incorporation and
hereby acknowledge the same to be my act.
Dated the 25 day of November, 1996.
/S/ Jacqueline D. Andersen
---------------------------
Jacqueline D. Andersen
13
<PAGE>
EXHIBIT 3.2
ARTICLES OF AMENDMENT AND RESTATEMENT
-------------------------------------
OF
--
ANNALY MORTGAGE MANAGEMENT, INC.
--------------------------------
ANNALY MORTGAGE MANAGEMENT, INC., a Maryland corporation, having its
principal office at The Corporation Trust Incorporated, 32 South Street,
Baltimore, Maryland 21202 (hereinafter referred to as the "Corporation"),
hereby certifies to the State Department of Assessments and Taxation of Maryland
that:
FIRST: The Corporation desires to amend and restate its charter as
-----
currently in effect and as hereinafter amended.
SECOND: The following provisions are all the provisions of the charter
------
currently in effect and as hereinafter amended:
ARTICLE I
The undersigned, Jacqueline D. Andersen, whose address is 32 South Street,
Baltimore, Maryland 21202, being at least eighteen (18) years of age, does
hereby act as an incorporator, under and by virtue of the General Laws of the
State of Maryland authorizing the formation of corporations, and with the
intention of forming a corporation, does hereby form a corporation under the
General Laws of the State of Maryland.
ARTICLE II
The name of the corporation (which is hereinafter called the "Corporation")
is:
Annaly Mortgage Management, Inc.
ARTICLE III
The purpose for which the Corporation is formed is to transact any or all
lawful business, not required to be specifically stated in these Articles, for
which corporations may be incorporated under the Maryland General Corporation
Law, as amended from time to time.
<PAGE>
ARTICLE IV
The present address of the principal office of the Corporation in the State
of Maryland is:
The Corporation Trust Incorporated
32 South Street
Baltimore, Maryland 21202
ARTICLE V
The name and address of the resident agent of the Corporation in the
State of Maryland are:
The Corporation Trust Incorporated
32 South Street
Baltimore, Maryland 21202
Said resident agent is a Maryland corporation actually residing in the State of
Maryland.
ARTICLE VI
A. The total number of shares of stock of all classes which the
Corporation has authority to issue is one hundred million (100,000,000) shares
of capital stock, par value one cent ($0.01) per share, amounting in aggregate
par value to one million dollars ($1,000,000). All of such shares are initially
classified as "Common Stock." The Board of Directors may classify and
reclassify any unissued shares of Common Stock by setting or changing in any one
or more respects the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications or terms or conditions
of redemption of such shares of stock.
B. The following is a description of the preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption of the Common Stock of the
Corporation.
(1) Each share of Common Stock shall have one vote, and, except as
otherwise provided in respect of any class of capital stock hereafter classified
or reclassified, the exclusive voting power for all purposes shall be vested in
the holders of the Common Stock.
(2) Subject to the provisions of law and any preferences of any class
of capital stock hereafter classified or reclassified, dividends, including
dividends payable in shares
2
<PAGE>
of the Corporation's stock, may be paid on the Common Stock of the Corporation
at such time and in such amounts as the Board of Directors may deem advisable.
(3) In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the holders of the Common Stock
shall be entitled, after payment or provision for payment of the debts and other
liabilities of the Corporation and the amount to which the holders of any class
of capital stock hereafter classified or reclassified having a preference on
distributions in the liquidation, dissolution or winding up of the Corporation,
shall be entitled, together with the holders of any other class of capital stock
hereafter classified or reclassified not having a preference on distributions in
the liquidation, dissolution or winding up of the Corporation, to share ratably
in the remaining net assets of the Corporation.
C. Subject to the foregoing, the power of the Board of Directors to
classify and reclassify any of the shares of capital stock shall include,
without limitation, subject to the provisions of the charter, authority to
classify or reclassify any unissued shares of such capital stock into a class or
classes of preferred stock, preference stock, special stock, or other stock, and
to divide and classify shares of any class into one or more series of such
class, by determining, fixing or altering one or more of the following:
(1) The distinctive designation of such class or series and the number
of shares to constitute such class or series; provided that, unless otherwise
prohibited by the terms of such or any other class or series, the number of
shares of any class or series may be decreased by the Board of Directors in
connection with any classification or reclassification of unissued shares and
the number of shares of such class or series may be increased by the Board of
Directors in connection with any such classification or reclassification, and
any shares of any class or series which have been redeemed, purchased, otherwise
acquired or converted into shares of Common Stock or any other class or series
shall become part of the authorized capital stock and be subject to
classification and reclassification as provided in this subparagraph.
(2) Whether or not and, if so, the rates, amounts and times at which,
and the conditions under which, dividends shall be payable on shares of such
class or series, whether any such dividends shall rank senior or junior to or on
a parity with the dividends payable on any other class or series of capital
stock, and the status of any such dividends as cumulative, cumulative to a
limited extent or noncumulative and as participating or nonparticipating.
(3) Whether or not shares of such class or series shall have voting
rights in addition to any voting rights provided by law and, if so, the terms of
such voting rights.
(4) Whether or not shares of such class or series shall have
conversion or exchange privileges and, if so, the terms and conditions thereof,
including provision for
3
<PAGE>
adjustment of the conversion or exchange rate in such events or at such times as
the Board of Directors shall determine.
(5) Whether or not shares of such class or series shall be subject to
redemption and, if so, the terms and conditions of such redemption, including
the date or dates upon or after which they shall be redeemable and the amount
per share payable in case of redemption, which amount may vary under different
conditions and at different redemption dates; and whether or not there shall be
any sinking fund or purchase account in respect thereof, and if so, the terms
thereof.
(6) The rights of the holders of shares of such class or series upon
the liquidation, dissolution or winding up of the affairs of, or upon any
distribution of the assets of, the Corporation, which rights may vary depending
upon whether such liquidation, dissolution or winding up is voluntary or
involuntary and, if voluntary, may vary at different dates, and whether such
rights shall rank senior or junior to or on a parity with such rights of any
other class or series of capital stock.
(7) Whether or not there shall be any limitations applicable, while
shares of such class or series are outstanding, upon the payment of dividends or
making of distributions on, or the acquisition of, or the use of moneys for
purchase or redemption of, any capital stock of the Corporation, or upon any
other action of the Corporation, including action under this subparagraph, and,
if so, the terms and conditions thereof.
(8) Any other preferences, rights, restrictions, including
restrictions on transferability, and qualifications of shares of such class or
series, not inconsistent with law and the Charter.
D. For the purposes hereof and of any Articles Supplementary hereto
providing for the classification or reclassification of any shares of capital
stock or of any other charter document of the Corporation (unless otherwise
provided in any such Articles or document), any class or series of capital stock
of the Corporation shall be deemed to rank:
(1) prior to another class or series either as to dividends or upon
liquidation, if the holders of such class or series shall be entitled to the
receipt of dividends or of amounts distributable on liquidation, dissolution or
winding up, as the case may be, in preference or priority to holders of such
other class or series;
(2) on a parity with another class or series either as to dividends or
upon liquidation, whether or not the dividend rates, dividend payment dates or
redemption or liquidation price per share thereof be different from those of
such others, if the holders of such class or series of stock shall be entitled
to receipt of dividends or amounts distributable upon liquidation, dissolution
or winding up, as the case may be, in proportion to their respective
4
<PAGE>
dividend rates or redemption or liquidation prices, without preference or
priority over the holders of such other class or series; and
(3) junior to another class or series either as to dividends or upon
liquidation, if the rights of the holders of such class or series shall be
subject or subordinate to the rights of the holders of such other class or
series in respect of the receipt of dividends or the amounts distributable upon
liquidation, dissolution or winding up, as the case may be.
ARTICLE VII
The number of Directors of the Corporation shall be three (3), which
number may be increased or decreased pursuant to the by-laws of the Corporation,
but shall never be less than the minimum number permitted by the General Laws of
the State of Maryland now or hereafter in force. The names of the directors who
shall act until the first annual meeting or until their successors are duly
chosen and qualified are:
Michael A. J. Farrell
Timothy J. Guba
Wellington J. St. Claire
ARTICLE VIII
Except as may otherwise be provided by the Board of Directors of the
Corporation, no holder of any shares of the stock of the Corporation shall have
any preemptive or preferential right to purchase, subscribe for, or otherwise
acquire any shares of stock of the Corporation of any class now or hereafter
authorized, or any securities exchangeable for or convertible into such shares,
or any warrants or other instruments evidencing rights or options to subscribe
for, purchase or otherwise acquire such shares.
ARTICLE IX
The Corporation shall indemnify (A) its directors and officers,
whether serving the Corporation or at its request any other entity, to the full
extent required or permitted by the General Laws of the State of Maryland now or
hereafter in force, including the advance of expenses under the procedures and
to the full extent permitted by law and (B) other employees and agents to such
extent as shall be authorized by the Board of Directors or the Corporation's By-
Laws and be permitted by law. The foregoing rights of indemnification shall not
be exclusive of any other rights to which those seeking indemnification may be
entitled. The Board of Directors may take such action as is necessary to carry
out these indemnification provisions and is expressly empowered to adopt,
approve and amend from time to time such By-Laws,
5
<PAGE>
resolutions or contracts implementing such provisions or such further
indemnification arrangements as may be permitted by law. No amendment of the
charter of the Corporation or repeal of any of its provisions shall limit or
eliminate the right to indemnification provided hereunder with respect to acts
or omissions occurring prior to such amendment or repeal.
ARTICLE X
To the fullest extent permitted by Maryland statutory or decisional
law, as amended or interpreted, no director or officer of this Corporation shall
be personally liable to the Corporation or its stockholders for money damages.
No amendment of the Charter of the Corporation or repeal of any of its
provisions shall limit or eliminate the benefits provided to directors and
officers under this provision with respect to any act or omission which occurred
prior to such amendment or repeal.
ARTICLE XI
Section 1. Definitions. For the purposes of this Article XI, the
-----------
following terms shall have the following meanings:
"Beneficial Ownership" shall mean ownership of Capital Stock by a
Person either directly or constructively through the application of section 544
of the Code, as modified by sections 856(h)(l)(B) and 856(h)(3)(A) of the Code
and determined without respect to whether such ownership has the effect of
meeting the stock ownership requirement of section 542(a)(2) of the Code. The
terms "Beneficial Owner," "Beneficially Owning," "Beneficially Own" and
"Beneficially Owned" shall have the correlative meanings.
"Beneficiary" shall mean the beneficiary of the Trust as
determined pursuant to Section 9 of this Article XI.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Capital Stock" shall mean stock that is either Common Stock,
Preferred Stock or any other class of capital stock of the Corporation
classified or reclassified pursuant to Article VI or this Article XI.
"Excess Securities" shall have the meaning set forth in Section 4
of this Article XI.
"Initial Offering" shall mean the first offering by the Company
involving the issuance and sale of not less than 3,000,000 shares of Common
Stock, whether or not such offering is pursuant to a registration statement
under the Securities Act of 1933, as amended.
6
<PAGE>
"Initial Public Offering" shall mean the sale of shares of Common
Stock pursuant to the Corporation's first effective registration statement for
such Common Stock filed under the Securities Act of 1933, as amended.
"Market Price" for any class of Capital Stock shall mean the last
reported sales price reported on the New York Stock Exchange of such Capital
Stock, on the trading day immediately preceding the relevant date, or if not
then traded on the New York Stock Exchange, the last reported sales price of
such Capital Stock on the trading day immediately preceding the relevant date as
reported on any exchange or quotation system over which such Capital Stock may
be traded, or if not then traded over any exchange or quotation system, then the
market price of the Capital Stock on the relevant date as determined in good
faith by the Board of Directors of the Corporation.
"NYSE" shall mean the New York Stock Exchange.
"Ownership Limit" shall mean the Beneficial Ownership of 9.8%, in
number of shares or value, of each class of outstanding Capital Stock of the
Corporation, and after adjustment as set forth in Section 11 of this Article XI,
shall mean such greater or lesser percentage of the outstanding Capital Stock as
so adjusted. The number and value of shares of the outstanding Capital Stock of
the Corporation shall be determined by the Board of Directors in good faith,
which determination shall be conclusive for all purposes hereof.
"Person" shall mean an individual, corporation, partnership, estate,
trust (including a trust qualified under section 401(a) or 501(c)(17) of the
Code), a portion of a trust permanently set aside for or to be used exclusively
for the purposes described in section 642(c) of the Code, association, private
foundation within the meaning of section 509(a) of the Code, joint stock company
or other entity; but does not include an underwriter which participated in a
public offering or private placement of Capital Stock for a period of 90 days
following the purchase by such underwriter of such Capital Stock.
"Purported Transferee" shall mean, with respect to any purported
Transfer which results in Excess Securities, the purported transferee who would
have acquired shares of Capital Stock, if such Transfer had been valid under
Section 2 of this Article XI.
"REIT" shall mean a real estate investment trust as defined under
section 856 of the Code.
"Restriction Termination Date" shall mean the first day of the taxable
year as to which the Board of Directors of the Corporation determines that it is
no longer in the best interests of the Corporation to attempt to, or continue
to, qualify as a REIT.
"Transfer" shall mean any sale, transfer, gift, assignment, devise or
other disposition of Capital Stock (including (a) the granting of any option or
entering into any
7
<PAGE>
agreement for the sale, transfer or other disposition of Capital Stock, (b) the
sale, transfer, assignment or other disposition of any securities or rights
convertible into or exchangeable for Capital Stock, but excluding the actual
conversion or exchange of such securities or rights into Capital Stock and (c)
any transfer or other disposition of any interest in Capital Stock as a result
of a change in the martial status of the holder thereof), whether voluntary or
involuntary, whether of record or beneficially and whether by operation of law
or otherwise. The terms "Transfers" and "Transferred" shall have the
correlative meanings.
"Trust" shall mean the trust created pursuant to Section 6 of
this Article XI.
"Trustee" shall mean a banking institution designated by the
Corporation as trustee for the Trust that is unaffiliated with either the
Corporation or the Purported Transferee.
Section 2. Ownership Limitation.
--------------------
(A) Except as provided in Section 12 of this Article XI, from the
earlier of (x) the date of the Initial Offering or (y) January 1, 1998, and
until the Restriction Termination Date, no Person shall Beneficially Own any
class of shares of the outstanding Capital Stock in excess of the Ownership
Limit.
(B) Except as provided in Section 12 of this Article XI, from the
earlier of (x) the date of the Initial Offering or (y) January 1, 1998, and
until the Restriction Termination Date, any Transfer that, if effective, would
result in any Person Beneficially Owning any class of Capital Stock in excess of
the Ownership Limit shall be void ab initio as to the Transfer of such shares of
Capital Stock representing Beneficial Ownership of shares of any class of
Capital Stock in excess of the Ownership Limit; and the intended transferee
shall acquire no rights in such shares of Capital Stock.
(C) From the earlier of (x) the date of the Initial Public Offering
or (y) January 1, 1998, and until the Restriction Termination Date, any Transfer
that, if effective, would result in the Capital Stock being beneficially owned
(as provided in section 856(a) of the Code) by less than 100 Persons (determined
without reference to any rules of attribution) shall be void ab initio as to the
Transfer of such shares of Capital Stock which would be otherwise beneficially
owned (as provided in section 856(a) of the Code) by the intended transferee;
and the intended transferee shall acquire no rights in such shares of Capital
Stock.
(D) From the earlier of (x) the date of the Initial Offering or (y)
January 1, 1998, and until the Restriction Termination Date, any Transfer that,
if effective, would result in the Corporation being "closely held" within the
meaning of section 856(h) of the Code shall be void ab initio as to the Transfer
of such shares of Capital Stock which would cause the
8
<PAGE>
Corporation to be "closely held" within the meaning of section 856(h) of the
Code; and the intended transferee shall acquire no rights in such shares of
Capital Stock.
(E) Until the Restriction Termination Date, any Transfer that, if
effective, would result in disqualification of the Corporation as a REIT shall
be void ab initio as to the Transfer of such shares of Capital Stock; and the
intended transferee shall acquire no rights in such shares of Capital Stock.
(F) Nothing contained herein shall impair the settlement of
transactions entered into on the facilities of the NYSE or any other exchange or
quotation system on which shares of Capital Stock are traded.
Section 3. Prevention of Transfer. If the Board of Directors or
----------------------
its designee shall at any time determine in good faith that a purported Transfer
has taken place in violation of Section 2 of this Article XI (whether or not
such Transfer is a result of a transaction entered into through the facilities
of the NYSE or any other exchange or quotation system on which shares of Capital
Stock are traded) or that a Person intends to acquire or Transfer or has
attempted to acquire or Transfer Beneficial Ownership of Capital Stock of the
Corporation in violation of Section 2, the Board of Directors or its designee
shall take such action as it deems advisable to refuse to give effect to or to
prevent such Transfer, including, but not limited to, refusing to give effect to
such Transfer on the books of the Corporation or instituting proceedings to
enjoin such Transfer; provided, however, that any purported Transfers in
-------- -------
violation of this Article XI shall automatically result in the designation and
treatment described in this Article XI, irrespective of any action (or non-
action) by the Board of Directors.
Section 4. Excess Securities. If at any time after the earlier of
-----------------
(x) the date of the Initial Offering or (y) January 1, 1998 and before the
Restriction Termination Date there is a purported Transfer or other change in
the capital structure of the Corporation such that (x) any Person would
Beneficially Own Capital Stock in excess of the applicable Ownership Limit and
(y) any provision of Section 2 of this Article XI or any application of such
provision is determined to be void, invalid, or unenforceable by any court
having jurisdiction over the issue, then, except as otherwise provided in
Section 12 of this Article XI, such shares of Capital Stock representing
Beneficial Ownership of shares of Capital Stock in excess of such Ownership
Limit (rounded up to the nearest whole share) shall constitute "Excess
Securities" and be treated as provided in this Article XI. Such designation and
treatment shall be effective as of the close of business on the business day
prior to the date of the purported Transfer or change in capital structure;
provided, however, subject to the provisions of Section 12, shares of Capital
- -------- -------
Stock held by an underwriter in a public offering or private placement of
shares, or in a transaction involving the issuance of shares by the Corporation
in which the Board of Directors determines that the underwriter or other person
or party initially acquiring such shares will make a timely distribution of such
shares to or among other holders such that, following such distribution, none of
such securities will be Excess Securities, shall not constitute Excess
Securities.
9
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Section 5. Notice to Corporation. Any Person who acquires shares of
---------------------
Capital Stock in violation of Section 2 of this Article XI, or any Person who is
a Purported Transferee such that Excess Securities results under Section 4 of
this Article XI, shall immediately give written notice or, in the event of a
proposed or attempted Transfer that would violate Section 2 of this Article XI,
give at least 15 days prior written notice to the Corporation of such event and
shall provide to the Corporation such other information as the Corporation may
request in order to determine the effect, if any, of such Transfer on the
Corporation's status as a REIT.
Section 6. Trust for Excess Securities. All Excess Securities shall
---------------------------
be transferred by operation of law to the Trustee of a Trust for the benefit of
such Beneficiary or Beneficiaries to whom an interest in such Excess Securities
may later be transferred pursuant to Section 9 of this Article XI. Excess
Securities that constitute Capital Stock so held in trust shall be issued and
outstanding stock of the Corporation. The Purported Transferee shall have no
rights in any Excess Securities.
Section 7. No Distribution for Excess Securities. The Trustee, as
-------------------------------------
holder of Excess Securities, shall pay any distributions (including dividends or
distributions upon liquidation, dissolution or winding up) to the Beneficiary.
Any dividend or distribution paid prior to the discovery by the Corporation that
the shares of Capital Stock have been purportedly Transferred so as to be deemed
Excess Securities shall be paid to the Trust for the exclusive benefit of the
Beneficiary.
Section 8. No Voting or Exercise Rights for Excess Securities. The
--------------------------------------------------
Trustee, as holder of Excess Securities, shall not be entitled to vote on any
matter and shall not be entitled to exercise or convert any such securities into
shares of Capital Stock.
Section 9. Transfer of Excess Securities. The Trustee shall
-----------------------------
designate as beneficiary an organization described in sections 170(b)(1)(A) or
170(c) of the Code (a "Beneficiary") of an interest in the Trust (representing
the number of shares (as the case may be) of Excess Securities held by the Trust
attributable to a purported Transfer that resulted in the Excess Securities),
provided, the Excess Securities held in the Trust would not be Excess Securities
in the hands of such Beneficiary. The Trust may transfer shares of Excess
Securities if such shares of Capital Stock do not constitute Excess Securities
in the hands of the new owner. Upon such a transfer, the Purported Transferee
shall receive a price for such Excess Securities equal to the lesser of (i) the
price per share such Purported Transferee paid for the Capital Stock in the
purported Transfer that resulted in the Excess Securities (or, if the Purported
Transferee did not give value for such Excess Securities (through a gift, devise
or other transaction), a price per share equal to the Market Price for the
shares of the Excess Securities on the date of the purported Transfer that
resulted in the Excess Securities), or (ii) the price per share for the Excess
Securities received by the Trust from the sale or other disposition of the
Excess Securities to the new owner.
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<PAGE>
If any of the foregoing restrictions on transfer of Excess Securities
are determined to be void, invalid or unenforceable by any court of competent
jurisdiction, then the Purported Transferee may be deemed, at the option of the
Corporation, to have acted as an agent of the Corporation in acquiring such
Excess Securities and to hold such Excess Securities on behalf of the
Corporation.
Section 10. Information for Corporation. Until the Restriction
---------------------------
Termination Date:
(A) Every record owner of more than 5.0% (during any period in which
the number of stockholders of record is 2,000 or more) or 1% (during any period
in which the number of stockholders of record is greater than 200 but less than
2,000) or 1/2% (during any period in which the number of stockholders is 200 or
less) of the number or value of the outstanding shares of Capital Stock of the
Corporation shall, within 30 days after December 31 of each year, give written
notice to the Corporation stating the name and address of such record owner, the
number of shares Beneficially Owned, and a description of how such shares are
held. Each such record owner shall also provide to the Corporation such
additional information as the Corporation may reasonably request in order to
determine the effect, if any, of such Beneficial Ownership on the Corporation's
status as a REIT.
(B) Each Person who is a Beneficial Owner of Capital Stock and each
Person (including the stockholder of record) who is holding Capital Stock for a
Beneficial Owner shall provide to the Corporation such information that the
Corporation may reasonably request in order to determine the Corporation's
status as a REIT, to comply with the requirements of any taxing authority or
governmental agency, or to determine any such compliance.
Section 11. Increase in Ownership Limit. The Board of Directors may
---------------------------
from time to time increase or decrease the Ownership Limit; provided, however,
-------- -------
that:
(A) Any decrease may be made prospectively as to subsequent holders
(other than a decrease as a result of a retroactive change in existing law, in
which case such decrease shall be effective immediately);
(B) The Ownership Limit may not be increased if, after giving effect
to such increase, five Beneficial Owners of Common Stock could Beneficially Own,
in the aggregate, more than 50.0% in value of the shares of Capital Stock then
outstanding; and
(C) Prior to the modification of the Ownership Limit the Board of
Directors of the Corporation may require such opinions of counsel, affidavits,
undertakings or agreements as it may deem necessary or advisable in order to
determine or ensure the Corporation's status as a REIT.
Section 12. Waivers by Board. The Board of Directors, upon receipt
----------------
of a ruling from the Internal Revenue Service or an opinion of its tax advisor
or other documents or
11
<PAGE>
evidence satisfactory to the Board of Directors and upon such other conditions
as the Board of Directors may direct, may waive the Ownership Limit with respect
to an intended transferee in connection with a proposed Transfer which, if
consummated, would result in such intended transferee owning shares in excess of
the Ownership Limit. The Board may require written notice from a transferee
such number of days prior to the proposed Transfer as the Board may determine in
its discretion.
Section 13. Legend. All certificates for shares of Capital Stock
------
shall bear a legend referencing the restrictions on ownership and transfer as
set forth in these Articles of Incorporation.
Section 14. Other Action by Board. Subject to Section 2(F) of this
---------------------
Article XI, nothing contained in this Article XI shall limit the authority of
the Board of Directors to take such other action as it deems necessary or
advisable to preserve the Corporation's status as a REIT.
Section 15. Ambiguities. Subject to Section 2(F) of this Article XI,
-----------
in the case of an ambiguity in the application of any of the provisions of this
Article XI, including any definition contained in Section 1, the Board of
Directors shall have the power to determine the application of the provisions of
this Article XI with respect to any situation based on the facts known to it.
Section 16. Severability. If any provisions of this Article XI or
------------
any application of any such provision is determined to be void, invalid or
unenforceable by any court having jurisdiction over the issue, the validity and
enforceability of the remaining provisions shall be affected only to the extent
necessary to comply with the determination of such court.
ARTICLE XII
The Corporation hereby expressly elects not to be governed by the
provisions of Section 3-602 of the Maryland General Corporation Law.
ARTICLE XIII
Notwithstanding any provision of law requiring the authorization of
any action by a greater proportion than a majority of the total number of shares
of all classes of capital stock or of the total number of shares of any class of
capital stock, such action shall be valid and effective if authorized by the
affirmative vote of the holders of a majority of the total number of shares of
all classes outstanding and entitled to vote thereon, except as otherwise
provided in the charter.
12
<PAGE>
ARTICLE XIV
The Board of Directors is hereby empowered to authorize the issuance
from time to time of shares of its stock of any class, whether now or hereafter
authorized, or securities convertible into shares of its stock of any class or
classes, whether now or hereafter authorized, for such consideration as may be
deemed advisable by the Board of Directors and without any action by the
stockholders.
ARTICLE XV
The Corporation reserves the right from time to time to make any
amendments of its charter which may now or hereafter be authorized by law,
including any amendments changing the terms or contract rights, as expressly set
forth in its charter, or any of its outstanding stock by classification,
reclassification or otherwise.
ARTICLE XVI
The enumeration and definition of particular powers of the Board of
Directors included in the foregoing Articles shall in no way be limited or
restricted by reference to or inference from the terms of any other Article of
the charter of the Corporation, or construed as or deemed by inference or
otherwise in any manner to exclude or limit any powers conferred upon the Board
of Directors under the General Laws of the State of Maryland now or hereafter in
force.
ARTICLE XVII
The duration of the Corporation shall be perpetual.
THIRD: The amendment to and restatement of the charter of the
-----
Corporation as hereinabove set forth has been duly advised by the Board of
Directors and approved by the stockholders of the Corporation as required by
law.
FOURTH: The amendment and restatement of the charter of the
------
Corporation does not increase the authorized stock of the Corporation.
13
<PAGE>
FIFTH: The undersigned President acknowledges these Articles of
-----
Amendment and Restatement to be the corporate act of the corporation and as to
all matters or facts required to be verified under oath, the undersigned
President acknowledges that to the best of his knowledge, information and
belief, these matters and facts are true in all material respects and that this
statement is made under the penalties for perjury.
IN WITNESS WHEREOF, the Corporation has caused these Articles to be
signed in its name and on its behalf by its President and attested by its
Secretary on this 30th day of January, 1997.
ATTEST ANNALY MORTGAGE MANAGEMENT, INC
/s/ Jennifer A. Stephens By: /s/ Timothy J. Guba
-------------------------- ------------------------
Name: Jennifer A. Stephens Name: Timothy J. Guba
Title: Secretary Title: President
14
<PAGE>
EXHIBIT 3.3
BYLAWS
OF
ANNALY MORTGAGE MANAGEMENT, INC.
ARTICLE I
---------
SEAL
----
The Board of Directors may provide a suitable seal for the
Corporation, which may be either facsimile or any other form of seal and shall
remain in the custody of the Secretary. If the Board of Directors so provides,
it shall be affixed to all certificates of the Corporation's stock and to other
instruments requiring a seal. If the Corporation is required to place its
corporate seal to a document, it is sufficient to meet the requirement of any
law, rule, or regulation relating to a corporate seal to place the word "Seal"
adjacent to the signature of the person authorized to sign the document on
behalf of the Corporation.
ARTICLE II
----------
STOCK
-----
SECTION 1. Certificates. Each stockholder shall be entitled to
------------
a certificate or certificates which shall represent and certify the number and
kind and class of shares owned by it in the Corporation. Each certificate shall
be signed by the Chairman of the Board or the President or a Vice President and
countersigned by the Secretary or an assistant secretary or the Treasurer or an
assistant treasurer.
The signatures may be either manual or facsimile signatures. In case
any officer who has signed any certificate ceases to be an officer of the
Corporation before the certificate is issued, the certificate may nevertheless
be issued by the Corporation with the same effect as if the officer had not
ceased to be such officer as of the date of its issue. Each stock certificate
shall include on its face the name of the Corporation, the name of the
stockholder and the class of stock and number of shares represented by the
certificate. If the Corporation has authority to issue stock of more than one
class, the stock certificate shall contain on its face or back a full statement
or summary of the designations and any preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends, qualifications and
terms and conditions of redemption of the stock of each class which the
Corporation is authorized to issue and if the Corporation is authorized to issue
any preferred or special class in series, the differences in the relative rights
and preferences between the shares of each series to the extent they have been
set,
<PAGE>
and the authority of the Board of Directors to set the relative rights and
preferences of subsequent series. In lieu of such full statement or summary,
there may be set forth upon the face or back of the certificate a statement that
the Corporation will furnish to any stockholder upon request and without charge,
a full statement or summary of such information. Every stock certificate
representing shares of stock which are restricted as to transferability by the
Corporation shall contain a full statement of the restriction or state that the
Corporation will furnish information about the restriction to the stockholder on
request and without charge. A stock certificate may not be issued until the
stock represented by it is fully paid, except in the case of stock purchased
under an option plan as permitted by law.
SECTION 2. Lost Certificates. The Board of Directors may order a
-----------------
new certificate or certificates of stock to be issued in place of any
certificates shown to have been lost or destroyed under such terms and
conditions as to it may seem reasonable. When authorizing such issue of a new
certificate or certificates, the Board of Directors may, in its discretion and
as a condition precedent to the issuance thereof, require the owner of such
stolen, lost or destroyed certificate or certificates, or his legal
representative, to advertise the same in such manner as it shall require and/or
to give the Corporation a bond, with sufficient surety to the Corporation to
indemnify it against any loss or claim which may arise by reason of the issuance
of a new certificate.
SECTION 3. Transfer Agents and Registrars. At such time as the
------------------------------
Corporation lists its securities on a national securities exchange or NASDAQ,
the Board of Directors shall appoint one or more banks or trust companies in
such city or cities as the Board of Directors may deem advisable, from time to
time, to act as transfer agents and/or registrars of the shares of stock of the
Corporation; and, upon such appointments being made, no certificate representing
shares shall be valid until countersigned by one of such transfer agents and
registered by one of such registrars.
SECTION 4. Transfer of Stock. No transfers of shares of stock of
the Corporation shall be made if (i) void ab initio pursuant to any Article of
-- ------
the Corporation's Articles of Incorporation, or (ii) the Board of Directors,
pursuant to such Articles, shall have refused to transfer such shares. Permitted
transfers of shares of stock of the Corporation shall be made on the stock
records of the Corporation only upon the instruction of the registered holder
thereof, or by his attorney thereunto authorized by power of attorney duly
executed and filed with the Secretary or with a transfer agent or transfer
clerk, and upon surrender of the certificate or certificates, if issued, for
such shares properly endorsed or accompanied by a duly executed stock transfer
power and the payment of all taxes thereon. Upon surrender to the Corporation or
the transfer agent of the Corporation of a certificate for shares duly endorsed
or accompanied by proper evidence of succession, assignment or authority to
transfer, as to any transfers not prohibited by such Article of the Articles of
Incorporation or by action of the Board of Directors thereunder, it shall be the
duty of the Corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
2
<PAGE>
The Corporation shall refuse to register any transfer of shares not
made in accordance with any applicable provisions of Regulation S under the
Securities Act of 1933, as amended.
SECTION 5. Fixing of Record Dates. The Board of Directors may fix,
----------------------
in advance, a date as the record date for the purpose of determining
stockholders entitled to notice of, or to vote at, any meeting of stockholders,
or stockholders entitled to receive payment of any dividend or the allotment of
any rights, or in order to make a determination of stockholders for any other
proper purpose. Such date, in any case, shall be not more than ninety (90) days,
and in case of a meeting of stockholders, not less than ten (10) days prior to
the date on which the particular action requiring such determination of
stockholders is to be taken.
SECTION 6. Registered Stockholders. The Corporation shall be
-----------------------
entitled to recognize the exclusive right of a person registered on its books as
the owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments, if any, a person registered on its books as
the owner of shares, and shall not be bound to recognize any equitable or other
claim to or interest in such share or shares on the part of any other person,
whether or not it shall have express or other notice thereof, except as
otherwise provided by law or the Articles of Incorporation.
SECTION 7. Regulations. The Board of Directors may make such
-----------
additional rules and regulations, not inconsistent with the Bylaws, as it may
deem expedient concerning the issue, transfer and registration of certificates
for shares of stock of the Corporation.
ARTICLE III
-----------
STOCKHOLDERS' MEETING
---------------------
SECTION 1. Annual Meeting. The annual meeting of the stockholders
--------------
of the Corporation shall be held in each year at the principal office of the
Corporation or at such other place in the United States as the Board of
Directors or the President may determine, at a time and date determined by the
Board of Directors or the President, for the purpose of electing directors and
for the transaction of such other business as may lawfully be brought before the
meeting.
SECTION 2. Special Meetings. Special meetings of the stockholders
----------------
for any purpose or purposes may be called at any time by the President, by the
Chairman of the Board of Directors, by a majority of the Board of Directors, by
a majority of the Independent Directors (as defined in Section 1 of Article IV
hereof), or by stockholders entitled to cast at least twenty-five percent (25%)
of the votes which all stockholders are entitled to cast at the particular
meeting, addressed to the Secretary. Special meetings of the Stockholders shall
be called as may be required by law.
3
<PAGE>
SECTION 3. Notices. Notice of the annual meeting and of any special
-------
meeting of stockholders shall, at least ten days but not more than ninety days
prior to the date thereof, be given to each stockholder entitled to vote thereat
and each other stockholder entitled to notice of the meeting. Notice is given to
a stockholder when it is personally delivered to it, left at its residence or
usual place of business, or mailed to it at its address as it appears on the
records of the Corporation. Notwithstanding the foregoing provisions, each
person who is entitled to notice waives notice if, before or after the meeting,
such stockholder signs a waiver of notice which is filed with the records of the
stockholders' meeting, or is present at the meeting in person or by proxy. Every
notice of an annual meeting or a special meeting shall state the time and place
of the meeting. If the meeting is a special meeting or notice of the purpose or
purposes is required by statute, the notice shall also briefly state the purpose
or purposes thereof, and no business, other than that specified in such notice
and matters germane thereto, shall be transacted at the meeting without further
notice to stockholders not present in person or by proxy.
SECTION 4. Quorum; Manner of Acting and Adjournment. A majority of
----------------------------------------
the stock issued and outstanding and entitled to vote and represented by the
holders of record thereof in person or by proxy shall be requisite to constitute
a quorum at any meeting of stockholders, but less than such a majority may
adjourn the meeting from time to time, and at any such adjourned meeting, any
business may be transacted which might have been transacted if the meeting had
been held as originally called.
If a meeting cannot be organized because a quorum has not attended,
the stockholders entitled to vote and present in person or represented by proxy
may adjourn the meeting to such time and place as they may determine. At any
such adjourned meeting at which a quorum may be present, such business may be
transacted as might have been transacted at the meeting as originally called.
No notice of any adjourned meeting of the stockholders of the Corporation shall
be required to be given, except by announcement at the meeting, unless the
adjournment is for more than thirty (30) days or, after the adjournment, a new
record date is fixed for the adjourned meeting.
Except as otherwise specified in the Articles of Incorporation or
these Bylaws or provided by applicable law, the votes, at a duly organized
meeting of the stockholders present in person or by proxy and entitled to cast
at least a majority of the votes which all stockholders present in person or by
proxy are entitled to cast, shall be the acts of the stockholders.
SECTION 5. Organization. At every meeting of the stockholders, the
------------
Chairman of the Board, if there be one, shall conduct the meeting or, in the
case of vacancy in office or absence of the Chairman of the Board, one of the
following officers present shall conduct the meeting in the order stated: the
Vice Chairman of the Board, if there be one, the President, the Vice Presidents
in their order of rank and seniority, or a Chairman chosen by the stockholders
entitled to cast a majority of the votes which all stockholders present in
person or by proxy are entitled to cast, shall act as Chairman, and the
Secretary or, in his or her absence, an assistant
4
<PAGE>
secretary, or in the absence of both Secretary and assistant secretaries, a
person appointed by the Chairman, shall act as Secretary.
SECTION 6. Proxies. Any stockholder entitled to vote at a meeting
-------
of the stockholders may be represented and vote thereat by proxy, appointed by
an instrument in writing subscribed by such stockholder or by his duly
authorized attorney and submitted to the Secretary at or before such meeting.
SECTION 7. Voting. Each stockholder entitled to vote in accordance
------
with the terms and provisions of the Maryland General Corporation Law, the
Articles of Incorporation and these Bylaws, except the holder of shares which
have been called for redemption and with respect to which an irrevocable deposit
of funds has been made, shall be entitled to one vote, in person or by proxy,
for each share of stock entitled to vote held by such stockholder. Upon the
demand of any stockholder, the vote for directors and upon any question before
the meeting shall be by ballot.
SECTION 8. Voting Lists. The officer or agent of the Corporation
------------
having charge of the transfer books for shares of the Corporation shall make, at
least ten (10) days before each meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting or any adjournment thereof,
arranged in alphabetical order, with the address of and the number of shares
held by each, which list shall be kept on file at the registered office of the
Corporation or at the principal office or at the office of the transfer agent or
registrar of the Corporation, and shall be subject to inspection by any
stockholder at any time during usual business hours. Such list also shall be
produced and kept open at the time and place of the meeting and shall be subject
to the inspection of any stockholder during the whole time of the meeting. The
original share ledger or transfer book, or duplicate thereof, shall be prima
facie evidence as to who are the stockholders entitled to examine such list or
share ledger or transfer book, or to vote, in person or by proxy, at any meeting
of stockholders.
SECTION 9. Informal Action by Stockholders. Unless otherwise
-------------------------------
provided by law, any action required to be taken at a meeting of the
stockholders, or any other action which may be taken at a meeting of the
stockholders, may be taken without a meeting if a consent in writing, setting
forth the action so taken, shall be signed by all of the stockholders entitled
to vote with respect to the subject matter thereof.
ARTICLE IV
----------
DIRECTORS
---------
SECTION 1. Number, Classification, Election and Term. The affairs
-----------------------------------------
of the Corporation shall be under the direction and control of a Board of
Directors which shall be
5
<PAGE>
initially composed of three (3) members who shall hold office until its
successors are duly chosen and qualified. The number of directors shall be
increased or decreased from time to time by vote of a majority of the entire
Board of Directors; provided, however, that the number of directors may not
exceed fifteen (15) nor be less than three (3) except as permitted by law. A
director shall hold office until the next annual meeting and until his or her
successor shall be elected and shall qualify, subject, however, to prior death,
resignation, retirement, disqualification or removal from office.
At all times subsequent to the consummation of an Initial Offering (as
defined below), except in the case of a vacancy, a majority of the Board of
Directors shall be Independent Directors (as hereinafter defined). For the
purposes of these Bylaws, (i) "Initial Offering" shall mean an offering of
shares of stock of the Corporation resulting in proceeds to the Corporation of
not less than $5,000,000, whether or not such offering is pursuant to a
registration statement under the Securities Act of 1933, as amended, and (ii)
"Independent Director" shall mean a director of the Corporation who is not an
officer or employee of the Corporation, any subsidiary of the Corporation or
Fixed Income Discount Advisory Company. At the first annual meeting of
stockholders and at each annual meeting thereafter, the stockholders shall elect
directors to hold office until the next annual meeting or until their successors
are elected and qualify. Directors need not be stockholders in the Corporation.
SECTION 2. Function of Directors. The business and affairs of the
---------------------
Corporation shall be managed under the direction of the Board of Directors. All
the powers of the Corporation are vested in and shall be exercised by or under
the authority of the Board of Directors except as otherwise prescribed by
statute, by the Articles of Incorporation or by these Bylaws. If the entire
Board of Directors should become vacant, any stockholder may call a special
meeting and directors for the unexpired term may be elected at the said special
meeting in the same manner as provided for their election at annual meetings.
SECTION 3. Vacancies. Any vacancy occurring on the Board of
---------
Directors for any cause other than by reason of an increase in the number of
directors may, subject to the provisions of Section 5, be filled by a majority
of the remaining members of the Board of Directors, regardless of whether such
majority of the remaining members of the Board of Directors is less than a
quorum; provided, however, that if an Initial Offering has been consummated and,
in accordance with Section 1, a majority of the Board of Directors are required
to be Independent Directors, then Independent Directors shall nominate
replacements for vacancies among the Independent Directors, which replacements
must be elected by a majority of the directors, including a majority of the
Independent Directors. Any vacancy occurring by reason of an increase in the
number of directors may be filled by action of a majority of the entire Board of
Directors including, following an Initial Offering, a majority of the
Independent Directors. If the stockholders of any class or series are entitled
separately to elect one or more directors, a majority of the remaining directors
elected by that class or series or the sole remaining director elected by that
class or series may fill any vacancy among the number of directors elected by
that class or series. A director elected by the Board of Directors to fill a
vacancy shall be
6
<PAGE>
elected to hold office until the next annual meeting of stockholders or until
his successor is elected and qualified.
SECTION 4. Resignations. Any director or member of a committee may
------------
resign at any time. Such resignation shall be made in writing and shall take
effect at the time specified therein, or if no time be specified, at the time of
the receipt by the Chairman of the Board, the President or the Secretary.
Acceptance of a resignation shall not be necessary to make it effective.
SECTION 5. Removal. Unless statute or the Articles of Incorporation
-------
provide otherwise, at any meeting of stockholders duly called and at which a
quorum is present, the stockholders may, by the affirmative vote of the holders
of a majority of the votes entitled to be cast thereon, remove any director or
directors from office with or without cause, and may elect a successor or
successors to fill any resulting vacancies for the unexpired terms of removed
directors; provided, however, that at all times subsequent to the IPO Closing, a
majority of the Board of Directors shall be Independent Directors.
SECTION 6. Committees of the Board of Directors.
------------------------------------
The Board of Directors may appoint from among its members an executive committee
and other committees comprised of two (2) or more directors. A majority of the
members of any committee so appointed shall be Independent Directors. If the
Corporation lists its shares on a national securities exchange or on the
National Association of Securities Dealers, Inc.'s Automated Quotation System
("NASDAQ"), the Board of Directors shall appoint an audit committee comprised of
not less than two (2) members, all of whom are Independent Directors. The Board
of Directors may delegate to any committee any of the powers of the Board of
Directors except the power to elect directors, declare dividends or
distributions on stock, recommend to the stockholders any action which requires
stockholder approval, amend the Articles of Incorporation, amend or repeal the
Bylaws, approve any merger or share exchange which does not require stockholder
approval or issue stock. However, if the Board of Directors has given general
authorization for the issuance of stock, a committee of the Board of Directors,
at the direction of the Board of Directors or in accordance with a general
formula or method specified by the Board of Directors by resolution or by
adoption of a stock option, stock incentive or other compensation plan, may fix
the terms of stock subject to classification or reclassification and the terms
on which any stock may be issued. Notice of committee meetings shall be given in
the same manner as notice for special meetings of the Board of Directors.
One-third (1/3), but not less than two (2), of the members of any
committee shall be present in person at any meeting of such committee in order
to constitute a quorum for the transaction of business at such meeting, and the
act of a majority present shall be the act of such committee. The Board of
Directors may designate a chairman of any committee, and such chairman or any
two members of any committee may fix the time and place of its meetings unless
the Board of Directors shall otherwise provide. In the absence or
disqualification of any member of any such committee, the members thereof
present at any meeting and not disqualified from
7
<PAGE>
voting, whether or not they constitute a quorum, may unanimously appoint another
director to act at the meeting in the place of such absent or disqualified
members; provided, however, that in the event of the absence of disqualification
of any Independent Director, such appointee shall be an Independent Director.
Subject to the provisions hereof, the Board of Directors shall have
the power at any time to change the membership of any committee, to fill all
vacancies, to designate alternative members to replace any absent or
disqualified member, or to dissolve any such committee.
SECTION 7. Meetings of the Board of Directors.
----------------------------------
Meetings of the Board of Directors, regular or special, may be held at any place
in or out of the State of Maryland as the Board of Directors may from time to
time determine or as shall be specified in the notice of such meeting.
Members of the Board of Directors may participate in a meeting by
means of a conference telephone or similar communications equipment if all
persons participating in the meeting can hear each other at the same time.
Participation in a meeting by such means constitutes presence in person at a
meeting.
The first meeting of each newly elected Board of Directors shall be
held as soon as practicable after the annual meeting of the stockholders at
which the directors were elected. The meeting may be held at such time and
place as shall be specified in a notice given as hereinafter provided for
special meetings of the Board of Directors, or as shall be specified in a
written waiver signed by all of the directors as provided in this Section 7,
except that no notice shall be necessary if such meeting is held immediately
after the adjournment, and at the site, of the annual meeting of stockholders.
Regular meetings of the Board of Directors may be held without notice
at such time and place as shall from time to time be determined by the Board of
Directors. Special meetings of the Board of Directors may be called at any time
by two (2) or more directors or by a majority of the members of the executive
committee, if one be constituted, in writing with or without a meeting of such
committee, or by the Chairman of the Board of Directors or the President.
Special meetings may be held at such place or places in or out of the
State of Maryland as may be designated from time to time by the Board of
Directors; in the absence of such designation, such meetings shall be held at
such places as may be designated in the notice of meeting.
Notice of the place and time of every special meeting of the Board of
Directors shall be delivered by the Secretary to each director either personally
or by telephone, telegraph, overnight courier or facsimile, or by leaving the
same at his residence or usual place of business at least twenty-four (24) hours
before the time at which such meeting is to be held or, if by first-class
8
<PAGE>
mail, at least 72 hours before the time of such meeting. If mailed, such notice
shall be deemed to be given when deposited in the United States Mail addressed
to the director at his post office address as it appears on the records of the
Corporation, with postage thereon paid. Unless the Bylaws or a resolution of
the Board of Directors provides otherwise, the notice need not state the
business to be transacted at, or the purposes of, any special meeting of the
Board of Directors. No notice of any special meeting of the Board of Directors
need be given to any director who attends except where a director attends a
meeting for the express purpose of objecting to the transaction of any business
because the special meeting is not lawfully called or convened, or to any
director who, in writing executed and filed with the records of the meeting
either before or after the holding thereof, waives such notice.
Any meeting of the Board of Directors, regular or special, may adjourn
from time to time to reconvene at the same or some other place, and no notice
need be given of any such adjourned meeting other than by announcement.
SECTION 8. Informal Action by Directors. Unless otherwise provided
----------------------------
by law, any action required to be taken at a meeting of the directors or any
other action which may be taken at a meeting of the directors may be taken
without a meeting if a consent in writing, setting forth the action so taken,
shall be signed by all of the directors.
SECTION 9. Quorum and Voting. At all meetings of the Board of
-----------------
Directors, a majority of the entire Board of Directors shall constitute a quorum
for the transaction of business, and the action of a majority of the directors
present at any meeting at which a quorum is present shall be the action of the
Board of Directors unless the concurrence of a greater proportion is required
for such action by law, the Corporation's Articles of Incorporation or these
Bylaws. If a quorum shall not be present at any meeting of directors, the
directors present thereat may, by a majority vote, adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
shall be present.
SECTION 10. Organization. The Chairman of the Board shall preside at
------------
each meeting of the Board of Directors. In the absence or inability of the
Chairman of the Board to preside at a meeting, the President or, in his absence
or inability to act, another director chosen by a majority of the directors
present, shall act as chairman of the meeting and preside thereat. The
Secretary (or, in his absence or inability to act, any person appointed by the
chairman of the meeting) shall act as Secretary of the meeting and keep the
minutes thereof.
SECTION 11. Compensation of Directors. Independent Directors shall
-------------------------
receive a stated salary for their services or a fixed sum, and expenses of
attendance for attendance at each regular or special meeting of the Board of
Directors, or of any committee thereof or both, as may be determined from time
to time by the Board of Directors. Nothing herein contained shall be construed
to preclude any director from serving the Corporation in any other capacity and
receiving compensation therefor.
9
<PAGE>
SECTION 12. Investment Policies and Restrictions. The Board of
------------------------------------
Directors, including a majority of the Independent Directors, shall approve the
investment policies of the Corporation. The investment policies and compliance
therewith shall be reviewed by the Independent Directors at least annually to
determine that the policies then being followed by the Corporation are in the
best interest of the stockholders of the Corporation. Each such determination
and the basis therefor shall be set forth in the minutes of the meeting of the
Board of Directors.
It shall be the duty of the Board of Directors to ensure that the
purchase, sale, retention and disposal of the Corporation's assets, and the
investment policies of the Corporation and the limitations thereon or amendment
thereof are at all times in compliance with the restrictions applicable to real
estate investment trusts pursuant to the Internal Revenue Code of 1986, as
amended.
ARTICLE V
---------
OFFICERS
--------
SECTION 1. Officers. The officers of the Corporation shall be a
Chairman of the Board, a President, a Treasurer and a Secretary, who shall be
elected by the Board of Directors to serve for one year and until their
respective successors are elected and qualified, except as otherwise provided in
any employment agreement between the Corporation and any officer. The Board of
Directors may also appoint one or more Vice Presidents. The same person may
hold any two or more offices except those of President and Vice President.
SECTION 2. Subordinate Officers; Committees and Agents. The Board of
-------------------------------------------
Directors may from time to time elect such other officers and appoint such
committees, employees or other agents as the business of the Corporation may
require, including a Vice Chairman of the Board, Chief Executive Officer, Chief
Financial Officer, Chief Operating Officer, Portfolio Manager, one or more
assistant secretaries, and one or more assistant treasurers, each of whom shall
hold office for such period, have such authority, and perform such duties as are
provided in these Bylaws, or as the Board of Directors may from time to time
determine. The Board of Directors may delegate to any officer or committee the
power to elect subordinate officers and to retain or appoint employees or other
agents.
SECTION 3. Chairman of the Board. The Chairman of the Board shall preside
---------------------
at all meetings of the stockholders and the Board of Directors at which he or
she is present. Unless otherwise specified by the Board of Directors, the
Chairman of the Board shall also be the Chief Executive Officer of the
Corporation and perform the duties customarily performed by chief executive
officers, and shall perform such other duties as may from time to time be
requested of him or her by the Board of Directors.
10
<PAGE>
SECTION 4. President. Unless otherwise provided by resolution of the
---------
Board of Directors, the President, in the absence of the Chairman of the Board,
shall preside at all meetings of the Board of Directors and of the stockholders
at which he shall be present. The President shall, subject to the control of
the Board of Directors, in general supervise and control all of the business and
affairs of the Corporation. The President may sign, with the Secretary or any
other proper officer of the Corporation thereunto authorized by the Board of
Directors, certificates for shares of the Corporation, any deeds, mortgages,
bonds, contracts, or other instruments which the Board of Directors have
authorized to be executed, except in cases where the signing and execution
thereof shall be expressly delegated by the Board of Directors or by these
Bylaws to some other officer or agent of the Corporation, or shall be required
by law to be otherwise signed or executed; and in general shall perform all
duties incident to the office of President and such other duties as may be
prescribed by the Board of Directors from time to time.
SECTION 5. Vice-Presidents. In the absence of the President or in the
---------------
event of his or her death, inability or refusal to act, or at the request of the
Chief Executive Officer or President, the Vice President or Vice Presidents
shall perform the duties and exercise all the powers of the President and be
subject to all the restrictions upon the President. The Vice President or Vice
Presidents shall perform such other duties as from time to time may be assigned
to him or her or them by the President or by the Board of Directors.
SECTION 6. Secretary. The Secretary shall keep the minutes of the
---------
stockholders' and of the Board of Directors' meetings in one or more books
provided for that purpose, see that all notices are duly given in accordance
with the provisions of these Bylaws or as required by law, be custodian of the
corporate records and of the seal of the Corporation and keep a register of the
post office address of each stockholder which shall be furnished to the
Secretary by such stockholder, have general charge of the stock transfer books
of the Corporation and, in general, perform all duties incident to the office of
Secretary and such other duties as from time to time may be assigned to him or
her by the President, the Chief Executive Officer or the Board of Directors.
SECTION 7. Treasurer. The Treasurer shall have charge and custody of and
---------
be responsible for all funds and securities of the Corporation, receive and give
receipts for moneys due and payable to the Corporation from any source
whatsoever, and deposit all such moneys in the name of the Corporation in such
banks, trust companies or other depositories as shall be selected in accordance
with these Bylaws and in general perform all of the duties incident to the
office of Treasurer and such other duties as from time to time may be assigned
to him or her by the President, the Chief Executive Officer or by the Board of
Directors.
SECTION 8. Other Officers. The other officers of the Corporation shall
--------------
perform such duties as the Chief Executive Officer and the President may from
time to time assign to them.
SECTION 9. Removal. Any officer elected by the Board of Directors may be
-------
removed, either for or without cause, at any time upon the vote of a majority of
the Board of Directors.
11
<PAGE>
Any other employee of the Corporation may be removed or dismissed at any time by
the Chief Executive Officer.
SECTION 10. Resignation. Any officer or agent may resign at any time by
-----------
giving written notice to the Board of Directors, or to the Chief Executive
Officer, the President or the Secretary of the Corporation. Any such
resignation shall take effect at the date of the receipt of such notice or at
any later time specified therein and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
SECTION 11. Vacancies. A vacancy in any office because of death,
---------
resignation, removal, disqualification, or any other cause, shall be filled by
the Board of Directors or by the officer or remaining members of the committee
to which the power to fill such office has been delegated pursuant to Section 2
of this Article, as the case may be, and if the office is one for which these
Bylaws prescribe a term, shall be filled for the unexpired portion of the term.
SECTION 12. Salaries. The salaries, if any, of the officers elected by
--------
the Board of Directors shall be fixed from time to time by the Board of
Directors or by such officer as may be designated by resolution of the Board of
Directors. The salaries or other compensation of any other officers, employees
and other agents shall be fixed from time to time by the officer or committee to
which the power to elect such officers or to retain or appoint such employees or
other agents has been delegated pursuant to Section 2 of this Article. No
officer shall be prevented from receiving such salary or other compensation by
reason of the fact that he is also a director of the Corporation.
ARTICLE VI
----------
SIGNATURES
----------
SECTION 1. Negotiable Instruments. All checks, drafts or notes of
----------------------
the Corporation shall be signed and/or countersigned by such officer, officers,
agent or agents of the Corporation as may be so designated from time to time by
the Board of Directors of the Corporation.
SECTION 2. Stock Transfer. All endorsements, assignments, stock
--------------
powers or other instruments of transfer of securities standing in the name of
the Corporation shall be executed for and in the name of the Corporation by the
Chief Executive Officer, the President or any Vice President or by such officer
as the Board of Directors may designate.
12
<PAGE>
ARTICLE VII
-----------
FISCAL YEAR
-----------
The fiscal year of the Corporation shall be the twelve calendar month
period ending December 31 in each year, unless otherwise provided by the Board
of Directors.
ARTICLE VIII
------------
INDEMNIFICATION
---------------
SECTION 1. Procedure. Any indemnification (including, without
---------
limitation, pursuant to the Company's Articles of Incorporation), or payment of
expenses in advance of the final disposition of any proceeding, shall be made
promptly, and in any event within 60 days, upon the written request of the
director or officer entitled to seek indemnification (the "Indemnified Party").
The right to indemnification and advances shall be enforceable by the
Indemnified Party in any court of competent jurisdiction, if (i) the Corporation
denies such request, in whole or in part, or (ii) no disposition thereof is made
within 60 days. The Indemnified Party's costs and expenses incurred in
connection with successfully establishing his or her right to indemnification,
in whole or in part, in any such action shall also be reimbursed by the
Corporation. It shall be a defense to any action for advance for expenses that
(a) a determination has been made that the facts then known to those making the
determination would preclude indemnification or (b) the Corporation has not
received either (i) an undertaking as required by law to repay such advances in
the event it shall ultimately be determined that the standard of conduct has not
been met or (ii) a written affirmation by the Indemnified Party of such
Indemnified Party's good faith belief that the standard of conduct necessary for
indemnification by the Corporation has been met.
SECTION 2. Exclusivity, Etc. The indemnification and advance of
----------------
expenses provided by the Articles of Incorporation and these Bylaws shall not be
deemed exclusive of any other rights to which a person seeking indemnification
or advance of expenses may be entitled under any law (common or statutory), or
any agreement, vote of stockholders or disinterested directors or other
provision that is consistent with law, both as to action in his or her official
capacity and as to action in another capacity while holding office or while
employed by or acting as agent for the Corporation, shall continue in respect of
all events occurring while a person was a director or officer after such person
has ceased to be a director or officer, and shall inure to the benefit of the
estate, heirs, executors and administrators of such person. All rights to
indemnification and advance of expenses under the Articles of Incorporation of
the Corporation and hereunder shall be deemed to be a contract between the
Corporation and each director or officer of the Corporation who serves or served
in such capacity at any time while this Bylaw is in effect. Nothing herein
shall prevent the amendment of this Bylaw, provided that no such amendment shall
diminish the rights of any person hereunder with respect to events occurring or
claims made before its adoption or as to claims made after its adoption in
respect of events
13
<PAGE>
occurring before its adoption. Any repeal or modification of this Bylaw shall
not in any way diminish any rights to indemnification or advance of expenses of
such director or officer or the obligations of the Corporation arising hereunder
with respect to events occurring, or claims made, while this Bylaw or any
provision hereof is in force.
SECTION 3. Severability; Definitions. The invalidity or
-------------------------
unenforceability of any provision of this Article VIII shall not affect the
validity or enforceability of any other provision hereof. The phrase "this
Bylaw" in this Article VIII means this Article VIII in its entirety.
ARTICLE IX
----------
SUNDRY PROVISIONS
-----------------
SECTION 1. Books and Records. The Corporation shall keep correct and
-----------------
complete books and records of its accounts and transactions and minutes of the
proceedings of its stockholders and Board of Directors and of any executive or
other committee when exercising any of the powers of the Board of Directors.
The books and records of the Corporation may be in written form or in any other
form which can be converted within a reasonable time into written form for
visual inspection. Minutes shall be recorded in written form but may be
maintained in the form of a reproduction. The original or a certified copy of
the Bylaws shall be kept at the principal office of the Corporation.
SECTION 2. Voting Upon Shares in Other Corporations. Stock of other
----------------------------------------
corporations or associations, registered in the name of the Corporation, may be
voted by the Chief Executive Officer, the President, a Vice President, or a
proxy appointed by any of them. The Board of Directors, however, may by
resolution appoint some other person to vote such shares, in which case such
person shall be entitled to vote such shares upon the production of a certified
copy of such resolution.
ARTICLE X
---------
AMENDMENTS
----------
These Bylaws may be amended or replaced, or new Bylaws may be adopted,
either (1) by the vote of the stockholders entitled to cast at least a majority
of the votes which all stockholders are entitled to cast thereon at any duly
organized annual or special meeting of stockholders, or (2), with respect to
those matters which are not by statute reserved exclusively to the stockholders,
by vote of a majority of the Board of Directors, including a majority of the
Independent Directors of the Corporation, in office at any regular or special
meeting of the Board of Directors. It shall not be necessary to set forth such
proposed amendment, repeal or new Bylaws, or a summary thereof, in any notice of
such meeting, whether annual, regular or special.
14
<PAGE>
EXHIBIT 10.1
ANNALY MORTGAGE MANAGEMENT, INC.
3,600,000 Shares
Common Stock
PURCHASE AGREEMENT
------------------
February 12, 1997
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
Potomac Tower
1001 Nineteenth Street North
Arlington, Virginia 22209
Dear Sirs:
Annaly Mortgage Management, Inc., a Maryland corporation (the
"Company"), proposes to issue and sell to you (the "Initial Purchaser"),
3,600,000 shares (the "Shares"), of its common stock par value $.01 per share
("Common Stock"). The sale of Shares to you will be made without registration of
the Shares under the Securities Act of 1933, as amended (the "Act"), in reliance
upon the exemption from the registration requirements of the Act provided by
Section 4(2) thereof. You have advised the Company that you will make an
offering of the Shares purchased by you hereunder in accordance with Section 4
hereof on the terms set forth in the Final Memorandum (as defined below), as
soon as you deem advisable after this Agreement has been executed and delivered.
In connection with the sale of the Shares, the Company has prepared a
preliminary offering memorandum, dated January 27, 1997 (the "Preliminary
Memorandum"), and a final offering memorandum, dated February 12, 1997 (the
"Final Memorandum"). Each of the Preliminary Memorandum and the Final
Memorandum sets forth certain information concerning the Company and the Shares.
The Company hereby confirms that it has authorized the use of the Preliminary
Memorandum and the Final Memorandum in connection with the offering and resale
by the Initial Purchaser of the Shares. Any references herein to the
Preliminary Memorandum or the Final Memorandum shall be deemed to include all
exhibits thereto.
The holders of the Shares will be entitled to the benefits of a
Registration Rights Agreement dated the date hereof between the Company and the
Initial Purchaser (the "Registration Rights Agreement").
<PAGE>
1. Representations and Warranties.
------------------------------
(a) The Company represents and warrants to, and agrees with, the
Initial Purchaser as set forth below in this Section 1.
(i) Each of the Preliminary Memorandum and the Final Memorandum
as of its date did not, and the Final Memorandum as of the Closing
Date will not, contain any untrue statement of a material fact or omit
to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; provided, that the foregoing shall not apply to
statements or omissions made in reliance upon, and in conformity with,
written information furnished to the Company by you specifically for
use in the preparation thereof.
(ii) Neither the Company nor any affiliate (as defined in Rule
501(b) of Regulation D under the Act ("Regulation D")) of the Company
has directly, or through any agent, (i) sold, offered for sale,
solicited offers to buy or otherwise negotiated in respect of, any
security (as defined in the Act) which is or will be integrated with
the sale of the Shares in a manner that would require the registration
of the Shares under the Act or (ii) engaged in any form of general
solicitation or general advertising (within the meaning of Regulation
D) in connection with the offering of the Shares. For purposes of
this Agreement, the Initial Purchaser shall not be considered an
affiliate of the Company.
(iii) It is not necessary in connection with the offer, sale and
delivery of the Shares in the manner contemplated by this Agreement
and the Final Memorandum to register the Shares under the Act except
as contemplated by the Registration Rights Agreement.
(iv) None of the Company, its affiliates or any person acting on
behalf of the Company or its affiliates has engaged in any directed
selling efforts (as that term is defined in Regulation S under the Act
("Regulation S")) with respect to the Shares, and the Company and its
affiliates and any person acting on its or their behalf have complied
with the offering restrictions requirement of Regulation S.
(v) The Shares satisfy the requirements set forth in Rule
144A(d)(3) under the Act. The Company has been advised by the
National Association of Securities Dealers, Inc. PORTAL Market that
the Shares have or will be designated PORTAL eligible securities in
accordance with the rules and regulations of the National Association
of Securities Dealers, Inc.
-2-
<PAGE>
(vi) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the State
of Maryland and is duly qualified to transact business as a foreign
corporation and is in good standing under the laws of all other
jurisdictions where the ownership or leasing of its properties or the
conduct of its business requires such qualification, except where the
failure to be so qualified does not or would not result in a material
adverse change in the condition (financial or otherwise), management,
business, prospects, net worth or results of operations of the Company
(a "Material Adverse Effect").
(vii) The Company has full power (corporate and other) to own or
lease its properties and conduct its business as described in the
Final Memorandum; and the Company has full power (corporate and other)
to enter into this Agreement and the Registration Rights Agreement and
to carry out all the terms and provisions hereof and thereof to be
carried out by it.
(viii) The Company has no subsidiaries and does not own,
directly or indirectly, any shares of stock or other equity securities
of any corporations or any equity interest in any firm, partnership,
joint venture, association or other entity.
(ix) The Company has an authorized, issued and outstanding
capitalization as set forth in the Final Memorandum. All of the
issued shares of capital stock of the Company have been duly
authorized and validly issued and are fully paid and nonassessable.
The Shares been duly authorized and at the Closing Date, after payment
therefor in accordance herewith, will be validly issued, fully paid
and nonassessable. At the Closing Date, no holders of outstanding
shares of capital stock of the Company will be entitled to any
preemptive or other rights to subscribe for any of the Shares, and no
holder of securities of the Company has any right to require the
Company to register the offer or sale of any securities owned by such
holder under the Act other than pursuant to the Registration Rights
Agreement.
(x) The capital stock of the Company conforms to the
description thereof contained in the Final Memorandum.
(xi) Except as disclosed in the Final Memorandum, there are no
outstanding (A) securities or obligations of the Company convertible
into or exchangeable for any capital stock of the Company, (B)
warrants, rights or options to subscribe for or purchase from the
Company any such capital stock or any such convertible or
exchangeable securities or obligations, or (C) obligations of the
Company to issue any shares of capital stock, any such convertible or
exchangeable securities or obligations, or any such warrants, rights
or options, and the description of the Company's stock option, stock
bonus and other stock plans or arrangements and the options or other
rights granted and exercised thereunder, set forth in the Final
-3-
<PAGE>
Memorandum accurately and fairly presents in all material respects the
information required to be shown with respect to such plans,
arrangements, options and rights.
(xii) The financial statements and schedules of the Company
included in the Final Memorandum fairly present in all material
respects the financial position of the Company as of the date therein
specified. Such financial statements and schedules have been prepared
in accordance with generally accepted accounting principles ("GAAP")
consistently applied throughout the periods involved.
(xiii) Deloitte & Touche LLP, who have audited certain financial
statements of the Company and delivered their report with respect to
the audited financial statements included in the Final Memorandum, are
independent public accountants within the meaning of Rule 101 of the
AICPA's Code of Professional Conduct.
(xiv) The execution and delivery of this Agreement and the
Registration Rights Agreement have been duly authorized by the Company
and this Agreement and the Registration Rights Agreement have been
duly executed and delivered by the Company, and each is the valid and
binding agreement of the Company, enforceable against the Company in
accordance with its respective terms, except as such enforceability
may be limited by the effect of bankruptcy, insolvency,
reorganization, moratorium and other similar laws relating to rights
and remedies of creditors or by general equitable principles.
(xv) No legal or governmental proceedings are pending to which
the Company is a party or to which the property of the Company is
subject and no such proceedings have been threatened against the
Company or with respect to any of its properties.
(xvi) No consent, approval, authorization, registration,
qualification or order of or with any court or governmental agency
or body is required to be obtained by the Company for the issue or
sale of the Shares or for the consummation of any other of the
transactions herein contemplated or for the fulfillment of the terms
of this Agreement herein or in the Registration Rights Agreement
except the registration statement pursuant to the Registration Rights
Agreement which, in accordance with the terms thereof, must be
declared effective by the Commission, and such as have been obtained
and such as may be required under the blue sky laws of any
jurisdiction.
(xvii) Neither the issue or sale of the Shares, nor the
consummation of any other of the transactions contemplated herein or
in the Registration Rights Agreement nor the fulfillment of the terms
hereof or thereof, will conflict with, result in a breach or violation
of, or constitute a default under, any law or regulation or the
articles of incorporation or by-laws of the Company or the terms of
any indenture, credit
-4-
<PAGE>
agreement, mortgage, deed of trust, lease or other agreement or
instrument to which the Company is a party or by which the Company or
any of its properties is bound, or any statute or any judgment, order,
decree, rule or regulation of any court, regulatory body,
administrative agency, governmental body or arbitrator having
jurisdiction over the Company.
(xviii) Subsequent to the respective dates as of which
information is given in the Final Memorandum, and except as described
in or specifically contemplated by the Final Memorandum, (i) the
Company has not incurred any material liabilities or obligations,
direct or indirect, or entered into any material verbal or written
agreement or other transaction which is not in the ordinary course of
business or which could result in a material reduction in the future
earnings of the Company; (ii) the Company has not sustained any
material loss or interference with its business or properties from
fire, flood, hurricane, accident or other calamity, whether or not
covered by insurance, or from any labor dispute or any legal or
governmental proceeding; (iii) the Company has not paid or declared
any dividends or other distributions with respect to its capital
stock, and the Company is not in default in the payment of principal
or interest on any outstanding debt obligations; (iv) there has not
been any change in the capital stock (other than the sale of the
Shares hereunder), or indebtedness material to the Company (other than
in the ordinary course of business); and (v) there has not been any
event, circumstance, or development that results in, or that the
Company believes would result in, a Material Adverse Effect, except in
each case as described in or contemplated by the Final Memorandum.
(xix) Neither the Company nor any employee of the Company has
made any payment of funds of the Company prohibited by law and no
funds of the Company have been set aside to be used for any payment
prohibited by law.
(xx) (a) The Company possesses all certificates, authorizations
and permits issued by the appropriate federal, state or foreign
regulatory authorities material to the conduct its business, all of
which are valid and in full force and effect, and (b) the Company has
not received any notice of proceedings relating to the revocation or
modification of any such certificate, authorization or permit.
(xxi) The Company is not in violation of any provision of its
articles of incorporation or bylaws.
(xxii) The Company is conducting business in compliance with all
applicable laws, rules and regulations of the jurisdictions in which
it is conducting business, including without limitation, all
applicable local, state and federal environmental laws and
regulations, except where the failure to be in compliance would not
have a Material Adverse Effect.
-5-
<PAGE>
(xxiii) The Company is not an "investment company" or an entity
"controlled" by an "investment company", as such terms are defined in
the Investment Company Act of 1940, as amended (the "1940 Act"), and
this transaction will not cause the Company to become an "investment
company" or an entity "controlled" by an "investment company" under
the 1940 Act.
(xxiv) The Company has filed all necessary foreign, federal,
state and local tax returns that are required to be filed on or before
the date hereof and has paid all taxes required to be paid by it and
any other assessment, fine or penalty levied against it and required
to be paid on or before the date hereof; and the Company has no
knowledge of any tax deficiency which has been or might be asserted or
threatened against the Company which could have a Material Adverse
Effect.
(xxv) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurance that (A)
transactions are executed in accordance with management's general or
specific authorizations; (B) transactions are recorded as necessary to
permit preparation of financial statements in conformity with GAAP and
to maintain asset accountability; (C) access to assets is permitted
only in accordance with management's general or specific
authorization; and (D) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(xxvi) No default exists, and no event has occurred that, with
notice or lapse of time or both, would constitute a default, in the
due performance and observance of any term, covenant or condition of
any indenture, mortgage, deed of trust, lease or other agreement or
instrument to which the Company is a party or by which the Company or
any of its properties is bound or may be affected, in any respect that
would have a Material Adverse Effect.
(xxvii) The Company owns no real property. The Company has good
and marketable title to all the properties and assets owned by it, in
each case free and clear of any security interests, liens,
encumbrances, equities, claims and other defects, except such as do
not have a Material Adverse Effect and do not interfere with the use
made or proposed to be made of such property by the Company, and
except as described in or contemplated by the Final Memorandum. The
Company holds its leased properties under valid, subsisting and
enforceable leases, with such exceptions as are not materially
significant to the business of the Company.
(xxviii) No labor dispute with the employees of the Company
exists or, to the Company's knowledge, is threatened or imminent that
could result in a Material Adverse Effect.
-6-
<PAGE>
(xxix) The Company owns or possesses, or can acquire on
reasonable terms, all necessary trademarks, service marks, trade
names, licenses, patents, copyrights and proprietary or other
confidential information to conduct its business as now conducted or
as proposed to be conducted; and the Company has not received any
notice of infringement of or conflict with asserted rights of any
third party with respect to any of the foregoing which, singly or in
the aggregate, if the subject of an unfavorable decision, ruling or
finding, would have a Material Adverse Effect.
(xxx) The Company is insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as
are prudent and customary in the business in which it is engaged; and
the Company has no reason to believe that it will not be able to renew
its existing insurance coverage as and when such coverage expires or
to obtain similar coverage from similar insurers as may be necessary
to continue its business at a cost that would not have a Material
Adverse Effect.
(xxxi) Neither the Company nor any of its officers, directors,
employees or stockholders have incurred any liability for a fee,
commission or other compensation on account of the employment of a
broker or finder in connection with the transactions contemplated by
this Agreement other than the discount and fees to be received by the
Initial Purchaser.
(xxxii) As of the Closing Date, the Company will be organized
and intends to operate in a manner so as to qualify as a "real estate
investment trust" ("REIT") under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended (the "Code"), and will elect
to, will use its best efforts to and intends to remain qualified to,
be taxed as a REIT under the Code and pursuant to any applicable state
tax laws. The Company does not know of any event which would cause or
is likely to cause the Company to fail to qualify as a REIT at any
time.
(xxxiii) The description set forth under the heading "ERISA
Considerations" is true and correct in all material respects.
(b) Any certificate signed by any officer of the Company or any of its
affiliates and delivered to the Initial Purchaser or its counsel shall be deemed
a representation and warranty by the Company to the Initial Purchaser as to the
matters covered thereby.
2. Purchase and Sale. Subject to the terms and conditions and in reliance
-----------------
upon the representations and warranties herein set forth, the Company agrees to
sell to the Initial Purchaser, and the Initial Purchaser agrees to purchase from
the Company, 3,600,000 shares of Common Stock at a price per share of $9.30
which is equal to the initial offering price of $10.00 per Share less the
discount to the Initial Purchaser of $.70 per Share.
-7-
<PAGE>
3. Delivery and Payment. Certificates for the Shares shall be registered
--------------------
in such names and in such denominations (subject to any ownership restrictions)
as the Initial Purchaser requests upon notice to the Company at least two days
prior to the Closing Date and shall be delivered by or on behalf of the Company
to the Initial Purchaser, against payment by or on behalf of the Initial
Purchaser of the aggregate purchase price therefor by wire transfer of same-day
funds. Such delivery of and payment for the Shares shall be made at the offices
of Andrews & Kurth L.L.P., 1701 Pennsylvania Avenue, N.W., Washington, D.C.
20006, at 10:00 a.m., eastern time, on February 18, 1997, or at such other
place, time or date as the Initial Purchaser and the Company may agree upon,
such time and date of delivery against payment being herein referred to as the
"Closing Date." The Company will make such certificates for the Shares
available for checking and packaging by the Initial Purchaser at least 24 hours
prior to the Closing Date.
4. Offering of Shares; Restrictions on Transfer.
--------------------------------------------
(a) The Initial Purchaser represents and warrants to and agrees with
the Company that (i) it has not solicited and will not solicit any offer to buy
or offer to sell the Shares by means of any form of general solicitation or
general advertising (within the meaning of Regulation D) with respect to Shares
sold in reliance on Regulation S, by means of any directed selling efforts and
(ii) it has solicited and will solicit offers to buy the Shares only from, and
has offered and will offer, sell to or deliver the Shares only to, (A) persons
who it reasonably believes to be qualified institutional buyers (as defined in
Rule 144A under the Act) or, if any such person is buying for one or more
institutional accounts for which such person is acting as fiduciary or agent,
only when such person has represented to it that each such account is a
qualified institutional buyer to whom notice has been given that such sale or
delivery is being made in reliance on Rule 144A, and, in each case, in
transactions under Rule 144A and who provide to it a certificate in the form of
Exhibit A hereto, (B) persons who it reasonably believes to be institutional
"accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) of
Regulation D), and who provide to it a letter in the form of Exhibit B hereto or
(C) persons to whom, and under circumstances which, it reasonably believes
offers and sales of Shares may be made without registration of the Shares under
the Act in reliance upon Regulation S thereunder, and who provide to it a letter
in the form of Exhibit C hereto. The Initial Purchaser also represents and
warrants and agrees that it has offered and will offer to sell the Shares only
to, and has solicited and will solicit offers to buy the Shares only from,
persons that in purchasing such Shares will be deemed to have represented and
agreed as provided under "Notice to Investors" in Exhibit D hereto. The Initial
Purchaser represents and warrants that it is familiar with the rules and
restrictions set forth in Regulation S and that it has not undertaken any
activity for the purpose of, or that could reasonably be expected to have the
effect of, conditioning the market for any Shares being offered in reliance on
Regulation S. The Initial Purchaser further represents and warrants that, in
the case of any sale of Shares to a distributor, a dealer (as defined in Section
2(12) of the Securities Act) or a person receiving a selling concession, fee or
other remuneration, prior to the expiration of the one-year restricted period
set forth in Rule 903(c)(3)(iii) of Regulation S, it will send a confirmation or
other notice to the purchaser stating that the purchaser is subject to the same
restrictions on offers and sales that apply to a distributor.
-8-
<PAGE>
(b) The Purchaser represents and warrants that (i) it has not offered
or sold and will not offer or sell any Shares to persons in the United Kingdom
prior to the expiration of the period six months from the date of their
issuance, except to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent) for the
purposes of their businesses or otherwise in circumstances which have not and
will not result in an offer to the public in the United Kingdom within the
meaning of the Public Offers of Securities Regulations 1995 or the Financial
Services Act 1986; (ii) it has complied and will comply with all applicable
provisions of the Financial Services Act 1986 with respect to anything done by
it in relation to the Shares in, from or otherwise involving the United Kingdom;
and (iii) it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the issue of the
Shares to a person who is of a kind described in Article 11(3) of the Financial
Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995 or is a
person to whom the document may otherwise lawfully be issued or passed on.
(c) The Initial Purchaser understands that the Company and, for the
purposes of the opinions to be delivered to the Initial Purchaser pursuant to
Section 7 hereof, counsel to the Company and counsel to the Initial Purchaser
will rely upon the accuracy and the truth of the forgoing representations and
Initial Purchaser hereby consents to such reliance.
5. Covenants of the Company. The Company covenants and agrees with the
------------------------
Initial Purchaser that:
(a) The Company will furnish to the Initial Purchaser, without charge,
such copies of the Final Memorandum and any supplements or amendments thereof as
the Initial Purchaser may reasonably request.
(b) The Company will cooperate with the Initial Purchaser and its
counsel in arranging for the qualification or registration of the Shares for
offering and sale under, or establishing an exemption from such qualification or
registration under, the securities or blue sky laws of such jurisdictions as
the Initial Purchaser may designate.
(c) If, at any time prior to the completion of the sale of the Shares
by the Initial Purchaser as determined by the Initial Purchaser, (i) any event
occurs as a result of which the Final Memorandum, as then amended or
supplemented, would include any untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading, or if for
any other reason it is necessary at any time to amend or supplement the Final
Memorandum to comply with the Act or the rules or regulations of the Commission
thereunder, or (ii) the Company receives any notification with respect to the
modification, rescission, withdrawal or suspension of the qualification or
registration of the Shares, or any exemption from such registration or
qualification, in any jurisdiction, the Company will promptly notify the Initial
Purchaser thereof and will prepare, at the Company's expense, an amendment or
supplement to the Final Memorandum that corrects such statement or omission or
effects such compliance. The Company will use its best efforts to prevent
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<PAGE>
the issuance of any such modification, rescission, withdrawal or suspension and,
if any such modification, rescission, withdrawal or suspension is issued and the
Initial Purchaser so requests, to obtain the lifting thereof as promptly as
possible.
(d) The Company shall, during any period in the three years (or such
shorter period as may then be applicable under the Act regarding the holding
period for securities under Rule 144(k) of the Act or any successor rule) after
the Closing Date in which the Company is not subject to Section 13 or 15(d) of
the Exchange Act, make available, upon request, to any holder of such Shares in
connection with any sale thereof and any prospective purchaser of Shares from
such holder the information ("Rule 144A Information") specified in Rule
144A(d)(4) under the Act, and any such 144A information will not, at the date
thereof, contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the light
of the circumstances under which they are made, not misleading.
(e) Neither the Company nor any affiliate (as defined in Rule 501(b)
of Regulation D) of the Company will solicit any offer to buy or offer or sell
the Shares by means of any form of general solicitation or general advertising
(within the meaning of Regulation D).
(f) None of the Company, its affiliates nor any person acting on
behalf of the Company or its affiliates will engage in any directed selling
efforts with respect to the Shares within the meaning of Regulation S, and the
Company, its affiliates and each such person acting on its or their behalf will
comply with the offering restrictions requirement of Regulation S.
(g) Neither the Company or any affiliate (as defined in Rule 501(b) of
Regulation D) will sell, offer for sale or solicit offers to buy or otherwise
negotiate in respect of any security (as defined in the Act) the offering of
which security will be integrated with the sale of the Shares in a manner which
would require the registration of the Shares under the Act.
(h) The Company will apply the net proceeds from the sale of the
Shares as set forth under "Use of Proceeds" in the Final Memorandum.
(i) The Company will not, directly or indirectly, without the prior
written consent of the Initial Purchaser, offer, sell, offer to sell, contract
to sell, pledge, grant any option to purchase or otherwise sell or dispose (or
announce any offer, sale, offer of sale, contract of sale, pledge, grant of any
option to purchase or other sale or disposition) of any shares of Common Stock
or any securities convertible into, or exchangeable or exercisable for, shares
of Common Stock (i) prior to the Closing Date and (ii) for a period of 180 days
after the Closing Date, except pursuant to this Agreement and except for the
grant of stock options or other awards pursuant to the Company's Long-Term Stock
Incentive Plan or issuances pursuant to the exercise of such options or other
awards.
(j) The Company shall not, during the period commencing on the date
hereof and ending on the Closing Date, issue any press release or other
communication, or hold any press
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<PAGE>
conference with respect to the Company, its financial condition, results of
operations, business, properties, assets or liabilities, or the Offering,
without the prior written consent of the Initial Purchaser.
(k) The Company shall use reasonable efforts in cooperation with the
Initial Purchaser to obtain permission for the Shares sold to Qualified
Institutional Buyers, as such term is defined in Rule 144A under the Securities
Act to be eligible for clearance and settlement through the Depository Trust
Company.
(l) During the period of 3 years hereafter, the Company will furnish
to the Initial Purchaser (i) as soon as practicable after the end of each fiscal
year, copies of annual distributions of audited financial statements containing
the balance sheet of the Company as of the close of such fiscal year and
statements of income, stockholders' equity and cash flows for the year then
ended and the opinion thereof of the Company's independent public accountants;
(ii) as soon as practicable after the issuance or filing thereof, copies of
quarterly distributions of unaudited financial statements, all current and
periodic reports promptly following the issuance or filing thereof by the
Company with any securities exchange, the Commission or any other regulatory
authority with whom the Company's securities are then registered; and (iii)
until the Company has conducted an initial public offering of its securities, a
description of any event having a Material Adverse Effect; and, (iv) as soon as
available, copies of any report or communication of the Company mailed generally
to holders of its Common Stock.
(m) The Company will continue to elect to qualify as a REIT under the
Code and will use its best efforts to continue to meet the requirements to
qualify as a REIT.
(n) The Company will retain Deloitte & Touche LLP, as its qualified
accountants and such qualified tax experts as the Company may identify for a
period of not less than 2 years beginning on the Closing Date to assist the
Company in developing appropriate accounting systems and testing procedures and
to conduct quarterly compliance reviews designed to determine compliance with
the REIT provisions of the Code and the Company's exempt status under the 1940
Act.
(o) The Company will not invest in futures contracts, options on
futures contracts or options on commodities unless the Company is exempt from
the registration requirements of the Commodity Exchange Act, as amended, or
otherwise complies with the Commodity Exchange Act, as amended. In addition,
the Company will not engage in any activities which might be subject to the
Commodity Exchange Act unless such activities are exempt from that Act or
otherwise comply with that Act or with an applicable no-action letter to the
Company from the Commodities Futures Trading Commission.
(p) Upon the Closing, the Company shall automatically grant to the
Initial Purchaser the right of first refusal to act as exclusive financial
advisor, underwriter or agent, as the case may be, in connection with the
Company's future financings, strategic opportunities and initiatives, including
(i) any sale of assets or stock, merger or acquisition, (ii) an offering of
equity
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<PAGE>
or debt securities, (iii) any securitization or similar transaction, (iv) any
exercise of warrants or options to purchase the Company's securities by
employees, agents or others pursuant to a cashless exercise or other exercise
program for a term of one year. The one-year term shall be renewed annually
unless terminated by the Company or the Initial Purchaser. Upon notice of
termination by the Company or the Initial Purchaser, the term of the right of
first refusal shall continue for an additional one-year period.
6. Expenses. The Company will pay all costs and expenses incident to the
--------
performance of its obligations under this Agreement, whether or not the
transactions contemplated herein are consummated or this Agreement is terminated
pursuant to Section 11 hereof, including all costs and expenses incident to (i)
the printing or other production of documents with respect to the transactions,
including any costs of printing the Preliminary Memorandum and the Final
Memorandum, and any amendment or supplement thereto, this Agreement, the
Registration Rights Agreement and any blue sky memoranda, (ii) all arrangements
relating to the delivery to the Initial Purchaser of copies of the foregoing
documents, (iii) the fees and disbursements of the counsel, the accountants and
any other experts or advisors retained by the Company, (iv) preparation,
issuance and delivery of any certificates evidencing the Shares, including
transfer agent's and registrar's fees, (v) the qualification or exemption of the
Shares under state securities and blue sky laws, and (vi) the designation of the
Shares as PORTAL eligible securities by the National Association of Securities
Dealers, Inc. PORTAL Market. If the sale of the Shares provided for herein is
consummated, the Company will reimburse the Initial Purchaser for its reasonable
out-of-pocket expenses (including counsel fees and disbursements) that shall
have been incurred by it in connection with the purchase and sale of the Shares
in an amount equal to $80,000. If the sale of the Shares provided for herein is
not consummated because any condition to the obligations of the Initial
Purchaser set forth in Section 7 hereof is not satisfied, because this Agreement
is terminated pursuant to Section 10 hereof or because of any failure, refusal
or inability on the part of the Company to perform all obligations and satisfy
all conditions on its part to be performed or satisfied hereunder other than by
reason of a breach or default of the Initial Purchaser, the Company will
reimburse the Initial Purchaser upon demand for reasonable out-of-pocket
expenses (including counsel fees and disbursements) that shall have been
incurred by it in connection with the proposed purchase and sale of the Shares
provided that such expenses do not exceed a total of $125,000, without the
written consent of the Company. The Company shall not in any event be liable to
the Initial Purchaser for the loss of anticipated profits from the transactions
covered by this Agreement. Notwithstanding the foregoing, the Initial Purchaser
will pay 60% of the blue sky fees and expenses incurred in connection with the
Offering.
7. Conditions of the Initial Purchaser's Obligations. The obligation of
-------------------------------------------------
the Initial Purchaser to purchase the Shares shall be subject to the accuracy of
the representations and warranties of the Company contained herein as of the
date and time that this Agreement is executed and delivered by the parties
hereto (the "Execution Time") and the Closing Date, to the accuracy of the
statements of the Company's officers made pursuant to the provisions hereof, to
the performance by the Company of its covenants and agreements hereunder and to
the following additional conditions:
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<PAGE>
(a) (i) The Offering contemplated by this Agreement will become
qualified or be exempt from qualification under the securities laws of the
several states pursuant to subsection 5(b) not later than the Closing Date, and
(ii) at the Closing Date no stop order suspending the sale of the Shares shall
have been issued, and no proceeding for that purpose shall have been initiated
or threatened.
(b) The Final Memorandum, or any supplement thereto, will not contain
any untrue statement of a material fact, or omit to state any material fact
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading.
(c) The Initial Purchaser shall have received an opinion, dated the
Closing Date, of Morgan, Lewis & Bockius LLP, counsel for the Company, in the
form of Exhibit E.
In rendering any such opinion, such counsel may rely, as to matters of
local law, on opinions of local counsel, and as to matters of fact on
certificates of responsible officers of the Company and public officials, in
which case their opinion is to state that they are so doing and that the Initial
Purchaser is justified in relying on such opinions or certificates.
References to the Final Memorandum in this paragraph (c) shall include
any amendment or supplement thereto at the date of such opinion.
(d) The Initial Purchaser shall have received from Deloitte & Touche
LLP a letter or letters dated, respectively, the date hereof and the Closing
Date, in form and substance satisfactory to the Initial Purchaser, to the effect
that:
(i) they are independent accountants with respect to the Company
within the meaning of Rule 101 of the AICPA's Code of Professional Conduct;
(ii) in their opinion, the audited financial statements examined
by them and included in the Final Memorandum comply in form in all material
respects with the applicable accounting requirements of the Act and the
related published rules and regulations;
(iii) on the basis of carrying out certain specified procedures
(which do not constitute an examination made in accordance with generally
accepted auditing standards) that would not necessarily reveal matters of
significance with respect to the comments set forth in this paragraph
(iii), a reading of the minute books of the stockholders, the board of
directors and any committees thereof of the Company, and inquiries of
certain officials of the Company who have responsibility for financial and
accounting matters, nothing came to their attention that caused them to
believe that at a specific date not more than three business days prior to
the date of such letter, there were any changes in the capital stock or
total debt of the Company or any decreases in assets or stockholders'
equity of the Company, in each case compared with amounts shown on the
December 18, 1996 balance sheet included in the
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<PAGE>
Final Memorandum; and, except in all instances for changes, decreases or
increases set forth in such letter; and
(iv) they have carried out certain specified procedures, not
constituting an audit, with respect to certain amounts, percentages and
financial information that are derived from the general accounting records
of the Company and its consolidated subsidiaries and are included in the
Final Memorandum, and have compared such amounts, percentages and financial
information with such records of the Company and its consolidated
subsidiaries and with information derived from such records and have found
them to be in agreement, excluding any questions of legal interpretation.
In the event that the letters referred to above set forth any such
changes, decreases or increases which, in the reasonable discretion of the
Initial Purchaser, are likely to result in a Material Adverse Effect, it shall
be a further condition to the obligations of the Initial Purchaser such letters
shall be accompanied by a written explanation of the Company as to the
significance thereof, unless the Initial Purchaser deems such explanation
unnecessary.
References to the Final Memorandum in this paragraph (d) with respect
to either letter referred to above shall include any amendment or supplement
thereto at the date of such letter.
(e) The Initial Purchaser shall have received from Andrews & Kurth
L.L.P., counsel for the Initial Purchaser, such opinion or opinions, dated the
Closing Date, with respect to the issuance and sale of the Shares, the Final
Memorandum (together with any amendment or supplement thereof or thereto) and
other related matters as the Initial Purchaser may reasonably require, and the
Company shall have furnished to such counsel such documents as they request for
the purpose of enabling them to pass upon such matters.
(f) The Initial Purchaser shall have received a certificate, dated the
Closing Date, of Michael A.J. Farrell and Wellington J. St. Claire in their
capacities as the Chief Executive Officer and Chairman of the Board and Vice
Chairman of the Board, respectively, of the Company to the effect that the
signers of such certificate have carefully examined the Final Memorandum, any
amendment or supplement to the Final Memorandum and this Agreement and that:
(i) the representations and warranties of the Company in this
Agreement are true and correct as if made on and as of the Closing Date;
the Final Memorandum, as amended or supplemented as of the Closing Date,
does not include any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading; and
the Company has performed all covenants and agreements and satisfied all
conditions on its part to be performed or satisfied at or prior to the
Closing Date; and
(ii) subsequent to the respective dates as of which information
is given in the Final Memorandum (exclusive of any amendment or supplement
thereof or thereto), the Company has not sustained any loss or interference
with its business or properties having or
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<PAGE>
resulting in a Material Adverse Effect from fire, flood, hurricane,
accident or other calamity, whether or not covered by insurance, or from
any labor dispute or any legal or governmental proceeding, and there has
not been any event, circumstance, or development that results in, or that
the Company believes would result in, a Material Adverse Effect, except in
each case as described in or contemplated by the Final Memorandum
(exclusive of any amendment or supplement thereto).
(g) The Initial Purchaser shall receive a certificate of the Secretary
or Assistant Secretary of the Company certifying as to (i) the Articles of
Incorporation of the Company and any amendments thereto, (ii) the Bylaws of the
Company, and (iii) resolutions of the Board of Directors of the Company
authorizing the execution and delivery of this Agreement, the Registration
Rights Agreement and the other offering documents and (iv) a specimen Common
Stock certificate.
(h) The Initial Purchaser shall have received from each officer and
director of the Company an agreement to the effect that such person will not,
directly or indirectly, without the prior written consent of the Initial
Purchaser, offer, sell, offer to sell, contract to sell, pledge, grant any
option to purchase or otherwise sell or dispose (or announce any offer, sale,
offer of sale, contract of sale, pledge, grant of an option to purchase or other
sale or disposition) of any shares of Common Stock or any securities convertible
into, or exchangeable or exercisable for, shares of Common Stock for a period of
180 days after the Closing Date.
(i) On or before the Closing Date, the Initial Purchaser and counsel
for the Initial Purchaser shall have received such further certificates,
documents or other information as they may have reasonably requested from the
Company.
(j) At the Closing Date, the Company shall have delivered to the
Initial Purchaser the duly authorized and executed Registration Rights
Agreement.
All opinions, certificates, letters and documents delivered pursuant
to this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Initial Purchaser and
counsel for the Initial Purchaser. The Company shall furnish to the Initial
Purchaser such copies of such opinions, certificates, letters and documents in
such quantities as the Initial Purchaser and counsel for the Initial Purchaser
shall reasonably request.
If any of the conditions specified in this Section 7 shall not have
been fulfilled in all material respects when and as provided in this Agreement,
or if any of the opinions and certificates mentioned above or elsewhere in this
Agreement shall not be in all material respects reasonably satisfactory in form
and substance to the Initial Purchaser and counsel for the Initial Purchaser,
this Agreement and all obligations of the Initial Purchaser hereunder may be
canceled at, or at any time prior to, the Closing Date by the Initial Purchaser.
Notice of such cancellation shall be given to the Company in writing or by
telephone or telegraph confirmed in writing.
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<PAGE>
8. Indemnification and Contribution.
--------------------------------
(a) The Company agrees to indemnify and hold harmless the Initial
Purchaser and each person, if any, who controls the Initial Purchaser within the
meaning of the Act or the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), against any and all losses, claims, damages or liabilities,
joint or several, to which the Initial Purchaser or such controlling person may
become subject under the Act, the Exchange Act, any applicable federal or state
law, or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon:
(i) any untrue statement or alleged untrue statement of any
material fact contained in (A) the Preliminary Memorandum, the Final
Memorandum or any Rule 144A Information provided by the Company to any
holder or prospective purchaser of securities pursuant to Section 5(d) or
any amendment or supplement thereto or (B) any application or other
document, or any amendment or supplement thereto, executed by the Company
or based upon written information furnished by or on behalf of the Company
filed in any jurisdiction in order to qualify the Shares under the
securities or blue sky laws thereof or filed with the Commission or any
securities association or securities exchange (each, an "Application");
-----------
(ii) the omission or alleged omission to state in the
Preliminary Memorandum, Final Memorandum or any amendment or supplement
thereto, any Rule 144A Information or any Application, a material fact
required to be stated therein or necessary to make the statements therein
not misleading; or
(iii) any untrue statement or alleged untrue statement of any
material fact contained in any audio or visual materials prepared in
cooperation with the Company and used in connection with the marketing of
the Shares, including without limitation, slides, videos, films, tape
recordings, and, such party or parties, as the case may be, will reimburse,
as incurred, the Initial Purchaser and each such controlling person for any
legal or other expenses reasonably incurred by the Initial Purchaser or
such controlling person in connection with investigating, defending against
or appearing as a third-party witness in connection with any such loss,
claim, damage, liability or action;
provided, however, the Company will not be liable in any such case to the
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extent that any such loss, claim, damage or liability arises out of or is based
upon, an untrue statement or alleged untrue statement or omission or alleged
omission made in the Preliminary Memorandum or the Final Memorandum or any
amendment or supplement thereto in reliance upon and in conformity with the
information furnished to the Company by the Initial Purchaser specifically for
inclusion therein; provided, further, that the foregoing indemnity with respect
-------- -------
to any untrue statement contained in or omission from a Preliminary Memorandum
shall not inure to the benefit of the Initial Purchaser (or any person
controlling the Initial Purchaser) from whom the person asserting any such loss,
liability, claim, damage or action purchased the Shares which are the subject
thereof if a copy of the Final Memorandum (or the Final Memorandum as then
amended or supplemented if the Company shall
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<PAGE>
have furnished any amendments or supplements thereto) was not sent or given by
or on behalf of the Initial Purchaser to such person as of or prior to the
written confirmation of the sale of such Shares to such person if such untrue
statement contained in or omission from such Preliminary Memorandum was
corrected in the Final Memorandum (or the Final Memorandum as so amended or
supplemented), and if the Company had previously furnished copies of such
corrected Final Memorandum to the Initial Purchaser. This indemnity agreement
will be in addition to any liability that the Company may otherwise have. The
Company will not, without the prior written consent of the Initial Purchaser,
settle or compromise or consent to the entry of any judgment in any pending or
threatened claim, action, suit or proceeding in respect of which indemnification
may be sought hereunder (whether or not the Initial Purchaser or any person who
controls the Initial Purchaser within the meaning of the Act or the Exchange Act
is a party to such claim, action, suit or proceeding), unless such settlement,
compromise or consent includes an unconditional release of the Initial Purchaser
and such controlling persons from all liability arising out of such claim,
action, suit or proceeding.
(b) The Initial Purchaser agrees to indemnify and hold harmless the
Company, its directors, its officers, and each person who controls the Company
within the meaning of either the Act or the Exchange Act, to the same extent as
the foregoing indemnity from the Company to the Initial Purchaser, but only with
reference to written information relating to the Initial Purchaser furnished to
the Company by or on behalf of the Initial Purchaser specifically for inclusion
in the Preliminary Memorandum or the Final Memorandum, or in any amendment
thereof or supplement thereto. This indemnity agreement will be in addition to
any liability which the Initial Purchaser may otherwise have. The Company
acknowledges that the statements set forth in (i) the first sentence of the last
paragraph of the cover page in the Preliminary Memorandum and the Final
Memorandum and (ii) on the first, second and last sentences in the fourth
paragraph under the caption "Plan of Distribution" in the Preliminary Memorandum
and Final Memorandum constitute the only information furnished in writing by or
on behalf of the Initial Purchaser for inclusion in the Preliminary Memorandum
or the Final Memorandum.
(c) Promptly after receipt by an indemnified party under this Section
8 of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section 8, notify the indemnifying party in writing of the commencement thereof,
but the omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party otherwise than under
this Section 8, except to the extent the indemnifying party is prejudiced as a
result of such failure. In case any such action is brought against any
indemnified party, and it notifies the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein and, to
the extent that it may wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel reasonably satisfactory to
such indemnified party; provided, however, that if the defendants in any such
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action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded or shall have been advised by
its counsel that there may be one or more legal defenses available to it and/or
other indemnified parties that conflict with those available to the indemnifying
party, the indemnifying party shall not have the right to direct the defense of
such action on behalf of such indemnified party
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<PAGE>
or parties and such indemnified party or parties shall have the right to select
separate counsel to defend such action on behalf of such indemnified party or
parties. After notice from the indemnifying party to such indemnified party of
its election so to assume the defense thereof and approval by such indemnified
party of counsel appointed to defend such action, the indemnifying party will
not be liable to such indemnified party under this Section 8 for any legal or
other expenses, other than reasonable costs of investigation, subsequently
incurred by such indemnified party in connection with the defense thereof,
unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being understood,
however, that in connection with such action the indemnifying party shall not be
liable for the expenses of more than one separate counsel (in addition to local
counsel) in any one action or separate but substantially similar actions in the
same jurisdiction arising out of the same general allegations or circumstances,
designated by the Initial Purchaser, representing the indemnified parties under
paragraph (a) of this Section 8 who are parties to such action or actions) or
(ii) the indemnifying party does not promptly retain counsel satisfactory to the
indemnified party or (iii) the indemnifying party has authorized the employment
of counsel for the indemnified party at the expense of the indemnifying party.
After such notice from the indemnifying party to such indemnified party, the
indemnifying party will not be liable for the costs and expenses of any
settlement of such action effected by such indemnified party without the consent
of the indemnifying party.
(d) In circumstances in which the indemnity agreement provided for in
the preceding paragraphs of this Section 8 is unavailable or insufficient, for
any reason, to hold harmless an indemnified party in respect of any losses,
claims, damages or liabilities (or actions in respect thereof), each
indemnifying party, in order to provide for just and equitable contribution,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect (i) the relative
benefits received by the indemnifying party or parties on the one hand and the
indemnified party on the other from the offering of the Shares or (ii) if the
allocation provided by the foregoing clause (i) is not permitted by applicable
law, not only such relative benefits but also the relative fault of the
indemnifying party or parties on the one hand and the indemnified party on the
other in connection with the statements or omissions or alleged statements or
omissions that resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the Initial Purchaser on the other shall be deemed to be in the same
proportion as the total proceeds from the offering (before deducting expenses)
received by the Company bear to the total Initial Purchaser's discount with
respect to the Shares. The relative fault of the parties shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Initial Purchaser, the
parties' relative intents, knowledge, access to information and opportunity to
correct or prevent such statement or omission, and any other equitable
considerations appropriate in the circumstances. The Company and the Initial
Purchaser agree that it would not be equitable if the amount of such
contribution were determined by pro rata or per capita allocation or by any
other method of allocation that does not take into account the equitable
considerations referred to above in this paragraph (c). Notwithstanding any
other provision
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of this paragraph (c), no person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation, and in no
case shall the Initial Purchaser be responsible for any amount in excess of the
Initial Purchaser's discount applicable to the Shares purchased by the Initial
Purchaser hereunder. For the purposes of this paragraph 8(c), each person, if
any, who controls the Initial Purchaser within the meaning of the Act or the
Exchange Act shall have the same rights to contribution as the Initial
Purchaser, and each director and officer of the Company, and each person, if
any, who controls the Company within the meaning of the Act or the Exchange Act,
shall have the same rights to contribution as the Company.
9. Survival. The respective representations, warranties, agreements,
--------
covenants, indemnities and other statements of the Company, its officers and the
Initial Purchaser set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement shall remain in full force and effect,
regardless of (i) any investigation made by or on behalf of the Company, any of
its officers or directors, the Initial Purchaser and each person, if any, who
controls the Initial Purchaser within the meaning of the Act or the Exchange Act
and their respective directors, officers, employees, agents and controlling
persons referred to in Section 8 hereof and (ii) delivery of and payment for the
Shares. The respective agreements, covenants, indemnities and other statements
set forth in Sections 6 and 8 hereof shall remain in full force and effect,
regardless of any termination or cancellation of this Agreement.
10. Termination.
-----------
(a) This Agreement may be terminated with respect to the Shares in the
sole discretion of the Initial Purchaser upon notice to the Company given prior
to the Closing Date, respectively, in the event that the Company shall have
failed, refused or been unable to perform all obligations and satisfy all
conditions on its part to be performed or satisfied hereunder at or prior
thereto:
(i) the Company shall have, in the reasonable judgment of the
Initial Purchaser, sustained any loss or interference with its business or
properties having or resulting in a Material Adverse Effect from fire,
flood, hurricane, accident or other calamity, whether or not covered by
insurance, or from any labor dispute or any legal or governmental
proceeding or there shall have been any event, circumstance of development
that results in, or that the Company believes would result in, a Material
Adverse Effect, except in each case as described in or contemplated by the
Final Memorandum (exclusive of any amendment or supplement thereto);
(ii) trading generally in securities on the New York Stock
Exchange or Nasdaq National Market shall have been suspended or minimum or
maximum prices shall generally have been established on either such
exchange or market system;
(iii) a banking moratorium shall have been declared by New York
or United States authorities; or
-19-
<PAGE>
(iv) there shall have been (A) an outbreak or escalation of major
hostilities between the United States and any foreign power, (B) an
outbreak or escalation of any other insurrection or armed conflict
involving the United States or (C) any other calamity or crisis or material
adverse change in general economic, political or financial conditions
having an effect on the U.S. financial markets that, in the reasonable
judgment of the Initial Purchaser, makes it impractical or inadvisable to
proceed with the offering or the delivery of the Shares as contemplated by
the Final Memorandum, as amended as of the date hereof.
(b) Termination of this Agreement pursuant to this Section 10 shall be
without liability of any party to any other party except for the expenses to be
paid by the Company pursuant to Section 6 and except as provided in Section 8
hereof.
11. Notices. All communications hereunder shall be in writing and, if
-------
sent to the Initial Purchaser, shall be delivered or sent by mail, telex or
facsimile transmission and confirmed in writing to Friedman, Billings, Ramsey &
Co., Inc., Potomac Tower, 1001 Nineteenth Street North, Arlington, Virginia
22209, Attention: James Kleeblatt; and if sent to the Company, shall be
delivered or sent by mail, telex or facsimile transmission and confirmed in
writing to the Company at 1500 Harbour Boulevard, Weehawken, New Jersey 07087,
Attention: Chief Executive Officer with a copy of Morgan, Lewis & Bockius LLP,
101 Park Avenue, New York, New York 10178, Attention: Robert Mendelson.
12. Successors. This Agreement shall inure to the benefit of and shall be
----------
binding upon the Initial Purchaser, the Company and their respective successors
and legal representatives, and nothing expressed or mentioned in this Agreement
is intended or shall be construed to give any other person any legal or
equitable right, remedy or claim under or in respect of this Agreement, or any
provisions herein contained, this Agreement and all conditions and provisions
hereof being intended to be and being for the sole and exclusive benefit of such
persons and for the benefit of no other person except that the indemnities of
the Company contained in Section 8 of this Agreement shall also be for the
benefit of any person or persons who control the Initial Purchaser within the
meaning of the Act or the Exchange Act. This Agreement shall not be assignable
by the parties. The term "successors" shall not include any purchaser of the
Shares from the Initial Purchaser merely by reason of such purchase.
13. Applicable Law. The validity and interpretation of this Agreement,
--------------
and the terms and conditions set forth herein, shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to any provisions relating to conflicts of laws.
14. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
-20-
<PAGE>
If the foregoing correctly sets forth our understanding please indicate
your acceptance thereof in the space provided below for that purpose, whereupon
this letter shall constitute a binding agreement between us.
Very truly yours,
ANNALY MORTGAGE MANAGEMENT, INC.
By: /s/ Michael A.J. Farrell
____________________________________
Name: Michael A.J. Farrell
Title: Chief Executive Officer and
Chairman of the Board
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
By: /s/ James R. Kleeblatt
___________________________________
Name: James R. Kleeblatt
Title: Managing Director
-21-
<PAGE>
EXHIBIT A
CERTIFICATE OF RULE 144A
QUALIFIED INSTITUTIONAL BUYER
Friedman, Billings, Ramsey & Co., Inc.
Potomac Tower
1001 Nineteenth Street, North
Arlington, Virginia 22209
Gentlemen:
We certify, to enable you to make offers and sales of securities pursuant
to Rule 144A under the Securities Act of 1933, as amended (the "Securities
Act"), that we are a qualified institutional buyer in that we satisfy the
requirements of one or more of paragraphs (i) through (vi) hereof (check
applicable box(es)).
[] (i) We are an entity referred to in sub-paragraphs (A) through (F) hereof
and in the aggregate owned and invested on a discretionary basis, for our
own account and the accounts of other persons, at least the amount of
securities specified below (not less than $100 million), calculated as
provided in Rule 144A as of the date specified below.
[] (A) Corporation, etc. A corporation (other than a bank, savings and
loan or similar institution referred to in (ii) below), partnership,
Massachusetts or similar business trust, organization described in Section
501(c)(3) of the Internal Revenue Code, Small Business Development Company
licensed by the U.S. Small Business Administration, under Section 301(c) or (d)
of the Small Business Investment Act of 1958, or business development company as
defined in Section 202(a)(22) of the Investment Advisers Act of 1940; or
[ ] (B) Insurance Company. An Insurance Company as defined in Section
(13) of the Act.
[ ] (C) ERISA Plan. An employee benefits plan within the meaning of Title
I of the Employee Retirement Income Security Act of 1974; or
[ ] (D) State or Local Plan. A plan established and maintained by a
state, its political subdivisions, or any agency or instrumentality
of a state or its political subdivisions, for the benefit of its
employees; or
[ ] (E) Investment Company. An investment company registered under the
Investment Company Act of 1940 or any business development company
as defined in Section 2(a)(48) of that Act; or
[ ] (F) Investment Adviser. An investment adviser registered under the
Investment Advisers Act of 1940.
[] (ii) Bank or Savings and Loan. We are a bank defined in Section3(a)(2) of
the Act; a savings and loan association or other institution referenced in
Section 3(a)(5)(A) of the Securities Act, or a foreign bank or savings and
loan association or equivalent institution that
Exh. A-1
<PAGE>
in the aggregate owned and invested on a discretionary basis, for our own
account and the accounts of other persons, at least the amount of
securities specified below (not less than $100 million), calculated as
provided in Rule 144A, as of the date specified below and had an audited
net worth of at least $25 million as of the end of our most recent fiscal
year. (This paragraph does not include bank commingled funds.)
[] (iii) One of a Family of Investment Companies. We are an investment company
registered under the Investment Company Act of 1940 that is part of a
"family of investment companies", as defined in Rule 144A, that owned in
the aggregate at least the amount of securities specified below (not less
than $100 million), calculated as provided in Rule 144A, as of the date
specified below.
[] (iv) Dealer. We are a dealer registered under Section 15 of the Securities
Exchange Act of 1934 (the "Exchange Act") that in the aggregate owned and
invested on a discretionary for our own account and the accounts of other
persons, at least the amount of securities specified below (not less than
$10 million), calculated as provided in Rule 144A, as of the date specified
below.
[] (v) Dealer (Riskless Principal Transaction). We are a dealer registered
under Section 15 of the Exchange Act acting in a riskless principal
transaction on behalf of a qualified institutional buyer.
[] (vi) Entity Owned by Qualified Buyers. We are an entity, all of the equity
owners of which are qualified institutional buyers (each satisfying one or
more of (i) through (iv) above including, as applicable, the $100 million
test).
In calculating the amount of securities owned or invested by an entity as
provided in Rule 144A: (a) repurchase agreements, securities owned but subject
to repurchase agreements, swaps, bank deposit instruments, loan participation,
securities of affiliates and dealers' unsold allotments are excluded; and (b)
securities are valued at cost, except they may be valued at market if they are
reported in financial statements at market and no current cost information is
published.
Each entity, including a parent or subsidiary, must separately meet the
requirements to be a qualified institutional buyer under Rule 144A. Securities
owned by any subsidiary are included as owned or invested by its parent entity
for purposes of Rule 144A only if (1) the subsidiary is consolidated in the
parent entity's financial statements and (2) the subsidiary's investments are
managed under the parent entity's direction (except that a subsidiary's
securities are not included if the parent entity is itself a majority-owned
consolidated subsidiary of another enterprise and is not a reporting company
under the Exchange Act).
We further certify that we will purchase securities under Rule 144A from or
through you only for our account or for the account of another entity which is a
qualified institutional buyer. We will not purchase securities for another
entity under Rule 144A unless it satisfies one or more paragraphs (i) through
(vi) above including, as applicable, the $100 million test.
Exh. A-2
<PAGE>
We agree to notify you of any change in the certifications herein, and each
purchase by us of securities under Rule 144A from or through you will constitute
a reaffirmation of the certifications herein (as modified by any such notice) as
of the time of such purchase.
Amount of Securities: $ _________________
(State specific amount owned/invested - may
be approximate, but no range or minimum)
Most Recent Fiscal Year-End: ____________
Date Owned/Invested: ____________________
(Complete only if this date is after most
recent fiscal year-end)
Date: _____________________, 19__________
By: _____________________________________
Name: ___________________________________
Title: __________________________________
* Certificate must be signed by the Institution's chief financial officer or
another executive officer, except that if the Institution is a member of a
"family of investment companies", the certificate must be signed by an
executive officer of such Institution's Investment Adviser.
Exh. A-3
<PAGE>
EXHIBIT B
INVESTMENT LETTER
FOR INSTITUTIONAL ACCREDITED INVESTORS
Annaly Mortgage Management, Inc.
1500 Harbour Boulevard
Weehawken, New Jersey 07087
Friedman, Billings, Ramsey & Co., Inc.
Potomac Tower
1001 Nineteenth Street, North
Arlington, Virginia 22209
Ladies and Gentlemen:
In connection with our proposed purchase of ___ shares (the "Shares") of
common stock, par value $.01 per share (the "Common Stock"), of Annaly Mortgage
Management, Inc., a Maryland corporation (the "Company"), we confirm that:
1. We understand that the Shares have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), and may not be sold
except as permitted in the following sentence. We understand and agree, on our
own behalf and on behalf of any accounts for which we are acting as hereinafter
stated, (x) that such Shares are being offered only in a transaction not
involving any public offering within the meaning of the Securities Act, (y) that
if we should resell, pledge or otherwise transfer such Shares within three years
(or such shorter period as may then be applicable under the Securities Act)
after the date of the original issuance of the Shares or within three months
after we cease to be an affiliate (within the meaning of Rule 144 under the
Securities Act) of the Company, such Shares may be resold, pledged or
transferred only (i) to the Company, (ii) so long as the Shares are eligible for
resale pursuant to Rule 144A under the Securities Act ("Rule 144A"), to a person
whom we reasonably believe is a "qualified institutional buyer" (as defined in
Rule 144A) ("QIB") that purchases for its own account or for the account of a
QIB to whom notice is given that the resale, pledge or transfer is being made in
reliance on Rule 144A (as indicated by the box checked by the transferor on the
Certificate of Transfer on the reverse of the certificate representing the
Shares), (iii) in an "offshore transaction" (within the meaning of Regulation S
under the Securities Act) (as indicated by the box checked by the transferor on
the Certificate of Transfer on the reverse of the certificate representing the
Shares), and, if such transfer is being effected prior to the expiration of the
"one year restricted period" (within the meaning of Rule 903(c)(3) of Regulation
S under the Securities Act), the transferee shall have certified to the Company
and the Transfer Agent that such transfer is to a non-U.S. person (within the
meaning of Regulation S) and that such transferee is acquiring the Shares in an
offshore transaction (within the meaning of Regulation S), (iv) to an
institution that is an "accredited investor" as defined in Rule 501(a)(1), (2),
(3) or (7) of Regulation D under the Securities Act (as indicated by the box
checked by the transferor on the Certificate of Transfer on the reverse of the
certificate representing the Shares) that has certified to the Company and the
Transfer Agent that it is such an institutional
Exh. B-1
<PAGE>
accredited investor and is acquiring the Shares for investment purposes and not
for distribution (provided that no transferor who has purchased Shares from any
person other than a QIB or an institutional accredited investor pursuant to
clause (iii) shall be permitted to transfer any Shares so purchased by it to an
institutional accredited investor pursuant to this clause (iv) prior to the
expiration of the "one year restricted period" (within the meaning of Rule
903(c)(3) of Regulation S under the Securities Act)), (v) pursuant to an
exemption from registration under the Securities Act provided by Rule 144 (if
applicable) under the Securities Act or (vi) pursuant to an effective
registration statement under the Securities Act and in each case in accordance
with any applicable securities laws of any state of the United States or other
jurisdictions, and we will notify any purchaser of the Shares from us of the
above resale restrictions, if then applicable. We further understand and agree
that, in connection with any transfer of the Shares by us pursuant to clauses
(iii), (iv) or (v) of the previous sentence, we and the transferee of the Shares
will deliver to the Company and the Transfer Agent certificates which may be
obtained from the Company and the Transfer Agent and such other certificates and
other information (including an opinion of counsel) as they may reasonably
require to confirm that any such transfer complies with the foregoing
restrictions.
We are able to fend for ourselves in the transactions contemplated by
the Offering Memorandum relating to the Shares, we have such knowledge and
experience in financial and business matters as to be capable of evaluating the
merits and risks of our investment in the Shares, and we and any accounts for
which we are acting are each able to bear the economic risk of our or its
investment for an indefinite period of time and can afford the complete loss of
such investment.
3. We understand that the Company and Friedman, Billings, Ramsey & Co.,
Inc., as the initial purchaser of the Shares (the "Initial Purchaser"), and
others will rely upon the truth and accuracy of the foregoing acknowledgments,
representations and agreements and we agree that if any of the acknowledgments,
representations and warranties deemed to have been made by us by our purchase of
Shares, for our own account or for one or more accounts as to each of which we
exercise sole investment discretion, are no longer accurate, we shall promptly
notify the Company and the Initial Purchaser.
4. We are an institutional "accredited investor" (as defined in Rule
501(a)(1), (2), (3) or (7) under the Securities Act or, if the Shares are to be
purchased for one or more accounts for which we are acting as fiduciary or
agent, each such investor account is an institutional Accredited Investor on a
like basis.
5. We are acquiring the Shares for our own account (or such investor
accounts set forth in paragraph 4) and not with a view to or for resale in
connection with any distribution or public offering thereof in violation of the
Securities Act.
6. The Shares were not offered or sold to us by any form of general
solicitation or general advertising.
7. The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain requirements on those employee benefit plans to which
it applies ("Plans") and on those persons who are fiduciaries with respect to
such Plans. Plans cannot purchase Shares unless
Exh. B-2
<PAGE>
(i) they are represented in this regard by a "qualified professional asset
manager" as that term is defined in U.S. Department of Labor Prohibited
Transaction Exemption ("PTE") 84-14, and other conditions to the applicability
of PTE 84-14 to the purchase and holding of Common Stock are satisfied, or (ii)
the conditions to the applicability of (a) PTE 90-1 (for insurance company
pooled separate accounts), (b) PTE 91-38 (for bank collective funds), (c) PTE
95-60 (for insurance company general accounts) or (d) PTE 96-23 (for in-house
asset managers) to the purchase and holding of Common Stock are satisfied. By
purchasing Common Stock, the investing Plan is deemed to represent and agree
that its is so represented and that such conditions are satisfied.
Employee benefit Plans that are governmental plans (as defined in section
3(32) of ERISA) are not subject to ERISA requirements but may be subject to
somewhat similar provisions of other applicable federal or state law or legal
restrictions on their ability to invest in shares of Common Stock. Accordingly,
governmental plans should consult with legal counsel prior to making an
investment.
The sale of shares to Plans is in no respect a representation by the
Company, the Initial Purchaser or any other person associated with the sale of
the Shares that such Shares meet all relevant legal requirements with respect to
investments by Plans generally or any particular Plan, or that such shares are
otherwise appropriate for Plans generally or any particular Plan.
8. We understand that we and our professional advisor(s), if any, have
the right to ask questions of and receive answers from the Company and its
officers and directors, and to obtain such information concerning the terms and
conditions of the offering of the Shares to the extent that the Company
possesses the same or can acquire it without unreasonable effort or expense, as
we and our advisor(s), if any, deem necessary to verify the accuracy of the
information referred to in the Offering Memorandum pursuant to which the Company
is offering the Shares to certain qualified offerees. We represent and agree
that prior to our agreement to purchase Shares we and our professional
advisor(s), if any, will have asked such questions, received such answers and
obtained such information as we deem necessary to verify the accuracy (i) of the
information referred to in the Offering Memorandum and (ii) of any other
information that we deem relevant to making an investment decision with respect
to the Shares.
9. You are entitled to rely upon this letter and you are irrevocably
authorized to produce this letter or a copy hereof to any interested party in
any administrative or legal proceeding or official inquiry with respect to the
matters covered hereby.
Very truly yours,
_____________________________________
(Name of Purchaser)
By:__________________________________
Address:_____________________________
_____________________________
Exh. B-3
<PAGE>
EXHIBIT C
INVESTMENT LETTER FOR NON U.S. PURCHASERS
Annaly Mortgage Management, Inc.
1500 Harbour Boulevard
Weehawken, New Jersey 07087
Friedman, Billings, Ramsey & Co., Inc.
Potomac Tower
1001 Nineteenth Street, North
Arlington, Virginia 22209
Dear Sirs:
In connection with our proposed purchase of _______ shares (the "Shares")
of common stock, par value $.01 per share (the "Common Stock"), of Annaly
Mortgage Management, Inc., a Maryland corporation (the "Company"), we confirm
that:
1. We understand that the Shares have not been registered under the
United States Securities Act of 1933, as amended (the "Securities Act"), and may
not be sold except as permitted in the following sentence. We understand and
agree, on our own behalf and on behalf of any accounts for which we are acting
as hereinafter stated, (x) that such Shares are being offered only in a
transaction not involving any public offering within the meaning of the
Securities Act, (y) that if we should resell, pledge or otherwise transfer such
Shares within three years (or such shorter period as may then be applicable
under the Securities Act) after the date of the original issuance of the Shares
or within three months after we cease to be an affiliate (within the meaning of
Rule 144 under the Securities Act) of the Company, such Shares may be resold,
pledged or transferred only (i) to the Company, (ii) so long as Shares are
eligible for resale pursuant to Rule 144A under the Securities Act ("Rule
144A"), to a person whom we reasonably believe is a "qualified institutional
buyer" (as defined in Rule 144A) (a "QIB") that purchases for its own account or
for the account of a QIB to whom notice is given that the resale, pledge or
transfer is being made in reliance on Rule 144A (as indicated by the box checked
by the transferor on the Certificate of Transfer on the reverse of the
certificate representing the Shares), (iii) in an "offshore transaction" (within
the meaning of Regulation S under the Securities Act) (as indicated by the box
checked by the transferor on the Certificate of Transfer on the reverse of the
certificate representing the Shares), and, if such transfer is being effected
prior to the expiration of the "one year restricted period" (within the meaning
of Rule 903(c)(3) of Regulation S under the Securities Act) the transferee shall
have certified to the Company and the Transfer Agent that such transfer is to a
non-U.S. person (within the meaning of Regulation S) and that such transferee is
acquiring the Shares in an offshore transaction (within the meaning of
Regulation S), (iv) to an institution that is an "accredited investor" as
defined in rule 501(a)(1),(2),(3) or (7) of Regulation D under the Securities
Act (as indicated by the box checked by the transferor on the Certificate of
Transfer on the reverse of the certificate representing the Shares) that has
certified to the Company and the Transfer Agent that it is such an institutional
accredited investor and is acquiring the Shares for investment purposes and not
for distribution
C-1
<PAGE>
(provided that no transferor who has purchased shares from any person other than
a QIB or an institutional accredited investor pursuant to clause (iii) shall be
permitted to transfer any Shares so purchased by it to an institutional
accredited investor pursuant to this clause (iv) prior to the expiration of the
"one year restricted period" (within the meaning of Rule 903(c)(3) of Regulation
S under the Securities Act)), (v) pursuant to an exemption from registration
under the Securities Act provided by Rule 144 (if applicable) under the
Securities Act, or (vi) pursuant to an effective registration statement under
the Securities Act and, in each case in accordance with any applicable
securities laws of any state of the United States or other jurisdictions, and we
will notify any purchaser of the Shares from us of the above resale restriction,
if then applicable. We further understand and agree that, in connection with
any transfer of the Shares by us pursuant to clause (iii), (iv) or (v) of the
previous sentence, we and the transferee of the Shares will deliver to the
Company and the Transfer Agent certificates which may be obtained from the
Company and the Transfer Agent and such other certificates and other
information, including an opinion of counsel, as the Company and the Transfer
Agent may request, to confirm that any such transfer complies with the foregoing
restrictions.
We are able to fend for ourselves in the transactions contemplated by
the Offering Memorandum relating to the Shares, we have such knowledge and
experience in financial and business matters as to be capable of evaluating the
merits and risks of our investment in the Shares, and we and any accounts for
which we are acting are each able to bear the economic risk of our or its
investment for an indefinite period of time and can afford the complete loss of
such investment.
3. We have made ourselves familiar with the rules and restrictions set
forth in Regulation S.
4. We have not undertaken any activity for the purpose of, or that could
reasonably be expected to have the effect of, conditioning the market for any of
the Shares being offered in reliance on Regulation S.
5. We understand that the Company and Friedman, Billings, Ramsey & Co.,
Inc., as the initial purchaser of the Shares (the "Initial Purchaser"), and
others will rely upon the truth and accuracy of the acknowledgments,
representations and agreements herein and we agree that if any of the
acknowledgments, representations and warranties deemed to have been made by us
by our purchase of Shares, for our own account or for one or more accounts as to
each of which we exercise sole investment discretion, are no longer accurate, we
shall promptly notify the Company and the Initial Purchaser.
6. We are not a U.S. person (and are not purchasing for the account or
benefit of a U.S. person) within the meaning of Regulation S under the
Securities Act.
7. Our principal address is outside the United States and we were outside
the United States at the time that any offer of the Shares was made to us and
the time that the buy order for our purchase of the Shares was originated.
C-2
<PAGE>
8. We understand that we and our professional advisor(s), if any, have
the right to ask questions of and receive answers from the Company and its
officers and directors, and to obtain such information concerning the terms and
conditions of the offering of the Shares to the extent that the Company
possesses the same or can acquire it without unreasonable effort or expense, as
we and our advisor(s), if any, deem necessary to verify the accuracy of the
information referred to in the Offering Memorandum pursuant to which the Company
is offering the Shares to certain qualified offerees. We represent and agree
that prior to our agreement to purchase Shares we and our professional
advisor(s), if any, will have asked such questions, received such answers and
obtained such information as we deem necessary to verify the accuracy (i) of the
information referred to in the Offering Memorandum and (ii) of any other
information that we deem relevant to making an investment decision with respect
to the Shares.
9. You are entitled to rely upon this letter and you are irrevocably
authorized to produce this letter or a copy hereof to any interested party in
any administrative or legal proceeding or official inquiry with respect to the
matters covered hereby.
Very truly yours,
------------------------------------
(Name of Purchaser)
By:_________________________________
C-3
<PAGE>
EXHIBIT D
NOTICE TO INVESTORS
OFFERS AND SALES BY THE INITIAL PURCHASER
The Shares have not been registered under the Securities Act and may not be
offered or sold except in accordance with an applicable exemption from the
registration requirements thereof. Accordingly, the Shares are being offered
and sold only (1) in the United States to "qualified institutional buyers" as
defined in Rule 144A under the Securities Act ("Qualified Institutional Buyers")
and to a limited number of other institutional "accredited investors" as defined
in Rule 501(a)(1), (2), (3) or (7) under the Securities Act ("Accredited
Investors") in a private sale exempt from the registration requirements of the
Securities Act, and (2) outside the United States to non-U.S. persons ("foreign
purchasers") in reliance upon Regulation S under the Securities Act. Each
Qualified Institutional Buyer that is a purchaser of Shares from the Initial
Purchaser will be required to sign a certificate in the form of Exhibit A
hereto. Each institutional Accredited Investor that is a purchaser of Shares
from the Initial Purchaser will be required to sign a certificate in the form of
Exhibit B hereto. Each foreign purchaser that is a purchaser of Shares from the
Initial Purchaser ("Initial Foreign Purchaser") will be required to sign a
certificate in the form of Exhibit C hereto.
INVESTOR REPRESENTATIONS AND RESTRICTIONS ON RESALE
Each purchaser of the Shares will be deemed to have represented and agreed as
follows:
1. Either:
(a) it is not a U.S. person (within the meaning of Regulation S
under the Securities Act) and is not acquiring the Shares for the
account or benefit of any U.S. person and, at the time its buy order
for the Shares was originated and at the time that any offer for the
Shares was made to it, it was outside the United States; it has made
itself familiar with the rules and restrictions set forth in
Regulation S; and it has not undertaken any activity for the purpose
of, or that could reasonably be expected to have the effect of,
conditioning the market for any of the Shares being offered in
reliance on Regulation S; or
(b) it is a Qualified Institutional Buyer within the meaning of
Rule 144A promulgated under the Securities Act and is aware that any
sale of the Shares to it will be made in reliance on Rule 144A. Such
acquisition will be for its own account or for the account of another
Qualified Institutional Buyer; or
(c) it is an institutional "Accredited Investor" within the
meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act
or, if the Shares are to be
Exh. D-1
<PAGE>
purchased for one or more accounts for which it is acting as fiduciary
or agent, each such investor account is an institutional Accredited
Investor on a like basis; it is acquiring the Shares for its own
account (or such investor accounts) and not with a view to or for
resale in connection with any distribution or public offering thereof
in violation of the Securities Act; it has such knowledge and
experience in financial and business matters that it is capable of
evaluating the merits and risks of purchasing any of the Shares; it is
aware that it may be required to bear the economic risk of an
investment in the Shares for an indefinite period of time and it (or
such account) is able to bear such risk for an indefinite period; and
the Shares were not offered or sold to it by any form of general
solicitation or general advertising;
2. it acknowledges that the Shares have not been registered under the
Securities Act and may not be sold except as permitted below;
3. it understands and agrees (x) that such Shares are being offered
only in a transaction not involving any public offering within the meaning
of the Securities Act, and (y) that (A) if within three years (or such
shorter period as may then be applicable under the Securities Act regarding
the holding period for securities under Rule 144(k) of the Securities Act
or any successor rule) after the date of original issuance of the Shares or
if within three months after it ceases to be an affiliate (within the
meaning of Rule 144 under the Securities Act) of the Company, it decides to
resell, pledge or otherwise transfer such Shares on which the applicable
legend set forth below appears, such Shares may be resold, pledge or
transferred only (i) to the Company, (ii) so long as such Shares are
eligible for resale pursuant to Rule 144A, to a person who the transferor
reasonably believes is a Qualified Institutional Buyer that purchases for
its own account or for the account of a Qualified Institutional Buyer to
whom notice is given that the resale, pledge or transfer is being made in
reliance on Rule 144A (as indicated by the box checked by the transferor on
the Certificate of Transfer on the reverse of the certificate representing
the Shares if such Shares are not in book-entry form), (iii) in an offshore
transaction in accordance with Regulation S (as indicated by the box
checked by the transferor on the Certificate of Transfer on the reverse of
the certificate representing the Shares if such Shares are not in book-
entry form), and if such transfer is being effected pursuant to this clause
(iii) prior to the expiration of the "one year restricted period" (within
the meaning of Rule 903 (c)(3) of Regulation S), the transferee shall have
certified to the Company and the Transfer Agent that such transferee is a
non-U.S. Person (within the meaning of Regulation S) and that such
transferee is acquiring the Shares in an offshore transaction (within the
meaning of Regulation S), (iv) to an institutional Accredited Investor
(as indicated by the box checked by the transferor on the Certificate of
Transfer on the reverse of the certificate representing the Shares if such
Shares are not in book-entry form) who has certified to the Company and the
Transfer Agent that such transferee is an institutional Accredited Investor
and is acquiring the Shares for investment purposes and not for
distribution (provided that no Purchaser who has purchased Shares from any
Exh. D-2
<PAGE>
person other than a Qualified Institutional Buyer or an institutional
Accredited Investor pursuant to clause (iii) shall be permitted to transfer
any Shares so purchased by it to an Institutional Accredited Investor
pursuant to this clause (iv) prior to the expiration of the "one year
restricted period" (within the meaning of Rule 903(c)(3) of Regulation
S )), (v) pursuant to an exemption from registration under the Securities
Act provided by Rule 144 (if applicable) under the Securities Act, or (vi)
pursuant to an effective registration statement under the Securities Act in
each case in accordance with any applicable securities laws of any state of
the United States or other jurisdictions; (B) the purchaser will, and each
subsequent holder is required to, notify any purchaser of Shares from it of
the resale restrictions referred to in (A) above, if then applicable; and
(C) with respect to any transfer of Shares pursuant to clauses (A)(iii),
(iv) or (v) above, such holder and the transferee will deliver to the
Company and the Transfer Agent certificates which may be obtained from the
Company and such other certificates and other information, including an
opinion of counsel, as they may reasonably require to confirm that the
transfer by it to the transferee complies with the foregoing restrictions;
4. it understands that the notification requirements referred to in
3. above will be satisfied by virtue of the fact that the following legend
will be placed on the certificates representing the Shares unless otherwise
agreed by the Company:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING THIS
SECURITY, AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) THIS SECURITY MAY
NOT BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED (X) PRIOR TO THE THIRD
ANNIVERSARY (OR SUCH SHORTER PERIOD AS MAY THEN BE APPLICABLE UNDER THE
SECURITIES ACT) OF THE ISSUANCE HEREOF (OR OF ANY PREDECESSOR SECURITY
HERETO) OR (Y) BY ANY HOLDER THAT WAS AN AFFILIATE OF THE COMPANY AT ANY
TIME DURING THE THREE MONTHS PRECEDING THE DATE OF SUCH TRANSFER, IN EITHER
CASE OTHER THAN (1) TO THE COMPANY, (2) SO LONG AS THIS SECURITY IS
ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE
144A"), TO A PERSON WHOM THE TRANSFEROR REASONABLY BELIEVES IS A QUALIFIED
INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A PURCHASING FOR ITS OWN
ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM
NOTICE IS GIVEN THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN
RELIANCE ON RULE 144A (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON
THE CERTIFICATE OF TRANSFER ON THIS SECURITY), (3) IN AN OFFSHORE
TRANSACTION IN ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT (AS
INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF
TRANSFER ON THIS SECURITY), AND, IF SUCH TRANSFER IS BEING EFFECTED PRIOR
TO THE EXPIRATION
Exh. D-3
<PAGE>
OF THE "ONE YEAR RESTRICTED PERIOD" (WITHIN THE MEANING OF RULE 903(c)(3)
OF REGULATION S UNDER THE SECURITIES ACT), A CERTIFICATE WHICH MAY BE
OBTAINED FROM THE COMPANY IS DELIVERED BY THE TRANSFEREE TO THE COMPANY AND
THE TRANSFER AGENT, (4) TO AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR"
AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT (AS
INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF
TRANSFER ON THIS SECURITY) THAT IS ACQUIRING THIS SECURITY FOR INVESTMENT
PURPOSES AND NOT FOR DISTRIBUTION (PROVIDED THAT NO PURCHASER WHO HAS
PURCHASED SHARES FROM ANY PERSON OTHER THAN A QUALIFIED INSTITUTIONAL BUYER
OR AN INSTITUTIONAL ACCREDITED INVESTOR PURSUANT TO CLAUSE (3) SHALL BE
PERMITTED TO TRANSFER ANY SHARES SO PURCHASED BY IT TO AN INSTITUTIONAL
ACCREDITED INVESTOR PURSUANT TO THIS CLAUSE (4) PRIOR TO THE EXPIRATION OF
THE "ONE-YEAR RESTRICTED PERIOD" (WITHIN THE MEANING OF RULE 903(c)(3) OF
REGULATION S)), (5) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT PROVIDED BY RULE 144 (IF APPLICABLE) UNDER THE SECURITIES
ACT, OR (6) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES
LAWS OF ANY STATE OF THE UNITED STATES OR OTHER JURISDICTIONS; AND (B) IT
WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM
IT OF THIS SECURITY OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE.
WITH RESPECT TO ANY TRANSFER OF SECURITIES PURSUANT TO CLAUSES (A)(3), (4)
AND (5) ABOVE, THE HOLDER OF THIS SECURITY AGREES THAT IT AND THE
TRANSFEREE WILL FURNISH TO THE COMPANY AND THE TRANSFER AGENT CERTIFICATES
IN THE RESPECTIVE FORMS ATTACHED TO THIS CERTIFICATE AND SUCH OTHER
CERTIFICATES AND OTHER INFORMATION, INCLUDING AN OPINION OF COUNSEL, AS
THEY MAY REASONABLY REQUIRE TO CONFIRM THAT ANY TRANSFER BY IT TO THE
TRANSFEREE OF THIS SECURITY COMPLIES WITH THE FOREGOING RESTRICTIONS. THE
HOLDER HEREOF, BY PURCHASING THIS SECURITY, REPRESENTS AND AGREES FOR THE
BENEFIT OF THE TRANSFEROR THAT IT IS (1) A QUALIFIED INSTITUTIONAL BUYER
WITHIN THE MEANING OF RULE 144A OR (2) AN INSTITUTION THAT IS AN
"ACCREDITED INVESTOR" AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) UNDER
THE SECURITIES ACT AND THAT IT IS HOLDING THIS SECURITY FOR INVESTMENT
PURPOSES AND NOT FOR DISTRIBUTION OR (3) A NON-U.S. PERSON OUTSIDE THE
UNITED STATES WITHIN THE MEANING OF (OR ANY ACCOUNT SATISFYING THE
REQUIREMENTS OF PARAGRAPH (o)(2) OF RULE 901 UNDER) REGULATION S UNDER THE
SECURITIES ACT";
Exh. D-4
<PAGE>
5. it understands that the Company, the Initial Purchaser and others
will rely upon the truth and accuracy of the foregoing acknowledgments,
representations, warranties and agreements and agrees that if any of the
acknowledgments, representations, warranties and agreements deemed to have
been made by it by its purchase of the Shares are no longer accurate, it
shall promptly notify the Company and the Initial Purchaser. If it is
acquiring the Shares as a fiduciary or agent for one or more investor
accounts, it represents that it has sole investment discretion with respect
to each such account and it has full power to make the foregoing
acknowledgments, representations, warranties and agreements on behalf of
each such account;
6. if it is a purchaser in a sale that occurs outside the United
States within the meaning of Regulation S under the Securities Act, it
acknowledges that until the expiration of the "one year restricted period"
within the meaning of Rule 903 of Regulation S under the Securities Act,
any offer or sale of the Shares shall not be made by it within the United
States or to, or for the account or benefit of, a U.S. person within the
meaning of Rule 902(o) of the Securities Act; and
7. it understands that the sale of Shares to Plans is in no respect a
representation by the Company, the Initial Purchaser or any other person
associated with the sale of the Shares that such Shares meet all relevant
legal requirements with respect to investments by Plans generally or any
particular Plan, or that such Shares are otherwise appropriate for Plans
generally or any particular Plan.
Exh. D-5
<PAGE>
EXHIBIT E
FORM OF OPINION OF COUNSEL TO THE COMPANY
[Letterhead of Morgan, Lewis & Bockius LLP]
Date
Friedman, Billings, Ramsey & Co., Inc.
Potomac Tower
1001 Nineteenth Street North
Arlington, Virginia 22209
Ladies and Gentlemen:
We have acted as counsel to Annaly Mortgage Management, Inc., a Maryland
corporation (the "Company"), in connection with the preparation of a preliminary
offering memorandum, dated January 27, 1997 (the "Preliminary Memorandum"), and
a final offering memorandum, dated February 12, 1997 (the "Final Memorandum"),
relating to the sale by the Company to you (the "Initial Purchaser") of
3,600,000 shares (the "Shares") of its common stock, par value $.01 per share
(the "Common Stock").
The Shares are being sold pursuant to a Purchase Agreement, dated February 12,
1997 (the "Purchase Agreement"), between the Company and the Initial Purchaser.
In connection with rendering the opinions expressed herein, we have examined,
among other things, copies of (i) the Articles of Incorporation and the Articles
of Amendment and Restatement of the Company, each as amended to date, (ii) the
by-laws of the Company, as amended to date, (iii) the Preliminary Memorandum,
(iv) the Final Memorandum, (v) the Purchase Agreement and (vi) the Registration
Rights Agreement, dated February 12, 1997, between the Company and the Initial
Purchaser (the "Registration Rights Agreement").
We have also examined originals, or copies satisfactory to us, of all such
corporate records, agreements, certificates, governmental orders, permits and
other documents as we have deemed relevant and necessary as a basis for the
opinions hereinafter expressed. In such examination we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to us
as originals and the conformity with the original documents of all documents
submitted to us as copies. As to any facts material to such opinions (including
determinations with respect to the question of materiality to the Company's
business), we have relied, among other things, upon the representations and
warranties of the Company and the Initial Purchaser in the Purchase
Exh. E-1
<PAGE>
Agreement, certificates of public officials and certificates of officers or
other representatives of the Company.
We have participated in conferences with representatives of the Company,
representatives of the independent auditors of the Company and representatives
of the Initial Purchaser, at which conferences the contents of the Preliminary
Memorandum and the Final Memorandum were discussed and, although we have not
established or confirmed factual matters and are not passing upon and do not
assume any responsibility for the factual accuracy or completeness of the
Preliminary Memorandum or the Final Memorandum, on the basis of the foregoing
nothing has come to our attention to cause us to believe that the Preliminary
Memorandum, as of its date, or the Final Memorandum, as of the date hereof
(except for financial statements and schedules and other financial and
statistical data included therein, as to which we state no belief) contained or
contains any untrue statement of a material fact or omitted or omits to state a
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
The opinions expressed below are limited to the laws of the State of New York,
United States Federal law and the Maryland General Corporation Law, except to
the extent provided in paragraph 2 of this opinion letter. The opinion
expressed in paragraph 1 is based solely upon our review of a Certificate of
Good Standing from the State Department of Assessments and Taxation of the State
of Maryland. The opinion in the first sentence of paragraph 2 is bases solely
upon our review of a Certificate of Existence from the New Jersey Department of
State. The opinions expressed below are also subject to the qualifications that
we have assumed the due authorization, execution and delivery by each party
thereto other than the Company of the Purchase Agreement and the Registration
Rights Agreement (collectively, the "Agreements"), the legal right and power of
each such party under all applicable laws and regulations to execute, deliver
and perform its obligations under the Agreements, and the validity, binding
effect and enforceability of the Agreements against such persons in accordance
with the terms thereof. Whenever our opinion with respect to the existence or
absence of facts is indicated to be based on our knowledge, we are referring
only to the actual knowledge (after such inquiry as we have considered
appropriate) of those of our attorneys who have represented the Company in
connection with the transactions contemplated by the Agreements.
Based upon and subject to the foregoing, we are of the opinion that:
1. The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Maryland.
2. The Company is authorized to transact business as a foreign corporation in
the State of New Jersey and such authorization is in full force and effect. We
are not aware of any other state in which the Company is required to be
qualified to transact business as a foreign corporation and in which the failure
to be so qualified would have a material adverse effect.
Exh. E-2
<PAGE>
3. The Company has the corporate power to own or lease its properties and
conduct is business as described in the Final Memorandum, and the Company has
the corporate power to enter into the Agreements and to carry out the terms and
provisions thereof to be carried out by it.
4. To our knowledge, the Company has no subsidiaries and does not own,
directly or indirectly, any shares of stock or other equity securities of any
corporation or any equity interest in any firm, partnership, join venture,
association or other entity.
5. All of the issued shares of capital stock of the Company have been duly
authorized and validly issued and are fully paid and nonassessable, and were not
issued in violation of or subject to any statutory preemptive rights or, to our
knowledge, other preemptive rights or other rights to subscribe for or purchase
securities; the Shares have been duly authorized by all necessary corporate
action of the Company and, when issued, paid for and delivered pursuant to the
Purchase Agreement, will be validly issued, fully paid and nonassessable; no
holders of outstanding shares of capital stock of the Company are entitled as
such to any statutory preemptive rights or, to our knowledge, other preemptive
or other rights to subscribe for any of the Shares; and, to our knowledge, no
holders of securities of the Company are entitled to have such securities
registered under the Securities Act of 1933, as amended (the "Securities Act"),
other than pursuant to the Registration Rights Agreement.
6. The statements set forth under the headings "Description of Capital Stock,"
"ERISA Consideration" and "Certain Federal Income Tax Considerations" in the
Final Memorandum, insofar as such statements constitute matters of law,
summaries of legal matters, documents or proceedings, or legal conclusions, have
been reviewed by us and are accurate in all material respects.
7. The execution and delivery of the Agreements have been duly and validly
authorized by all necessary corporate action of the Company, the Agreements have
been duly executed and delivered by the Company, and each Agreement (except as
to those provisions relating to indemnity or contribution for liabilities
arising under the Securities Act as to which we express no opinion) is the valid
and binding agreement of the Company, enforceable against the Company in
accordance with its respective terms.
8. To our knowledge, (a) no legal or govenmental proceedings are pending to
which the Company is a party or to which the property of the Company is subject
and (b) no such proceedings are threatened against the Company or with respect
to any of its properties.
9. No consent, approval, authorization or order of any court or governmental
agency or body is required for the consummation by the Company of the
transactions contemplated by the Agreements, except for such consents,
approvals, authorizations or orders as have been obtained, the registration
statement to be filed pursuant to the Registration Rights Agreement which, in
accordance with the terms thereof, must be declared effective by the Securities
and Exchange
Exh. E-3
<PAGE>
Commission, and such consents, approvals, authorizations or orders as may be
required under the blue sky laws of any jurisdiction in conneciton with the
purchase and resale of the Shares by the Initial Purchaser.
10. Neither the issue and sale of the Shares, the execution and delivery of the
Agreements, nor the consummation of any of the transactions therein nor the
fulfillment of the terms thereof will conflict with, result in a breach or
violaiton of, or constitute a default under any law or the articles of
incorporation or by-laws of the Company or the terms of any Material Agreement
to which the Company is a party or by which the Company or any of its properties
is bound, or any statute or any judgment, order, rule or regulation of any
court, regulatory body, administrative agency, governmental body or arbitrator
having jurisdiction over the Company. For purposes of our opinion, "Material
Agreement" means any indenture, credit agreement, mortgage, deed of trust, lease
or other material agreement or instrument identified on Schedule A which the
----------
Company has certified to us, and to our knowledge are the only indentures,
credit agreemetns, mortgages, deeds of trust, leases or other material
agreemetns or instruments to which the Company is a party or by which the
Company or any of its properties is bound.
11. It is not necessary in connection with the offer, sale and delivery of the
Shares in the manner contemplated by the Purchase Agreement, the Preliminary
Memorandum and the Final Memorandum to register the Shares under the Securities
Act, except as is contemplated by the Registration Rights Agreement.
12. Assuming that at all times either (a)(i) the Company's outstanding
securities (other than short-term paper) are beneficially owned by not more than
100 persons within the meaning of Section 3(c)(1) of the Investment Company Act
of 1940, as amended ("1940 Act"), and (ii) the Company is not making and does
not at any such time propose to make, a public offering of its securities, or
(b)(i) the Company is not engaged in the business of issuing redeemable
securities, face-amount certificates of the installment type or periodic payment
plan certificates, and (ii) the Company is primarily engaged in the business of
purchasing or otherwise acquiring mortgages and other liens on and interests in
real estate within the meaning of Section 3(c)(5)(C) of the 1940 Act, the
Company is not, and the transactions contemplated by the Purchase Agreement will
not cause the Company to become, an "investment company" under the 1940 Act. We
note for your information that there are other available exceptions under the
1940 Act from the definition of "investment company" thereunder.
13. The specimen stock certificate of the Company is in due and proper form
under Maryland law to evidence shares of the Common Stock, has been duly
authorized and approved by the Board of Directors of the Company and complies
with all legal requirements; and the Common Stock conforms in all material
respects to the description contained in the Final Memorandum.
14. To our knowledge, the Company is not in violation of its articles of
incorporation or by-laws or other organizational documents or in breach of or
default under any provision of any Material Agreement, except where such default
would not have a Material Adverse Effect.
Exh. E-4
<PAGE>
15. Commencing with the Company's taxable year ending December 31, 1997, and
assuming the Company operates in the manner described in the Final Memorandum
and in all respects in accordance with the representations, warranties and
agreements set forth in a certificate of the Company addressed to us dated the
date hereof, a copy of which is attached as Exhibit A hereto, the Company will
---------
be organized in conformity with the requirements for qualification as a REIT
under the Code (as defined in the Purchase Agreement), and the Company's
proposed method of operation will enable it to meet the requirements for
qualification and taxation as a REIT under the Code.
16. Assuming that the Company does not solicit, accept or receive from others
funds, securities or property, either directly or through capital contributions,
the sale of stock or otherwise, for the purpose of trading in any commodity (as
defined in the Commodity Exchange Act, as amended (the "Commodity Act")) for
future delivery on or subject to the rules of any contract market (as defined in
the Commodity Act), the Company is not required to be registered as a commodity
pool operator under the Commodity Act.
Our opinon in paragraph 7 is subject to (i) applicable bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium or similar laws affecting the
enforcement of creditors' rights generally, (ii) certain laws and judicial
decisions relating to certian rights or remedies which, among other things, may
affect the availability of the remedies provided in the Agreements, and (iii)
general equitable principles (whether condsidered in a proceeding in equity or
at law).
In connection with our opinion set forth in paragraph 11 above, we have assumed
(i) that the offer, issuance, sale and delivery of the Shares to you and the
reoffer, resale and delivery thereof to subsequent purchasers have been
conducted solely in the mangger contemplated by the Preliminary Memorandum, the
Final Memorandum and the Purchase Agreement, (ii) the accuracy of the
representations and confirmations contained in the Preliminary Memorandum, the
Final Memorandum, the Purchase Agreement and the Investor Letters referred to
below, (iii) that each offer and sale of Shares made in reliance on Regulation S
has been and will be made in an offshore transaction (as defined in Regulation
S) and to a person who is not a U.S. person (as defined in Regulation S) or a
person acquiring the securities for the account or benefit of any U.S. person
who has exeucted and delivered to the Initial Purchaser and the Company and
Investor Letter in the form of Exhibit C to the Purchase Agreement, (iv) that
each offer and sale of Shares made in reliance on Rule 144A has been and will be
made to a Qualified Institutional Buyer (as defined in Rule 144A under the
Securities Act) which has been made aware that the seller of the Shares may rely
on the exemption from registration provided under Rule 144A, which has been
provided with the information described in Rule 144A(d)(4) under the Securities
Act, and which has executed a certificate in the form of Exhibit A to the
Purchase Agreement, and (v) that each offer and sale of Shares to institutional
accredited investors has been and will be made to a person with whom the Initial
Purchaser has a preexisting relationship as a result of which the Initial
Purchaser has reason to believe that such person has such knowledge and
experience in financial and business matters as to be capable of evaluating the
merits and risks of
Exh. E-5
<PAGE>
an investment in the Shares, and that each such institutional accredited
investor has executed and delivered to the Company and Investor Letter in form
of Exhibit B to the Purchase Agreement.
This opinion is furnished by us at your request for your sole benefit and this
opinion is not to be used, circulated, quoted or otherwise referred to for any
other purpose. No other person or entity shall be entitled to rely on this
opinon without our express written consent. This opinon shall not be published
or reproduced in any manner or distributed or circulated to any person or entity
without our express written consent. Our opinion is limited to the matters
stated herein, and no opinion is implied or may be inferred beyond the matters
expressly stated herein.
Very truly yours,
Exh. E-6
<PAGE>
EXHIBIT 10.2
COMMON STOCK
REGISTRATION RIGHTS AGREEMENT
Dated as of February 12, 1997
by and between
ANNALY MORTGAGE MANAGEMENT, INC.
as the Company,
and
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
as the Initial Purchaser
This Registration Rights Agreement is made and entered into as of February
12, 1997, by and between Annaly Mortgage Management, Inc., a Maryland
corporation (the "Company"), and Friedman, Billings, Ramsey & Co., Inc. (the
"Initial Purchaser").
This Agreement is made pursuant to the purchase agreement (the "Purchase
Agreement"), dated February 12, 1997, between the Company and the Initial
Purchaser (the "Initial Purchaser"). In order to induce the Initial Purchaser to
enter into the Purchase Agreement, the Company has agreed to provide the
registration rights provided for in this Agreement to the Initial Purchaser and
its respective direct and indirect transferees. The execution of this Agreement
is a condition to the closing of the transactions contemplated by the Purchase
Agreement.
The parties hereby agree as follows:
1. Definitions
-----------
As used in this Agreement, the following terms shall have the following
meanings:
Accredited Investor Shares: Shares initially resold by the Initial
---------------------------
Purchaser pursuant to the Purchase Agreement to institutional "accredited
investors" (within the meaning of Rule 501(a)(1), (2), (3) or (7) promulgated by
the Commission under the Securities Act) and all Shares issued upon registration
of transfer of or in exchange for such Shares.
Affiliate: As to any specified person shall mean any other person directly
----------
or indirectly controlling or controlled by or under direct or indirect common
control with such specified person.
<PAGE>
For the purposes of this definition,"control," when used with respect to any
person, means the power to direct the management and policies of such person,
directly or indirectly, whether through the ownership of voting securities, by
contract or otherwise and the terms "affiliated," "controlling" and "controlled"
have meanings correlative to the foregoing.
Agreement: This Registration Rights Agreement, as the same may be amended,
---------
supplemented or modified from time to time in accordance with the terms hereof.
Business Day: With respect to any act to be performed hereunder, each
------------
Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which
banking institutions in New York, New York or other applicable place where such
act is to occur are authorized or obligated by applicable law, regulation or
executive order to close.
Closing Date: February 18, 1997, or such other time or such other date as
------------
the Initial Purchaser and the Company may agree.
Commission: The Securities and Exchange Commission.
----------
Common Stock: Common stock, $0.01 par value per share, of the Company.
------------
Company: Annaly Mortgage Management, Inc., a Maryland corporation, and any
-------
successor corporation thereto.
Controlling Person: As defined in Section 8(a) hereof.
------------------
Exchange Act: The Securities Exchange Act of 1934, as amended, and the
------------
rules and regulations promulgated by the Commission pursuant thereto.
Holder: Each registered holder of any Registrable Shares.
------
Indemnified Party: As defined in Section 8(a) hereof.
-----------------
Initial Purchaser: Friedman, Billings, Ramsey & Co., Inc.
-----------------
Person: An individual, partnership, corporation, trust, or unincorporated
------
organization, or government and agency or political subdivision thereof.
Proceeding: An action, claim, suit or proceeding (including, without
----------
limitation, an investigation or partial proceeding, such as a deposition),
whether commenced or, to the knowledge of the person subject thereto,
threatened.
Prospectus: The prospectus included in any Registration Statement,
----------
including any preliminary Prospectus, and all other amendments and supplements
to any such prospectus,
-2-
<PAGE>
including post-effective amendments, and all material incorporated by reference
or deemed to be incorporated by reference, if any, in such prospectus.
Purchase Agreement: The Purchase Agreement is as defined in the preamble.
------------------
Register, registered and registration: Such terms shall refer to a
-------- ---------- ------------
registration effected by preparing and filing a registration statement in
compliance with the Securities Act and applicable rules and regulations
thereunder, and the declaration or ordering of the effectiveness of such
registration statement.
Registrable Shares: The Rule 144A Shares, the Accredited Investor Shares
------------------
and the Regulation S Shares, upon original issuance thereof, and at all times
subsequent thereto, until, in the case of any such Rule 144A Share, Accredited
Investor Share and Regulation S Share, (i) the date on which it has been
registered effectively pursuant to the Securities Act and disposed of in
accordance with the Registration Statement relating to it, (ii) the date on
which either it is distributed to the public pursuant to Rule 144 (or any
similar provisions then in effect) or is saleable pursuant to Rule 144(k)
promulgated by the Commission pursuant to the Securities Act or (iii) the date
on which it is saleable, without restriction, pursuant to an available exemption
from registration under the Securities Act, or (iv) the date on which it is
sold to the Company.
Registration Expenses: Any and all expenses incident to performance of or
---------------------
compliance with this Agreement, including without limitation: (i) all
Commission, stock exchange, National Association of Securities Dealers, Inc.
("NASD") registration, listing and filing fees, (ii) all fees and expenses
incurred in connection with compliance with federal or state securities or blue
sky laws (including any registration, listing and filing fees and reasonable
fees and disbursements of counsel in connection with blue sky qualification of
any of the Registrable Shares and the preparation of a Blue Sky Memorandum and
compliance with the rules of the NASD), (iii) all expenses of any Persons in
preparing or assisting in preparing, word processing, duplicating, printing,
delivering and distributing any Registration Statement, any Prospectus, any
amendments or supplements thereto, any underwriting agreements, securities sales
agreements, certificates and other documents relating to the performance of and
compliance with this Agreement, (iv) all fees and expenses incurred in
connection with the listing of any of the Registrable Shares on any securities
exchange or The NASDAQ National Market pursuant to Section 6(l) hereof, (v) the
------------
fees and disbursements of counsel for the Company and of the independent public
accountants (including without limitation, the expenses of any special audit and
"cold comfort" letters required by or incident to such performance) of the
Company (provided that Registration Expenses shall not include the fees and
expenses of any counsel to the Holders) and (vi) any fees and disbursements of
the underwriters customarily paid by issuers or sellers of securities (including
fees paid to a qualified independent underwriter, and the reasonable fees and
expenses of any special experts retained by the Company in connection with any
Registration Statement), but excluding underwriting discounts and commission and
transfer taxes, if any, relating to the sale or disposition of Registrable
Shares by a Holder.
-3-
<PAGE>
Registration Statement: Any registration statement of the Company that
----------------------
covers the resale of any of the Registrable Shares pursuant to the provisions of
this Agreement, including the Prospectus, amendments and supplements to such
registration statement or Prospectus, including pre- and post-effective
amendments, all exhibits thereto, and all material incorporated by reference or
deemed to be incorporated by reference, if any, in such registration statement.
Regulation S: Regulation S (Rules 901-904) as promulgated by the Commission
------------
under the Securities Act, as such rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission as a replacement
thereto having substantially the same effect as such rule.
Regulation S Shares: Shares initially resold by the Initial Purchaser
-------------------
pursuant to the Purchase Agreement to "non U.S. persons" (in accordance with
Regulation S) in an "offshore transaction" (in accordance with Regulation S).
Rule 144: Rule 144 promulgated by the Commission pursuant to the
--------
Securities Act, as such rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission as a replacement thereto
having substantially the same effect as such rule.
Rule 144A: Rule 144A promulgated by the Commission pursuant to the
---------
Securities Act, as such rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission as a replacement thereto
having substantially the same effect as such rule.
Rule 144A Shares: Shares initially resold by the Initial Purchaser
----------------
pursuant to the Purchase Agreement to "qualified institutional buyers" (as such
term is defined in Rule 144A) and all Shares upon registration of transfer of or
in exchange for such Shares.
Rule 158: Rule 158 promulgated by the Commission pursuant to the
--------
Securities Act, as such rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission as a replacement thereto
having substantially the same effect as such rule.
Rule 174: Rule 174 promulgated by the Commission pursuant to the
--------
Securities Act, as such rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission as a replacement thereto
having substantially the same effect as such rule.
Rule 424: Rule 424 promulgated by the Commission pursuant to the
--------
Securities Act, as such rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission as a replacement thereto
having substantially the same effect as such rule.
Securities Act: The Securities Act of 1933, as amended, and the rules and
--------------
regulations promulgated by the Commission thereunder.
-4-
<PAGE>
Shares: The shares of Common Stock being offered and sold pursuant to the
------
terms and conditions of the Purchase Agreement.
Underwritten Offering: A sale of securities of the Company to an
---------------------
underwriter or underwriters for reoffering to the public.
2. Piggyback Registration
----------------------
(a) Piggyback Registration Rights and Notice of Registration. On each of
--------------------------------------------------------
the first two occasions on which the Company proposes to register its securities
under the Securities Act (other than in connection with a merger or pursuant to
Form S-8, S-4 or comparable registration statement) the Holders shall have the
right to include their Registrable Shares in such registrations. The Company
shall notify the Holders in writing, by registered mail, at least 30 days prior
to the filing of each such registration statement of its intention to do so. If
any Holder notifies the Company within 20 days after receipt of any such notice
of its desire to include any of the Registrable Shares in such proposed
Registration Statement, the Company shall afford such Holder the opportunity to
have any such Registrable Shares registered under such Registration Statement,
at the Company's sole cost and expense (not including the costs of counsel for
the Holders).
(b) Right to Terminate Registration. The Company shall have the right to
-------------------------------
terminate or withdraw any registration initiated by it under this Section 2
prior to the effectiveness of such registration whether or not any Holder has
elected to include Registrable Shares in such registration.
(c) Underwriting. (i) If the registration of which the Company gives
------------
notice is for an Underwritten Offering, the Company shall so advise the Holders
as a part of the written notice given pursuant to Section 2(a) above. In such
------------
event, the right of any Holder to registration pursuant to this Section 2 shall
---------
be conditioned upon such Holder's participation in such Underwritten Offering
and the inclusion of such Holder's Registrable Shares in the Underwritten
Offering to the extent provided herein. All Holders proposing to distribute
their Registrable Shares through such Underwritten Offering (together with the
Company and such other holders of securities of the Company exercising
registration rights with respect to such registration) shall enter into an
underwriting agreement in customary form with the representative of the
underwriters selected by the Company or the security holders initiating such
registration, as the case may be.
(ii) Notwithstanding any other provision of this Section 2(c), if the
------------
representative of the underwriters advises the Company in writing that marketing
factors require a limitation on the number of securities to be underwritten, the
representative may (subject to the limitations set forth below) exclude all
Registrable Shares from, or limit the number of Registrable Shares to be
included in, the registration and Underwritten Offering. The Company shall so
advise all holders of securities requesting registration, and the amount of
securities that are entitled to be included in the registration and Underwritten
Offering shall be (x) first, the securities being sold by the Company for its
own account, (y) second, the number of Registrable Shares requested to be
included (any reductions to be shared pro rata among the Holders) and (z) third,
any other securities requested to be included by
-5-
<PAGE>
persons to whom the Company has granted registration rights (any reductions to
be shared pro rata among such holders). If any Holder does not agree to the
terms of any such Underwritten Offering, such person shall be excluded therefrom
by written notice from the Company or the representative of the underwriters
provided, however, that an exclusion of such Holder from such Underwritten
- -------- -------
Offering shall not be treated as an exclusion from an Underwritten Offering for
the purposes of Section 3(a). Any Registrable Shares or other securities
excluded or withdrawn from such underwriting shall be withdrawn from such
registration.
(d) Hold-Back Agreement. By electing to include Registrable Shares in any
-------------------
registration pursuant to Section 2 hereof, the Holder of the Registrable Shares
---------
shall be deemed to have agreed not to effect any public sale or distribution of
securities of the Company of the same or similar class or classes of the
securities included in the Registration Statement or any securities convertible
into or exchangeable or exercisable for such securities, including a sale
pursuant to Rule 144 or Rule 144A under the Securities Act, during such periods
as reasonably requested by the representatives of the underwriters, if an
Underwritten Offering, or the Company in any other registration.
(e) The Company shall not be obligated to effect, or to take any action to
effect any such registration of Registrable Shares pursuant to this Section 2:
---------
(i) in any particular jurisdiction in which the Company would be required
to execute a general consent to service of process or to qualify to do business
as a foreign corporation in effecting such registration, qualification, or
compliance, unless the Company is already subject to service or required to be
so qualified in such jurisdiction and except as may be required by the
Securities Act, or
(ii) if within 14 days after its receipt of a written request to effect
such registration, the Company causes to be delivered to the Holders an opinion
of Morgan, Lewis & Bockius LLP or other counsel reasonably acceptable to the
Holders to the effect that the proposed disposition of Registrable Shares by the
Holders will not require registration or qualification under the Securities Act,
it being specifically understood and agreed that the Holders will promptly
furnish to the Company and such counsel all information such counsel may
reasonably request in order to enable such counsel to determine whether it would
be able to render such opinion.
3. Demand Registration
-------------------
(a) Demand Registration Right. (i) If (x) after the eighteen month
-------------------------
period starting on the Closing Date the Company has not yet registered any of
its securities under the Securities Act or (y) the Company has registered
securities under the Securities Act on two separate occasions (other than in
connection with a merger or pursuant to Form S-8, S-4 or comparable registration
statement) and, on either occasion, Holders of Shares notified the Company of
their desire to include such Shares in such proposed registration pursuant to
Section 2 hereof but were unable to do so because, in accordance with Section
- --------- -------
2(c) hereof, the representative of the underwriters advised the Company that the
- ----
number of Shares and other securities requested to be included exceeded the
-6-
<PAGE>
number that could be sold in such prior registered Underwritten Offerings, then
on any one occasion, if the Holders of greater than 50% of the Registrable
Shares request in writing that the Company register all or part of the
Registrable Shares, representing more than 50% of the Registrable Shares then
outstanding, the Company will:
(1) promptly give written notice of the proposed registration to all other
Holders;
(2) prepare and use its best efforts to file with the Commission within 60
days of receipt of the demand therefor a Registration Statement and such other
documents including a Prospectus and shall use its best effort to effect such
registration (including, without limitation, filing any appropriate pre-
effective or post-effective amendments, appropriate qualifications under
applicable blue sky or other sate securities laws as may be necessary in the
opinion of both counsel for the Company and counsel for the Holders, in order to
comply with the Securities Act) at the earliest possible time so as to permit or
facilitate the sale and distribution of all or such portion of the Registrable
Shares as are specified in such request, together with all or such portion of
the Registrable Shares of any Holder or Holders joining in such request as are
specified in a written request received by the Company within 20 days after
written notice from the Company is effective.
Any request for registration under this Section 3 shall specify the amount
---------
of Registrable Shares proposed to be registered.
(b) The Company shall not be obligated to effect, or to take any action to
effect, any such registration pursuant to this Section 3:
---------
(i) in any particular jurisdiction in which the Company would be
required to execute a general consent to service of process or to qualify
to do business as a foreign corporation in effecting such registration,
qualification, or compliance, unless the Company is already subject to
service or required to be so qualified in such jurisdiction and except as
may be required by the Securities Act; or
(ii) if, within 14 days after its receipt of a written request to
effect such registration, the Company causes to be delivered to the Holders
an opinion of Morgan, Lewis & Bockius LLP or other counsel reasonably
acceptable to the Holders to the effect that the proposed disposition of
Registrable Shares by the Holders will not require registration or
qualification under the Securities Act, it being specifically understood
and agreed that the Holders will promptly furnish to the Company and such
counsel all information such counsel may reasonably request in order to
enable such counsel to determine whether it would be able to render such
opinion.
4. Expenses. As between the Company and the Holders, the Company shall pay all
--------
Registration Expenses in connection with the registrations pursuant to this
Agreement. The Holder or Holders shall pay all underwriting discounts and
commissions and transfer taxes, if any, relating to the sale or disposition of
such Holder's Registrable Shares pursuant to any Registration Statement.
-7-
<PAGE>
5. Rules 144 and 144A. The Company shall use its reasonable efforts to file
------------------
the reports required to be filed by it under the Securities Act and the Exchange
Act in a timely manner in accordance with Rule 144, and if it is not required to
file such reports, it will make available other information as required by, and
so long as necessary to permit, sales of its Registrable Shares pursuant to Rule
144A. Notwithstanding the foregoing, nothing in this Section 5 shall be deemed
to require the Company to register any of its securities pursuant to the
Exchange Act.
6. Registration Procedures
-----------------------
In connection with the obligations of the Company with respect to any
registration pursuant to this Agreement, the Company shall use its best efforts
to effect or cause to be effected the registration of the Registrable Shares
under the Securities Act to permit the sale of such Registrable Shares by the
Holder or Holders in accordance with the Holders' intended method or methods of
distribution, and the Company shall:
(a) prepare and file with the Commission, as specified in this Agreement, a
Registration Statement, which Registration Statement shall comply as to form in
all material respects with the requirements of the applicable form and include
all financial statements required by the Commission to be filed therewith, and
use its best efforts to cause such Registration Statement to become effective
and remain effective for the lesser of a period of 180 days (subject to the
provisions of Section 2(c) hereof) or until all such Registrable Shares are sold
in accordance with the intended distribution of such Shares;
(b) subject to Section 6(i) hereof, prepare and file with the SEC such
------------
amendments and post-effective amendments to each such Registration Statement as
may be necessary to keep such Registration Statement effective for the
applicable period; cause each such Prospectus to be supplemented by any required
prospectus supplement, and as so supplemented to be filed pursuant to Rule 424
or any similar rule that may be adopted under the Securities Act; and comply
with the provisions of the Securities Act with respect to the disposition of all
securities covered by each Registration Statement during the applicable period
in accordance with the intended method or methods of distribution by the selling
Holder thereof;
(c) furnish to the Holder of Registrable Shares without charge, as many
copies of each Prospectus, including each preliminary Prospectus, and any
amendment or supplement thereto and such other documents as such Holder may
reasonably request, in order to facilitate the public sale or other disposition
of the Registrable Shares; the Company consents to the use of any such
Prospectus, including each preliminary Prospectus, by the Holder of Registrable
Shares, if any, in connection with the offering and sale of the Registrable
Shares covered by any such Prospectus;
(d) use its best efforts to register or qualify, or obtain exemption for
registration or qualification for, all Registrable Shares by the time the
applicable Registration Statement is declared effective by the Commission under
all applicable state securities or "blue sky" laws of such jurisdictions as the
Holder of Registrable Shares covered by a Registration Statement shall
-8-
<PAGE>
reasonably request in writing, keep each such registration or qualification or
exemption effective during the period such Registration Statement is required to
be kept effective and do any and all other acts and things which may be
reasonably necessary or advisable to enable such Holder to consummate the
disposition in each such jurisdiction of such Registrable Shares owned by such
Holder; provided, however, that the Company shall not be required to (i) qualify
-----------------
generally to do business in any jurisdiction or to register as a broker or
dealer in such jurisdiction where it would not otherwise be required to qualify
but for this Section 6(d), (ii) subject itself to taxation in any such
------------
jurisdiction, or (iii) submit to the general service of process in any such
jurisdiction; provided, further, that if the Company fails to list the
-----------------
Registrable Shares on a national stock exchange or qualify for quotation on an
automatic quotation system at or prior to the time the Registration Statement is
declared effective by the Commission because it fails to meet requirements for
such listing or quotation regarding the number of holders, the obligation in
this Section 6(d) shall not require the Company to register or qualify the
----
Registrable Shares in any jurisdiction where the Company reasonably concludes,
based on advice of securities counsel, that such registration or qualification
would require unreasonable effort (including, without limitation, amendments to
the Company's charter or bylaws) or expense;
(e) notify the Holder of Registrable Shares promptly and, if requested by
such Holder, confirm such advice in writing (i) when a Registration Statement
has become effective and when any post-effective amendments and supplements
thereto become effective, (ii) of the issuance by the Commission or any state
securities authority of any stop order suspending the effectiveness of a
Registration Statement or the initiation of any proceedings for that purpose,
and (iii) of the happening of any event during the period a Registration
Statement is effective as a result of which such Registration Statement or the
related Prospectus contains any untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading, and (iv) at the request of any such Holder,
promptly to furnish to such Holder a reasonable number of copies of a supplement
to or an amendment of such Prospectus as may be necessary so that, as thereafter
delivered to the purchaser of such securities, such Prospectus shall not include
an untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not misleading;
(f) upon request by the Holder, furnish to the Holder of Registrable Shares
copies of any request by the Commission or any state securities authority of
amendments or supplements to a Registration Statement and Prospectus or for
additional information;
(g) make every reasonable effort to avoid the issuance of, or, if issued,
obtain the withdrawal of any enjoining order suspending the use or effectiveness
of a Registration Statement or the lifting of any suspension of the
qualification (or exemption from qualification) of any of the Registrable Shares
for sale in any jurisdiction, at the earliest possible moment;
(h) upon request furnish to the Holder of Registrable Shares, without
charge, at least one conformed copy of each Registration Statement and any post-
effective amendment thereto (without documents incorporated therein by reference
or exhibits thereto, unless requested);
-9-
<PAGE>
(i) upon the occurrence of any event contemplated by Section 6(e) (iii)
------------ -----
hereof, use its best efforts to prepare a supplement or post-effective amendment
to a Registration Statement or the related Prospectus or any document
incorporated therein by reference or file any other required document so that,
as thereafter delivered to the purchasers of the Registrable Shares, such
Prospectus will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading;
(j) If requested by the representative underwriters, if any, or any Holders
of Registrable Shares being sold in connection with such offering, (i) promptly
incorporate in a prospectus supplement or post-effective amendment such
information as the representative of the underwriters, if any, or such Holders
indicate relates to them or otherwise reasonably request be included therein,
and (ii) make all required filings of such prospectus supplement or such post-
effective amendment as soon as practicable after the Company has received
notification of the matters to be incorporated in such prospectus supplement or
post-effective amendment; provided, however, that the Company shall not be
-------- -------
required to take any action pursuant to this Section 6(j) that would, in the
------------
opinion of counsel for the Company, violate applicable law;
(k) make available to inspection by representatives of the Holder of the
Registrable Shares and the representative of any underwriters participating in
any disposition pursuant to a Registration Statement and any special counsel or
accountant retained by such Holders or underwriters, all financial and other
records, pertinent corporate documents and properties of the Company and cause
the respective officers, directors and employees of the Company to supply all
information reasonably requested by any such representatives, the representative
of the underwriters, the special counsel or accountants in connection with a
Registration Statement; provided, however, that such records, documents or
-----------------
information which the Company determines, in good faith, to be confidential and
notifies such representatives, representative of the underwriters, special
counsel or accountants are confidential shall not be disclosed by the
representatives, representative of the underwriters, special counsel or
accountants unless (i) the disclosure of such records, documents or information
is necessary to avoid or correct a misstatement or omission in a Registration
Statement, (ii) the release of such records, documents or information is ordered
pursuant to a subpoena or other order from a court of competent jurisdiction, or
(iii) such records, documents or information have been generally made available
to the public;
(l) use its best efforts (including, without limitation, seeking to cure
any deficiencies (within the Company's control) cited by the exchange or market
in the Company's listing application) to list all Registrable Shares on the
American Stock Exchange or The NASDAQ National Market (or the NASDAQ Small Cap
Market if not qualified for the NASDAQ National Market) (unless the Company
qualifies and chooses to list all Registrable Shares on the New York Stock
Exchange, in which event the Company shall use its best efforts to list all
Registrable Shares on the New York Stock Exchange);
-10-
<PAGE>
(m) provide a CUSIP number for all Registrable Shares, not later than the
effective date of the Registration Statement;
(n) otherwise use its best efforts to comply with all applicable rules and
regulations of the Commission and make generally available to its
securityholders, as soon as reasonably practicable, earnings statements covering
at least 12 months which satisfy the provisions of Section 11(a) of the
Securities Act and Rule 158 (or any similar rule promulgated under the
Securities Act) thereunder;
(o) provide and cause to be maintained a transfer agent for all Registrable
Shares covered by any Registration Statement from and after a date not later
than the effective date of such Registration Statement; and
(p) In connection with any sale or transfer of the Registrable Shares that
will result in such securities no longer being the Registrable Shares, cooperate
with the Holders and the representative of the underwriters, if any, to
facilitate the timely preparation and delivery of certifi cates representing
the Registrable Shares to be sold, which certificates shall not bear any
restrictive legends and to enable such Registrable Shares to be in such
denominations and registered in such names as the representative of the
underwriters, if any, or Holders may request at least two Business Days prior to
any sale of the Registrable Shares.
The Company may require the Holder of Registrable Shares to furnish to the
Company such information regarding the proposed distribution by such Holder of
such Registrable Shares as the Company may from time to time reasonably request
in writing.
The Holder agrees that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 6(e)(iii) hereof, such
-----------------
Holder will immediately discontinue disposition of Registrable Shares pursuant
to a Registration Statement until such Holder's receipt of the copies of the
supplemented or amended Prospectus. If so directed by the Company, such Holder
will deliver to the Company (at the expense of the Company) all copies in its
possession, other than permanent file copies then in such Holder's possession,
of the Prospectus covering such Registrable Shares current at the time of
receipt of such notice.
7. Black-Out Period. Following the effectiveness of a Registration Statement
----------------
(and the filings with any state securities commissions), the Company may direct
the Holder to suspend sales of the Registrable Shares for such times as the
Company reasonably may determine is necessary and advisable, including the
following events: (i) an Underwritten Offering by the Company where the Company
is advised by the representative of underwriters for such Underwritten Offering
that sale of Registrable Shares under the Registration Statement would have a
material adverse effect on the primary offering, or (ii) pending negotiations
relating to, or consummation of, a transaction or the occurrence of an event (x)
that would require additional disclosure of material information by the Company
in the Registration Statement (or such filings), (y) as to which the Company has
a bona fide business purpose for preserving confidentiality or (z) which renders
the Company unable to
-11-
<PAGE>
comply with Commission requirements, in each case under circumstances that would
make it impractical or inadvisable to cause the Registration Statement (or such
filings) to become effective or to promptly amend or supplement the Registration
Statement on a post-effective basis, as applicable.
In the case of an event which causes the Company to suspend the
effectiveness of a Registration Statement (a "Suspension Event"), the Company
may give notice (a "Suspension Notice") to the Holders to suspend sales of the
Registrable Shares so that the Company may correct or update the Registration
Statement (or such filings); provided, however, that such suspension shall
continue only for so long as the Suspension Event or its effect is continuing.
The Holders shall not effect any sales of the Registrable Shares pursuant to
such Registration Statement (or such filings) at any time after it has received
a Suspension Notice from the Company. If so directed by the Company, the
Holders will deliver to the Company all copies of the Prospectus covering the
Registrable Shares held by them at the time of receipt of the Suspension Notice.
The Holders may recommence effecting sales of the Registrable Shares pursuant to
the Registration Statement (or such filings) following further notice to such
effect (an "End of Suspension Notice") from the Company, which End of Suspension
Notice shall be given by the Company promptly following the conclusion of any
Suspension Event.
Notwithstanding Section 2 hereof, if the Company shall give a Suspension
---------
Notice pursuant to this Section 7, the Company agrees it shall extend the period
---------
during which the Registration Statement shall be maintained effective pursuant
to this Agreement by the number of days during the period from the date of the
giving of the Suspension Notice to and including the date when the Holders shall
have retrieved the End of Suspension Notice and copies of the supplemented or
amended Prospectus necessary to resume sales.
8. Indemnification: Contribution
-----------------------------
(a) Indemnification by the Company. The Company agrees to indemnify and
------------------------------
hold harmless (i) the Initial Purchaser, (ii) each Holder of the Registrable
Shares, (iii) each person, if any, who controls (within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act) any of the foregoing
(any of the persons referred to in this clause (iii) being hereinafter referred
to as a "controlling person"), and (iv) the respective officers, directors,
partners, employees, representatives and agents of the Initial Purchaser, each
Holder of the Registrable Shares, or any controlling person (any person referred
to in clause (i), (ii), (iii) or (iv) may hereinafter be referred to as an
"Indemnified Party"), as follows:
- -------------------
(i) from and against any and all loss, claim, liability, damage and
expense whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in any Registration Statement (or
any amendment thereto) pursuant to which Registrable Shares were registered
under the Securities Act including all documents incorporated therein by
reference, or the omission or alleged omission to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they
-12-
<PAGE>
were made, not misleading or arising out of any untrue statement or alleged
untrue statement of a material fact contained in any Prospectus (or any
amendment or supplement thereto), including all documents incorporated therein
by reference, or the omission or alleged omission to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that such indemnity with respect to any
-------- -------
Prospectus shall not inure to the benefit of the Holder (or any controlling
person thereof) to the extent that any such loss, claim, liability, damage or
expense arises out of such Holder's failure to send or give a copy of the final
Prospectus, as the same may be then supplemented or amended, to the Person
asserting an untrue statement or alleged untrue statement or omission or alleged
omission at or prior to the written confirmation of the sale of Registrable
Shares to such Person if such statement or omission was corrected in such final
Prospectus.
(ii) from and against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or investigation or proceeding by any governmental
agency or body, commenced or threatened, or of any claim whatsoever based upon
any such untrue statement or omission, if such settlement is effected with the
written consent of the Company; and
(iii) from and against any and all expense whatsoever, as incurred
(including reasonable fees and disbursements of counsel), incurred in
investigating, preparing or defending against any litigation, or investigation
or proceeding by any governmental agency or body, commenced or threatened, in
each case whether or not a party, or any claim whatsoever based upon any such
untrue statement or omission, or any such alleged untrue statement or omission,
to the extent that any such expense is not paid under subparagraph (i) or (ii)
above;
provided, however, that this indemnity agreement does not apply to the
-------- -------
Holder with respect to any loss, liability, claim, damage or expense to the
extent arising out of any untrue statement or omission or alleged untrue
statement or omission made in reliance upon and in conformity with written
information furnished to the Company by such Holder expressly for use in a
Registration Statement (or any amendment thereto) or any prospectus (or any
amendment or supplement thereto).
(b) Indemnification by Holders. Each Holder severally agrees to indemnify
--------------------------
and hold harmless the Company, and directors and officers (including each
officer of the Company who signed the Registration Statement), and each Person,
if any, who controls the Company, within the meaning of Section 15 of the
Securities Act, against any and all loss, liability, claim, damage and expenses
described in the indemnity contained in Section 8(a) hereof (provided, however,
------------ -------- -------
that any settlement described in Section 8(a) (ii) hereof is effected with the
-----------------
written consent of such Holder), as incurred, but only with respect to such
untrue statement or omission, or alleged untrue statements or omissions, made in
a Registration Statement (or any amendment thereto) or any Prospectus (or any
amendment or supplement thereto) in reliance upon and in conformity with written
information furnished to the Company by the Holder expressly for use in such
Registration Statement (or any amendment thereto) or such Prospectus (or any
amendment or supplement thereto). If the Holder elects to include Registrable
Shares in an Underwritten Offering pursuant to Section 3 or 4 hereof,
--------------
-13-
<PAGE>
the Holder shall be required to agree to such indemnification provisions as may
be required by the Underwriter in connection with such Underwritten Offering.
(c) Conduct of Indemnification Proceedings. Each Indemnified Party shall
--------------------------------------
give reasonably prompt notice to each indemnifying party of any action or
proceeding commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve it
from any liability which it may have under this indemnity agreement except to
the extent that the indemnifying party is actually prejudiced by such failure to
give notice. If the indemnifying party so elects within a reasonable time after
receipt of such notice, the indemnifying party may assume the defense of such
action or proceeding at such indemnifying party's own expense with counsel
chosen by the indemnifying party and approved by the Indemnified Parties
defendant in such action or proceeding, which approval shall not be unreasonably
withheld; provided, however, that, if such Indemnified Party or parties
-------- -------
reasonably determined that a conflict of interest exists where it is advisable
for such Indemnified Party or parties to be represented by separate counsel or
that, upon advice of counsel, there may be legal defenses available to them
which are different from or in addition to those available to the indemnifying
party, then the indemnifying party shall not be entitled to assume such defense
and the Indemnified Party or parties shall be entitled to one separate counsel
at the indemnifying party's expense. If an indemnifying party is not entitled
to assume the defense of such action or proceeding as a result of the proviso to
the preceding sentence, such indemnifying party's counsel shall be entitled to
conduct such indemnifying party's defense and counsel for the Indemnified Party
or parties shall be entitled to conduct the defense of such Indemnified Party or
parties it being understood that both such counsel will cooperate with each
other to conduct the defense of such action or proceeding as efficiently as
possible. If an indemnifying party is not so entitled to assume the defense of
such action or does not assume such defense, after having received the notice
referred to in the first sentence of this paragraph, the indemnifying party or
parties will pay the reasonable fees and expenses of counsel for the Indemnified
Party or parties. In such event, however, no indemnifying party will be liable
for any settlement effected without the written consent of such indemnifying
party. No indemnifying party shall, without the consent of the Indemnified
Party, consent to entry of any judgment or enter into a settlement which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in respect
to such claim or litigation. If an indemnifying party is entitled to assume,
and assumes, the defense of such action or proceeding in accordance with this
paragraph, such indemnifying party shall not be liable for any fees and expenses
for counsel for the Indemnified Parties incurred thereafter in connection with
such action or proceeding.
(d) Contribution. In order to provide for just and equitable contribution
------------
in circumstances in which the indemnity agreement provided for in this Section 8
---------
is for any reason held to be unenforceable, unavailable or insufficient although
applicable in accordance with it terms; the Company and Holder shall contribute
to the aggregate losses, liabilities, claims, damages and expenses of the nature
contemplated by such indemnity agreement incurred by the Company and the Holder
in such proportion as is appropriate to reflect the relative fault of the
Company on the one hand and the Holder on the other (taking into consideration
the fact that the provisions of the
-14-
<PAGE>
registration rights hereunder are a material inducement to the Holder to
purchase the Registrable Shares), in connection with the statements or omissions
which resulted in such losses, claims damages, liabilities or expenses, as well
as any other relevant equitable considerations. Notwithstanding the foregoing,
no Person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentation. For purposes of this
Section 8, each Person, if any, who controls a Holder within the meaning of
- ---------
Section 15 of the Securities Act shall have the same rights to contribution as
such Holder, and each director of the Company, each officer of the Company who
signed the Registration Statement and each Person, if any, who controls the
Company within the meaning of Section 15 of the Securities Act shall have the
same rights to contribution as the Company. Each party entitled to contribution
agrees that upon the service of a summons or other initial legal process upon it
in any action instituted against it in respect of which contribution may be
sought, it shall promptly give written notice of such service to the party or
parties from whom contribution may be sought, but the omission so to notify such
party or parties of any such service shall not relieve the party from whom
contribution may be sought from any obligation it may have hereunder or
otherwise.
9. Miscellaneous
-------------
(a) Remedies. In the event of a breach by the Company, or by a Holder of
---------
the Registrable Shares, of any of their obligations under this Agreement, each
Holder of the Registrable Shares or the Company, in addition to being entitled
to exercise all rights granted by law, including recovery of damages, will be
entitled to specific performance of its rights under this Agreement. The
Company and each Holder of the Registrable Shares agrees that monetary damages
would not be adequate compensation for any loss incurred by reason of a breach
by it of any of the provisions of this Agreement and hereby further agrees that,
in the event of any action for specific performance in respect of such breach,
it shall waive the defense that a remedy at law would be adequate.
(b) Amendments and Waivers. The provisions of this Agreement, including
----------------------
the provisions of this sentence, may not be amended, modified or supplemented,
and waivers or consents to departures from the provisions hereof may not be
given, except if the written consent of the Holders of a majority in aggregate
principal amount of the then outstanding Registrable Shares is obtained;
provided, however, that, for the purposes of this Agreement, Registrable Shares
- -------- -------
that are owned, directly or indirectly, by either the Company or an Affiliate of
the Company are not deemed outstanding. Notwithstanding the foregoing, a waiver
or consent to depart from the provisions hereof with respect to a matter that
relates exclusively to the rights of Holders of the Registrable Shares whose
securities are being sold pursuant to a Registration Statement and that does
not directly or indirectly affect the rights of other Holders of the Registrable
Shares may be given by Holders of a majority of the Registrable Shares being
sold by such Holders pursuant to such Registration Statement; provided, however,
-------- -------
that the provisions of this sentence may not be amended, modified, or
supplemented except in accordance with the provisions of the immediately
preceding sentence.
-15-
<PAGE>
(d) Notices. All notices and other communications provided for herein
-------
shall be made in writing by hand-delivery, next-day air courier, certified
first-class mail, return receipt requested, telex or telecopy:
(i) if to the Company, as provided in the Purchase Agreement,
(ii) if to the Initial Purchaser, as provided in the Purchase
Agreement, or
(iii) if to any other person who is then the registered Holder of any
Registrable Shares, to the address of such Holder as it appears in the
Common Stock register of the Company.
Except as otherwise provided in this Agreement, all such communications
shall be deemed to have been duly given when (v) delivered by hand, if
personally delivered, (w) one Business Day after being timely delivered to a
next-day air courier, (x) five Business Days after being deposited in the mail,
postage prepaid, if mailed, (y) when answered back, if telexed or (z) when
receipt is acknowledged by the recipient's telecopier machine, if telecopied.
(e) Successors and Assigns. This Agreement shall inure to the benefit of
----------------------
and be binding upon the successors and permitted assigns of each of the parties
and shall inure to the benefit of each Holder of the Registrable Shares. The
Company may not assign its rights or obligations hereunder without the prior
written consent of each Holder of the Registrable Shares. Notwithstanding the
foregoing, no transferee shall have any of the rights granted under this
Agreement until such transferee shall acknowledge its rights and obligations
hereunder by a signed written statement of such transferee's acceptance of such
rights and obligations.
(f) Counterparts. This Agreement may be executed in any number of
------------
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and, all of which taken
together shall constitute one and the same Agreement.
(g) Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of New York, as applied to contracts made
and performed within the State of New York without regard to principles of
conflicts of law.
(h) Severability. The remedies provided herein are cumulative and not
------------
exclusive of any remedies provided by law. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their reasonable efforts to find and employ an alternative
means to achieve the same or substantially the same result as that contemplated
by such term, provision, covenant or restriction. It is hereby stipulated and
declared to be the intention of the parties that they would have executed the
remaining
-16-
<PAGE>
terms, provisions, covenants and restrictions without including any of such that
may be hereafter declared invalid, illegal, void or unenforceable.
(i) Headings. The headings in this Agreement are for convenience of
--------
reference only and shall not limit or otherwise affect the hereof. All
references made in this Agreement to "Section" refer to such Section of this
Agreement, unless expressly stated otherwise.
(j) Attorneys' Fees. In any action or proceeding brought to enforce any
---------------
provision of this Agreement, or where any provision hereof is validly asserted
as a defense, the prevailing party, as determined by the court, shall be
entitled to recover its reasonable attorneys' fees in addition to any other
available remedy.
IN WITNESS WHEREOF, the parties have caused this Registration Rights
Agreement to be duly executed as of the date first written above.
ANNALY MORTGAGE MANAGEMENT, INC.
By: /s/ Michael A.J. Farrell
_____________________________________
Name: Michael A. J. Farrell
Title: Chief Executive Officer and
Chairman of the Board
The foregoing Registration Rights Agreement
is hereby confirmed and accepted as of the date
first above written.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
By: /s/ James R. Kleeblatt
___________________________________
Name: James R. Kleeblatt
Title: Managing Director
-17-
<PAGE>
EXHIBIT 10.3
ANNALY MORTGAGE MANAGEMENT, INC.
LONG-TERM STOCK INCENTIVE PLAN
l. Purpose. The purpose of this Long-Term Stock Incentive Plan (the "Plan")
-------
of Annaly Mortgage Management, Inc., a Maryland corporation, is to advance the
interests of the Company and its stockholders by providing a means to attract,
retain, and reward directors, officers and other key employees and consultants
of the Company and its subsidiaries and to enable such persons to acquire or
increase a proprietary interest in the Company, thereby promoting a closer
identity of interests between such persons and the Company's stockholders.
2. Definitions. The definitions of awards under the Plan, including Stock
-----------
Options, SARs (including Limited SARs), Restricted Stock, Deferred Stock, Stock
granted as a bonus or in lieu of other awards, Dividend Equivalents, Non-
Employee Directors Options, and Other Stock-Based Awards, are set forth in
Section 6 of the Plan. Such awards, together with any other right or interest
granted to a Participant under the Plan, are termed "Awards." For purposes of
the Plan, the following additional terms shall be defined as set forth below:
"Award Agreement" means any written agreement, contract, or other
instrument or document evidencing an Award.
"Beneficiary" shall mean the person, persons, trust, or trusts which have
been designated by a Participant in his or her most recent written beneficiary
designation filed with the Committee to receive the benefits specified under
this Plan upon such Participant's death or, if there is no designated
Beneficiary or surviving designated Beneficiary, then the person, persons,
trust, or trusts entitled by will or the laws of descent and distribution to
receive such benefits.
"Affiliate" has the meanings set forth in Rule 12b-2 of the 1934 Act.
"Board" means the Board of Directors of the Company.
"Cause" shall mean Cause as defined in any employment or severance
agreement then in effect between the Participant and the Company or any
subsidiary, or if not defined therein or if there shall be no such agreement,
shall mean: (i) the willful and continued failure by the Participant to
substantially perform his or her duties for the Company (other than any such
failure resulting from the Participant's incapacity due to physical or mental
illness), (ii) the willful engaging by the Participant in misconduct which is
materially and financially injurious to the Company, or (iii) the Participant's
conviction of a felony.
<PAGE>
"Change in Control" shall be deemed to have occurred upon:
(i) the date of the acquisition by any "person" (within the meaning of
Section 13(d)(3) or 14(d)(2) of the Exchange Act), excluding the Company or
any of its subsidiaries or Affiliates, of beneficial ownership (within the
meaning of Rule 13d-3 under the Exchange Act) of 50% or more of either the
then outstanding shares of common stock of the Company, or the then
outstanding voting securities entitled to vote generally in the election of
directors: or
(ii) the date the individuals who constitute the Board as of the date
of this Agreement, or who become directors upon or prior to the first
offering of shares of the Company's Stock (the "Incumbent Board") cease for
any reason to constitute at least a majority of the members of the Board,
provided that any person becoming a director subsequent to the effective
date of this Agreement whose election, or nomination for election by the
Company's stockholders, was approved by a vote of at least a majority of
the directors then comprising the Incumbent Board (other than any
individual whose nomination for election to Board membership was not
endorsed by the Company's management prior to, or at the time of, such
individual's initial nomination for election) shall be, for purposes of
this Agreement, considered as though such person were a member of the
Incumbent Board; or
(iii) the consummation of a merger, consolidation, recapitalization,
reorganization, sale or disposition of all or a substantial portion of the
Company's assets, or the issuance of shares of stock of the Company in
connection with the acquisition of the stock or assets of another entity,
provided, however, that a Change in Control shall not occur under this
clause (iii) if consummation of the transaction would result in at least
50% of the total voting power represented by the voting securities of the
Company (or, if not the Company, the entity that succeeds to all or
substantially all of the Company's business) outstanding immediately after
such transaction being beneficially owned (within the meaning of Rule 13d-3
promulgated pursuant to the Exchange Act) by at least 50% of the holders of
outstanding voting securities of the Company immediately prior to the
transaction, with the voting power of each such continuing holder relative
to other such continuing holders not substantially altered in the
transaction.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time. References to any provision of the Code shall be deemed to include
regulations thereunder and successor provisions and regulations thereto.
"Committee" means the Compensation Committee of the Board, or such other
Board committee as may be designated by the Board to administer the Plan and,
until the Board shall have designated the Compensation Committee, the entire
Board.
2
<PAGE>
"Common Stock" means the shares of common stock, par value $.01 per share,
of the Company.
"Company" means Annaly Mortgage Management, Inc., a corporation organized
under the laws of the State of Maryland, and any successor thereto; provided
that unless otherwise provided in this Plan, all references in this Plan to
employment by the Company shall include employment by any subsidiary of the
Company, and all references to termination of employment with the Company shall
include the sale of a subsidiary of the Company by which the Participant was
employed.
"Exchange Act" means the Securities Exchange Act of 1934, as amended from
time to time. References to any provision of the Exchange Act shall be deemed
to include rules thereunder and successor provisions and rules thereto.
"Fair Market Value" means, with respect to Stock, Awards, or other
property, (a) if the Stock is listed on a securities exchange or is traded over
the NASDAQ National Market System, the closing sales price of the Stock on such
exchange or over such system on such date or, in the absence of reported sales
on such date, the closing sales price on the immediately preceding date on which
sales were reported, or (b) if the Stock is not listed on a securities exchange
or traded over the NASDAQ National market System, the mean between the bid and
offered prices of the Stock as quoted by the National Association of Securities
Dealers through NASDAQ for such date, provided, that if the Committee determines
that the fair market value of the Stock is not properly reflected by such NASDAQ
quotations, the "Fair Market Value" of the Stock will mean the fair market value
as determined by such other method as the Committee determines in good faith to
be reasonable.
"ISO" means any Option intended to be and designated as an incentive stock
option within the meaning of Section 422 of the Code.
"Non-Employee Director" shall mean a member of the Board who is not
otherwise an employee of the Company or any subsidiary.
"Participant" means a person who, at a time when eligible under Section 5
hereof, has been granted an Award under the Plan.
"Rule 16b-3" means Rule 16b-3, as from time to time in effect and
applicable to the Plan and Participants, promulgated by the Securities and
Exchange Commission under Section 16 of the Exchange Act.
"Stock" means the Common Stock and such other securities as may be
substituted for Stock or such other securities pursuant to Section 4.
3
<PAGE>
3. Administration.
--------------
(a) Authority of the Committee. The Plan shall be administered by the
--------------------------
Committee. The Committee shall have full and final authority to take the
following actions, in each case subject to and consistent with the provisions of
the Plan:
(i) to select Participants to whom Awards may be granted;
(ii) to determine the type or types of Awards to be granted to each
Participant;
(iii) to determine the number of Awards to be granted, the number of
shares of Stock to which an Award will relate, the terms and conditions of
any Award granted under the Plan (including, but not limited to, any
exercise price, grant price, or purchase price, any restriction or
condition, any schedule for lapse of restrictions or conditions relating to
transferability or forfeiture, exercisability, or settlement of an Award,
and waivers or accelerations thereof, and waivers of or modifications to
performance conditions relating to an Award, based in each case on such
considerations as the Committee shall determine), and all other matters to
be determined in connection with an Award;
(iv) to determine whether, to what extent, and under what
circumstances an Award may be settled, or the exercise price of an Award
may be paid, in cash, Stock, other Awards, or other property, or an Award
may be canceled, forfeited, or surrendered;
(v) to determine whether, to what extent, and under what
circumstances cash, Stock, other Awards, or other property payable with
respect to an Award will be deferred either automatically, at the election
of the Committee, or at the election of the Participant;
(vi) to prescribe the form of each Award Agreement, which need not
be identical for each Participant;
(vii) to adopt, amend, suspend, waive, and rescind such rules and
regulations and appoint such agents as the Committee may deem necessary or
advisable to administer the Plan;
(viii) to correct any defect or supply any omission or reconcile any
inconsistency in the Plan and to construe and interpret the Plan and any
Award, rules and regulations, Award Agreement, or other instrument
hereunder; and
(ix) to make all other decisions and determinations as may be
required under the terms of the Plan or as the Committee may deem necessary
or advisable for the administration of the Plan.
4
<PAGE>
Other provisions of the Plan notwithstanding, the Board may perform any function
of the Committee under the Plan, including without limitation for the purpose of
ensuring that transactions under the Plan by Participants who are then subject
to Section 16 of the Exchange Act in respect of the Company are exempt under
Rule 16b-3. In any case in which the Board is performing a function of the
Committee under the Plan, each reference to the Committee herein shall be deemed
to refer to the Board.
(b) Manner of Exercise of Committee Authority. Unless authority is
-----------------------------------------
specifically reserved to the Board under the terms of the Plan, the Company's
Articles of Incorporation or Bylaws, or applicable law, the Committee shall have
sole discretion in exercising authority under the Plan. Any action of the
Committee with respect to the Plan shall be final, conclusive, and binding on
all persons, including the Company, subsidiaries of the Company, Participants,
any person claiming any rights under the Plan from or through any Participant,
and stockholders. The express grant of any specific power to the Committee, and
the taking of any action by the Committee, shall not be construed as limiting
any power or authority of the Committee. The Committee may delegate to officers
or managers of the Company or any subsidiary of the Company the authority,
subject to such terms as the Committee shall determine, to perform
administrative functions and to perform such other functions as the Committee
may determine.
(c) Limitation of Liability. Each member of the Committee shall be
-----------------------
entitled to, in good faith, rely or act upon any report or other information
furnished to him by any officer or other employee of the Company or any
subsidiary, the Company's independent certified public accountants, or any
executive compensation consultant, legal counsel, or other professional retained
by the Company to assist in the administration of the Plan. No member of the
Committee, nor any officer or employee of the Company acting on behalf of the
Committee, shall be personally liable for any action, determination, or
interpretation taken or made in good faith with respect to the Plan, and all
members of the Committee and any officer or employee of the Company acting on
their behalf shall, to the extent permitted by law, be fully indemnified and
protected by the Company with respect to any such action, determination, or
interpretation.
4. Stock Subject to Plan.
---------------------
(a) Amount of Stock Reserved. The total number of shares of Stock reserved
------------------------
and available for issuance under the Plan shall be the greater of five hundred
thousand (500,000) shares or five percent (5%) of the total number of shares of
Stock outstanding (on a fully diluted basis, assuming, if applicable, the
conversion of all warrants and convertible securities into Stock), in the
aggregate. The total number of shares of Stock that may be delivered upon
exercise of an ISO shall not exceed the greater of five hundred thousand
(500,000) shares or five percent (5%) of the total number of shares of Stock
outstanding (on a fully diluted basis, assuming, if applicable, the conversion
of all warrants and convertible securities into Stock), in the aggregate. If
an Award valued by reference to Stock may only be settled in cash, the number of
shares to which such Award relates shall be deemed to be Stock subject to such
Award for
5
<PAGE>
purposes of this Section 4(a). Any shares of Stock delivered pursuant to an
Award may consist, in whole or in part, of authorized and unissued shares or
treasury shares.
(b) Adjustments. In the event that any dividend or other distribution
-----------
(whether in the form of cash, Stock, or other property), recapitalization,
forward or reverse split, reorganization, merger, consolidation, spin-off,
combination, repurchase, or share exchange, or other similar cor porate
transaction or event, affects the Stock such that an adjustment is appropriate
in order to prevent dilution or enlargement of the rights of Participants under
the Plan, then the Committee shall adjust any or all of (i) the number and kind
of shares of Stock reserved and available for Awards under Section 4(a), (ii)
the number and kind of shares of outstanding Restricted Stock or other
outstanding Award in connection with which shares have been issued, (iii) the
number and kind of shares that may be issued in respect of other outstanding
Awards, and (iv) the exercise price, grant price, or purchase price relating to
any Award, (v) the number of shares with respect to which Awards may be granted
or measured in any calendar year, as set forth in Section 4(b).
5. Eligibility. Non-Employee Directors, executive officers and other key
-----------
employees of the Company and its subsidiaries (including any director or officer
who is also an employee), and persons who provide consulting or other services
to the Company deemed by the Committee to be of substantial value to the
Company, are eligible to be granted Awards under the Plan; provided, that, only
executive officers and other key employees of the Company and its subsidiaries
(including any director or officer who is also an employee) are eligible to be
granted ISOs under the Plan. In addition, a person who has been offered
employment by the Company or its subsidiaries is eligible to be granted an Award
under the Plan, provided that such Award shall be canceled if such person fails
to commence such employment, and no payment of value may be made in connection
with such Award until such person has commenced such employment.
6. Specific Terms of Awards.
------------------------
(a) General. Awards may be granted on the terms and conditions set forth
-------
in this Section 6. In addition, the Committee may impose on any Award or the
exercise thereof, at the date of grant or thereafter (subject to Section 8(e)),
such additional terms and conditions, not inconsistent with the provisions of
the Plan, as the Committee shall determine, including terms requiring forfeiture
of Awards in the event of termination of employment or service of the
Participant. Except as provided in Sections 6(e), 6(g), or 7(a), or to the
extent required to comply with requirements of the Corporations and Associations
Article of the Annotated Code of Maryland that lawful consideration be paid for
Stock, only services may be required as consideration for the grant (but not the
exercise) of any Award.
(b) Stock Options. The Committee is authorized to grant options to
-------------
purchase shares of Stock ("Options") to Participants (including "reload" Options
automatically granted to offset specified exercises of Options) on the following
terms and conditions:
6
<PAGE>
(i) Exercise Price. The exercise price per share of Stock purchasable
--------------
under an Option shall be determined by the Committee and set forth in an
Award Agreement.
(ii) Time and Method of Exercise. The Committee shall determine and
---------------------------
set forth in an Award Agreement the time or times at which an Option may be
exercised in whole or in part, the methods by which such exercise price may
be paid or deemed to be paid, the form of such payment, including, without
limitation, cash, Stock, other Awards or awards granted under other Company
plans, or other property (including notes or other contractual obligations
of Participants to make payment on a deferred basis, such as through
"cashless exercise" arrangements, to the extent permitted by applicable
law), and the methods by which Stock will be delivered or deemed to be
delivered to Participants.
(iii) ISOs. The terms of any ISO granted under the Plan shall comply
----
in all respects with the provisions of Section 422 of the Code, including
but not limited to the requirement that no ISO shall be granted with an
exercise price less than 100% (110% for an individual described in Section
422(b)(6) of the Code) of the Fair Market Value of a share of Stock on the
date of grant and granted no more than ten years after the effective date
of the Plan. Anything in the Plan to the contrary notwithstanding, no term
of the Plan relating to ISOs shall be interpreted, amended, or altered, nor
shall any discretion or authority granted under the Plan be exercised, so
as to disqualify either the Plan or any ISO under Section 422 of the Code,
unless requested by the affected Participant.
(iv) Termination of Employment. Unless otherwise determined by the
-------------------------
Committee and set forth in an Award Agreement, upon termination of a
Participant's employment with the Company and its subsidiaries, such
Participant may exercise any Options during the three month period
following such termination of employment (if such three-month period does
not exceed the remaining term of the Option), but only to the extent such
Option was exercisable immediately prior to such termination of employment.
Notwithstanding the foregoing, if such termination is for Cause, all
Options held by the Participant shall immediately terminate.
(c) Stock Appreciation Rights. The Committee is authorized to grant SARs
-------------------------
to Participants on the following terms and conditions:
(i) Right to Payment. An SAR shall confer on the Participant to whom
----------------
it is granted a right to receive, upon exercise thereof, the excess of (A)
the Fair Market Value of one share of Stock on the date of exercise (or, if
the Committee shall so determine in the case of any such right other than
one related to an ISO, the Fair Market Value of one share at any time
during a specified period before or after the date of exercise), over (B)
the grant price of the SAR as determined by the Committee as of the date of
grant of the SAR, which, except as provided in Section 7(a), shall be not
less than the Fair Market Value of one share of Stock on the date of grant.
7
<PAGE>
(ii) Other Terms. The Committee shall determine and set forth in an
-----------
Award Agreement the time or times at which an SAR may be exercised in whole
or in part, the method of exercise, method of settlement, form of
consideration payable in settlement, method by which Stock will be
delivered or deemed to be delivered to Participants, whether or not an SAR
shall be in tandem with any other Award, and any other terms and conditions
of any SAR. Limited SARs that may only be exercised upon the occurrence of
a Change in Control may be granted on such terms, not inconsistent with
this Section 6(c), as the Committee may determine. Limited SARs may be
either freestanding or in tandem with other Awards.
(d) Restricted Stock. The Committee is authorized to grant Restricted
----------------
Stock to Participants on the following terms and conditions:
(i) Grant and Restrictions. Restricted Stock shall be subject to such
----------------------
restrictions on transferability and other restrictions, if any, as the
Committee may impose and set forth in an Award Agreement, which
restrictions may lapse separately or in combination at such times, under
such circumstances, in such installments, or otherwise, as the Committee
may determine. Except to the extent restricted under the terms of the Plan
and any Award Agreement relating to the Restricted Stock, a Participant
granted Restricted Stock shall have all of the rights of a stockholder
including, without limitation, the right to vote Restricted Stock or the
right to receive dividends thereon.
(ii) Forfeiture. Except as otherwise determined by the Committee and
----------
set forth in an Award Agreement, upon termination of employment or service
(as determined under criteria established by the Committee) during the
applicable restriction period, Restricted Stock that is at that time
subject to restrictions shall be forfeited and reacquired by the Company;
provided, however, that the Committee may provide, by rule or regulation or
-----------------
in any Award Agreement, or may determine in any individual case, that
restrictions or forfeiture conditions relating to Restricted Stock will be
waived in whole or in part in the event of termination resulting from
specified causes.
(iii) Certificates for Stock. Restricted Stock granted under the
----------------------
Plan may be evidenced in such manner as the Committee shall determine. If
certificates representing Restricted Stock are registered in the name of
the Participant, such certificates shall bear an appropriate legend
referring to the terms, conditions, and restrictions applicable to such
Restricted Stock, the Company shall retain physical possession of the
certificate, and the Participant shall have delivered a stock power to the
Company, endorsed in blank, relating to the Restricted Stock.
(iv) Dividends. Dividends paid on Restricted Stock shall be either
---------
paid at the dividend payment date in cash or in shares of unrestricted
Stock having a Fair Market Value equal to the amount of such dividends as
the Committee shall determine or permit the Participant to elect. Stock
distributed in connection with a Stock split or Stock
8
<PAGE>
dividend, and other property distributed as a dividend, shall be subject to
restrictions and a risk of forfeiture to the same extent as the Restricted
Stock with respect to which such Stock or other property has been
distributed.
(e) Deferred Stock. The Committee is authorized to grant Deferred Stock to
--------------
Participants, subject to the following terms and conditions:
(i) Award and Restrictions. Delivery of Stock will occur upon
----------------------
expiration of the deferral period specified in an Award Agreement for an
Award of Deferred Stock by the Committee (or, if permitted by the
Committee, as elected by the Participant). In addition, Deferred Stock
shall be subject to such restrictions as the Committee may impose and set
forth in an Award Agreement, if any, which restrictions may lapse at the
expiration of the deferral period or at earlier specified times, separately
or in combination, in installments, or otherwise, as the Committee may
determine.
(ii) Forfeiture. Except as otherwise determined by the Committee and
----------
set forth in an Award Agreement, upon termination of employment or service
(as determined under criteria established by the Committee) during the
applicable deferral period or portion thereof to which forfeiture
conditions apply (as provided in the Award Agreement evidencing the
Deferred Stock), all Deferred Stock that is at that time subject to
deferral (other than a deferral at the election of the Participant) shall
be forfeited; provided, however, that the Committee may provide, by rule or
-----------------
regulation or in any Award Agreement, or may determine in any individual
case, that restrictions or forfeiture conditions relating to Deferred Stock
will be waived in whole or in part in the event of termination resulting
from specified causes.
(f) Bonus Stock and Awards in Lieu of Cash Obligations. The Committee is
--------------------------------------------------
authorized to grant Stock as a bonus, or to grant Stock or other Awards in lieu
of Company obligations to pay cash under other plans or compensatory
arrangements. Stock or Awards granted hereunder shall be subject to such other
terms as shall be determined by the Committee and set forth in an Award
Agreement.
(g) Dividend Equivalents. The Committee is authorized to grant Dividend
--------------------
Equivalents to a Participant, entitling the Participant to receive cash, Stock,
other Awards, or other property equal in value to dividends paid with respect to
a specified number of shares of Stock. Dividend Equivalents may be awarded on a
free-standing basis or in connection with another Award. The Committee may
provide that Dividend Equivalents shall be paid or distributed when accrued or
shall be deemed to have been reinvested in additional Stock, Awards, or other
investment vehicles, and subject to such restrictions on transferability and
risks of forfeiture, as the Committee may specify.
(h) Other Stock-Based Awards. The Committee is authorized, subject to
------------------------
limitations under applicable law, to grant to Participants such other Awards
that may be denominated or
9
<PAGE>
payable in, valued in whole or in part by reference to, or otherwise based on,
or related to, Stock and factors that may influence the value of Stock, as
deemed by the Committee to be consistent with the purposes of the Plan,
including, without limitation, convertible or exchangeable debt securities,
other rights convertible or exchangeable into Stock, purchase rights for Stock,
Awards with value and payment contingent upon performance of the Company or any
other factors designated by the Committee, and Awards valued by reference to the
book value of Stock or the value of securities of or the performance of
specified subsidiaries. The Committee shall determine, and set forth in an
Award Agreement, the terms and conditions of such Awards. Stock issued pursuant
to an Award in the nature of a purchase right granted under this Section 6(h)
shall be purchased for such consideration, paid for at such times, by such
methods, and in such forms, including, without limitation, cash, Stock, other
Awards, or other property, as the Committee shall determine. Cash awards, as an
element of or supplement to any other Award under the Plan, may be granted
pursuant to this Section 6(h).
(i) Non-Employee Directors Options. (a) Each Non-Employee Director shall
------------------------------
receive, without the exercise of the discretion of any person, (I) upon
appointment to the Board, a non-qualified stock option to purchase 5,000 shares
of Stock (the "Initial Director Options"), and (II) on June 26 of each year
during the term of the Plan, a non-qualified stock option under the Plan to
purchase 1,250 shares of Stock (the "Additional Director Options"). In the
event that there are not sufficient shares available under this Plan to allow
for the grant to each Non-Employee Director of an Option for the number of
shares provided herein, each Non-Employee Director shall receive an Option for
his pro rata share of the total number of shares of Stock available under the
Plan. The exercise price of each share of Stock subject to an Option granted to
a Non-Employee Director shall equal the Fair Market Value of a share of Stock on
the date such Option is granted or, if the Company consummates a private
placement of its Shares of Common Stock, the greater of such amount and the
offering price per share in connection with the first private placement
consummated by the Company. Each Option shall have a term of ten years from
its grant. Each Initial Director Option shall vest and become exercisable as to
one-quarter of the shares underlying the Option on each of the first, second,
third and fourth anniversaries thereof, respectively, provided, that the Non-
Employee Director to whom such Option has been awarded continues to serve as a
Non-Employee Director as of such vesting date. Each Additional Director Option
shall vest and become exercisable on the date of grant. Upon a Non-Employee
Director's cessation of service as a Non-Employee Director, the Option, to the
extent it was exercisable upon such cessation, shall remain vested and
exercisable for a period of one year or remainder of term, if less.
7. Certain Provisions Applicable to Awards.
---------------------------------------
(a) Stand-Alone, Additional, Tandem, and Substitute Awards. Awards granted
------------------------------------------------------
under the Plan may, in the discretion of the Committee, be granted either alone
or in addition to, in tandem with, or in substitution for, any other Award
granted under the Plan or any award granted under any other plan of the Company,
any subsidiary, or any business entity to be acquired by the Company or a
subsidiary, or any other right of a Participant to receive payment from the
10
<PAGE>
Company or any subsidiary. Awards granted in addition to or in tandem with
other Awards or awards may be granted either as of the same time as or a
different time from the grant of such other Awards or awards.
(b) Term of Awards. The term of each Award shall be for such period as may
--------------
be determined by the Committee and set forth in an Award Agreement; provided,
---------
however, that in no event shall the term of any ISO or an SAR granted in tandem
- -------
therewith exceed a period of ten years from the date of its grant (or such
shorter period as may be applicable under Section 422 of the Code).
(c) Form of Payment Under Awards. Subject to the terms of the Plan and any
----------------------------
applicable Award Agreement, payments to be made by the Company or a subsidiary
upon the grant or exercise of an Award may be made in such forms as the
Committee shall determine, including, without limitation, cash, Stock, other
Awards, or other property, and may be made in a single payment or transfer, in
installments, or on a deferred basis. Such payments may include, without
limitation, provisions for the payment or crediting of reasonable interest on
installment or deferred payments or the grant or crediting of Dividend
Equivalents in respect of installment or deferred payments denominated in Stock.
(d) Rule 16b-3 Compliance.
---------------------
(i) Six-Month Holding Period. Unless a Participant could otherwise
------------------------
dispose of equity securities, including derivative securities, acquired
under the Plan without incurring liability under Section 16(b) of the
Exchange Act, equity securities acquired under the Plan must be held for a
period of six months following the date of such acquisition, provided that
this condition shall be satisfied with respect to a derivative security if
at least six months elapse from the date of acquisition of the derivative
security to the date of disposition of the derivative security (other than
upon exercise or conversion) or its underlying equity security.
(ii) Other Compliance Provisions. With respect to a Participant who
---------------------------
is then subject to Section 16 of the Exchange Act in respect of the
Company, the Committee shall implement transactions under the Plan and
administer the Plan in a manner that will ensure that each transaction by
such a Participant is exempt from liability under Rule 16b-3, except that
such a Participant may be permitted to engage in a non-exempt transaction
under the Plan if written notice has been given to the Participant
regarding the non-exempt nature of such transaction. The Committee may
authorize the Company to repurchase any Award or shares of Stock resulting
from any Award in order to prevent a Participant who is subject to Section
16 of the Exchange Act from incurring liability under Section 16(b).
Unless otherwise specified by the Participant, equity securities, including
derivative securities, acquired under the Plan which are disposed of by a
Participant shall be deemed to be disposed of in the order acquired by the
Participant.
11
<PAGE>
(e) Loan Provisions. With the consent of the Committee, and subject at all
---------------
times to, and only to the extent, if any, permitted under and in accordance
with, laws and regulations and other binding obligations or provisions
applicable to the Company, the Company may make, guarantee, or arrange for a
loan or loans to a Participant with respect to the exercise of any Option or
other payment in connection with any Award, including the payment by a
Participant of any or all federal, state, or local income or other taxes due in
connection with any Award. Subject to such limitations, the Committee shall have
full authority to decide whether to make a loan or loans hereunder and to
determine the amount, terms, and provisions of any such loan or loans, including
the interest rate to be charged in respect of any such loan or loans, whether
the loan or loans are to be with or without recourse against the borrower, the
terms on which the loan is to be repaid and conditions, if any, under which the
loan or loans may be forgiven.
(f) Acceleration upon a Change of Control. Notwithstanding anything
-------------------------------------
contained herein to the contrary, unless otherwise provided by the Committee in
an Award Agreement, all conditions and/or restrictions relating to the continued
performance of services and/or the achievement of performance objectives with
respect to the exercisability or full enjoyment of an Award shall immediately
lapse upon a Change in Control, provided, that this Section 7(f) shall not be
applicable if it is intended that the transaction constituting such Change in
Control be accounted for as a pooling of interests under Accounting Principles
Board Option No. 16 (or any successor thereto), and operation of this Section
7(f) would otherwise violate Paragraph 47(c) thereof.
8. General Provisions.
------------------
(a) Compliance With Laws and Obligations. The Company shall not be
------------------------------------
obligated to issue or deliver Stock in connection with any Award or take any
other action under the Plan in a transaction subject to the registration
requirements of the Securities Act of 1933, as amended, or any other federal or
state securities law, any requirement under any listing agreement between the
Company and any national securities exchange or automated quotation system, or
any other law, regulation, or contractual obligation of the Company, until the
Company is satisfied that such laws, regulations, and other obligations of the
Company have been complied with in full. Certificates representing shares of
Stock issued under the Plan will be subject to such stop-transfer orders and
other restrictions as may be applicable under such laws, regulations, and other
obligations of the Company, including any requirement that a legend or legends
be placed thereon.
(b) Limitations on Transferability. Awards and other rights under the
------------------------------
Plan will not be transferable by a Participant except by will or the laws of
descent and distribution or to a Beneficiary in the event of the Participant's
death, shall not be pledged, mortgaged, hypothecated or otherwise encumbered, or
otherwise subject to the claims of creditors, and, in the case of ISOs and SARs
in tandem therewith, shall be exercisable during the lifetime of a Participant
only by such Participant or his guardian or legal representative; provided,
---------
however, that such Awards and other rights (other than ISOs and SARs in tandem
- -------
therewith) may be transferred to one or more
12
<PAGE>
transferees during the lifetime of the Participant to the extent and on such
terms as then may be permitted by the Committee.
(c) No Right to Continued Employment. Neither the Plan nor any action
--------------------------------
taken hereunder shall be construed as giving any employee the right to be
retained in the employ of the Company or any of its subsidiaries, nor shall it
interfere in any way with the right of the Company or any of its subsidiaries to
terminate any employee's employment at any time.
(d) Taxes. The Company and any subsidiary is authorized to withhold from
-----
any Award granted or to be settled, any delivery of Stock in connection with an
Award, any other payment relating to an Award, or any payroll or other payment
to a Participant amounts of withholding and other taxes due or potentially
payable in connection with any transaction involving an Award, and to take such
other action as the Committee may deem advisable to enable the Company and
Participants to satisfy obligations for the payment of withholding taxes and
other tax obligations relating to any Award. This authority shall include
authority to withhold or receive Stock or other property and to make cash
payments in respect thereof in satisfaction of a Participant's tax obligations.
(e) Changes to the Plan and Awards. The Board may amend, alter, suspend,
------------------------------
discontinue, or terminate the Plan or the Committee's authority to grant Awards
under the Plan without the consent of stockholders or Participants, except that
any such action shall be subject to the approval of the Company's stockholders
at or before the next annual meeting of stockholders for which the record date
is after such Board action if such stockholder approval is required by any
federal or state law or regulation or the rules of any stock exchange or
automated quotation system on which the Stock may then be listed or quoted, and
the Board may otherwise, in its discretion, determine to submit other such
changes to the Plan to stockholders for approval; provided, however, that,
-----------------
without the consent of an affected Participant, no such action may materially
impair the rights of such Participant under any Award theretofore granted to
him. The Committee may waive any conditions or rights under, or amend, alter,
suspend, discontinue, or terminate, any Award theretofore granted and any Award
Agreement relating thereto; provided, however, that, without the consent of an
-----------------
affected Participant, no such action may materially impair the rights of such
Participant under such Award.
(f) No Rights to Awards; No Stockholder Rights. No Participant or employee
------------------------------------------
shall have any claim to be granted any Award under the Plan, and there is no
obligation for uniformity of treatment of Participants and employees. No Award
shall confer on any Participant any of the rights of a stockholder of the
Company unless and until Stock is duly issued or transferred and delivered to
the Participant in accordance with the terms of the Award or, in the case of an
Option, the Option is duly exercised.
(g) Unfunded Status of Awards; Creation of Trusts. The Plan is intended to
---------------------------------------------
constitute an "unfunded" plan for incentive and deferred compensation. With
respect to any payments not yet made to a Participant pursuant to an Award,
nothing contained in the Plan or
13
<PAGE>
any Award shall give any such Participant any rights that are greater than those
of a general creditor of the Company; provided, however, that the Committee may
-----------------
authorize the creation of trusts or make other arrangements to meet the
Company's obligations under the Plan to deliver cash, Stock, other Awards, or
other property pursuant to any Award, which trusts or other arrangements shall
be consistent with the "unfunded" status of the Plan unless the Committee
otherwise determines with the consent of each affected Participant.
(h) Nonexclusivity of the Plan. Neither the adoption of the Plan by the
--------------------------
Board nor its submission to the stockholders of the Company for approval shall
be construed as creating any limitations on the power of the Board to adopt such
other compensatory arrangements as it may deem desirable, including, without
limitation, the granting of stock options otherwise than under the Plan, and
such arrangements may be either applicable generally or only in specific cases.
(i) No Fractional Shares. No fractional shares of Stock shall be issued or
--------------------
delivered pursuant to the Plan or any Award. The Committee shall determine
whether cash, other Awards, or other property shall be issued or paid in lieu of
such fractional shares or whether such fractional shares or any rights thereto
shall be forfeited or otherwise eliminated.
(j) Governing Law. The validity, construction, and effect of the Plan, any
-------------
rules and regulations relating to the Plan, and any Award Agreement shall be
determined in accordance with the Corporations and Associations Article of the
Annotated Code of Maryland, without giving effect to principles of conflicts of
laws, and applicable federal law.
(k) Effective Date; Plan Termination. The Plan shall become effective as
--------------------------------
of the date of its adoption by the Board and shall continue in effect until
terminated by the Board, provided, however, that any Awards granted prior to the
approval of such adoption by the Company's stockholders shall be granted
conditional upon such approval.
14
<PAGE>
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT ("Agreement"), effective as of the 27th day
of January, 1997, is entered into by and between Michael A. J. Farrell (the
"Executive") and Annaly Mortgage Management, Inc., a Maryland corporation (the
"Company").
The Company desires to establish its right to the continued services
of the Executive, in the capacity described below, on the terms and conditions
and subject to the rights of termination hereinafter set forth, and the
Executive is willing to accept such employment on such terms and conditions.
The Company is currently offering for sale shares of Common Stock as set forth
in an offering memorandum dated January 27, 1997 (the "Offering").
In consideration of the mutual agreements hereinafter set forth, the
Executive and the Company have agreed and do hereby agree as follows:
1. EMPLOYMENT AS CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
---------------------------------------------------------------
OF THE COMPANY. The Company does hereby employ, engage and hire the Executive
- --------------
as Chairman of the Board and Chief Executive Officer of the Company, and the
Executive does hereby accept and agree to such hiring, engagement, and
employment. The Executive's duties as Chairman of the Board and Chief Executive
Officer shall be such executive and managerial duties as the Board of Directors
of the Company shall from time to time prescribe and as provided in the Bylaws
of the Company. The Executive shall devote such time, energy and skill to the
performance of his duties for the Company and for the benefit of the Company as
may be necessary or required for the effective conduct and operation of the
<PAGE>
Company's business. Furthermore, the Executive shall exercise due diligence and
care in the performance of his duties to the Company under this Agreement.
2. TERM OF AGREEMENT. The term ("Term") of this Agreement shall
-----------------
commence as of the date of the closing under the Offering (the "Effective Date")
and shall continue through December 31, 1999. From and after December 31, 1999,
and each anniversary thereafter, the Term of the Agreement shall automatically
be extended for additional successive one-year periods unless, not later than
three months prior to December 31, 1999 or any such anniversary, as applicable,
either party shall have given written notice to the other that it does not wish
to extend the Term of the Agreement.
3. COMPENSATION.
------------
(a) BASE SALARY. The Company shall pay the Executive, and the
-----------
Executive agrees to accept from the Company, in payment for his services to the
Company a base salary at the rate determined below ("Base Salary"), payable in
equal biweekly installments or at such other time or times as the Executive and
Company shall agree. Base Salary shall (i) equal a per annum amount of 0.20%
times the book value (as defined below) of the Company, (ii) be reviewed
quarterly and upon the raising of additional equity through the placement of
securities, and (iii) be subject to a maximum per annum amount of $250,000
("Salary Cap"). The Salary Cap can be raised at any time by the Board of
Directors of the Company in its sole discretion. In determining the Base
Salary, the "book value" of the Company shall be the aggregate amounts reported
on the Company's balance sheet prepared in accordance with generally accepted
accounting principles as Stockholders' Equity but excluding any adjustments for
valuation reserves (i.e., changes in the value of the Company's portfolio of
investments as a
-2-
<PAGE>
result of mark-to-market valuation changes), all determined as of the close of
business on the Effective Date and thereafter on the closing date of any
placements of securities resulting in additional equity and on the last day of
each fiscal quarter. In consideration of the cash flow needs of the Company,
the Base Salary can be lowered at management's discretion.
(b) PERFORMANCE BONUS - BOARD OF DIRECTORS DISCRETION. The Executive
-------------------------------------------------
shall be eligible to receive an incentive performance bonus based upon a
percentage of his Base Salary. Except as provided in Section 7, any such bonus
awarded to the Executive shall be payable in the amount, in the manner, and at
the time determined by the Company's Board of Directors in its sole and absolute
discretion.
(c) ANNUAL REVIEW. The Board of Directors of the Company shall, at
-------------
least annually, review the Executive's entire compensation package to determine
whether it continues to meet the Company's compensation objectives. Such annual
review will include a determination of (i) whether to increase the Salary Cap in
accordance with Section 3(a) and (ii) the incentive performance bonus to be
awarded in accordance with Section 3(b).
4. FRINGE BENEFITS. The Executive shall be entitled to participate
---------------
in any benefit programs adopted from time to time by the Company for the benefit
of its executive employees, and the Executive shall be entitled to receive such
other fringe benefits as may be granted to him from time to time by the
Company's Board of Directors.
(a) BENEFIT PLANS. The Executive shall be entitled to participate in
-------------
any benefit plans relating to stock options, stock purchases, awards, pension,
thrift, profit sharing, life insurance, medical coverage, education, or other
retirement or employee benefits available to other executive employees of the
Company, subject to any restrictions (including
-3-
<PAGE>
waiting periods) specified in such plans. The Company shall make commercially
reasonable efforts to obtain medical and disability insurance, and such other
forms of insurance as the Board of Directors shall from time to time determine,
for its employees.
(b) VACATION. The Executive shall be entitled to (i) four (4) weeks
--------
of paid vacation per calendar year for the first two years of service to the
Company, and (ii) five (5) weeks of paid vacation per calendar year for the next
two years of service to the Company, with such vacation to be scheduled and
taken in accordance with the Company's standard vacation policies. After four
years of service to the Company, the Executive shall be entitled to such number
of weeks of paid vacation per calendar year as determined by the Board of
Directors of the Company after review of industry standards, but shall in no
event be entitled to fewer than five weeks of paid vacation per calendar year.
5. BUSINESS EXPENSES. The Company shall reimburse the Executive
-----------------
for any and all necessary, customary and usual expenses, properly receipted in
accordance with Company policies, incurred by Executive on behalf of the
Company.
6. TERMINATION OF EXECUTIVE'S EMPLOYMENT.
-------------------------------------
(a) DEATH. If the Executive dies while employed by the Company, his
-----
employment shall immediately terminate. The Company's obligation to pay the
Executive's Base Salary shall cease as of the date of Executive's death.
Thereafter, Executive's beneficiaries or his estate shall receive benefits in
accordance with the Company's retirement, insurance and other applicable
programs and plans then in effect.
(b) DISABILITY. (i) If, as a result of the Executive's incapacity
----------
due to physical or mental illness ("Disability"), Executive shall have been
absent from the full-
-4-
<PAGE>
time performance of his duties with the Company for six (6) consecutive months,
and, within thirty (30) days after written notice is provided to him by the
Company, he shall not have returned to the full-time performance of his duties,
the Executive's employment under this Agreement may be terminated by the Company
for Disability. During any period prior to such termination during which the
Executive is absent from the full-time performance of his duties with the
Company due to Disability, the Company shall continue to pay the Executive his
Base Salary at the rate in effect at the commencement of such period of
Disability. Subsequent to such termination, the Executive's benefits shall be
determined under the Company's retirement, insurance and other compensation
programs then in effect in accordance with the terms of such programs.
(ii) If, however, as a result of the Executive's partial incapacity
due to physical or mental illness in which Executive shall not have been absent
from his duties for six consecutive months and shall have returned to work on a
full-time basis but is not able to perform at the same level as when hired
and/or is not able to perform the same functions originally hired for ("Partial
Disability"), the Company shall make reasonable efforts to accommodate the
Executive's Partial Disability by modifying his job description appropriately,
together with a commensurate adjustment in compensation; provided, however, the
Company shall be required to so continue the employment of the Executive in the
event of a Partial Disability of the Executive only if the Company determines,
in its sole discretion, that it can create a position for which the Executive
would be suited and that would be economically advantageous to the Company.
-5-
<PAGE>
(c) TERMINATION BY THE COMPANY FOR CAUSE. The Company may terminate
------------------------------------
the Executive's employment under this Agreement for "Cause," at any time prior
to expiration of the Term of the Agreement, only in the event of (i) the
Executive's material breach of this Agreement, including without limitation the
failure to substantially perform the reasonable and lawful duties of his
position for the Company, which breach shall continue for 60 days after notice
thereof by the Company to the Executive, which notice shall specify in detail
the Executive's breach, (ii) acts or omissions constituting recklessness or
wilful misconduct on the part of the Executive in respect of his fiduciary
obligations or otherwise relating to the business of the Company, or (iii) the
Executive's conviction for fraud, misappropriation or embezzlement. In the case
of clauses (ii) and (iii), the Executive's employment under this Agreement may
be terminated immediately without any advance written notice, and the Company's
obligation to pay the Executive's Base Salary, any bonus and benefits shall
cease as of the termination date.
(d) TERMINATION BY THE EXECUTIVE FOR GOOD REASON. The Executive shall
--------------------------------------------
have the right to terminate this Agreement for Good Reason. For purposes of
this Agreement, "Good Reason" shall mean the occurrence, without the Executive's
express written consent, of any one or more of the following events:
(i) A reduction in title and/or compensation of the Executive by the
Board of Directors or the assignment of duties to the Executive not
consistent with those of a senior executive of the Company, except in
connection with the Company's termination of the Executive's employment for
Cause pursuant to Section 6(c) or as otherwise expressly contemplated
herein;
-6-
<PAGE>
(ii) The Company's material breach of any of the provisions of this
Agreement, including, but not limited to, a reduction by the Company in the
Executive's Base Salary in effect as of the Effective Date, or as the same
may be increased as provided herein; or a change in the conditions of the
Executive's employment (e.g., including, without limitation, a failure by
----
the Company to provide the Executive with incentive compensation and
benefits plans that provide benefits and the opportunity to obtain
incentive compensation, in each case comparable to those available under
benefits programs in effect as of the Effective Date, etc.);
(iii) The relocation of the Company's principal executive offices to
a location more than 50 miles from its location as of Effective Date or the
Company's requiring the Executive to be based anywhere other than the
Company's principal executive offices, except for required travel on the
Company's business to the extent necessary to meet the standard set forth
in the last two sentences of Section 1; or
(iv) A Change in Control as defined in Section 8 below. The
Executive agrees to provide the Company with thirty (30) days' prior
written notice of any termination for Good Reason.
(e) TERMINATION BY THE EXECUTIVE WITHOUT GOOD REASON. The Executive
------------------------------------------------
may at any time during the Term of this Agreement terminate his employment
hereunder for any reason or no reason by giving the Company notice in writing
not less than one hundred twenty (120) days in advance of such termination. The
Executive shall have no further obligations to the Company after the effective
date of termination, as set forth in the notice. Notwithstanding the foregoing,
in the event any "person" (as defined in Section 8
-7-
<PAGE>
below) begins a tender or exchange offer, circulates a proxy to shareholders or
takes other steps to effect a Change of Control, the Executive agrees that he
will not voluntarily leave the employ of the Company, and will render services
to the Company commensurate with his position, until such "person" has abandoned
or terminated efforts to effect a Change of Control or until a Change of Control
has occurred. In the event of a termination by the Executive under this
paragraph, the Company will pay only the portion of Base Salary or previously
awarded Bonus unpaid as of the termination date. Benefits which have accrued
and/or vested on the termination date will continue in effect according to their
terms, but no additional accrual or vesting will take place.
7. COMPENSATION UPON TERMINATION BY THE COMPANY OTHER THAN FOR
-----------------------------------------------------------
CAUSE, OR BY THE EXECUTIVE FOR GOOD REASON. If the Executive's employment shall
- ------------------------------------------
be terminated (i) by the Company other than for Cause, or (ii) by the Executive
for Good Reason, the Executive shall be entitled to the following benefits:
(a) PAYMENT OF UNPAID BASE SALARY. The Company shall immediately pay
-----------------------------
the Executive any portion of the Executive's Base Salary or previously awarded
bonus not paid prior to the termination date.
(b) SEVERANCE PAYMENT. The Company shall pay the Executive an amount
-----------------
(the "Severance Amount") equal to three times the higher of (i) the Executive's
combined Salary Cap and actual bonus compensation for the preceding fiscal year
or (ii) the average for the three preceding years of the Executive's combined
actual Base Salary and bonus compensation; provided, however, that the Severance
Amount shall not be less than $250,000, nor more than 1.0% of book value (as
defined in Section 3(a)) to the extent the Severance
-8-
<PAGE>
Amount is greater than $250,000. The Severance Amount shall be payable 50%
within five (5) days after the termination date and the remaining 50% shall be
payable in twelve (12) equal consecutive monthly installments beginning on the
first day of the month following the termination date.
(c) IMMEDIATE VESTING OF STOCK OPTIONS. The Company shall take all
----------------------------------
appropriate action to ensure that all stock options on the Company's stock owned
by the Executive as of the Effective Date and which have not been exercised
prior to the termination date become immediately exercisable by the Executive,
whether or not the right to exercise such stock options would otherwise then be
vested in the Executive, provided, however, an option that is an incentive stock
-------- -------
option (within the meaning of Code Section 422(b)) shall not be exercisable for
the first time in a calendar year to the extent that the aggregate fair market
value of stock (as determined under Code Section 422(b)(3)) with respect to
which ISO's are exercisable by the Executive during such calendar year exceeds
$100,000. The provisions of this Section 7(c) shall constitute an amendment to
any existing stock option agreements (including award certificates) of the
Company as of the Effective Date. All other stock options owned by the
Executive as of the termination date shall be exercisable in accordance with the
Company's stock option plan and the applicable stock option agreements.
(d) CONTINUATION OF FRINGE BENEFITS. From and after termination of
-------------------------------
the Executive's employment, the Company shall continue to provide the Executive
with all life insurance and medical coverage Fringe Benefits set forth in
Section 4 as if the Executive's employment under the Agreement had not been
terminated until the earlier to occur of (i) such time as the Executive finds
full-time employment or (ii) this Agreement terminates.
-9-
<PAGE>
Notwithstanding the immediately preceding sentence, if, as the result of the
termination of the Executive's employment, the Executive and/or his otherwise
eligible dependents or beneficiaries shall become ineligible for benefits under
any one or more of the Company's benefit plans or the cost of providing such
benefits exceeds 200% of the cost of providing such benefits to other members of
senior management, the Company, at the Company's option, shall (i) continue to
provide the Executive and his eligible dependents or beneficiaries with benefits
at a level at least equivalent to the level of benefits for which the Executive
and his dependents and beneficiaries were eligible under such plans immediately
prior to the termination date or (ii) for any Fringe Benefit not so provided,
the Company shall pay the Executive 200% of the cost of providing such Fringe
Benefit to other members of senior management.
(e) EXCISE TAX GROSS-UP. In the event that (i) the Executive becomes
-------------------
entitled to the benefit payments provided under subparagraphs (a)-(d) of this
Section 7 ("Benefit Payments"), and (ii) any of the Benefit Payments will be
subject to any excise tax imposed under Section 4999 of the Internal Revenue
Code of 1986, as amended from time to time ("Code"), or successor sections
thereto ("Excise Tax"), the Company shall pay to the Executive an additional
amount (the "Gross-Up Payment") such that the net amount retained by the
Executive, after deduction of any Excise Tax on the Benefit Payments and any
federal, state and local income tax and Excise Tax upon the payments provided
for under this Section 7, shall be equal to the amount of the Benefit Payments.
For purposes of determining whether any of the Benefit Payments will be subject
to the Excise Tax and the amount of such Excise Tax, (i) any other payments or
benefits received or to be received by the Executive in connection with a Change
in Control (defined below) or the termination of Executive's employment (whether
-10-
<PAGE>
pursuant to the terms of this Agreement or any other plan, arrangement or
agreement with the Company, any person whose actions result in a Change in
Control or any person affiliated with the Company or such person) shall be
treated as "parachute payments" within the meaning of section 280G(b)(2) of the
Code, and all "excess parachute payments" within the meaning of section
280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless in
the opinion of tax advisors selected by the Company and reasonably acceptable to
the Executive such other payments or benefits (in whole or in part) do not
constitute parachute payments, including by reason of section 280G(b)(4)(A) of
the Code, or such excess parachute payments (in whole or in part) represent
reasonable compensation for services actually rendered, within the meaning of
section 280G(b)(4)(B) of the Code, in excess of the Base Amount (as defined in
section 280G(b)(3) of the Code) allocable to such reasonable compensation, or
are otherwise not subject to the Excise Tax, (ii) the amount of the Benefit
Payments which shall be treated as subject to the Excise Tax shall be equal to
the lesser of (A) the total amount of the Benefit Payments or (B) the amount of
excess parachute payments within the meaning of section 280G(b)(1) of the Code
(after applying clause (i), above), and (iii) the value of any non-cash benefits
or any deferred payment or benefit shall be determined by the Company's
independent auditors in accordance with the principles of section 280G(d)(3) and
(4) of the Code. For purposes of determining the amount of the Gross-Up
Payment, the Executive shall be deemed to pay federal income taxes at the
highest marginal rate of federal income taxation in the calendar year in which
the Gross-Up Payment is to be made and state and local income taxes at the
highest marginal rate of taxation in the state and locality of the Executive's
residence on the termination date of employment, net of the maximum reduction in
federal income taxes which could be obtained from deduction of such
-11-
<PAGE>
state and local taxes based on the marginal rate referenced above. In the event
that the Excise Tax is subsequently determined to be less than the amount taken
into account hereunder at the termination date, the Executive shall repay to the
Company, at the time that the amount of such reduction in Excise Tax is finally
determined, the portion of the Gross-Up Payment attributable to such reduction
(plus that portion of the Gross-Up Payment attributable to the Excise Tax and
federal, state and local income tax imposed on the Gross-Up Payment being repaid
by the Executive to the extent that such repayment results in a reduction in
Excise Tax and/or a federal, state or local income tax deduction) plus interest
on the amount of such repayment at the rate provided in section 1274(b)(2)(B) of
the Code. In the event that the Excise Tax is determined to exceed the amount
taken into account hereunder at the time of the termination of the Executive's
employment (including by reason of any payment the existence or amount of which
cannot be determined at the time of the Gross-Up Payment), the Company shall
make an additional Gross-Up Payment in respect of such excess (plus any
interest, penalties or additions payable by the Executive with respect to such
excess but only to the extent that such interest, penalties or additions would
not have been reduced by prompt payment by the Executive to the appropriate tax
authority of the Gross-Up Payments previously received) at the time that the
amount of such excess is finally determined. The Executive and the Company
shall each reasonably cooperate with the other in connection with any
administrative or judicial proceedings concerning the existence or amount of
liability for Excise Tax with respect to the Benefit Payments.
(f) NO MITIGATION REQUIRED; NO OTHER ENTITLEMENT TO BENEFITS UNDER
--------------------------------------------------------------
AGREEMENT. The Executive shall not be required in any way to mitigate the
- ---------
amount of any payment provided for in this Section 7, including, but not limited
to,
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<PAGE>
by seeking other employment, nor shall the amount of any payment provided for in
this Section 7 be reduced by any compensation earned by the Executive as the
result of employment with another employer after the termination date of
employment, or otherwise. Except as set forth in this Section 7, following a
termination governed by this Section 7, the Executive shall not be entitled to
any other compensation or benefits set forth in this Agreement, except as may be
separately negotiated by the parties and approved by the Board of Directors of
the Company in writing in conjunction with the termination of Executive's
employment under this Section 7.
8. CHANGE IN CONTROL. A "Change in Control" shall be deemed to have
-----------------
occurred if the conditions set forth in any one of the following paragraphs
shall have been satisfied:
(a) Any "Person" (as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934 (the "Exchange Act") (other than the Company
any trustee or other fiduciary holding securities under an Executive benefit
plan of the Company; or any company owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as their
ownership of the stock of the Company) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company (not including in the securities beneficially owned by
such Person any securities acquired directly from the Company or from a
transferor in a transaction expressly approved or consented to by the Board of
Directors) representing more than 9.8% of the combined voting power of the
Company's then outstanding securities; or
(b) During any period of two consecutive years (not including any
period prior to the execution of this Agreement), individuals who at the
beginning of such period
-13-
<PAGE>
constitute the Board of Directors and any new director (other than a director
designated by a person who has entered into an agreement with the Company to
effect a transaction described in clause (a), (c) or (d) of this section), (i)
whose election by the Board of Directors or nomination for election by the
Company's stockholders was approved by a vote of at lest two-thirds (2/3) of the
directors then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so approved
or (ii) whose election is to replace a person who ceases to be a director due to
death, disability or age, cease for any reason to constitute a majority thereof;
or
(c) The shareholders of the Company approve a merger or consolidation
of the Company with any other corporation, other than (i) a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity), in combination with the ownership of any trustee or other
fiduciary holding securities under an Executive benefit plan of the Company, at
least 75% of the combined voting power of the voting securities of the Company
or such surviving entity outstanding immediately after such merger or
consolidation, or (ii) a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which no person
acquires more than 50% of the combined voting power of the Company's then
outstanding securities; or
(d) The shareholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets.
-14-
<PAGE>
9. DISPUTE RELATING TO EXECUTIVE'S TERMINATION OF EMPLOYMENT FOR
-------------------------------------------------------------
GOOD REASON. If the Executive resigns his employment with the Company alleging
- -----------
in good faith as the basis for such resignation any of the "Good Reasons"
specified in Section 6(d), and if the Company then disputes the Executive's
right to the payment of benefits under Section 7, the Company shall continue to
pay the Executive the full compensation (including, but not limited to, his Base
Salary) in effect at the date the Executive provided notice of such resignation,
and the Company shall continue the Executive as a participant in all
compensation, benefit and insurance plans in which the Executive was then a
participant, until the earlier of (i) the expiration of the Term of the
Agreement or (ii) the date the dispute is finally resolved, either by mutual
written agreement of the parties or by arbitration in accordance with Section
22. For the purposes of this Section, the Company shall bear the burden of
proving that the grounds for the Executive's resignation do not fall within the
scope of Section 6(d), and there shall be a rebuttable presumption that the
Executive alleged such grounds in good faith.
10. NONCOMPETITION PROVISIONS.
-------------------------
(a) NONCOMPETITION. The Executive agrees that during the Term of
--------------
this Agreement prior to any termination of his employment hereunder and for a
period of one year following the occurrence of any event entitling the Executive
to Benefit Payments, provided the Company makes all such payments when due
according to the provisions of Section 7, he will not, directly or indirectly,
without the prior written consent of the Company, manage, operate, join,
control, participate in, or be connected as a stockholder (other than as a
holder of shares publicly traded on a stock exchange or the NASDAQ National
Market System), partner,
-15-
<PAGE>
or other equity holder with, or as an officer, director or employee of, any real
estate investment trust whose business strategy is competitive with that of the
Company, as determined by a majority of the Company's Independent Directors
("Competing REIT"). It is further expressly agreed that the Company will or
would suffer irreparable injury of the Company in violation of the preceding
sentence of this Agreement and that the Company would by reason of such
competition be entitled to injunctive relief in a court of appropriate
jurisdiction, and the Executive further consents and stipulates to the entry of
such injunctive relief in such a court prohibiting the Executive from competing
with the Company or any subsidiary or affiliate of the Company, in the areas of
business set forth above, in violation of this Agreement. It is further
expressly agreed that the Executive's interest in and employment by Fixed Income
Discount Advisory Company or eNTR shall not be deemed to violate any provisions
of this Section, regardless of the scope of the Executive's activities with such
firm; provided, however, that the Executive shall not in such capacity provide
services to any Competing REIT.
(b) RIGHT TO COMPANY MATERIALS. The Executive agrees that all
--------------------------
styles, designs, lists, materials, books, files, reports, correspondence,
records, and other documents ("Company Materials") used, prepared, or made
available to the Executive in connection with his employment by the Company
shall be and shall remain the property of the Company. Upon the termination of
employment or the expiration of this Agreement, all Company Materials shall be
returned immediately to the Company, and the Executive shall not make or retain
any copies thereof.
(c) SOLICITING EXECUTIVES. The Executive promises and agrees that he
---------------------
will not directly or indirectly solicit any of the Company Executives to work
for any
-16-
<PAGE>
Competing REIT.
(d) MARYLAND LAW. The Executive agrees, in accordance with Maryland
------------
law, to first offer to the Company corporate opportunities learned of solely as
a result of his service as an officer and director of the Company.
11. NOTICES. All notices and other communications under this
-------
Agreement shall be in writing and shall be given by fax or first class mail,
certified or registered with return receipt requested, and shall be deemed to
have been duly given three (3) days after mailing or twenty-four (24) hours
after transmission of a fax to the respective persons named below:
If to the Company: Timothy J. Guba
President
Annaly Mortgage Management, Inc.
1500 Harbor Blvd.
Weehawken, NJ 07087
Phone: (201) 223-1900
Fax: (201) 223-1230
If to the Executive: Michael A. J. Farrell
Chief Executive Officer
Annaly Mortgage Management, Inc.
1500 Harbor Blvd.
Weehawken, NJ 07087
Phone: (201) 223-1900
Fax: (201) 223-1230
A copy of any notice pursuant to this Agreement shall be sent to Morgan, Lewis &
Bockius, 101 Park Avenue, New York, New York 10178, Attn: Robert C. Mendelson.
Either party may change such party's address for notices by notice duly given
pursuant hereto.
12. ATTORNEYS' FEES. In the event judicial determination is
---------------
necessary of any dispute arising as to the parties' rights and obligations
hereunder, each party shall have the right, in addition to any other relief
granted by the court, to attorneys' fees based on a
-17-
<PAGE>
determination by the court of the extent to which each party has prevailed as to
the material issues raised in determination of the dispute.
13. TERMINATION OF PRIOR AGREEMENTS. This Agreement terminates and
-------------------------------
supersedes any and all prior agreements and understandings between the parties
with respect to employment or with respect to the compensation of the Executive
by the Company.
14. ASSIGNMENT; SUCCESSORS. This Agreement is personal in its nature
----------------------
and neither of the parties hereto shall, without the consent of the other,
assign or transfer this Agreement or any rights or obligations hereunder;
provided that, in the event of the merger, consolidation, transfer, or sale of
all or substantially all of the assets of the Company with or to any other
individual or entity, this Agreement shall, subject to the provisions hereof, be
binding upon and inure to the benefit of such successor and such successor shall
discharge and perform all the promises, covenants, duties, and obligations of
the Company hereunder.
15. GOVERNING LAW. This Agreement and the legal relations thus
-------------
created between the parties hereto shall be governed by and construed under and
in accordance with the laws of the State of New Jersey.
16. ENTIRE AGREEMENT; HEADINGS. This Agreement embodies the entire
--------------------------
agreement of the parties respecting the matters within its scope and may be
modified only in writing. Section headings in this Agreement are included
herein for convenience of reference only and shall not constitute a part of this
Agreement for any other purpose.
17. WAIVER; MODIFICATION. Failure to insist upon strict compliance
--------------------
with any of the terms, covenants, or conditions hereof shall not be deemed a
waiver of such term,
-18-
<PAGE>
covenant, or condition, nor shall any waiver or relinquishment of, or failure to
insist upon strict compliance with, any right or power hereunder at any one or
more times be deemed a waiver or relinquishment of such right or power at any
other time or times. This Agreement shall not be modified in any respect except
by a writing executed by each party hereto.
18. SEVERABILITY. In the event that a court of competent
------------
jurisdiction determines that any portion of this Agreement is in violation of
any statute or public policy, only the portions of this Agreement that violate
such statute or public policy shall be stricken. All portions of this Agreement
that do not violate any statute or public policy shall continue in full force
and effect. Further, any court order striking any portion of this Agreement
shall modify the stricken terms as narrowly as possible to give as much effect
as possible to the intentions of the parties under this Agreement.
19. INDEMNIFICATION. The Company shall indemnify and hold Executive
---------------
harmless to the maximum extent permitted by Section 2-418 of the Maryland
General Corporations Law or its successor statute.
20. COUNTERPARTS. This Agreement may be executed in several
------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
21. SUCCESSOR SECTIONS. References herein to sections or rules of
------------------
the Code or Exchange Act shall be deemed to include any successor sections or
rules.
22. ARBITRATION. Any dispute, claim or controversy arising out of or
-----------
in relation to this Agreement, which the Executive and the Company are unable to
resolve shall be determined by the decision of a board of arbitration consisting
of three (3) members (the "Board
-19-
<PAGE>
of Arbitration") selected by the American Arbitration Association upon
application made to it for such purpose by either the Company or the Executive.
The arbitration proceedings shall take place in New York, New York or such other
place as shall be agreed to by the parties. The Board of Arbitration shall
reach and render a decision in writing. In connection with rendering its
decision, the Board of Arbitration shall adopt and follow such rules and
procedures as a majority of the members of the Board of Arbitration deems
necessary or appropriate. Any award shall be rendered on the basis of the
substantive law governing this Agreement and shall be concurred in by a majority
of the arbitrators. To the extent practical, decisions of the arbitrators shall
be rendered no more than thirty (30) calendar days following commencement of the
arbitration proceedings with respect thereto. Any decision made by the Board of
Arbitration (either prior to or after the expiration of such thirty (30)
calendar day period) shall be final, binding and conclusive on the Executive and
the Company and entitled to be enforced to the fullest extent permitted by law
and entered in any court of competent jurisdiction. Each party to the
arbitration shall bear its own expense in relation thereto, including but not
limited to such party's attorneys' fees, if any, and the expenses and fees of
the member of the Board of Arbitration appointed by such party; provided,
--------
however, that the expenses and fees of the third member of the Board of
- -------
Arbitration and any other expenses of the Board of Arbitration not capable of
being attributed to any one member shall be borne in equal parts by Executive
and the Company.
-20-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer, and the Executive has hereunto signed
this Agreement, as of the date first above written.
ANNALY MORTGAGE MANAGEMENT, INC.
By: /s/ Timothy J. Guba
---------------------------------------------
Name: Timothy J. Guba
Title: President
/s/ Michael A. J. Farrell
--------------------------------------
Michael A. J. Farrell
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<PAGE>
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT ("Agreement"), effective as of the 27th day
of January, 1997, is entered into by and between Timothy J. Guba (the
"Executive") and Annaly Mortgage Management, Inc., a Maryland corporation (the
"Company").
The Company desires to establish its right to the continued services
of the Executive, in the capacity described below, on the terms and conditions
and subject to the rights of termination hereinafter set forth, and the
Executive is willing to accept such employment on such terms and conditions.
The Company is currently offering for sale shares of Common Stock as set forth
in an offering memorandum dated January 27, 1997 (the "Offering").
In consideration of the mutual agreements hereinafter set forth, the
Executive and the Company have agreed and do hereby agree as follows:
1. EMPLOYMENT AS PRESIDENT AND CHIEF OPERATING OFFICER OF THE
----------------------------------------------------------
COMPANY. The Company does hereby employ, engage and hire the Executive as
- -------
President and Chief Operating Officer of the Company, and the Executive does
hereby accept and agree to such hiring, engagement, and employment. The
Executive's duties as President and Chief Operating Officer shall be such
executive and managerial duties as the Board of Directors of the Company shall
from time to time prescribe and as provided in the Bylaws of the Company. The
Executive shall devote such time, energy and skill to the performance of his
duties for the Company and for the benefit of the Company as may be necessary or
required for the effective conduct and operation of the Company's business.
Furthermore, the Executive shall
<PAGE>
exercise due diligence and care in the performance of his duties to the Company
under this Agreement.
2. TERM OF AGREEMENT. The term ("Term") of this Agreement shall
-----------------
commence as of the date of the closing under the Offering (the "Effective Date")
and shall continue through December 31, 1999. From and after December 31, 1999,
and each anniversary thereafter, the Term of the Agreement shall automatically
be extended for additional successive one-year periods unless, not later than
three months prior to December 31, 1999 or any such anniversary, as applicable,
either party shall have given written notice to the other that it does not wish
to extend the Term of the Agreement.
3. COMPENSATION.
------------
(a) BASE SALARY. The Company shall pay the Executive, and the
-----------
Executive agrees to accept from the Company, in payment for his services to the
Company a base salary at the rate determined below ("Base Salary"), payable in
equal biweekly installments or at such other time or times as the Executive and
Company shall agree. Base Salary shall (i) equal a per annum amount of 0.17%
times the book value (as defined below) of the Company, (ii) be reviewed
quarterly and upon the raising of additional equity through the placement of
securities, and (iii) be subject to a maximum per annum amount of $200,000
("Salary Cap"). The Salary Cap can be raised at any time by the Board of
Directors of the Company in its sole discretion. In determining the Base
Salary, the "book value" of the Company shall be the aggregate amounts reported
on the Company's balance sheet prepared in accordance with generally accepted
accounting principles as Stockholders' Equity but excluding any adjustments for
valuation reserves (i.e., changes in the value of the Company's portfolio of
investments as a
-2-
<PAGE>
result of mark-to-market valuation changes), all determined as of the close of
business on the Effective Date and thereafter on the closing date of any
placements of securities resulting in additional equity and on the last day of
each fiscal quarter. In consideration of the cash flow needs of the Company,
the Base Salary can be lowered at management's discretion.
(b) PERFORMANCE BONUS - BOARD OF DIRECTORS DISCRETION. The
-------------------------------------------------
Executive shall be eligible to receive an incentive performance bonus based upon
a percentage of his Base Salary. Except as provided in Section 7, any such bonus
awarded to the Executive shall be payable in the amount, in the manner, and at
the time determined by the Company's Board of Directors in its sole and absolute
discretion.
(c) ANNUAL REVIEW. The Board of Directors of the Company shall,
-------------
at least annually, review the Executive's entire compensation package to
determine whether it continues to meet the Company's compensation objectives.
Such annual review will include a determination of (i) whether to increase the
Salary Cap in accordance with Section 3(a) and (ii) the incentive performance
bonus to be awarded in accordance with Section 3(b).
4. FRINGE BENEFITS. The Executive shall be entitled to participate
---------------
in any benefit programs adopted from time to time by the Company for the benefit
of its executive employees, and the Executive shall be entitled to receive such
other fringe benefits as may be granted to him from time to time by the
Company's Board of Directors.
(a) BENEFIT PLANS. The Executive shall be entitled to
-------------
participate in any benefit plans relating to stock options, stock purchases,
awards, pension, thrift, profit sharing, life insurance, medical coverage,
education, or other retirement or employee benefits available to other executive
employees of the Company, subject to any restrictions (including
-3-
<PAGE>
waiting periods) specified in such plans. The Company shall make commercially
reasonable efforts to obtain medical and disability insurance, and such other
forms of insurance as the Board of Directors shall from time to time determine,
for its employees.
(b) VACATION. The Executive shall be entitled to (i) four (4)
--------
weeks of paid vacation per calendar year for the first two years of service to
the Company, and (ii) five (5) weeks of paid vacation per calendar year for the
next two years of service to the Company, with such vacation to be scheduled and
taken in accordance with the Company's standard vacation policies. After four
years of service to the Company, the Executive shall be entitled to such number
of weeks of paid vacation per calendar year as determined by the Board of
Directors of the Company after review of industry standards, but shall in no
event be entitled to fewer than five weeks of paid vacation per calendar year.
5. BUSINESS EXPENSES. The Company shall reimburse the Executive for
-----------------
any and all necessary, customary and usual expenses, properly receipted in
accordance with Company policies, incurred by Executive on behalf of the
Company.
6. TERMINATION OF EXECUTIVE'S EMPLOYMENT.
-------------------------------------
(a) DEATH. If the Executive dies while employed by the Company,
-----
his employment shall immediately terminate. The Company's obligation to pay the
Executive's Base Salary shall cease as of the date of Executive's death.
Thereafter, Executive's beneficiaries or his estate shall receive benefits in
accordance with the Company's retirement, insurance and other applicable
programs and plans then in effect.
(b) DISABILITY. (i) If, as a result of the Executive's
----------
incapacity due to physical or mental illness ("Disability"), Executive shall
have been absent from the full-
-4-
<PAGE>
time performance of his duties with the Company for six (6) consecutive months,
and, within thirty (30) days after written notice is provided to him by the
Company, he shall not have returned to the full-time performance of his duties,
the Executive's employment under this Agreement may be terminated by the Company
for Disability. During any period prior to such termination during which the
Executive is absent from the full-time performance of his duties with the
Company due to Disability, the Company shall continue to pay the Executive his
Base Salary at the rate in effect at the commencement of such period of
Disability. Subsequent to such termination, the Executive's benefits shall be
determined under the Company's retirement, insurance and other compensation
programs then in effect in accordance with the terms of such programs.
(ii) If, however, as a result of the Executive's partial
incapacity due to physical or mental illness in which Executive shall not have
been absent from his duties for six consecutive months and shall have returned
to work on a full-time basis but is not able to perform at the same level as
when hired and/or is not able to perform the same functions originally hired for
("Partial Disability"), the Company shall make reasonable efforts to accommodate
the Executive's Partial Disability by modifying his job description
appropriately, together with a commensurate adjustment in compensation;
provided, however, the Company shall be required to so continue the employment
of the Executive in the event of a Partial Disability of the Executive only if
the Company determines, in its sole discretion, that it can create a position
for which the Executive would be suited and that would be economically
advantageous to the Company.
-5-
<PAGE>
(c) TERMINATION BY THE COMPANY FOR CAUSE. The Company may
------------------------------------
terminate the Executive's employment under this Agreement for "Cause," at any
time prior to expiration of the Term of the Agreement, only in the event of (i)
the Executive's material breach of this Agreement, including without limitation
the failure to substantially perform the reasonable and lawful duties of his
position for the Company, which breach shall continue for 60 days after notice
thereof by the Company to the Executive, which notice shall specify in detail
the Executive's breach, (ii) acts or omissions constituting recklessness or
wilful misconduct on the part of the Executive in respect of his fiduciary
obligations or otherwise relating to the business of the Company, or (iii) the
Executive's conviction for fraud, misappropriation or embezzlement. In the case
of clauses (ii) and (iii), the Executive's employment under this Agreement may
be terminated immediately without any advance written notice, and the Company's
obligation to pay the Executive's Base Salary, any bonus and benefits shall
cease as of the termination date.
(d) TERMINATION BY THE EXECUTIVE FOR GOOD REASON. The Executive
--------------------------------------------
shall have the right to terminate this Agreement for Good Reason. For purposes
of this Agreement, "Good Reason" shall mean the occurrence, without the
Executive's express written consent, of any one or more of the following events:
(i) A reduction in title and/or compensation of the Executive by the
Board of Directors or the assignment of duties to the Executive not
consistent with those of a senior executive of the Company, except in
connection with the Company's termination of the Executive's employment for
Cause pursuant to Section 6(c) or as otherwise expressly contemplated
herein;
-6-
<PAGE>
(ii) The Company's material breach of any of the provisions of this
Agreement, including, but not limited to, a reduction by the Company in the
Executive's Base Salary in effect as of the Effective Date, or as the same
may be increased as provided herein; or a change in the conditions of the
Executive's employment (e.g., including, without limitation, a failure by
----
the Company to provide the Executive with incentive compensation and
benefits plans that provide benefits and the opportunity to obtain
incentive compensation, in each case comparable to those available under
benefits programs in effect as of the Effective Date, etc.);
(iii) The relocation of the Company's principal executive offices to
a location more than 50 miles from its location as of Effective Date or the
Company's requiring the Executive to be based anywhere other than the
Company's principal executive offices, except for required travel on the
Company's business to the extent necessary to meet the standard set forth
in the last two sentences of Section 1; or
(iv) A Change in Control as defined in Section 8 below. The
Executive agrees to provide the Company with thirty (30) days' prior
written notice of any termination for Good Reason.
(e) TERMINATION BY THE EXECUTIVE WITHOUT GOOD REASON. The Executive
------------------------------------------------
may at any time during the Term of this Agreement terminate his employment
hereunder for any reason or no reason by giving the Company notice in writing
not less than one hundred twenty (120) days in advance of such termination. The
Executive shall have no further obligations to the Company after the effective
date of termination, as set forth in the notice. Notwithstanding the foregoing,
in the event any "person" (as defined in Section 8
-7-
<PAGE>
below) begins a tender or exchange offer, circulates a proxy to shareholders or
takes other steps to effect a Change of Control, the Executive agrees that he
will not voluntarily leave the employ of the Company, and will render services
to the Company commensurate with his position, until such "person" has abandoned
or terminated efforts to effect a Change of Control or until a Change of Control
has occurred. In the event of a termination by the Executive under this
paragraph, the Company will pay only the portion of Base Salary or previously
awarded Bonus unpaid as of the termination date. Benefits which have accrued
and/or vested on the termination date will continue in effect according to their
terms, but no additional accrual or vesting will take place.
7. COMPENSATION UPON TERMINATION BY THE COMPANY OTHER THAN FOR CAUSE,
------------------------------------------------------------------
OR BY THE EXECUTIVE FOR GOOD REASON. If the Executive's employment shall be
- -----------------------------------
terminated (i) by the Company other than for Cause, or (ii) by the Executive for
Good Reason, the Executive shall be entitled to the following benefits:
(a) PAYMENT OF UNPAID BASE SALARY. The Company shall
-----------------------------
immediately pay the Executive any portion of the Executive's Base Salary or
previously awarded bonus not paid prior to the termination date.
(b) SEVERANCE PAYMENT. The Company shall pay the Executive an
-----------------
amount (the "Severance Amount") equal to three times the higher of (i) the
Executive's combined Salary Cap and actual bonus compensation for the preceding
fiscal year or (ii) the average for the three preceding years of the Executive's
combined actual Base Salary and bonus compensation; provided, however, that the
Severance Amount shall not be less than $250,000, nor more than 1.0% of book
value (as defined in Section 3(a)) to the extent the Severance
-8-
<PAGE>
Amount is greater than $250,000. The Severance Amount shall be payable 50%
within five (5) days after the termination date and the remaining 50% shall be
payable in twelve (12) equal consecutive monthly installments beginning on the
first day of the month following the termination date.
(c) IMMEDIATE VESTING OF STOCK OPTIONS. The Company shall take
----------------------------------
all appropriate action to ensure that all stock options on the Company's stock
owned by the Executive as of the Effective Date and which have not been
exercised prior to the termination date become immediately exercisable by the
Executive, whether or not the right to exercise such stock options would
otherwise then be vested in the Executive, provided, however, an option that is
-------- -------
an incentive stock option (within the meaning of Code Section 422(b)) shall not
be exercisable for the first time in a calendar year to the extent that the
aggregate fair market value of stock (as determined under Code Section
422(b)(3)) with respect to which ISO's are exercisable by the Executive during
such calendar year exceeds $100,000. The provisions of this Section 7(c) shall
constitute an amendment to any existing stock option agreements (including award
certificates) of the Company as of the Effective Date. All other stock options
owned by the Executive as of the termination date shall be exercisable in
accordance with the Company's stock option plan and the applicable stock option
agreements.
(d) CONTINUATION OF FRINGE BENEFITS. From and after termination
-------------------------------
of the Executive's employment, the Company shall continue to provide the
Executive with all life insurance and medical coverage Fringe Benefits set forth
in Section 4 as if the Executive's employment under the Agreement had not been
terminated until the earlier to occur of (i) such time as the Executive finds
full-time employment or (ii) this Agreement terminates.
-9-
<PAGE>
Notwithstanding the immediately preceding sentence, if, as the result of the
termination of the Executive's employment, the Executive and/or his otherwise
eligible dependents or beneficiaries shall become ineligible for benefits under
any one or more of the Company's benefit plans or the cost of providing such
benefits exceeds 200% of the cost of providing such benefits to other members of
senior management, the Company, at the Company's option, shall (i) continue to
provide the Executive and his eligible dependents or beneficiaries with benefits
at a level at least equivalent to the level of benefits for which the Executive
and his dependents and beneficiaries were eligible under such plans immediately
prior to the termination date or (ii) for any Fringe Benefit not so provided,
the Company shall pay the Executive 200% of the cost of providing such Fringe
Benefit to other members of senior management.
(e) EXCISE TAX GROSS-UP. In the event that (i) the Executive
-------------------
becomes entitled to the benefit payments provided under subparagraphs (a)-(d) of
this Section 7 ("Benefit Payments"), and (ii) any of the Benefit Payments will
be subject to any excise tax imposed under Section 4999 of the Internal Revenue
Code of 1986, as amended from time to time ("Code"), or successor sections
thereto ("Excise Tax"), the Company shall pay to the Executive an additional
amount (the "Gross-Up Payment") such that the net amount retained by the
Executive, after deduction of any Excise Tax on the Benefit Payments and any
federal, state and local income tax and Excise Tax upon the payments provided
for under this Section 7, shall be equal to the amount of the Benefit Payments.
For purposes of determining whether any of the Benefit Payments will be subject
to the Excise Tax and the amount of such Excise Tax, (i) any other payments or
benefits received or to be received by the Executive in connection with a Change
in Control (defined below) or the termination of Executive's employment (whether
-10-
<PAGE>
pursuant to the terms of this Agreement or any other plan, arrangement or
agreement with the Company, any person whose actions result in a Change in
Control or any person affiliated with the Company or such person) shall be
treated as "parachute payments" within the meaning of section 280G(b)(2) of the
Code, and all "excess parachute payments" within the meaning of section
280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless in
the opinion of tax advisors selected by the Company and reasonably acceptable to
the Executive such other payments or benefits (in whole or in part) do not
constitute parachute payments, including by reason of section 280G(b)(4)(A) of
the Code, or such excess parachute payments (in whole or in part) represent
reasonable compensation for services actually rendered, within the meaning of
section 280G(b)(4)(B) of the Code, in excess of the Base Amount (as defined in
section 280G(b)(3) of the Code) allocable to such reasonable compensation, or
are otherwise not subject to the Excise Tax, (ii) the amount of the Benefit
Payments which shall be treated as subject to the Excise Tax shall be equal to
the lesser of (A) the total amount of the Benefit Payments or (B) the amount of
excess parachute payments within the meaning of section 280G(b)(1) of the Code
(after applying clause (i), above), and (iii) the value of any non-cash benefits
or any deferred payment or benefit shall be determined by the Company's
independent auditors in accordance with the principles of section 280G(d)(3) and
(4) of the Code. For purposes of determining the amount of the Gross-Up
Payment, the Executive shall be deemed to pay federal income taxes at the
highest marginal rate of federal income taxation in the calendar year in which
the Gross-Up Payment is to be made and state and local income taxes at the
highest marginal rate of taxation in the state and locality of the Executive's
residence on the termination date of employment, net of the maximum reduction in
federal income taxes which could be obtained from deduction of such
-11-
<PAGE>
state and local taxes based on the marginal rate referenced above. In the event
that the Excise Tax is subsequently determined to be less than the amount taken
into account hereunder at the termination date, the Executive shall repay to the
Company, at the time that the amount of such reduction in Excise Tax is finally
determined, the portion of the Gross-Up Payment attributable to such reduction
(plus that portion of the Gross-Up Payment attributable to the Excise Tax and
federal, state and local income tax imposed on the Gross-Up Payment being repaid
by the Executive to the extent that such repayment results in a reduction in
Excise Tax and/or a federal, state or local income tax deduction) plus interest
on the amount of such repayment at the rate provided in section 1274(b)(2)(B) of
the Code. In the event that the Excise Tax is determined to exceed the amount
taken into account hereunder at the time of the termination of the Executive's
employment (including by reason of any payment the existence or amount of which
cannot be determined at the time of the Gross-Up Payment), the Company shall
make an additional Gross-Up Payment in respect of such excess (plus any
interest, penalties or additions payable by the Executive with respect to such
excess but only to the extent that such interest, penalties or additions would
not have been reduced by prompt payment by the Executive to the appropriate tax
authority of the Gross-Up Payments previously received) at the time that the
amount of such excess is finally determined. The Executive and the Company
shall each reasonably cooperate with the other in connection with any
administrative or judicial proceedings concerning the existence or amount of
liability for Excise Tax with respect to the Benefit Payments.
(f) NO MITIGATION REQUIRED; NO OTHER ENTITLEMENT TO BENEFITS
--------------------------------------------------------
UNDER AGREEMENT. The Executive shall not be required in any way to mitigate the
- ---------------
amount of any payment provided for in this Section 7, including, but not limited
to,
-12-
<PAGE>
by seeking other employment, nor shall the amount of any payment provided for in
this Section 7 be reduced by any compensation earned by the Executive as the
result of employment with another employer after the termination date of
employment, or otherwise. Except as set forth in this Section 7, following a
termination governed by this Section 7, the Executive shall not be entitled to
any other compensation or benefits set forth in this Agreement, except as may be
separately negotiated by the parties and approved by the Board of Directors of
the Company in writing in conjunction with the termination of Executive's
employment under this Section 7.
8. CHANGE IN CONTROL. A "Change in Control" shall be deemed to have
-----------------
occurred if the conditions set forth in any one of the following paragraphs
shall have been satisfied:
(a) Any "Person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") (other than
the Company any trustee or other fiduciary holding securities under an Executive
benefit plan of the Company; or any company owned, directly or indirectly, by
the stockholders of the Company in substantially the same proportions as their
ownership of the stock of the Company) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company (not including in the securities beneficially owned by
such Person any securities acquired directly from the Company or from a
transferor in a transaction expressly approved or consented to by the Board of
Directors) representing more than 9.8% of the combined voting power of the
Company's then outstanding securities; or
(b) During any period of two consecutive years (not including any
period prior to the execution of this Agreement), individuals who at the
beginning of such period
-13-
<PAGE>
constitute the Board of Directors and any new director (other than a director
designated by a person who has entered into an agreement with the Company to
effect a transaction described in clause (a), (c) or (d) of this section), (i)
whose election by the Board of Directors or nomination for election by the
Company's stockholders was approved by a vote of at lest two-thirds (2/3) of the
directors then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so approved
or (ii) whose election is to replace a person who ceases to be a director due to
death, disability or age, cease for any reason to constitute a majority thereof;
or
(c) The shareholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than (i) a merger
or consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity), in combination with the ownership of any trustee or other
fiduciary holding securities under an Executive benefit plan of the Company, at
least 75% of the combined voting power of the voting securities of the Company
or such surviving entity outstanding immediately after such merger or
consolidation, or (ii) a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which no person
acquires more than 50% of the combined voting power of the Company's then
outstanding securities; or
(d) The shareholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets.
-14-
<PAGE>
9. DISPUTE RELATING TO EXECUTIVE'S TERMINATION OF EMPLOYMENT FOR
-------------------------------------------------------------
GOOD REASON. If the Executive resigns his employment with the Company alleging
- -----------
in good faith as the basis for such resignation any of the "Good Reasons"
specified in Section 6(d), and if the Company then disputes the Executive's
right to the payment of benefits under Section 7, the Company shall continue to
pay the Executive the full compensation (including, but not limited to, his Base
Salary) in effect at the date the Executive provided notice of such resignation,
and the Company shall continue the Executive as a participant in all
compensation, benefit and insurance plans in which the Executive was then a
participant, until the earlier of (i) the expiration of the Term of the
Agreement or (ii) the date the dispute is finally resolved, either by mutual
written agreement of the parties or by arbitration in accordance with Section
22. For the purposes of this Section, the Company shall bear the burden of
proving that the grounds for the Executive's resignation do not fall within the
scope of Section 6(d), and there shall be a rebuttable presumption that the
Executive alleged such grounds in good faith.
10. NONCOMPETITION PROVISIONS.
-------------------------
(a) NONCOMPETITION. The Executive agrees that during the Term of
--------------
this Agreement prior to any termination of his employment hereunder and for a
period of one year following the occurrence of any event entitling the Executive
to Benefit Payments, provided the Company makes all such payments when due
according to the provisions of Section 7, he will not, directly or indirectly,
without the prior written consent of the Company, manage, operate, join,
control, participate in, or be connected as a stockholder (other than as a
holder of shares publicly traded on a stock exchange or the NASDAQ National
Market System), partner,
-15-
<PAGE>
or other equity holder with, or as an officer, director or employee of, any real
estate investment trust whose business strategy is competitive with that of the
Company, as determined by a majority of the Company's Independent Directors
("Competing REIT"). It is further expressly agreed that the Company will or
would suffer irreparable injury of the Company in violation of the preceding
sentence of this Agreement and that the Company would by reason of such
competition be entitled to injunctive relief in a court of appropriate
jurisdiction, and the Executive further consents and stipulates to the entry of
such injunctive relief in such a court prohibiting the Executive from competing
with the Company or any subsidiary or affiliate of the Company, in the areas of
business set forth above, in violation of this Agreement. It is further
expressly agreed that the Executive's interest in and employment by Fixed Income
Discount Advisory Company shall not be deemed to violate any provisions of this
Section, regardless of the scope of the Executive's activities with such firm;
provided, however, that the Executive shall not in such capacity provide
services to any Competing REIT.
(b) RIGHT TO COMPANY MATERIALS. The Executive agrees that all
--------------------------
styles, designs, lists, materials, books, files, reports, correspondence,
records, and other documents ("Company Materials") used, prepared, or made
available to the Executive in connection with his employment by the Company
shall be and shall remain the property of the Company. Upon the termination of
employment or the expiration of this Agreement, all Company Materials shall be
returned immediately to the Company, and the Executive shall not make or retain
any copies thereof.
(c) SOLICITING EXECUTIVES. The Executive promises and agrees
---------------------
that he will not directly or indirectly solicit any of the Company Executives to
work for any
-16-
<PAGE>
Competing REIT.
(d) MARYLAND LAW. The Executive agrees, in accordance with
------------
Maryland law, to first offer to the Company corporate opportunities learned of
solely as a result of his service as an officer and director of the Company.
11. NOTICES. All notices and other communications under this
-------
Agreement shall be in writing and shall be given by fax or first class mail,
certified or registered with return receipt requested, and shall be deemed to
have been duly given three (3) days after mailing or twenty-four (24) hours
after transmission of a fax to the respective persons named below:
If to the Company: Michael A. J. Farrell
Chairman and Chief Executive Officer
Annaly Mortgage Management, Inc.
1500 Harbor Blvd.
Weehawken, NJ 07087
Phone: (201) 223-1900
Fax: (201) 223-1230
If to the Executive: Timothy J. Guba
President and Chief Operating Officer
Annaly Mortgage Management, Inc.
1500 Harbor Blvd.
Weehawken, NJ 07087
Phone: (201) 223-1900
Fax: (201) 223-1230
A copy of any notice pursuant to this Agreement shall be sent to Morgan, Lewis &
Bockius, 101 Park Avenue, New York, New York 10178, Attn: Robert C. Mendelson.
Either party may change such party's address for notices by notice duly given
pursuant hereto.
12. ATTORNEYS' FEES. In the event judicial determination is
---------------
necessary of any dispute arising as to the parties' rights and obligations
hereunder, each party shall have the
-17-
<PAGE>
right, in addition to any other relief granted by the court, to attorneys' fees
based on a determination by the court of the extent to which each party has
prevailed as to the material issues raised in determination of the dispute.
13. TERMINATION OF PRIOR AGREEMENTS. This Agreement terminates and
-------------------------------
supersedes any and all prior agreements and understandings between the parties
with respect to employment or with respect to the compensation of the Executive
by the Company.
14. ASSIGNMENT; SUCCESSORS. This Agreement is personal in its nature
----------------------
and neither of the parties hereto shall, without the consent of the other,
assign or transfer this Agreement or any rights or obligations hereunder;
provided that, in the event of the merger, consolidation, transfer, or sale of
all or substantially all of the assets of the Company with or to any other
individual or entity, this Agreement shall, subject to the provisions hereof, be
binding upon and inure to the benefit of such successor and such successor shall
discharge and perform all the promises, covenants, duties, and obligations of
the Company hereunder.
15. GOVERNING LAW. This Agreement and the legal relations thus
-------------
created between the parties hereto shall be governed by and construed under and
in accordance with the laws of the State of New Jersey.
16. ENTIRE AGREEMENT; HEADINGS. This Agreement embodies the entire
--------------------------
agreement of the parties respecting the matters within its scope and may be
modified only in writing. Section headings in this Agreement are included
herein for convenience of reference only and shall not constitute a part of this
Agreement for any other purpose.
17. WAIVER; MODIFICATION. Failure to insist upon strict compliance
--------------------
-18-
<PAGE>
with any of the terms, covenants, or conditions hereof shall not be deemed a
waiver of such term, covenant, or condition, nor shall any waiver or
relinquishment of, or failure to insist upon strict compliance with, any right
or power hereunder at any one or more times be deemed a waiver or relinquishment
of such right or power at any other time or times. This Agreement shall not be
modified in any respect except by a writing executed by each party hereto.
18. SEVERABILITY. In the event that a court of competent
------------
jurisdiction determines that any portion of this Agreement is in violation of
any statute or public policy, only the portions of this Agreement that violate
such statute or public policy shall be stricken. All portions of this Agreement
that do not violate any statute or public policy shall continue in full force
and effect. Further, any court order striking any portion of this Agreement
shall modify the stricken terms as narrowly as possible to give as much effect
as possible to the intentions of the parties under this Agreement.
19. INDEMNIFICATION. The Company shall indemnify and hold Executive
---------------
harmless to the maximum extent permitted by Section 2-418 of the Maryland
General Corporations Law or its successor statute.
20. COUNTERPARTS. This Agreement may be executed in several
------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
21. SUCCESSOR SECTIONS. References herein to sections or rules of
------------------
the Code or Exchange Act shall be deemed to include any successor sections or
rules.
22. ARBITRATION. Any dispute, claim or controversy arising out of or
-----------
in relation to this Agreement, which the Executive and the Company are unable to
resolve shall be
-19-
<PAGE>
determined by the decision of a board of arbitration consisting of three (3)
members (the "Board of Arbitration") selected by the American Arbitration
Association upon application made to it for such purpose by either the Company
or the Executive. The arbitration proceedings shall take place in New York, New
York or such other place as shall be agreed to by the parties. The Board of
Arbitration shall reach and render a decision in writing. In connection with
rendering its decision, the Board of Arbitration shall adopt and follow such
rules and procedures as a majority of the members of the Board of Arbitration
deems necessary or appropriate. Any award shall be rendered on the basis of the
substantive law governing this Agreement and shall be concurred in by a majority
of the arbitrators. To the extent practical, decisions of the arbitrators shall
be rendered no more than thirty (30) calendar days following commencement of the
arbitration proceedings with respect thereto. Any decision made by the Board of
Arbitration (either prior to or after the expiration of such thirty (30)
calendar day period) shall be final, binding and conclusive on the Executive and
the Company and entitled to be enforced to the fullest extent permitted by law
and entered in any court of competent jurisdiction. Each party to the
arbitration shall bear its own expense in relation thereto, including but not
limited to such party's attorneys' fees, if any, and the expenses and fees of
the member of the Board of Arbitration appointed by such party; provided,
--------
however, that the expenses and fees of the third member of the Board of
- -------
Arbitration and any other expenses of the Board of Arbitration not capable of
being attributed to any one member shall be borne in equal parts by Executive
and the Company.
-20-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer, and the Executive has hereunto signed
this Agreement, as of the date first above written.
ANNALY MORTGAGE MANAGEMENT, INC.
By: /s/ Michael A. J. Farrell
----------------------------------------
Name: Michael A. J. Farrell
Title: Chairman and CEO
/s/ Timothy J. Guba
----------------------------------------
Timothy J. Guba
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<PAGE>
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT ("Agreement"), effective as of the 27th day
of January, 1997, is entered into by and between Wellington J. St. Claire (the
"Executive") and Annaly Mortgage Management, Inc., a Maryland corporation (the
"Company").
The Company desires to establish its right to the continued services
of the Executive, in the capacity described below, on the terms and conditions
and subject to the rights of termination hereinafter set forth, and the
Executive is willing to accept such employment on such terms and conditions.
The Company is currently offering for sale shares of Common Stock as set forth
in an offering memorandum dated January 27, 1997 (the "Offering").
In consideration of the mutual agreements hereinafter set forth, the
Executive and the Company have agreed and do hereby agree as follows:
1. EMPLOYMENT AS VICE CHAIRMAN OF THE BOARD
----------------------------------------
The Company does hereby employ, engage and hire the Executive as Vice
Chairman of the Board of the Company, and the Executive does hereby accept and
agree to such hiring, engagement, and employment. The Executive's duties as
Vice Chairman of the Board shall be such executive and managerial duties as the
Board of Directors of the Company shall from time to time prescribe and as
provided in the Bylaws of the Company. The Executive shall devote such time,
energy and skill to the performance of her duties for the Company and for the
benefit of the Company as may be necessary or required for the effective conduct
and operation of the Company's business. Furthermore, the Executive shall
exercise due diligence and care in
<PAGE>
the performance of her duties to the Company under this Agreement.
2. TERM OF AGREEMENT. The term ("Term") of this Agreement shall
-----------------
commence as of the date of the closing under the Offering (the "Effective Date")
and shall continue through December 31, 1999. From and after December 31, 1999,
and each anniversary thereafter, the Term of the Agreement shall automatically
be extended for additional successive one-year periods unless, not later than
three months prior to December 31, 1999 or any such anniversary, as applicable,
either party shall have given written notice to the other that it does not wish
to extend the Term of the Agreement.
3. COMPENSATION.
------------
(a) BASE SALARY. The Company shall pay the Executive, and the
-----------
Executive agrees to accept from the Company, in payment for her services to the
Company a base salary at the rate determined below ("Base Salary"), payable in
equal biweekly installments or at such other time or times as the Executive and
Company shall agree. Base Salary shall (i) equal a per annum amount of 0.17%
times the book value (as defined below) of the Company, (ii) be reviewed
quarterly and upon the raising of additional equity through the placement of
securities, and (iii) be subject to a maximum per annum amount of $200,000
("Salary Cap"). The Salary Cap can be raised at any time by the Board of
Directors of the Company in its sole discretion. In determining the Base
Salary, the "book value" of the Company shall be the aggregate amounts reported
on the Company's balance sheet prepared in accordance with generally accepted
accounting principles as Stockholders' Equity but excluding any adjustments for
valuation reserves (i.e., changes in the value of the Company's portfolio of
investments as a
-2-
<PAGE>
result of mark-to-market valuation changes), all determined as of the close of
business on the Effective Date and thereafter on the closing date of any
placements of securities resulting in additional equity and on the last day of
each fiscal quarter. In consideration of the cash flow needs of the Company,
the Base Salary can be lowered at management's discretion.
(b) PERFORMANCE BONUS - BOARD OF DIRECTORS DISCRETION. The
-------------------------------------------------
Executive shall be eligible to receive an incentive performance bonus based upon
a percentage of her Base Salary. Except as provided in Section 7, any such bonus
awarded to the Executive shall be payable in the amount, in the manner, and at
the time determined by the Company's Board of Directors in its sole and absolute
discretion.
(c) ANNUAL REVIEW. The Board of Directors of the Company
-------------
shall, at least annually, review the Executive's entire compensation package to
determine whether it continues to meet the Company's compensation objectives.
Such annual review will include a determination of (i) whether to increase the
Salary Cap in accordance with Section 3(a) and (ii) the incentive performance
bonus to be awarded in accordance with Section 3(b).
4. FRINGE BENEFITS. The Executive shall be entitled to
---------------
participate in any benefit programs adopted from time to time by the Company for
the benefit of its executive employees, and the Executive shall be entitled to
receive such other fringe benefits as may be granted to her from time to time by
the Company's Board of Directors.
(a) BENEFIT PLANS. The Executive shall be entitled to
-------------
participate in any benefit plans relating to stock options, stock purchases,
awards, pension, thrift, profit sharing, life insurance, medical coverage,
education, or other retirement or employee benefits available to other executive
employees of the Company, subject to any restrictions (including
-3-
<PAGE>
waiting periods) specified in such plans. The Company shall make commercially
reasonable efforts to obtain medical and disability insurance, and such other
forms of insurance as the Board of Directors shall from time to time determine,
for its employees.
(b) VACATION. The Executive shall be entitled to (i) four (4)
--------
weeks of paid vacation per calendar year for the first two years of service to
the Company, and (ii) five (5) weeks of paid vacation per calendar year for the
next two years of service to the Company, with such vacation to be scheduled and
taken in accordance with the Company's standard vacation policies. After four
years of service to the Company, the Executive shall be entitled to such number
of weeks of paid vacation per calendar year as determined by the Board of
Directors of the Company after review of industry standards, but shall in no
event be entitled to fewer than five weeks of paid vacation per calendar year.
5. BUSINESS EXPENSES. The Company shall reimburse the Executive
-----------------
for any and all necessary, customary and usual expenses, properly receipted in
accordance with Company policies, incurred by Executive on behalf of the
Company.
6. TERMINATION OF EXECUTIVE'S EMPLOYMENT.
-------------------------------------
(a) DEATH. If the Executive dies while employed by the
-----
Company, her employment shall immediately terminate. The Company's obligation to
pay the Executive's Base Salary shall cease as of the date of Executive's death.
Thereafter, Executive's beneficiaries or his estate shall receive benefits in
accordance with the Company's retirement, insurance and other applicable
programs and plans then in effect.
(b) DISABILITY. (i) If, as a result of the Executive's
----------
incapacity due to physical or mental illness ("Disability"), Executive shall
have been absent from the full-
-4-
<PAGE>
time performance of her duties with the Company for six (6) consecutive months,
and, within thirty (30) days after written notice is provided to her by the
Company, she shall not have returned to the full-time performance of her duties,
the Executive's employment under this Agreement may be terminated by the Company
for Disability. During any period prior to such termination during which the
Executive is absent from the full-time performance of her duties with the
Company due to Disability, the Company shall continue to pay the Executive her
Base Salary at the rate in effect at the commencement of such period of
Disability. Subsequent to such termination, the Executive's benefits shall be
determined under the Company's retirement, insurance and other compensation
programs then in effect in accordance with the terms of such programs.
(ii) If, however, as a result of the Executive's partial
incapacity due to physical or mental illness in which Executive shall not have
been absent from her duties for six consecutive months and shall have returned
to work on a full-time basis but is not able to perform at the same level as
when hired and/or is not able to perform the same functions originally hired for
("Partial Disability"), the Company shall make reasonable efforts to accommodate
the Executive's Partial Disability by modifying her job description
appropriately, together with a commensurate adjustment in compensation;
provided, however, the Company shall be required to so continue the employment
of the Executive in the event of a Partial Disability of the Executive only if
the Company determines, in its sole discretion, that it can create a position
for which the Executive would be suited and that would be economically
advantageous to the Company.
-5-
<PAGE>
(c) TERMINATION BY THE COMPANY FOR CAUSE. The Company may
------------------------------------
terminate the Executive's employment under this Agreement for "Cause," at any
time prior to expiration of the Term of the Agreement, only in the event of (i)
the Executive's material breach of this Agreement, including without limitation
the failure to substantially perform the reasonable and lawful duties of her
position for the Company, which breach shall continue for 60 days after notice
thereof by the Company to the Executive, which notice shall specify in detail
the Executive's breach, (ii) acts or omissions constituting recklessness or
wilful misconduct on the part of the Executive in respect of his fiduciary
obligations or otherwise relating to the business of the Company, or (iii) the
Executive's conviction for fraud, misappropriation or embezzlement. In the case
of clauses (ii) and (iii), the Executive's employment under this Agreement may
be terminated immediately without any advance written notice, and the Company's
obligation to pay the Executive's Base Salary, any bonus and benefits shall
cease as of the termination date.
(d) TERMINATION BY THE EXECUTIVE FOR GOOD REASON. The
Executive shall have the right to terminate this Agreement for Good Reason. For
purposes of this Agreement, "Good Reason" shall mean the occurrence, without the
Executive's express written consent, of any one or more of the following events:
(i) A reduction in title and/or compensation of the Executive by the
Board of Directors or the assignment of duties to the Executive not
consistent with those of a senior executive of the Company, except in
connection with the Company's termination of the Executive's employment for
Cause pursuant to Section 6(c) or as otherwise expressly contemplated
herein;
-6-
<PAGE>
(ii) The Company's material breach of any of the provisions of this
Agreement, including, but not limited to, a reduction by the Company in the
Executive's Base Salary in effect as of the Effective Date, or as the same
may be increased as provided herein; or a change in the conditions of the
Executive's employment (e.g., including, without limitation, a failure by
----
the Company to provide the Executive with incentive compensation and
benefits plans that provide benefits and the opportunity to obtain
incentive compensation, in each case comparable to those available under
benefits programs in effect as of the Effective Date, etc.);
(iii) The relocation of the Company's principal executive offices to
a location more than 50 miles from its location as of Effective Date or the
Company's requiring the Executive to be based anywhere other than the
Company's principal executive offices, except for required travel on the
Company's business to the extent necessary to meet the standard set forth
in the last two sentences of Section 1; or
(iv) A Change in Control as defined in Section 8 below. The
Executive agrees to provide the Company with thirty (30) days' prior
written notice of any termination for Good Reason.
(e) TERMINATION BY THE EXECUTIVE WITHOUT GOOD REASON. The
------------------------------------------------
Executive may at any time during the Term of this Agreement terminate her
employment hereunder for any reason or no reason by giving the Company notice in
writing not less than one hundred twenty (120) days in advance of such
termination. The Executive shall have no further obligations to the Company
after the effective date of termination, as set forth in the notice.
Notwithstanding the foregoing, in the event any "person" (as defined in Section
8
-7-
<PAGE>
below) begins a tender or exchange offer, circulates a proxy to shareholders or
takes other steps to effect a Change of Control, the Executive agrees that she
will not voluntarily leave the employ of the Company, and will render services
to the Company commensurate with his position, until such "person" has abandoned
or terminated efforts to effect a Change of Control or until a Change of Control
has occurred. In the event of a termination by the Executive under this
paragraph, the Company will pay only the portion of Base Salary or previously
awarded Bonus unpaid as of the termination date. Benefits which have accrued
and/or vested on the termination date will continue in effect according to their
terms, but no additional accrual or vesting will take place.
7. COMPENSATION UPON TERMINATION BY THE COMPANY OTHER THAN FOR
-----------------------------------------------------------
CAUSE, OR BY THE EXECUTIVE FOR GOOD REASON. If the Executive's employment shall
- ------------------------------------------
be terminated (i) by the Company other than for Cause, or (ii) by the Executive
for Good Reason, the Executive shall be entitled to the following benefits:
(a) PAYMENT OF UNPAID BASE SALARY. The Company shall
-----------------------------
immediately pay the Executive any portion of the Executive's Base Salary or
previously awarded bonus not paid prior to the termination date.
(b) SEVERANCE PAYMENT. The Company shall pay the Executive an
-----------------
amount (the "Severance Amount") equal to three times the higher of (i) the
Executive's combined Salary Cap and actual bonus compensation for the preceding
fiscal year or (ii) the average for the three preceding years of the Executive's
combined actual Base Salary and bonus compensation; provided, however, that the
Severance Amount shall not be less than $250,000, nor more than 1.0% of book
value (as defined in Section 3(a)) to the extent the Severance
-8-
<PAGE>
Amount is greater than $250,000. The Severance Amount shall be payable 50%
within five (5) days after the termination date and the remaining 50% shall be
payable in twelve (12) equal consecutive monthly installments beginning on the
first day of the month following the termination date.
(c) IMMEDIATE VESTING OF STOCK OPTIONS. The Company shall
----------------------------------
take all appropriate action to ensure that all stock options on the Company's
stock owned by the Executive as of the Effective Date and which have not been
exercised prior to the termination date become immediately exercisable by the
Executive, whether or not the right to exercise such stock options would
otherwise then be vested in the Executive, provided, however, an option that is
-------- -------
an incentive stock option (within the meaning of Code Section 422(b)) shall not
be exercisable for the first time in a calendar year to the extent that the
aggregate fair market value of stock (as determined under Code Section
422(b)(3)) with respect to which ISO's are exercisable by the Executive during
such calendar year exceeds $100,000. The provisions of this Section 7(c) shall
constitute an amendment to any existing stock option agreements (including award
certificates) of the Company as of the Effective Date. All other stock options
owned by the Executive as of the termination date shall be exercisable in
accordance with the Company's stock option plan and the applicable stock option
agreements.
(d) CONTINUATION OF FRINGE BENEFITS. From and after
-------------------------------
termination of the Executive's employment, the Company shall continue to provide
the Executive with all life insurance and medical coverage Fringe Benefits set
forth in Section 4 as if the Executive's employment under the Agreement had not
been terminated until the earlier to occur of (i) such time as the Executive
finds full-time employment or (ii) this Agreement terminates.
-9-
<PAGE>
Notwithstanding the immediately preceding sentence, if, as the result of the
termination of the Executive's employment, the Executive and/or his otherwise
eligible dependents or beneficiaries shall become ineligible for benefits under
any one or more of the Company's benefit plans or the cost of providing such
benefits exceeds 200% of the cost of providing such benefits to other members of
senior management, the Company, at the Company's option, shall (i) continue to
provide the Executive and his eligible dependents or beneficiaries with benefits
at a level at least equivalent to the level of benefits for which the Executive
and her dependents and beneficiaries were eligible under such plans immediately
prior to the termination date or (ii) for any Fringe Benefit not so provided,
the Company shall pay the Executive 200% of the cost of providing such Fringe
Benefit to other members of senior management.
(e) EXCISE TAX GROSS-UP. In the event that (i) the Executive
-------------------
becomes entitled to the benefit payments provided under subparagraphs (a)-(d) of
this Section 7 ("Benefit Payments"), and (ii) any of the Benefit Payments will
be subject to any excise tax imposed under Section 4999 of the Internal Revenue
Code of 1986, as amended from time to time ("Code"), or successor sections
thereto ("Excise Tax"), the Company shall pay to the Executive an additional
amount (the "Gross-Up Payment") such that the net amount retained by the
Executive, after deduction of any Excise Tax on the Benefit Payments and any
federal, state and local income tax and Excise Tax upon the payments provided
for under this Section 7, shall be equal to the amount of the Benefit Payments.
For purposes of determining whether any of the Benefit Payments will be subject
to the Excise Tax and the amount of such Excise Tax, (i) any other payments or
benefits received or to be received by the Executive in connection with a Change
in Control (defined below) or the termination of Executive's employment (whether
-10-
<PAGE>
pursuant to the terms of this Agreement or any other plan, arrangement or
agreement with the Company, any person whose actions result in a Change in
Control or any person affiliated with the Company or such person) shall be
treated as "parachute payments" within the meaning of section 280G(b)(2) of the
Code, and all "excess parachute payments" within the meaning of section
280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless in
the opinion of tax advisors selected by the Company and reasonably acceptable to
the Executive such other payments or benefits (in whole or in part) do not
constitute parachute payments, including by reason of section 280G(b)(4)(A) of
the Code, or such excess parachute payments (in whole or in part) represent
reasonable compensation for services actually rendered, within the meaning of
section 280G(b)(4)(B) of the Code, in excess of the Base Amount (as defined in
section 280G(b)(3) of the Code) allocable to such reasonable compensation, or
are otherwise not subject to the Excise Tax, (ii) the amount of the Benefit
Payments which shall be treated as subject to the Excise Tax shall be equal to
the lesser of (A) the total amount of the Benefit Payments or (B) the amount of
excess parachute payments within the meaning of section 280G(b)(1) of the Code
(after applying clause (i), above), and (iii) the value of any non-cash benefits
or any deferred payment or benefit shall be determined by the Company's
independent auditors in accordance with the principles of section 280G(d)(3) and
(4) of the Code. For purposes of determining the amount of the Gross-Up
Payment, the Executive shall be deemed to pay federal income taxes at the
highest marginal rate of federal income taxation in the calendar year in which
the Gross-Up Payment is to be made and state and local income taxes at the
highest marginal rate of taxation in the state and locality of the Executive's
residence on the termination date of employment, net of the maximum reduction in
federal income taxes which could be obtained from deduction of such
-11-
<PAGE>
state and local taxes based on the marginal rate referenced above. In the event
that the Excise Tax is subsequently determined to be less than the amount taken
into account hereunder at the termination date, the Executive shall repay to the
Company, at the time that the amount of such reduction in Excise Tax is finally
determined, the portion of the Gross-Up Payment attributable to such reduction
(plus that portion of the Gross-Up Payment attributable to the Excise Tax and
federal, state and local income tax imposed on the Gross-Up Payment being repaid
by the Executive to the extent that such repayment results in a reduction in
Excise Tax and/or a federal, state or local income tax deduction) plus interest
on the amount of such repayment at the rate provided in section 1274(b)(2)(B) of
the Code. In the event that the Excise Tax is determined to exceed the amount
taken into account hereunder at the time of the termination of the Executive's
employment (including by reason of any payment the existence or amount of which
cannot be determined at the time of the Gross-Up Payment), the Company shall
make an additional Gross-Up Payment in respect of such excess (plus any
interest, penalties or additions payable by the Executive with respect to such
excess but only to the extent that such interest, penalties or additions would
not have been reduced by prompt payment by the Executive to the appropriate tax
authority of the Gross-Up Payments previously received) at the time that the
amount of such excess is finally determined. The Executive and the Company
shall each reasonably cooperate with the other in connection with any
administrative or judicial proceedings concerning the existence or amount of
liability for Excise Tax with respect to the Benefit Payments.
(f) NO MITIGATION REQUIRED; NO OTHER ENTITLEMENT TO BENEFITS
--------------------------------------------------------
UNDER AGREEMENT. The Executive shall not be required in any way to mitigate the
- ---------------
amount of any payment provided for in this Section 7, including, but not limited
to,
-12-
<PAGE>
by seeking other employment, nor shall the amount of any payment provided for in
this Section 7 be reduced by any compensation earned by the Executive as the
result of employment with another employer after the termination date of
employment, or otherwise. Except as set forth in this Section 7, following a
termination governed by this Section 7, the Executive shall not be entitled to
any other compensation or benefits set forth in this Agreement, except as may be
separately negotiated by the parties and approved by the Board of Directors of
the Company in writing in conjunction with the termination of Executive's
employment under this Section 7.
8. CHANGE IN CONTROL. A "Change in Control" shall be deemed to
have occurred if the conditions set forth in any one of the following paragraphs
shall have been satisfied:
(a) Any "Person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") (other than
the Company any trustee or other fiduciary holding securities under an Executive
benefit plan of the Company; or any company owned, directly or indirectly, by
the stockholders of the Company in substantially the same proportions as their
ownership of the stock of the Company) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company (not including in the securities beneficially owned by
such Person any securities acquired directly from the Company or from a
transferor in a transaction expressly approved or consented to by the Board of
Directors) representing more than 9.8% of the combined voting power of the
Company's then outstanding securities; or
(b) During any period of two consecutive years (not including
any period prior to the execution of this Agreement), individuals who at the
beginning of such period
-13-
<PAGE>
constitute the Board of Directors and any new director (other than a director
designated by a person who has entered into an agreement with the Company to
effect a transaction described in clause (a), (c) or (d) of this section), (i)
whose election by the Board of Directors or nomination for election by the
Company's stockholders was approved by a vote of at lest two-thirds (2/3) of the
directors then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so approved
or (ii) whose election is to replace a person who ceases to be a director due to
death, disability or age, cease for any reason to constitute a majority thereof;
or
(c) The shareholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than (i) a merger
or consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity), in combination with the ownership of any trustee or other
fiduciary holding securities under an Executive benefit plan of the Company, at
least 75% of the combined voting power of the voting securities of the Company
or such surviving entity outstanding immediately after such merger or
consolidation, or (ii) a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which no person
acquires more than 50% of the combined voting power of the Company's then
outstanding securities; or
(d) The shareholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets.
-14-
<PAGE>
9. DISPUTE RELATING TO EXECUTIVE'S TERMINATION OF EMPLOYMENT FOR
-------------------------------------------------------------
GOOD REASON. If the Executive resigns her employment with the Company alleging
- -----------
in good faith as the basis for such resignation any of the "Good Reasons"
specified in Section 6(d), and if the Company then disputes the Executive's
right to the payment of benefits under Section 7, the Company shall continue to
pay the Executive the full compensation (including, but not limited to, his Base
Salary) in effect at the date the Executive provided notice of such resignation,
and the Company shall continue the Executive as a participant in all
compensation, benefit and insurance plans in which the Executive was then a
participant, until the earlier of (i) the expiration of the Term of the
Agreement or (ii) the date the dispute is finally resolved, either by mutual
written agreement of the parties or by arbitration in accordance with Section
22. For the purposes of this Section, the Company shall bear the burden of
proving that the grounds for the Executive's resignation do not fall within the
scope of Section 6(d), and there shall be a rebuttable presumption that the
Executive alleged such grounds in good faith.
10. NONCOMPETITION PROVISIONS.
-------------------------
(a) NONCOMPETITION. The Executive agrees that during the Term
--------------
of this Agreement prior to any termination of his employment hereunder and for a
period of one year following the occurrence of any event entitling the Executive
to Benefit Payments, provided the Company makes all such payments when due
according to the provisions of Section 7, she will not, directly or indirectly,
without the prior written consent of the Company, manage, operate, join,
control, participate in, or be connected as a stockholder (other than as a
holder of shares publicly traded on a stock exchange or the NASDAQ National
Market System), partner,
-15-
<PAGE>
or other equity holder with, or as an officer, director or employee of, any real
estate investment trust whose business strategy is competitive with that of the
Company, as determined by a majority of the Company's Independent Directors
("Competing REIT"). It is further expressly agreed that the Company will or
would suffer irreparable injury of the Company in violation of the preceding
sentence of this Agreement and that the Company would by reason of such
competition be entitled to injunctive relief in a court of appropriate
jurisdiction, and the Executive further consents and stipulates to the entry of
such injunctive relief in such a court prohibiting the Executive from competing
with the Company or any subsidiary or affiliate of the Company, in the areas of
business set forth above, in violation of this Agreement. It is further
expressly agreed that the Executive's interest in and employment by Fixed Income
Discount Advisory Company shall not be deemed to violate any provisions of this
Section, regardless of the scope of the Executive's activities with such firm;
provided, however, that the Executive shall not in such capacity provide
services to any Competing REIT.
(b) RIGHT TO COMPANY MATERIALS. The Executive agrees that all
--------------------------
styles, designs, lists, materials, books, files, reports, correspondence,
records, and other documents ("Company Materials") used, prepared, or made
available to the Executive in connection with her employment by the Company
shall be and shall remain the property of the Company. Upon the termination of
employment or the expiration of this Agreement, all Company Materials shall be
returned immediately to the Company, and the Executive shall not make or retain
any copies thereof.
(c) SOLICITING EXECUTIVES. The Executive promises and agrees
---------------------
that she will not directly or indirectly solicit any of the Company Executives
to work for any
-16-
<PAGE>
Competing REIT.
(d) MARYLAND LAW. The Executive agrees, in accordance with
------------
Maryland law, to first offer to the Company corporate opportunities learned of
solely as a result of her service as an officer and director of the Company.
11. NOTICES. All notices and other communications under this
-------
Agreement shall be in writing and shall be given by fax or first class mail,
certified or registered with return receipt requested, and shall be deemed to
have been duly given three (3) days after mailing or twenty-four (24) hours
after transmission of a fax to the respective persons named below:
If to the Company: Michael A. J. Farrell
Chairman and Chief Executive Officer
Annaly Mortgage Management, Inc.
1500 Harbor Blvd.
Weehawken, NJ 07087
Phone: (201) 223-1900
Fax: (201) 223-1230
If to the Executive: Wellington J. St. Claire
Vice Chairman of the Board
Annaly Mortgage Management, Inc.
1500 Harbor Blvd.
Weehawken, NJ 07087
Phone: (201) 223-1900
Fax: (201) 223-1230
A copy of any notice pursuant to this Agreement shall be sent to Morgan, Lewis &
Bockius, 101 Park Avenue, New York, New York 10178, Attn: Robert C. Mendelson.
Either party may change such party's address for notices by notice duly given
pursuant hereto.
12. ATTORNEYS' FEES. In the event judicial determination is
---------------
necessary of any dispute arising as to the parties' rights and obligations
hereunder, each party shall have the
-17-
<PAGE>
right, in addition to any other relief granted by the court, to attorneys' fees
based on a determination by the court of the extent to which each party has
prevailed as to the material issues raised in determination of the dispute.
13. TERMINATION OF PRIOR AGREEMENTS. This Agreement terminates and
-------------------------------
supersedes any and all prior agreements and understandings between the parties
with respect to employment or with respect to the compensation of the Executive
by the Company.
14. ASSIGNMENT; SUCCESSORS. This Agreement is personal in its
----------------------
nature and neither of the parties hereto shall, without the consent of the
other, assign or transfer this Agreement or any rights or obligations hereunder;
provided that, in the event of the merger, consolidation, transfer, or sale of
all or substantially all of the assets of the Company with or to any other
individual or entity, this Agreement shall, subject to the provisions hereof, be
binding upon and inure to the benefit of such successor and such successor shall
discharge and perform all the promises, covenants, duties, and obligations of
the Company hereunder.
15. GOVERNING LAW. This Agreement and the legal relations thus
-------------
created between the parties hereto shall be governed by and construed under and
in accordance with the laws of the State of New Jersey.
16. ENTIRE AGREEMENT; HEADINGS. This Agreement embodies the entire
--------------------------
agreement of the parties respecting the matters within its scope and may be
modified only in writing. Section headings in this Agreement are included
herein for convenience of reference only and shall not constitute a part of this
Agreement for any other purpose.
17. WAIVER; MODIFICATION. Failure to insist upon strict compliance
--------------------
-18-
<PAGE>
with any of the terms, covenants, or conditions hereof shall not be deemed a
waiver of such term, covenant, or condition, nor shall any waiver or
relinquishment of, or failure to insist upon strict compliance with, any right
or power hereunder at any one or more times be deemed a waiver or relinquishment
of such right or power at any other time or times. This Agreement shall not be
modified in any respect except by a writing executed by each party hereto.
18. SEVERABILITY. In the event that a court of competent
------------
jurisdiction determines that any portion of this Agreement is in violation of
any statute or public policy, only the portions of this Agreement that violate
such statute or public policy shall be stricken. All portions of this Agreement
that do not violate any statute or public policy shall continue in full force
and effect. Further, any court order striking any portion of this Agreement
shall modify the stricken terms as narrowly as possible to give as much effect
as possible to the intentions of the parties under this Agreement.
19. INDEMNIFICATION. The Company shall indemnify and hold
---------------
Executive harmless to the maximum extent permitted by Section 2-418 of the
Maryland General Corporations Law or its successor statute.
20. COUNTERPARTS. This Agreement may be executed in several
------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
21. SUCCESSOR SECTIONS. References herein to sections or rules of
------------------
the Code or Exchange Act shall be deemed to include any successor sections or
rules.
22. ARBITRATION. Any dispute, claim or controversy arising out of
-----------
or in relation to this Agreement, which the Executive and the Company are unable
to resolve shall be
-19-
<PAGE>
determined by the decision of a board of arbitration consisting of three (3)
members (the "Board of Arbitration") selected by the American Arbitration
Association upon application made to it for such purpose by either the Company
or the Executive. The arbitration proceedings shall take place in New York, New
York or such other place as shall be agreed to by the parties. The Board of
Arbitration shall reach and render a decision in writing. In connection with
rendering its decision, the Board of Arbitration shall adopt and follow such
rules and procedures as a majority of the members of the Board of Arbitration
deems necessary or appropriate. Any award shall be rendered on the basis of the
substantive law governing this Agreement and shall be concurred in by a majority
of the arbitrators. To the extent practical, decisions of the arbitrators shall
be rendered no more than thirty (30) calendar days following commencement of the
arbitration proceedings with respect thereto. Any decision made by the Board of
Arbitration (either prior to or after the expiration of such thirty (30)
calendar day period) shall be final, binding and conclusive on the Executive and
the Company and entitled to be enforced to the fullest extent permitted by law
and entered in any court of competent jurisdiction. Each party to the
arbitration shall bear its own expense in relation thereto, including but not
limited to such party's attorneys' fees, if any, and the expenses and fees of
the member of the Board of Arbitration appointed by such party; provided,
--------
however, that the expenses and fees of the third member of the Board of
- -------
Arbitration and any other expenses of the Board of Arbitration not capable of
being attributed to any one member shall be borne in equal parts by Executive
and the Company.
-20-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer, and the Executive has hereunto signed
this Agreement, as of the date first above written.
ANNALY MORTGAGE MANAGEMENT, INC.
By: /S/ Timothy J. Guba
------------------------------------
Name: Timothy J. Guba
Title: President
/S/ Wellington J. St. Claire
-------------------------------------
Wellington J. St. Claire
-21-
<PAGE>
EXHIBIT 10.7
[LOGO AND LETTERHEAD OF PUBLIC SECURITIES ASSOCIATION APPEARS HERE]
MASTER REPURCHASE AGREEMENT
DATED AS OF ___________ ___, _____
BETWEEN: ___________________________
AND
___________________________
1. APPLICABILITY
From time to time the parties hereto may enter into transactions in which one
party ("Seller") agrees to transfer to the other ("Buyer") securities or other
assets ("Securities") against the transfer of funds by Buyer, with a
simultaneous agreement by Buyer to transfer to Seller such Securities at a date
certain or on demand, against the transfer of funds by Seller. Each such
transaction shall be referred to herein as a "Transaction" and, unless otherwise
agreed in writing, shall be governed by this Agreement, including any
supplemental terms or conditions contained in Annex I hereto and in any other
annexes identified herein or therein as applicable hereunder.
2. DEFINITIONS
(a) "Act of Insolvency", with respect to any party, (i) the commencement by such
party as debtor of any case or proceeding under any bankruptcy, insolvency,
reorganization, liquidation, moratorium, dissolution, delinquency or similar
law, or such party seeking the appointment or election of a receiver,
conservator, trustee, custodian or similar official for such party or any
substantial part of its property, or the convening of any meeting of creditors
for purposes of commencing any such case or proceeding or seeking such an
appointment or election, (ii) the commencement of any such case or proceeding
against such party, or another seeking such an appointment or election, or the
filing against a party of an application for a protective decree under the
provisions of the Securities Investor Protection Act of 1970, which (A) is
consented to or not timely contested by such party, (B) results in the entry of
an order for relief, such an appointment or election, the issuance of such a
protective decree or the entry of an order having a similar effect, or (C) is
not dismissed within 15 days, (iii) the making by such party of a general
assignment for the benefit of creditors, or (iv) the admission in writing by
such party of such party's inability to pay such party's debts as they become
due;
(b) "Additional Purchased Securities", Securities provided by Seller to Buyer
pursuant to Paragraph 4(a) hereof;
(c) "Buyer's Margin Amount", with respect to any Transaction as of any date, the
amount obtained by application of the Buyer's Margin Percentage to the
Repurchase Price for such Transaction as of such date;
(d) "Buyer's Margin Percentage", with respect to any Transaction as of any date,
a percentage (which may
<PAGE>
be equal to the Seller's Margin Percentage) agreed to by Buyer and Seller or, in
the absence of any such agreement, the percentage obtained by dividing the
Market Value of the Purchased Securities on the Purchase Date by the Purchase
Price on the Purchase Date for such Transaction;
(e) "Confirmation", the meaning specified in Paragraph 3(b) hereof;
(f) "Income", with respect to any Security at any time, any principal thereof
and all interest, dividends or other distributions thereon;
(g) "Margin Deficit", the meaning specified in Paragraph 4(a) hereof;
(h) "Margin Excess", the meaning specified in Paragraph 4(b) hereof;
(i) "Margin Notice Deadline", the time agreed to by the parties in the relevant
Confirmation, Annex I hereto or otherwise as the deadline for giving notice
requiring same-day satisfaction of margin maintenance obligations as provided in
Paragraph 4 hereof (or, in the absence of any such agreement, the deadline for
such purposes established in accordance with market practice);
(j) "Market Value", with respect to any Securities as of any date, the price for
such Securities on such date obtained from a generally recognized source agreed
to by the parties or the most recent closing bid quotation from such a source,
plus accrued Income to the extent not included therein (other than any Income
credited or transferred to, or applied to the obligations of, Seller pursuant to
Paragraph 5 hereof) as of such date (unless contrary to market practice for such
Securities);
(k) "Price Differential", with respect to any Transaction as of any date, the
aggregate amount obtained by daily application of the Pricing Rate for such
Transaction to the Purchase Price for such Transaction on a 360 day per year
basis for the actual number of days during the period commencing on (and
including) the Purchase Date for such Transaction and ending on (but excluding)
the date of determination (reduced by any amount of such Price Differential
previously paid by Seller to Buyer with respect to such Transaction);
(l) "Pricing Rate", the per annum percentage rate for determination of the Price
Differential;
(m) "Prime Rate", the prime rate of U.S. commercial banks as published in The
Wall Street Journal (or, if more than one such rate is published, the average of
such rates);
(n) "Purchase Date", the date on which Purchased Securities are to be
transferred by Seller to Buyer;
(o) "Purchase Price", (i) on the Purchase Date, the price at which Purchased
Securities are transferred by Seller to Buyer, and (ii) thereafter, except where
Buyer and Seller agree otherwise, such price increased by the amount of any cash
transferred by Buyer to Seller pursuant to Paragraph 4(b) hereof and decreased
by the amount of any cash transferred by Seller to Buyer pursuant to Paragraph
4(a) hereof or applied to reduce Seller's obligations under clause (ii) of
Paragraph 5 hereof;
(p) "Purchased Securities", the Securities transferred by Seller to Buyer in a
Transaction hereunder, and any Securities substituted therefor in accordance
with Paragraph 9 hereof. The term "Purchased Securities" with respect to any
Transaction at any time also shall include Additional Purchased Securities
delivered pursuant to Paragraph 4(a) hereof and shall exclude Securities
returned pursuant to Paragraph 4(b) hereof;
<PAGE>
(q) "Repurchase Date", the date on which Seller is to repurchase the Purchased
Securities from Buyer, including any date determined by application of the
provisions of Paragraph 3(c) or 11 hereof;
(r) "Repurchase Price", the price at which Purchased Securities are to be
transferred from Buyer to Seller upon termination of a Transaction, which will
be determined in each case (including Transactions terminable upon demand) as
the sum of the Purchase Price and the Price Differential as of the date of such
determination;
(s) "Seller's Margin Amount", with respect to any Transaction as of any date,
the amount obtained by application of the Seller's Margin Percentage to the
Repurchase Price for such Transaction as of such date;
(t) "Seller's Margin Percentage", with respect to any Transaction as of any
date, a percentage (which may be equal to the Buyer's Margin Percentage) agreed
to by Buyer and Seller or, in the absence of any such agreement, the percentage
obtained by dividing the Market Value of the Purchased Securities on the
Purchase Date by the Purchase Price on the Purchase Date for such Transaction.
3. INITIATION; CONFIRMATION; TERMINATION
(a) An agreement to enter into a Transaction may be made orally or in writing at
the initiation of either Buyer or Seller. On the Purchase Date for the
Transaction, the Purchased Securities shall be transferred to Buyer or its agent
against the transfer of the Purchase Price to an account of Seller.
(b) Upon agreeing to enter into a Transaction hereunder, Buyer or Seller (or
both), as shall be agreed, shall promptly deliver to the other party a written
confirmation of each Transaction (a "Confirmation"). The Confirmation shall
describe the Purchased Securities (including CUSIP number, if any), identify
Buyer and Seller and set forth (i) the Purchase Date, (ii) the Purchase Price,
(iii) the Repurchase Date, unless the Transaction is to be terminable on demand,
(iv) the Pricing Rate or Repurchase Price applicable to the Transaction, and (v)
any additional terms or conditions of the Transaction not inconsistent with this
Agreement. The Confirmation, together with this Agreement, shall constitute
conclusive evidence of the terms agreed between Buyer and Seller with respect to
the Transaction to which the Confirmation relates, unless with respect to the
Confirmation specific objection is made promptly after receipt thereof. In the
event of any conflict between the terms of such Confirmation and this Agreement,
this Agreement shall prevail.
(c) In the case of Transactions terminable upon demand, such demand shall be
made by Buyer or Seller, no later than such time as is customary in accordance
with market practice, by telephone or otherwise on or prior to the business day
on which such termination will be effective. On the date specified in such
demand, or on the date fixed for termination in the case of Transactions having
a fixed term, termination of the Transaction will be effected by transfer to
Seller or its agent of the Purchased Securities and any Income in respect
thereof received by Buyer (and not previously credited or transferred to, or
applied to the obligations of, Seller pursuant to Paragraph 5 hereof) against
the transfer of the Repurchase Price to an account of Buyer.
4. MARGIN MAINTENANCE
(a) If at any time the aggregate Market Value of all Purchased Securities
subject to all Transactions in which a particular party hereto is acting as
Buyer is less than the aggregate Buyer's Margin Amount for all such Transactions
(a "Margin Deficit"), then Buyer may by notice to Seller require Seller in such
<PAGE>
Transactions, at Seller's option, to transfer to Buyer cash or additional
Securities reasonably acceptable to Buyer ("Additional Purchased Securities"),
so that the cash and aggregate Market Value of the Purchased Securities,
including any such Additional Purchased Securities, will thereupon equal or
exceed such aggregate Buyer's Margin Amount (decreased by the amount of any
Margin Deficit as of such date arising from any Transactions in which such Buyer
is acting as Seller).
(b) If at any time the aggregate Market Value of all Purchased Securities
subject to all Transactions in which a particular party hereto is acting as
Seller exceeds the aggregate Seller's Margin Amount for all such Transactions at
such time (a "Margin Excess"), then Seller may by notice to Buyer require Buyer
in such Transactions, at Buyer's option, to transfer cash or Purchased
Securities to Seller, so that the aggregate Market Value of the Purchased
Securities, after deduction of any such cash or any Purchased Securities so
transferred, will thereupon not exceed such aggregate Seller's Margin Amount
(increased by the amount of any Margin Excess as of such date arising from any
Transactions in which such Seller is acting as Buyer).
(c) If any notice is given by Buyer or Seller under subparagraph (a) or (b) of
this Paragraph at or before the Margin Notice Deadline on any business day, the
party receiving such notice shall transfer cash or Additional Purchased
Securities as provided in such subparagraph no later than the close of business
in the relevant market on such day. If any such notice is given after the Margin
Notice Deadline, the party receiving such notice shall transfer such cash or
Securities no later than the close of business in the relevant market on the
next business day following such notice.
(d) Any cash transferred pursuant to this Paragraph shall be attributed to such
Transactions as shall be agreed upon by Buyer and Seller.
(e) Seller and Buyer may agree, with respect to any or all Transactions
hereunder, that the respective rights of Buyer or Seller (or both) under
subparagraphs (a) and (b) of this Paragraph may be exercised only where a Margin
Deficit or Margin Excess, as the case may be, exceeds a specified dollar amount
or a specified percentage of the Repurchase Prices for such Transactions (which
amount or percentage shall be agreed to by Buyer and Seller prior to entering
into any such Transactions).
(f) Seller and Buyer may agree, with respect to any or all Transactions
hereunder, that the respective rights of Buyer and Seller under subparagraphs
(a) and (b) of this Paragraph to require the elimination of a Margin Deficit or
a Margin Excess, as the case may be, may be exercised whenever such a Margin
Deficit or Margin Excess exists with respect to any single Transaction hereunder
(calculated without regard to any other Transaction outstanding under this
Agreement).
5. INCOME PAYMENTS
Seller shall be entitled to receive an amount equal to all Income paid or
distributed on or in respect of the Securities that is not otherwise received by
Seller, to the full extent it would be so entitled if the Securities had not
been sold to Buyer. Buyer shall, as the parties may agree with respect to any
Transaction (or, in the absence of any such agreement, as Buyer shall reasonably
determine in its discretion), on the date such Income is paid or distributed
either (i) transfer to or credit to the account of Seller such Income with
respect to any Purchased Securities subject to such Transaction or (ii) with
respect to Income paid in cash, apply the Income payment or payments to reduce
the amount, if any, to be transferred to Buyer by Seller upon termination of
such Transaction. Buyer shall not be obligated to take any action pursuant to
the preceding sentence (A) to the extent that such action would result in the
creation of a Margin Deficit, unless prior thereto or simultaneously therewith
Seller transfers to Buyer cash or Additional Purchased Securities sufficient to
eliminate such Margin Deficit, or (B) if an Event of
<PAGE>
Default with respect to Seller has occurred and is then continuing at the time
such Income is paid or distributed.
6. SECURITY INTEREST
Although the parties intend that all Transactions hereunder be sales and
purchases and not loans, in the event any such Transactions are deemed to be
loans, Seller shall be deemed to have pledged to Buyer as security for the
performance by Seller of its obligations under each such Transaction, and shall
be deemed to have granted to Buyer a security interest in, all of the Purchased
Securities with respect to all Transactions hereunder and all Income thereon and
other proceeds thereof.
7. PAYMENT AND TRANSFER
Unless otherwise mutually agreed, all transfers of funds hereunder shall be in
immediately available funds. All Securities transferred by one party hereto to
the other party (i) shall be in suitable form for transfer or shall be
accompanied by duly executed instruments of transfer or assignment in blank and
such other documentation as the party receiving possession may reasonably
request, (ii) shall be transferred on the book-entry system of a Federal Reserve
Bank, or (iii) shall be transferred by any other method mutually acceptable to
Seller and Buyer.
8. SEGREGATION OF PURCHASED SECURITIES
To the extent required by applicable law, all Purchased Securities in the
possession of Seller shall be segregated from other securities in its possession
and shall be identified as subject to this Agreement. Segregation may be
accomplished by appropriate identification on the books and records of the
holder, including a financial or securities intermediary or a clearing
corporation. All of Seller's interest in the Purchased Securities shall pass to
Buyer on the Purchase Date and, unless otherwise agreed by Buyer and Seller,
nothing in this Agreement shall preclude Buyer from engaging in repurchase
transactions with the Purchased Securities or otherwise selling, transferring,
pledging or hypothecating the Purchased Securities, but no such transaction
shall relieve Buyer of its obligations to transfer Purchased Securities to
Seller pursuant to Paragraph 3, 4 or 11 hereof, or of Buyer's obligation to
credit or pay Income to, or apply Income to the obligations of, Seller pursuant
to Paragraph 5 hereof.
- --------------------------------------------------------------------------------
REQUIRED DISCLOSURE FOR TRANSACTIONS IN WHICH THE SELLER RETAINS CUSTODY OF
THE PURCHASED SECURITIES
Seller is not permitted to substitute other securities for those subject to this
Agreement and therefore must keep Buyer's securities segregated at all times,
unless in this Agreement Buyer grants Seller the right to substitute other
securities. If Buyer grants the right to substitute, this means that Buyer's
securities will likely be commingled with Seller's own securities during the
trading day. Buyer is advised that, during any trading day that Buyer's
securities are commingled with Seller's securities, they [will]* [may]** be
subject to liens granted by Seller to [its clearing bank]* [third parties]** and
may be used by Seller for deliveries on other securities transactions. Whenever
the securities are commingled, Seller's ability to resegregate substitute
securities for Buyer will be subject to Seller's ability to satisfy [the
clearing]* [any]** lien or to obtain substitute securities.
- --------------------------------------------------------------------------------
*Language to be used under 17 C.F.R. (S)403.4(e) if Seller is a government
securities broker or dealer other than a financial institution.
<PAGE>
**Language to be used under 17 C.F.R. (S)403.5(d) if Seller is a financial
institution.
9. SUBSTITUTION
(a) Seller may, subject to agreement with and acceptance by Buyer, substitute
other Securities for any Purchased Securities. Such substitution shall be made
by transfer to Buyer of such other Securities and transfer to Seller of such
Purchased Securities. After substitution, the substituted Securities shall be
deemed to be Purchased Securities.
(b) In Transactions in which Seller retains custody of Purchased Securities, the
parties expressly agree that Buyer shall be deemed, for purposes of subparagraph
(a) of this Paragraph, to have agreed to and accepted in this Agreement
substitution by Seller of other Securities for Purchased Securities; provided,
however, that such other Securities shall have a Market Value at least equal to
the Market Value of the Purchased Securities for which they are substituted.
10. REPRESENTATIONS
Each of Buyer and Seller represents and warrants to the other that (i) it is
duly authorized to execute and deliver this Agreement, to enter into
Transactions contemplated hereunder and to perform its obligations hereunder and
has taken all necessary action to authorize such execution, delivery and
performance, (ii) it will engage in such Transactions as principal (or, if
agreed in writing, in the form of an annex hereto or otherwise, in advance of
any Transaction by the other party hereto, as agent for a disclosed principal),
(iii) the person signing this Agreement on its behalf is duly authorized to do
so on its behalf (or on behalf of any such disclosed principal), (iv) it has
obtained all authorizations of any governmental body required in connection with
this Agreement and the Transactions hereunder and such authorizations are in
full force and effect and (v) the execution, delivery and performance of this
Agreement and the Transactions hereunder will not violate any law, ordinance,
charter, by-law or rule applicable to it or any agreement by which it is bound
or by which any of its assets are affected. On the Purchase Date for any
Transaction Buyer and Seller shall each be deemed to repeat all the foregoing
representations made by it.
11. EVENTS OF DEFAULT
In the event that (i) Seller fails to transfer or Buyer fails to purchase
Purchased Securities upon the applicable Purchase Date, (ii) Seller fails to
repurchase or Buyer fails to transfer Purchased Securities upon the applicable
Repurchase Date, (iii) Seller or Buyer fails to comply with Paragraph 4 hereof,
(iv) Buyer fails, after one business day's notice, to comply with Paragraph 5
hereof, (v) an Act of Insolvency occurs with respect to Seller or Buyer, (vi)
any representation made by Seller or Buyer shall have been incorrect or untrue
in any material respect when made or repeated or deemed to have been made or
repeated, or (vii) Seller or Buyer shall admit to the other its inability to, or
its intention not to, perform any of its obligations hereunder (each an "Event
of Default"):
(a) The nondefaulting party may, at its option (which option shall be deemed to
have been exercised immediately upon the occurrence of an Act of Insolvency),
declare an Event of Default to have occurred hereunder and, upon the exercise or
deemed exercise of such option, the Repurchase Date for each Transaction
hereunder shall, if it has not already occurred, be deemed immediately to occur
(except that, in the event that the Purchase Date for any Transaction has not
yet occurred as of the date of such exercise or deemed exercise, such
Transaction shall be deemed immediately canceled). The nondefaulting party shall
(except upon the occurrence of an Act of Insolvency) give notice to the
defaulting party of the exercise of such option as promptly as practicable.
<PAGE>
(b) In all Transactions in which the defaulting party is acting as Seller, if
the nondefaulting party exercises or is deemed to have exercised the option
referred to in subparagraph (a) of this Paragraph, (i) the defaulting party's
obligations in such Transactions to repurchase all Purchased Securities, at the
Repurchase Price therefor on the Repurchase Date determined in accordance with
subparagraph (a) of this Paragraph, shall thereupon become immediately due and
payable, (ii) all Income paid after such exercise or deemed exercise shall be
retained by the nondefaulting party and applied to the aggregate unpaid
Repurchase Prices and any other amounts owing by the defaulting party hereunder,
and (iii) the defaulting party shall immediately deliver to the nondefaulting
party any Purchased Securities subject to such Transactions then in the
defaulting party's possession or control.
(c) In all Transactions in which the defaulting party is acting as Buyer, upon
tender by the nondefaulting party of payment of the aggregate Repurchase Prices
for all such Transactions, all right, title and interest in and entitlement to
all Purchased Securities subject to such Transactions shall be deemed
transferred to the nondefaulting party, and the defaulting party shall deliver
all such Purchased Securities to the nondefaulting party.
(d) If the nondefaulting party exercises or is deemed to have exercised the
option referred to in subparagraph (a) of this Paragraph, the nondefaulting
party, without prior notice to the defaulting party, may:
i. as to Transactions in which the defaulting party is acting as Seller, (A)
immediately sell, in a recognized market (or otherwise in a commercially
reasonable manner) at such price or prices as the nondefaulting party may
reasonably deem satisfactory, any or all Purchased Securities subject to
such Transactions and apply the proceeds thereof to the aggregate unpaid
Repurchase Prices and any other amounts owing by the defaulting party
hereunder or (B) in its sole discretion elect, in lieu of selling all or a
portion of such Purchased Securities, to give the defaulting party credit
for such Purchased Securities in an amount equal to the price therefor on
such date, obtained from a generally recognized source or the most recent
closing bid quotation from such a source, against the aggregate unpaid
Repurchase Prices and any other amounts owing by the defaulting party
hereunder; and
ii. as to Transactions in which the defaulting party is acting as Buyer, (A)
immediately purchase, in a recognized market (or otherwise in a
commercially reasonable manner) at such price or prices as the
nondefaulting party may reasonably deem satisfactory, securities
("Replacement Securities") of the same class and amount as any Purchased
Securities that are not delivered by the defaulting party to the
nondefaulting party as required hereunder or (B) in its sole discretion
elect, in lieu of purchasing Replacement Securities, to be deemed to have
purchased Replacement Securities at the price therefor on such date,
obtained from a generally recognized source or the most recent closing
offer quotation from such a source.
Unless otherwise provided in Annex I, the parties acknowledge and agree that (1)
the Securities subject to any Transaction hereunder are instruments traded in a
recognized market, (2) in the absence of a generally recognized source for
prices or bid or offer quotations for any Security, the nondefaulting party may
establish the source therefor in its sole discretion and (3) all prices, bids
and offers shall be determined together with accrued Income (except to the
extent contrary to market practice with respect to the relevant Securities).
(e) As to Transactions in which the defaulting party is acting as Buyer, the
defaulting party shall be liable to the nondefaulting party for any excess of
the price paid (or deemed paid) by the nondefaulting party
<PAGE>
for Replacement Securities over the Repurchase Price for the Purchased
Securities replaced thereby and for any amounts payable by the defaulting party
under Paragraph 5 hereof or otherwise hereunder.
(f) For purposes of this Paragraph 11, the Repurchase Price for each Transaction
hereunder in respect of which the defaulting party is acting as Buyer shall not
increase above the amount of such Repurchase Price for such Transaction
determined as of the date of the exercise or deemed exercise by the
nondefaulting party of the option referred to in subparagraph (a) of this
Paragraph.
(g) The defaulting party shall be liable to the nondefaulting party for (i) the
amount of all reasonable legal or other expenses incurred by the nondefaulting
party in connection with or as a result of an Event of Default, (ii) damages in
an amount equal to the cost (including all fees, expenses and commissions) of
entering into replacement transactions and entering into or terminating hedge
transactions in connection with or as a result of an Event of Default, and (iii)
any other loss, damage, cost or expense directly arising or resulting from the
occurrence of an Event of Default in respect of a Transaction.
(h) To the extent permitted by applicable law, the defaulting party shall be
liable to the nondefaulting party for interest on any amounts owing by the
defaulting party hereunder, from the date the defaulting party becomes liable
for such amounts hereunder until such amounts are (i) paid in full by the
defaulting party or (ii) satisfied in full by the exercise of the nondefaulting
party's rights hereunder. Interest on any sum payable by the defaulting party to
the nondefaulting party under this Paragraph 11(h) shall be at a rate equal to
the greater of the Pricing Rate for the relevant Transaction or the Prime Rate.
(i) The nondefaulting party shall have, in addition to its rights hereunder, any
rights otherwise available to it under any other agreement or applicable law.
12. SINGLE AGREEMENT
Buyer and Seller acknowledge that, and have entered hereinto and will enter into
each Transaction hereunder in consideration of and in reliance upon the fact
that, all Transactions hereunder constitute a single business and contractual
relationship and have been made in consideration of each other. Accordingly,
each of Buyer and Seller agrees (i) to perform all of its obligations in respect
of each Transaction hereunder, and that a default in the performance of any such
obligations shall constitute a default by it in respect of all Transactions
hereunder, (ii) that each of them shall be entitled to set off claims and apply
property held by them in respect of any Transaction against obligations owing to
them in respect of any other Transactions hereunder and (iii) that payments,
deliveries and other transfers made by either of them in respect of any
Transaction shall be deemed to have been made in consideration of payments,
deliveries and other transfers in respect of any other Transactions hereunder,
and the obligations to make any such payments, deliveries and other transfers
may be applied against each other and netted.
13. NOTICES AND OTHER COMMUNICATIONS
Any and all notices, statements, demands or other communications hereunder may
be given by a party to the other by mail, facsimile, telegraph, messenger or
otherwise to the address specified in Annex II hereto, or so sent to such party
at any other place specified in a notice of change of address hereafter received
by the other. All notices, demands and requests hereunder may be made orally, to
be confirmed promptly in writing, or by other communication as specified in the
preceding sentence.
14. ENTIRE AGREEMENT; SEVERABILITY
<PAGE>
This Agreement shall supersede any existing agreements between the parties
containing general terms and conditions for repurchase transactions. Each
provision and agreement herein shall be treated as separate and independent from
any other provision or agreement herein and shall be enforceable notwithstanding
the unenforceability of any such other provision or agreement.
15. NON-ASSIGNABILITY; TERMINATION
(a) The rights and obligations of the parties under this Agreement and under any
Transaction shall not be assigned by either party without the prior written
consent of the other party, and any such assignment without the prior written
consent of the other party shall be null and void. Subject to the foregoing,
this Agreement and any Transactions shall be binding upon and shall inure to the
benefit of the parties and their respective successors and assigns. This
Agreement may be terminated by either party upon giving written notice to the
other, except that this Agreement shall, notwithstanding such notice, remain
applicable to any Transactions then outstanding.
(b) Subparagraph (a) of this Paragraph 15 shall not preclude a party from
assigning, charging or otherwise dealing with all or any part of its interest in
any sum payable to it under Paragraph 11 hereof.
16. GOVERNING LAW
This Agreement shall be governed by the laws of the State of New York without
giving effect to the conflict of law principles thereof.
17. NO WAIVERS, ETC.
No express or implied waiver of any Event of Default by either party shall
constitute a waiver of any other Event of Default and no exercise of any remedy
hereunder by any party shall constitute a waiver of its right to exercise any
other remedy hereunder. No modification or waiver of any provision of this
Agreement and no consent by any party to a departure herefrom shall be effective
unless and until such shall be in writing and duly executed by both of the
parties hereto. Without limitation on any of the foregoing, the failure to give
a notice pursuant to Paragraph 4(a) or 4(b) hereof will not constitute a waiver
of any right to do so at a later date.
18. USE OF EMPLOYEE PLAN ASSETS
(a) If assets of an employee benefit plan subject to any provision of the
Employee Retirement Income Security Act of 1974 ("ERISA") are intended to be
used by either party hereto (the "Plan Party") in a Transaction, the Plan Party
shall so notify the other party prior to the Transaction. The Plan Party shall
represent in writing to the other party that the Transaction does not constitute
a prohibited transaction under ERISA or is otherwise exempt therefrom, and the
other party may proceed in reliance thereon but shall not be required so to
proceed.
(b) Subject to the last sentence of subparagraph (a) of this Paragraph, any such
Transaction shall proceed only if Seller furnishes or has furnished to Buyer its
most recent available audited statement of its financial condition and its most
recent subsequent unaudited statement of its financial condition.
(c) By entering into a Transaction pursuant to this Paragraph, Seller shall be
deemed (i) to represent to Buyer that since the date of Seller's latest such
financial statements, there has been no material adverse change in Seller's
financial condition which Seller has not disclosed to Buyer, and (ii) to agree
to provide Buyer with future audited and unaudited statements of its financial
condition as they are issued, so long
<PAGE>
as it is a Seller in any outstanding Transaction involving a Plan Party.
19. INTENT
(a) The parties recognize that each Transaction is a "repurchase agreement" as
that term is defined in Section 101 of Title 11 of the United States Code, as
amended (except insofar as the type of Securities subject to such Transaction or
the term of such Transaction would render such definition inapplicable), and a
"securities contract" as that term is defined in Section 741 of Title 11 of the
United States Code, as amended (except insofar as the type of assets subject to
such Transaction would render such definition inapplicable).
(b) It is understood that either party's right to liquidate Securities delivered
to it in connection with Transactions hereunder or to exercise any other
remedies pursuant to Paragraph 11 hereof is a contractual right to liquidate
such Transaction as described in Sections 555 and 559 of Title 11 of the United
States Code, as amended.
(c) The parties agree and acknowledge that if a party hereto is an "insured
depository institution," as such term is defined in the Federal Deposit
Insurance Act, as amended ("FDIA"), then each Transaction hereunder is a
"qualified financial contract," as that term is defined in FDIA and any rules,
orders or policy statements thereunder (except insofar as the type of assets
subject to such Transaction would render such definition inapplicable).
(d) It is understood that this Agreement constitutes a "netting contract" as
defined in and subject to Title IV of the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") and each payment entitlement and payment
obligation under any Transaction hereunder shall constitute a "covered
contractual payment entitlement" or "covered contractual payment obligation",
respectively, as defined in and subject to FDICIA (except insofar as one or both
of the parties is not a "financial institution" as that term is defined in
FDICIA).
20. DISCLOSURE RELATING TO CERTAIN FEDERAL PROTECTIONS
The parties acknowledge that they have been advised that:
(a) in the case of Transactions in which one of the parties is a broker or
dealer registered with the Securities and Exchange Commission ("SEC") under
Section 15 of the Securities Exchange Act of 1934 ("1934 Act"), the Securities
Investor Protection Corporation has taken the position that the provisions of
the Securities Investor Protection Act of 1970 ("SIPA") do not protect the other
party with respect to any Transaction hereunder;
(b) in the case of Transactions in which one of the parties is a government
securities broker or a government securities dealer registered with the SEC
under Section 15C of the 1934 Act, SIPA will not provide protection to the other
party with respect to any Transaction hereunder; and
(c) in the case of Transactions in which one of the parties is a financial
institution, funds held by the financial institution pursuant to a Transaction
hereunder are not a deposit and therefore are not insured by the Federal Deposit
Insurance Corporation or the National Credit Union Share Insurance Fund, as
applicable.
[Name of Party] [Name of Party]
By_________________________ By__________________________
<PAGE>
Title______________________ Title_______________________
Date_______________________ Date________________________
================================================================================
ANNEX I
SUPPLEMENTAL TERMS AND CONDITIONS
This Annex I forms a part of the Master Repurchase Agreement dated as of
__________________, 19__ (the "Agreement") between _______________________ and
______________________. Capitalized terms used but not defined in this Annex I
shall have the meanings ascribed to them in the Agreement.
1. OTHER APPLICABLE ANNEXES. In addition to this Annex I and Annex II, the
following Annexes and any Schedules thereto shall form a part of the Agreement
and shall be applicable thereunder:
[Annex III (International Transactions)]
[Annex IV (Party Acting as Agent)]
[Annex V (Margin for Forward Transactions)]
[Annex VI (Buy/Sell Back Transactions)]
[Annex VII (Transactions Involving Registered Investment Companies)]
================================================================================
ANNEX II
NAMES AND ADDRESSES FOR COMMUNICATIONS BETWEEN PARTIES
================================================================================
ANNEX III
INTERNATIONAL TRANSACTIONS
This Annex III (including any Schedules hereto) forms a part of the Master
Repurchase Agreement dated as of _________________, 19__ (the "Agreement")
between _______________________ and ______________________. Capitalized terms
used but not defined in this Annex III shall have the meanings ascribed to them
in the Agreement.
<PAGE>
1. DEFINITIONS. For purposes of the Agreement and this Annex III:
(a) The following terms shall have the following meanings:
"Base Currency", United States dollars or such other currency as Buyer and
Seller may agree in the Confirmation with respect to any International
Transaction or otherwise in writing;
"Business Day" or "business day":
i. in relation to any International Transaction which (A) involves an
International Security and (B) is to be settled through CEDEL or
Euroclear, a day on which CEDEL or, as the case may be, Euroclear is open
to settle business in the currency in which the Purchase Price and the
Repurchase Price are denominated;
ii. in relation to any International Transaction which (A) involves an
International Security and (B) is to be settled through a settlement
system other than CEDEL or Euroclear, a day on which that settlement
system is open to settle such International Transaction;
iii. in relation to any International Transaction which involves a delivery of
Securities not falling within (i) or (ii) above, a day on which banks are
open for business in the place where delivery of the relevant Securities
is to be effected; and
iv. in relation to any International Transaction which involves an obligation
to make a payment not falling within (i) or (ii) above, a day other than a
Saturday or Sunday on which banks are open for business in the principal
financial center of the country of which the currency in which the payment
is denominated is the official currency and, if different, in the place
where any account designated by the parties for the making or receipt of
the payment is situated (or, in the case of ECU, a day on which ECU
clearing operates);
"CEDEL", CEDEL Bank, societe anonyme;
"Contractual Currency", the currency in which the International Securities
subject to any International Transaction are denominated or such other
currency as may be specified in the Confirmation with respect to any
International Transaction;
"Euroclear", Morgan Guaranty Trust Company of New York, Brussels Branch,
as operator of the Euroclear System;
"International Security", any Security that (i) is denominated in a
currency other than United States dollars or (ii) is capable of being
cleared through a clearing facility outside the United States;
"International Transaction", any Transaction involving (i) an
International Security or (ii) a party organized under the laws of a
jurisdiction other than the United States or having its principal place of
business outside the United States;
"LIBOR", in relation to any sum in any currency, the offered rate for
deposits for such sum in such currency for a period of three months which
appears on the Reuters Screen LIBO page as of 11:00 A.M., London time, on
the date on which it is to be determined (or, if more than one such rate
appears, the arithmetic mean of such rates);
"Spot Rate", where an amount in one currency is to be converted into a
second currency on any date, the spot rate of exchange of a comparable
amount quoted by a major money-center bank in the New York interbank
market, as agreed by Buyer and Seller, for the sale by such bank of such
<PAGE>
second currency against a purchase by it of such first currency.
(b) Notwithstanding Paragraph 2 of the Agreement, the term "Prime Rate" shall
mean, with respect to any International Transaction, LIBOR plus a spread, as may
be specified in the Confirmation with respect to any International Transaction
or otherwise in writing.
2. MANNER OF TRANSFER. All transfers of International Securities (i) shall be in
suitable form for transfer and accompanied by duly executed instruments of
transfer or assignment in blank (where required for transfer) and such other
documentation as the transferee may reasonably request, or (ii) shall be
transferred through the book-entry system of Euroclear or CEDEL, or (iii) shall
be transferred through any other agreed securities clearing system or (iv) shall
be transferred by any other method mutually acceptable to Seller and Buyer.
3. CONTRACTUAL CURRENCY.
(a) Unless otherwise mutually agreed, all funds transferred in respect of the
Purchase Price or the Repurchase Price in any International Transaction shall be
in the Contractual Currency.
(b) Notwithstanding subparagraph (a) of this Paragraph 3, the payee of any
payment may, at its option, accept tender thereof in any other currency;
provided, however, that, to the extent permitted by applicable law, the
obligation of the payor to make such payment will be discharged only to the
extent of the amount of the Contractual Currency that such payee may, consistent
with normal banking procedures, purchase with such other currency (after
deduction of any premium and costs of exchange) for delivery within the
customary delivery period for spot transactions in respect of the relevant
currency.
(c) If for any reason the amount in the Contractual Currency so received,
including amounts received after conversion of any recovery under any judgment
or order expressed in a currency other than the Contractual Currency, falls
short of the amount in the Contractual Currency due in respect of the Agreement,
the party required to make the payment shall (unless an Event of Default has
occurred and such party is the nondefaulting party) as a separate and
independent obligation (which shall not merge with any judgment or any payment
or any partial payment or enforcement of payment) and to the extent permitted by
applicable law, immediately pay such additional amount in the Contractual
Currency as may be necessary to compensate for the shortfall.
(d) If for any reason the amount of the Contractual Currency received by one
party hereto exceeds the amount in the Contractual Currency due such party in
respect of the Agreement, then (unless an Event of Default has occurred and such
party is the nondefaulting party) the party receiving the payment shall refund
promptly the amount of such excess.
4. NOTICES. Any and all notices, statements, demands or other communications
with respect to International Transactions shall be given in accordance with
Paragraph 13 of the Agreement and shall be in the English language.
5. TAXES.
(a) Transfer taxes, stamp taxes and all similar costs with respect to the
transfer of Securities shall be paid by Seller.
(b) (i)Unless otherwise agreed, all money payable by one party (the "Payor") to
the other (the "Payee") in respect of any International Transaction shall be
paid free and clear of, and without withholding or
<PAGE>
deduction for, any taxes or duties of whatsoever nature imposed, levied,
collected, withheld or assessed by any authority having power to tax (a "Tax"),
unless the withholding or deduction of such Tax is required by law. In that
event, unless otherwise agreed, Payor shall pay such additional amounts as will
result in the net amounts receivable by Payee (after taking account of such
withholding or deduction) being equal to such amounts as would have been
received by Payee had no such Tax been required to be withheld or deducted. The
parties acknowledge and agree, for the avoidance of doubt, that the amount of
Income required to be transferred, credited or applied by Buyer for the benefit
of Seller under Paragraph 5 of the Agreement shall be determined without taking
into account any Tax required to be withheld or deducted from such Income,
unless otherwise agreed.
(ii) In the case of any Tax required to be withheld or deducted from any money
payable to a party hereto acting as Payee by the other party hereto acting as
Payor, Payee agrees to deliver to Payor (or, if applicable, to the authority
imposing the Tax) any certificate or document that would entitle Payee to an
exemption from, or reduction in the rate of, withholding or deduction of Tax
from money payable by Payor to Payee.
(iii) Each party hereto agrees to notify the other party of any circumstance
known or reasonably known to it (other than a Change of Tax Law, as defined in
Paragraph 6 hereof) that causes a certificate or document provided by it
pursuant to subparagraph (b)(ii) of this Paragraph to fail to be true.
(iv) Notwithstanding subparagraph (b)(i) of this Paragraph, no additional
amounts shall be payable by Payor to Payee in respect of an International
Transaction to the extent that such additional amounts are payable as a result
of a failure by Payee to comply with its obligations under subparagraph (b)(ii)
or (b)(iii) of this Paragraph with respect to such International Transaction.
6. TAX EVENT.
(a) This Paragraph 6 shall apply if either party notifies the other, with
respect to a Tax required to be collected by withholding or deduction, that -
i. any action taken by a taxing authority or brought in a court of competent
jurisdiction after the date an International Transaction is entered into,
regardless of whether such action is taken or brought with respect to a
party to the Agreement; or
ii. a change in the fiscal or regulatory regime after the date an
International Transaction is entered into, (each, a "Change of Tax Law")
has or will, in the notifying party's reasonable opinion, have a material
adverse effect on such party in the context of an International
Transaction.
(b) If so requested by the other party, the notifying party will furnish the
other party with an opinion of a suitably qualified adviser that an event
referred to in subparagraph (a)(i) or (a)(ii) of this Paragraph 6 has occurred
and affects the notifying party.
(c) Where this Paragraph 6 applies, the party giving the notice referred to in
subparagraph (a) above may, subject to subparagraph (d) below, terminate the
International Transaction effective from a date specified in the notice, not
being earlier (unless so agreed by the other party) than 30 days after the date
of such notice, by nominating such date as the Repurchase Date.
(d) If the party receiving the notice referred to in subparagraph (a) of this
Paragraph 6 so elects, it may override such notice by giving a counter-notice to
the other party. If a counter-notice is given, the party
<PAGE>
which gives such counter-notice will be deemed to have agreed to indemnify the
other party against the adverse effect referred to in subparagraph (a) of this
Paragraph 6 so far as it relates to the relevant International Transaction and
the original Repurchase Date will continue to apply.
(e) Where an International Transaction is terminated as described in this
Paragraph 6, the party which has given the notice to terminate shall indemnify
the other party against any reasonable legal and other professional expenses
incurred by the other party by reason of the termination, but the other party
may not claim any sum constituting consequential loss or damage in respect of a
termination in accordance with this Paragraph 6.
(f) This Paragraph 6 is without prejudice to Paragraph 5 of this Annex III; but
an obligation to pay additional amounts pursuant to Paragraph 5 of this Annex
III may, where appropriate, be a circumstance which causes this Paragraph 6 to
apply.
7. MARGIN. In the calculation of "Margin Deficit" and "Margin Excess" pursuant
to Paragraph 4 of the Agreement, all sums not denominated in the Base Currency
shall be deemed to be converted into the Base Currency at the Spot Rate on the
date of such calculation.
8. EVENTS OF DEFAULT.
(a) In addition to the Events of Default set forth in Paragraph 11 of the
Agreement, it shall be an additional "Event of Default" if either party fails,
after one business day's notice, to perform any covenant or obligation required
to be performed by it under this Annex III, including, without limitation, the
payment of taxes or additional amounts as required by Paragraph 6 of this Annex
III.
(b) In addition to the other rights of a nondefaulting party under Paragraph 11
of the Agreement, following an Event of Default, the nondefaulting party may, at
any time at its option, effect the conversion of any currency into a different
currency of its choice at the Spot Rate on the date of the exercise of such
option and offset obligations of the defaulting party denominated in different
currencies against each other.
================================================================================
SCHEDULE III.A
INTERNATIONAL TRANSACTIONS RELATING TO [RELEVANT COUNTRY]
This Schedule III.A forms a part of Annex III to the Master Repurchase Agreement
dated as of __________________, 19__ (the "Agreement") between
_______________________ and ______________________. Capitalized terms used but
not defined in this Schedule III.A shall have the meanings ascribed to them in
Annex III.
[Insert provisions applicable to relevant country.]
================================================================================
<PAGE>
Exhibit 10.8
July 18, 1997
Board of Directors
Annaly Mortgage Management, Inc.
1500 Harbor Blvd.
Weehawken, NJ 07087
Ladies and Gentlemen:
The undersigned (the "Purchaser") hereby offers to subscribe to the
number of shares of Common Stock, par value $.01 per share ("Common Stock"), of
Annaly Mortgage Management, Inc., a Maryland corporation (the "Company"), set
forth opposite the Purchaser's name on Schedule A hereto (the "Shares") and to
----------
pay therefor the price per share and total consideration set forth opposite the
Purchaser's name on Schedule A hereto. It is understood that the Company will
----------
deliver to the Purchaser a certificate for the Shares against payment to the
Company of the purchase price thereof.
The Purchaser hereby represents and warrants to the Company that the
Purchaser is acquiring the Shares for the Purchaser's own account for investment
and not with a view to the distribution thereof or with any present intention of
selling any thereof. The Purchaser hereby further represents and warrants to
the Company that the Purchaser is able to fend for himself or herself in
connection with the purchase contemplated hereby, that the Purchaser has such
knowledge and experience in financial and business matters as to be capable of
evaluating the merits and risks of an investment in the Shares, and that the
Purchaser is able to bear the economic risk of the Purchaser's investment for an
indefinite period of time and can afford the complete loss of such investment.
The Purchaser acknowledges that the Purchaser has been informed by the
Company that the Shares have not been registered under the Securities Act of
1933, as amended (the "Securities Act") and that the Shares must be held
indefinitely unless subsequently registered under the Securities Act or an
- ------------
exemption from such registration is available. The Purchaser also acknowledges
that the Purchaser is fully aware of the restrictions on disposing of the Shares
resulting from the
<PAGE>
provisions of the Securities Act and the General Rules and Regulations of the
Securities and Exchange Commission thereunder (including, without limitation,
Rule 144). The Purchaser understands that under the present circumstances sales
of the Shares may not be made in reliance upon Rule 144 since, among other
reasons, the requisite information concerning the Company is not publicly
available, and that the Company is under no obligation to the Purchaser to
supply to the Purchaser or disclose to the public the information necessary to
enable the Purchaser to make sales under Rule 144. The Purchaser further
understands that the Company is under no obligation to register the Shares or to
effect compliance with Regulation A or any other exemption.
Prior to any sale, transfer, pledge or other disposition (any of the
foregoing, a "Transfer") of any of the Shares, the holder of such Shares shall
give written notice to the Company of such proposed sale, transfer, pledge or
other disposition and as to the circumstances thereof. Promptly upon receiving
such notice, the Company may require that the holder obtain from Company
counsel or, at the Company's option, other counsel reasonably acceptable to the
Company, and deliver to the Company, as promptly as practicable, an opinion as
to whether the proposed Transfer may be effected without registration of such
Shares under the Securities Act. If in the opinion of such counsel such
Transfer may be made in the manner described in the notice thereof, the holder
may make such Transfer. If such counsel shall fail to render an opinion to such
effect, the holder shall not make such Transfer unless and until registration of
such Shares under the Securities Act has become effective or is no longer
required in the opinion of such counsel or unless the Company determines not to
require an opinion of counsel for such Transfer.
Each certificate representing any of the Shares or representing any
shares issued in payment or distribution of any stock dividend thereon, or
split-up thereof, and each certificate, issued upon any transfer or exchange of
any such certificate, shall bear such legends as shall be required by the
Company, including, without limitation, a legend similar to the following,
unless, in the opinion of the Company's counsel, such legend is no longer
necessary to assure compliance with the Securities Act and applicable state
securities laws:
-2-
<PAGE>
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the
"Securities Act"), or any state securities laws. The shares have been
acquired for investment purposes and may not be pledged, hypothecated,
sold or transferred in the absence of an effective Registration
Statement for the shares under the Securities Act, and the
registration of the Shares under any applicable state securities laws,
or an exemption from registration under the Securities Act and any
applicable state securities laws."
The Company will enter appropriate stop-transfer orders on any register or
records maintained by or on behalf of the Company with respect to the Shares to
insure that the Shares are not Transferred except in accordance with this
letter.
In addition to the foregoing, the Purchaser agrees that prior to and
for a period of 180 days following the date of the consummation of the Company's
first offering and sale of shares of Common Stock pursuant to an effective
registration statement under the Securities Act, the Purchaser will not
Transfer, or offer or agree to Transfer, any Shares without the Company's
consent.
Very truly yours,
______________________________
Annaly Mortgage Management,
Inc. hereby accepts the offer
set forth above.
By:________________________
Name:
Title:
-3-
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in Registration Statement No. 333-______________ of
Annaly Mortgage Management, Inc. of our report dated July 31, 1997, and to the
reference to us under "Experts" both of which are included in the Prospectus,
which is also included in such Registration Statement.
Deloitte & Touche LLP
New York, New York
August 4, 1997
