<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 24, 1997
REGISTRATION NO. 333-35473
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AEGIS INVESTMENT TRUST
(Exact name of registrant as specified in governing instruments)
2500 CITYWEST BOULEVARD, SUITE 1200
HOUSTON, TEXAS 77042
(Address of principal executive offices)
------------------------
PATRICK A. WALDEN
AEGIS INVESTMENT TRUST
2500 CITYWEST BOULEVARD, SUITE 1200
HOUSTON, TEXAS 77042
(713) 787-0100
(Name and address of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
EDWARD L. DOUMA, ESQ. CARY K. HYDEN, ESQ.
Hunton & Williams WILLIAM J. CERNIUS, ESQ.
951 East Byrd Street Latham & Watkins
Richmond, Virginia 23219 650 Town Center Drive
(804) 788-8200 Costa Mesa, California 92626
(714) 540-1235
</TABLE>
------------------------
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 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. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
AMOUNT BEING OFFERING PRICE AGGREGATE AMOUNT OF
TITLE OF SECURITIES BEING REGISTERED REGISTERED(1) PER SHARE OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Shares of beneficial interest,
$0.01 par value per share.......... 11,500,000 shares $20.00 $230,000,000 $69,697.00
</TABLE>
(1) Includes 1,500,000 Common Shares issuable upon exercise of the underwriters'
overallotment option.
------------------------
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 THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH
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.
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 24, 1997
PROSPECTUS
10,000,000 SHARES
AEGIS INVESTMENT TRUST
COMMON SHARES OF BENEFICIAL INTEREST
--------------
AEGIS INVESTMENT TRUST (TOGETHER WITH AEGIS OPERATING PARTNERSHIP, L.P., THE
"COMPANY") IS A SELF-MANAGED, SELF-ADMINISTERED REAL ESTATE INVESTMENT TRUST
THAT HAS BEEN FORMED TO INVEST IN MORTGAGE-RELATED ASSETS AND, THROUGH ITS
AFFILIATE AEGIS MORTGAGE CORPORATION ("AMC"), CONDUCTS MORTGAGE BANKING AND LOAN
TRADING OPERATIONS. THE FIVE MEMBERS OF THE COMPANY'S SENIOR MANAGEMENT TEAM
EACH HAVE IN EXCESS OF 13 YEARS OF EXPERIENCE IN THE AREAS OF ACQUISITION OF
MORTGAGE LOANS AND MORTGAGE-BACKED SECURITY PORTFOLIOS, THE DESIGN AND
IMPLEMENTATION OF MORTGAGE LOAN AND MORTGAGE-BACKED SECURITY PORTFOLIO
STRATEGIES AND THE OPERATION OF A RETAIL AND WHOLESALE MORTGAGE BANK; HOWEVER,
NONE OF ITS MEMBERS HAS EXPERIENCE IN STARTING UP OR OPERATING AN ENTITY SUCH AS
THE COMPANY.
ALL OF THE SHARES OF BENEFICIAL INTEREST ("COMMON SHARES") OFFERED HEREBY
(THE "OFFERING") ARE BEING OFFERED BY THE COMPANY. PRIOR TO THIS OFFERING, THERE
HAS BEEN NO PUBLIC MARKET FOR THE COMMON SHARES. IT IS CURRENTLY ANTICIPATED
THAT THE INITIAL PUBLIC OFFERING PRICE FOR THE COMMON SHARES OFFERED HEREBY WILL
BE BETWEEN $18.00 AND $20.00. SEE "UNDERWRITING" FOR INFORMATION RELATING TO THE
FACTORS CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE. THE COMPANY
INTENDS TO APPLY TO HAVE THE COMMON SHARES LISTED ON THE NEW YORK STOCK EXCHANGE
UNDER THE SYMBOL "EJS."
IN CONNECTION WITH THE CONTRIBUTION OF HIS COMMON STOCK IN AMC TO AEGIS
OPERATING PARTNERSHIP, L.P. (THE "CONTRIBUTION TRANSACTION" AS DESCRIBED
HEREIN), MR. WALDEN WILL RECEIVE 171,921 UNITS OF LIMITED PARTNERSHIP ("UNITS"),
EACH OF WHICH IS REDEEMABLE FOR ONE COMMON SHARE OF BENEFICIAL INTEREST IN THE
COMPANY. IN ADDITION, MESSRS. DAY AND WALDEN WILL RETAIN 245,000 AND 255,000
UNITS, RESPECTIVELY, AS FOUNDERS EQUITY FOR WHICH THEY PAID NOMINAL
CONSIDERATION.
---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
RELEVANT TO AN INVESTMENT IN THE COMMON SHARES INCLUDING, AMONG OTHERS:
---------------------
- The Company will borrow on a short-term basis to finance a majority of its
long-term investments.
- The Company's investments will be sensitive to interest rate changes.
- The Company and AMC must manage substantial growth.
- The Company will be dependent on key personnel for investment management
and operating experience, none of whom have previous experience managing a
REIT.
- The Company is a newly organized entity with no history of operations.
- No specific Mortgage Assets have been identified for acquisition for the
Company's investment portfolio.
- The Company's net income will depend on the Company's ability to acquire
Mortgage Assets at favorable spreads to net borrowing costs.
- The Company will be taxed as a corporation if it fails to qualify as a
REIT.
- The Company must invest in qualifying real estate in order to maintain its
exempt status under the Investment Company Act.
- The immediate dilution of $3.97 per share in tangible book value to
investors purchasing in this Offering.
- The Company's Declaration of Trust prohibits any shareholder from owning
more than 9.8% of the Company's Common Shares, which could make it more
difficult to effect a change in control of the Company.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
------------------- ------------------- -------------------
<S> <C> <C> <C>
PER SHARE................................................... $ $ $
TOTAL(3).................................................... $ $ $
</TABLE>
- -------------
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be
approximately $ .
(3) The Company has granted the several Underwriters a 30-day option to purchase
up to an aggregate of 1,500,000 additional Common Shares solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discount and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
---------------------
THE COMMON SHARES ARE OFFERED BY THE UNDERWRITERS, SUBJECT TO PRIOR SALE
WHEN, AS AND IF ISSUED TO AND ACCEPTED, BY THE UNDERWRITERS. THE UNDERWRITERS
RESERVE THE RIGHT TO REJECT ORDERS IN WHOLE OR IN PART. IT IS EXPECTED THAT
DELIVERY OF THE COMMON SHARES OFFERED HEREBY WILL BE MADE AGAINST PAYMENT
THEREFOR IN NEW YORK, NEW YORK ON OR ABOUT , 1997.
---------------------
JEFFERIES & COMPANY, INC.
, 1997
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES,
INCLUDING OVER-ALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
------------------------
CAUTIONARY STATEMENT
INFORMATION CONTAINED IN THIS PROSPECTUS CONTAINS "FORWARD-LOOKING
STATEMENTS," WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY
SUCH AS "MAY," "WILL," "SHOULD," "EXPECT," "ANTICIPATE," "ESTIMATE" OR
"CONTINUE" OR THE NEGATIVES THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE
TERMINOLOGY. THE CAUTIONARY STATEMENTS SET FORTH UNDER THE CAPTION "RISK
FACTORS" AND ELSEWHERE IN THE PROSPECTUS IDENTIFY IMPORTANT FACTORS WITH RESPECT
TO SUCH FORWARD-LOOKING STATEMENTS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES,
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH
FORWARD-LOOKING STATEMENTS.
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SUMMARY................ 1
<S> <C>
The Company..................... 1
Summary Risk Factors............ 5
The Offering.................... 8
Tax Status of the Company....... 8
Lack of Voting Control of AMC... 8
Benefits to Insiders............ 8
Distribution Policy............. 9
RISK FACTORS...................... 10
Substantial Leverage and
Potential Net Interest and
Operating Losses in Connection
with Borrowings............... 10
General....................... 10
Failure to Refinance
Outstanding Borrowing on
Favorable Terms May
Adversely Affect Results.... 10
Adverse Impact of Decline in
Market Value of Mortgage
Assets; Margin Calls........ 11
Inability to Establish Credit
Lines and Hedging Agreements
May Reduce Yield to
Investors................... 12
Failure to Hedge Against
Interest Rate Changes
Effectively May Adversely
Affect Results of
Operations.................... 12
Counterparty Defaults May
Adversely Impact Hedging
Effectiveness................. 12
Interest Rate Fluctuations May
Cause Decrease in Net Interest
Income........................ 13
Changes in Anticipated
Prepayment Rates May Adversely
Affect Net Interest Income.... 13
Dependence on Key Personnel for
Successful Operations......... 13
Newly-Organized Entity With No
History of Operations......... 14
Competition May Adversely Impact
Operations.................... 14
General Operating Risks......... 14
Losses on Mortgage Assets....... 15
General....................... 15
Agency Certificates........... 15
Mortgage Loans................ 15
Limitation on Ability to Enforce
Mortgage Loans................ 16
Tax Risks....................... 16
Failure to Qualify as a REIT
May Cause Company to be
Taxed as a Regular
Corporation................. 16
REIT Minimum Distribution
Requirements May Require
Incurrence of Additional
Debt........................ 16
Potential Characterization of
Distributions as UBTI May Be
Adverse to Tax-Exempt
Investors................... 17
Taxable Mortgage Pool
Characterization May Have
Adverse Tax Consequences for
Shareholders................ 17
Impact of Investment Company
Act........................... 18
Future Revisions in Policies and
Strategies at the Discretion
of the Board of Trustees...... 18
Adverse Consequences of Lack of
Control Over the Business of
AMC........................... 18
Impact of ERISA Provisions...... 19
Additional Risks Relating to
AMC's Operations.............. 19
Competition................... 19
Economic Slowdown and Decline
in Real Estate Values May
Adversely Affect Volume of
Loans....................... 20
Laws and Regulations May
Adversely Affect Lending
Operations.................. 20
Lawsuits Against AMC Relating
to Payments to Brokers...... 21
Dependence Upon Brokers and
Correspondents.............. 21
Inability of AMC to Implement
its Growth Strategy......... 21
Repurchase Obligations of
AMC......................... 22
Effect of Future Offerings on
Market Price of Common
Shares........................ 22
Shares Eligible for Future
Sale.......................... 22
Immediate Dilution.............. 23
Lack of Established Market for
Common Shares................. 23
Anti-takeover Effect of
Ownership Limit, Staggered
Board and Power to Issue
Additional Shares May
Adversely Affect Value of
Common Shares................. 23
Ownership Limitation.......... 23
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
Staggered Board............... 24
Issuance of Additional
Shares...................... 24
THE COMPANY....................... 25
USE OF PROCEEDS................... 25
DISTRIBUTION POLICY............... 26
CAPITALIZATION.................... 26
DILUTION.......................... 27
SELECTED FINANCIAL DATA........... 28
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....... 30
The Company..................... 30
AMC............................. 30
Loan Origination................ 31
Loan Trading.................... 31
Results of Operations........... 31
Financial Condition............. 34
Liquidity and Capital
Resources..................... 34
Cash Flows...................... 35
Inflation....................... 35
BUSINESS.......................... 36
General......................... 36
Business Strategy............... 36
Management...................... 37
Portfolio Operations............ 37
Mortgage Banking and Loan
Trading Operations............ 43
MANAGEMENT........................ 50
Trustees and Executive
Officers...................... 50
Board of Trustees............... 50
Committees of the Board of
Trustees...................... 51
Compensation of Trustees........ 51
Executive Compensation.......... 51
Employment Agreements........... 51
1997 Share Incentive Plan....... 52
The Trustees' Plan.............. 53
Indemnification................. 54
AMC............................. 54
CERTAIN RELATIONSHIPS AND
TRANSACTIONS.................... 55
Contribution Transaction........ 55
PRINCIPAL AND MANAGEMENT
SHAREHOLDERS.................... 55
DESCRIPTION OF SHARES OF
BENEFICIAL INTEREST............. 56
General......................... 56
Common Shares................... 57
Preferred Shares................ 58
Restrictions on Transfer........ 58
CERTAIN PROVISIONS OF MARYLAND LAW
AND OF THE COMPANY'S DECLARATION
OF TRUST AND BYLAWS............. 61
Classification of the Board of
Trustees...................... 61
Removal of Trustees............. 61
Business Combinations........... 61
Control Share Acquisitions...... 62
Amendment....................... 63
Limitation of Liability and
Indemnification............... 63
Operations...................... 64
Dissolution of the Company...... 64
Advance Notice of Trustees
Nominations and New
Business...................... 64
Anti-takeover Effect of Certain
Provisions of Maryland Law and
of the Declaration of Trust
and Bylaws.................... 65
Maryland Asset Requirements..... 65
Transfer Agent.................. 65
SHARES AVAILABLE FOR FUTURE
SALE............................ 65
OPERATING PARTNERSHIP AGREEMENT... 66
Management...................... 66
Transferability of Interests.... 67
Capital Contribution............ 67
Redemption Rights............... 67
Registration Rights............. 68
Operations...................... 68
Distributions................... 68
Allocations..................... 69
Term............................ 69
Fiduciary Duty.................. 69
Tax Matters..................... 69
FEDERAL INCOME TAX
CONSIDERATIONS.................. 69
Taxation of the Company......... 70
Requirements for
Qualification................. 71
Failure to Qualify.............. 78
Taxation of Taxable U.S.
Shareholders.................. 78
Taxation of Shareholders on the
Disposition of the Common
Shares........................ 80
Capital Gains and Losses........ 81
Information Reporting
Requirements and Backup
Withholding................... 81
</TABLE>
iv
<PAGE>
<TABLE>
<S> <C>
Taxation of Tax-Exempt
Shareholders.................. 81
Taxation of Non-U.S.
Shareholders.................. 82
Other Tax Consequences.......... 83
Tax Aspects of the Operating
Partnership................... 84
Sale of the Company's
Property...................... 86
Taxation of AMC................. 87
ERISA CONSIDERATIONS.............. 88
Employee Benefit Plans,
Tax-Qualified Retirement
Plans, and IRAs............... 88
Status of the Company and the
Operating Partnership under
ERISA......................... 89
UNDERWRITING...................... 91
LEGAL MATTERS..................... 92
EXPERTS........................... 92
ADDITIONAL INFORMATION............ 93
GLOSSARY.......................... 94
</TABLE>
v
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION, FINANCIAL STATEMENTS AND
RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. CAPITALIZED AND CERTAIN
OTHER TERMS USED HEREIN SHALL HAVE THE MEANINGS ASSIGNED TO THEM IN THE
GLOSSARY. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES
THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED AND AN INITIAL
PUBLIC OFFERING PRICE OF $19.00 (THE "OFFERING PRICE"). UNLESS THE CONTEXT
REQUIRES OTHERWISE, REFERENCES HEREIN TO THE "COMPANY" INCLUDE AEGIS INVESTMENT
TRUST AND AEGIS OPERATING PARTNERSHIP, L.P. (THE "OPERATING PARTNERSHIP").
THE COMPANY
The Company, which intends to operate as a self-managed, self-administered
real estate investment trust ("REIT"), has been formed to invest in
mortgage-related assets, with an emphasis on mortgage-backed securities
representing interests in pools of single family residential mortgage loans and
the acquisition of mortgage loans. The Company was formed by Messrs. James E.
Day and Patrick A. Walden on August 13, 1997 and does not anticipate commencing
operations until the closing of this Offering. Simultaneously with the closing
of this Offering, the Company will acquire 100% of the non-voting common stock
in AEGIS Mortgage Corporation ("AMC"), representing a 97% economic interest
therein. Upon the acquisition, the Company and AMC will share common management
and Messrs. Day and Walden will own 100% of the voting common stock of AMC and
serve as directors of AMC. AMC is a full-service mortgage banking and loan
trading business that is expected to provide the Company with a source of
mortgage-related assets.
The Company's principal objectives are (i) to provide investors with
attractive returns on equity by purchasing Mortgage Assets such as mortgage
backed securities and mortgage loans for investment and leveraging available
returns with short-term financings, and by hedging a significant portion of the
interest rate risk associated with such financings through the use of interest
rate caps, swaps and similar hedging instruments, (ii) to identify market
opportunities that allow the Company to acquire Mortgage Assets with higher
yields relative to the applicable asset groups and risks involved, and (iii) to
a lesser extent, benefit from the expansion of the mortgage origination,
servicing and trading businesses of AMC by providing AMC with credit support and
a well-financed, affiliated investor for its originations and acquisitions of
mortgage loans.
The Company's principal source of income will be from its ownership and
management of a portfolio of Mortgage Assets, referred to herein as the
Portfolio Operations. The principal source of income from its Portfolio
Operations will be net interest income, which is the spread between interest
income earned on Mortgage Assets held for investment and the net interest
expense and hedging costs associated with the borrowings used to finance the
acquisition of such Mortgage Assets. The Company will also receive income from
dividends paid to it by AMC. AMC's principal sources of income will be gains
recognized on the sale of Mortgage Loans and mortgage-backed securities, net
interest income earned on Mortgage Loans purchased by AMC pending their resale,
servicing fees and other origination and trading fee income. AMC will be fully
subject to federal and state income taxes with respect to its income.
The Company intends to acquire all of its Mortgage Assets from nationally
recognized primary dealers, mortgage brokers and through the Loan Trading and
Mortgage Banking Operations of AMC. The Company anticipates that the majority of
its investments in Mortgage Assets will be in Agency Certificates and initially
expects that substantially all of its Mortgage Assets will be comprised of
Agency Certificates. Also, the Company is expected to acquire through AMC
additional types of Mortgage Assets such as owner-financed single family
residential, small multi-family residential and commercial mortgage loans
("Owner-Financed Mortgage Loans") and seasoned single family residential and
small multi-family residential and commercial mortgage loans not originated by
AMC ("Seasoned Mortgage Loans") acquired primarily through the Loan Trading
Operations of AMC.
1
<PAGE>
Management believes Owner-Financed Mortgage Loans are available for
investment at attractive risk-adjusted yields because they are generally sold on
a loan-by-loan basis by individual brokers with the pricing of each loan
individually negotiated. This results in a secondary market for such loans that
is private and relatively inefficient when compared with the market for
Conforming Mortgage Loans. In addition, the documentation and underwriting of
such loans typically do not meet the standards of the established secondary
mortgage market. These market and loan characteristics tend to limit the number
of institutional buyers actively participating in this market, resulting in
non-competitive pricing for this type of Mortgage Loan. The Loan Trading
Operation of AMC has both the experience and market presence to effectively
acquire Owner-Financed Mortgage Loans. By correcting deficiencies in collateral
documentation, providing experienced loan servicing, using a consistent approach
to evaluating and re-underwriting and consolidating such mortgage loans into
pools suitable for the broader secondary market, the Company expects that AMC
has both the experience and operating capabilities to increase the market value
of the Owner-Financed Mortgage Loans acquired by the Company.
Similarly, the secondary market for Seasoned Mortgage Loans is fragmented
and such Mortgage Loans are available at attractive risk-adjusted yields;
however, at yields somewhat less than those expected for Owner-Financed Mortgage
Loans. Seasoned Mortgage Loans are generally offered on a pool rather than on a
loan-by-loan basis by thrifts, banks, insurance companies and other financial
institutions. Often the pools of Seasoned Mortgage Loans are unable to be sold
in traditional secondary mortgage markets due to the limited size of a pool or
because the Mortgage Loans within a pool differ in certain respects including
documentation quality, underwriting standards, loan-to-value ratio, loan type,
property type or payment history. Similar to Owner-Financed Mortgage Loans, the
Company anticipates that it can acquire Seasoned Mortgage Loans at attractive
risk-adjusted yields and enhance the value of such Mortgage Loans by correcting
deficiencies, if necessary, and pooling them by similar attributes whereby the
Company may either hold such pools for investment or sell such pools in the
established secondary mortgage market to government sponsored agencies or
nationwide mortgage conduits.
To a lesser extent, the Company may also acquire higher yielding mortgage
loans, which may include among other types, mortgage loans in excess of
$207,000, loans with limited documentation and loans to subprime borrowers, all
of which do not comply with requirements for inclusion in credit support
programs sponsored by GNMA, FHLMC or FNMA ("Non-Conforming Mortgage Loans"). As
described more fully herein, the Company expects that the Non-Conforming
Mortgage Loans may provide the Company with an attractive and additional source
of higher yielding Mortgage Loans.
Management believes that the Company provides a more attractive vehicle for
investing in Mortgage Assets than regulated financial institutions because the
Company is not currently subject to any of the federal and state regulations
imposed upon insured financial institutions and therefore does not incur the
related costs of compliance.
PORTFOLIO OPERATIONS
The Company's primary business (the "Portfolio Operations") will be the
acquisition and management of a portfolio comprised of (i) pass-through
certificates issued or guaranteed by the U.S. government or government-sponsored
agencies, which represent interests in underlying pools of mortgage loans
("Agency Certificates"), (ii) mortgage loans, including, but not limited to
Owner-Financed Mortgage Loans and Seasoned Mortgage Loans, (iii) Non-Conforming
Mortgage Loans, and (iv) other mortgage-related assets consistent with the
Company's investment objectives and policies and its REIT status. The
Owner-Financed Mortgage Loans, the Seasoned Mortgage Loans and the
Non-Conforming Mortgage Loans are referred to herein as the "Mortgage Loans" and
all of the mortgage related interests listed in clauses (i) through (iv) above
are collectively referred to as "Mortgage Assets."
Initially, substantially all of the Company's Mortgage Assets will consist
of Agency Certificates. Management currently contemplates that a substantial
majority of the Mortgage Assets will carry fixed
2
<PAGE>
rates of interest, although Mortgage Assets with adjustable interest rates may
be purchased from time to time depending upon market conditions. The Company
intends to finance a majority of its Mortgage Asset acquisitions through reverse
repurchase agreements and, to a lesser extent, dollar reverse repurchase
agreements and through bank warehouse financing.
It is anticipated that the Portfolio Operations eventually will comprise
over 95% of the total value of the assets of the Company.
MORTGAGE BANKING AND LOAN TRADING OPERATIONS OF AMC
AMC's businesses (collectively, the "Mortgage Banking and Loan Trading
Operations") consist of (i) the origination of Mortgage Loans through a network
of mortgage brokers and retail branches for sale to permanent investors (the
"Loan Origination Operations"), (ii) the acquisition of Mortgage Loans for
investment and trading (the "Loan Trading Operations"), and (iii) the servicing
of Mortgage Loans (the "Loan Servicing Operations"). AMC has engaged in Mortgage
Banking and Loan Trading Operations since 1993, and through its predecessor
corporations, has operated on a more limited basis as a mortgage banking
corporation since 1981. Upon completion of the Offering, the Company will own
all of the non-voting common stock representing a 97% economic interest in AMC.
See "Formation Transactions."
AMC's Loan Trading Operations consist of the acquisition of Mortgage Loans
for investment or trading from a nationwide network of financial institutions
and brokers. AMC historically has focused its Loan Trading Operations on the
acquisition and trading of Seasoned Mortgage Loans. A majority of the Seasoned
Mortgage Loans acquired by AMC are secured primarily by residential, and to a
lesser extent by commercial, real estate. AMC intends to continue to acquire
Seasoned Mortgage Loans and to identify market opportunities that allow it to
acquire other types of higher yielding Mortgage Loans. AMC has recently expanded
its acquisition of Owner-Financed Mortgage Loans.
AMC's Loan Origination Operations consist primarily of the origination of
Conforming Mortgage Loans (defined below) and, to a lesser extent,
Non-Conforming Mortgage Loans for sale to permanent investors. AMC has
relationships with over 800 approved, unaffiliated wholesale mortgage brokers in
22 states. Since January 1, 1996, AMC has funded loans originated by over 300 of
such mortgage brokers. AMC also originates Mortgage Loans directly through its
six retail branch offices in Texas. AMC originates a broad range of mortgage
loan products, including mortgage loans eligible for sale to GNMA, FNMA or FHLMC
("Conforming Mortgage Loans") and Non-Conforming Mortgage Loans, concentrating
principally on loans to creditworthy borrowers in amounts in excess of Agency
guidelines. AMC has recently begun originating a limited number of subprime
mortgage loans to borrowers with impaired credit risk characteristics.
Currently, AMC sells such subprime mortgage loans to unaffiliated third party
investors.
AMC's Loan Servicing Operations support its Loan Origination and Loan
Trading Operations. AMC may acquire servicing rights for investment in the
future, subject to meeting the investment criteria of AMC.
BUSINESS STRATEGY
The investment focus of the Company in Portfolio Operations will be
complemented by the asset generating, operating, management and servicing
capabilities of AMC. AMC is expected to provide the Company with the flexibility
and infrastructure to create a mortgage investment vehicle that delivers
attractive, risk adjusted total returns to investors. Substantially all of the
initial investments of the Company will be Agency Certificates which will allow
the Company to deploy capital quickly, with expected returns on equity
consistent with its principal objectives. Upon completion of the Offering, the
Company intends to immediately begin acquiring Mortgage Loans through the Loan
Trading Operations and Loan Origination Operations of AMC.
3
<PAGE>
AMC is expected to identify or directly acquire or originate Mortgage Loans
for purchase by the Company. AMC's Loan Trading and Loan Origination
capabilities complement the investment objectives of the Portfolio Operations by
allowing the Company to diversify its Mortgage Loan investments and acquisition
channels. The Company can also benefit from acquiring portions of pools of
Mortgage Loans it might not otherwise be able to acquire on an attractive, risk
adjusted basis due to AMC's ability to acquire entire pools of Mortgage Loans
and then subsequently resell the portions that do not meet the Company's
investment objectives. In addition, the Company may acquire Non-Conforming
Mortgage Loans originated by AMC at prices which are generally favorable to the
pricing levels for Non-Conforming Mortgage Loans acquired in the secondary
market.
The Company will provide credit support and, through the Portfolio
Operations, an investment capability which is expected to support and enhance
the operations and profitability of the Loan Trading Operations of AMC by
allowing it to acquire larger and more diverse Seasoned Mortgage Loan
portfolios. Management also anticipates that the Company's credit support and
investment capabilities will strengthen the Loan Origination Operations and
improve profitability by allowing AMC to increase its production and diversify
the types of Mortgage Loans it offers through its mortgage broker and retail
networks.
The Loan Servicing Operations allow AMC the flexibility to originate and
purchase a diverse mix of Mortgage Loans and then to effectively service the
Mortgage Loans for the Portfolio Operations.
The primary components of the Company's business objectives and strategy are
summarized as follows:
- Create a high-growth mortgage investment vehicle that delivers attractive,
risk adjusted total returns to investors.
- Structure a tax-advantaged mortgage investment operation by using a REIT
structure.
- Capitalize upon the capabilities of an experienced management team and
maintain a focus on selected assets types and the financing and hedging
strategies with which management has substantial expertise.
- Increase returns on equity through an appropriate use of leverage for each
asset group, while employing hedging strategies designed to manage the
associated interest rate risk.
- Utilize AMC's Mortgage Banking and Loan Trading Operations as a source of
assets for the Company.
- Employ increased capital to expand AMC's Mortgage Banking and Loan Trading
Operations to generate dividend income to the Company from AMC's net
income.
- Diversify the Company's asset base and asset acquisition sources.
MANAGEMENT
The Company's senior management team includes five members and is headed by
James E. Day and Patrick A. Walden, each of whom serves as Managing Director and
Co-Chairman of the Board of Trustees of the Company. Although none of its
members has experience operating a REIT, the Company's senior management team
has extensive experience in acquiring and managing a broad range of Mortgage
Assets for investment and trading, managing credit risk and utilizing hedging
techniques to manage interest rate risk in a variety of interest rate
environments. The members of the Company's senior management team have served in
various executive management positions in the mortgage banking and banking
industries and have between 13 and 29 years of experience.
4
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SUMMARY RISK FACTORS
An investment in Common Shares involves various risks, and prospective
investors should carefully consider the matters discussed under "Risk Factors"
prior to an investment in the Company. Such risks include, among others:
- The Company intends to invest substantially all of the net proceeds of the
Offering in Mortgage Assets and increase the size of its portfolio by
employing a leveraging strategy of borrowing against its Mortgage Assets
to finance the acquisition of additional Mortgage Assets. The Company will
be unable to achieve its investment objectives if it cannot establish and
maintain adequate sources of credit and liquidity and such a failure could
result in lower yields, or net losses, for the Company.
- The Company's operations will be substantially affected by prevailing
market interest rates and borrowing costs, which are determined in large
part by market conditions and governmental policies beyond the control of
the Company. The Company will experience negative cash flow and incur
losses if net borrowing costs exceed the income on Mortgage Assets.
- The Company's and AMC's business strategy will require each of them to
manage substantial growth. Failure to manage such growth could have a
material adverse effect on the Company.
- The Company will be dependent on certain key personnel for investment
management and operating experience, none of whom have previous experience
managing a REIT. The loss of any key person could have a material adverse
effect on the Company's business, financial condition and results of
operations.
- The Company is a newly organized entity with no history of operations.
There can be no assurance that management's past experience will be
appropriate to the operations of the Company.
- No specific Mortgage Assets have been identified for acquisition for the
Company's investment portfolio. There can be no assurance that the Company
will successfully obtain appropriate Mortgage Assets, the failure of which
may have a material adverse effect on the Company.
- The Company's net income will depend on the Company's ability to acquire
Mortgage Assets at favorable spreads to net borrowing costs. The Company
will be dependent on AMC, which in turn is largely dependent on third
party mortgage originators and suppliers, to provide Mortgage Loans
suitable for investment by the Company. Increased competition for the
acquisition of eligible Mortgage Assets or a diminution in the available
supply could result in higher prices and thus lower yields on such
Mortgage Assets which could further narrow or eliminate the yield spread
over net borrowing costs.
- If the Company fails to qualify as a REIT it would be treated as a regular
corporation and would be subject to federal and state income tax which
would result in a substantial reduction of income available for dividend
payments to shareholders.
- The Company must at all times conduct its business and maintain
substantially all its investments in qualifying interests in real estate
in order to maintain its exempt status under the Investment Company Act of
1940, as amended (the "Investment Company Act"). Failure to remain exempt
would severely limit the Company's ability to use leverage and conduct its
business as described herein.
- The initial public offering price is higher than the net tangible book
value per Common Share in this Offering. Investors purchasing Common
Shares in this Offering will be subject to immediate dilution of $3.97 per
share in net tangible book value. See "Dilution."
- The Company's Declaration of Trust prohibits any person from owning,
directly or indirectly, more than 9.8% of the Company's outstanding Common
Shares, which could make it more difficult to effect a change in control
of the Company even when it is in the best interests of the Company's
shareholders.
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<PAGE>
FORMATION TRANSACTIONS
Upon consummation of the Offering, AEGIS Investment Trust, the sole general
partner of the Operating Partnership, will contribute the net proceeds of the
Offering to the Operating Partnership. In addition, the current owners of AMC
(including Mr. Walden, currently a 25% owner of AMC) will contribute 98.5% of
the common stock of AMC to the Operating Partnership in exchange for 596,592
Units (based on the Offering Price) having a value of $11,335,250 and cash in
the amount of $2,356,250 (the "Contribution Transaction"). Mr. Walden will
receive 171,921 Units having a value of $3,266,500. The remaining 424,671 Units,
having a value of $8,068,750, and cash in the amount of $2,356,250 will be
issued to the other two owners of AMC who are not, and will not be, affiliated
with the Company. AMC will be capitalized (the "Recapitalization") pursuant to
which the Operating Partnership will exchange its shares of AMC voting common
stock for shares of AMC non-voting common stock. This will be followed by a
stock purchase by Mr. Day whereby AMC will issue voting common stock
representing slightly less than 50% of such class and approximately 1.5% of the
value of its total outstanding stock to Mr. Day in exchange for a note in the
initial aggregate principal amount of $208,500 bearing interest at an annual
rate of 6.25% and requiring equal quarterly payments over five years. After the
Recapitalization and the AMC stock purchase by Mr. Day, all of AMC's voting
common stock, representing a 3% economic interest, will be held by Messrs. Day
and Walden, and all of AMC's non-voting stock, representing a 97% economic
interest, will be held by the Operating Partnership. The Company will have no
voting control over AMC.
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[CHART]
- ------------------------------
(1) After completion of the Contribution Transaction and the Offering, AEGIS
Investment Trust will own a 90.12% interest in, and will be the sole general
partner of, the Operating Partnership. Messrs. Day and Walden will continue
to own 245,000 and 255,000 Units, respectively, for which they paid nominal
consideration.
(2) The existing owners of AMC (including Mr. Walden) will contribute 98.5% of
the common stock of AMC to the Operating Partnership in exchange for 596,592
Units (based on the Offering Price) having a value of $11,335,250 and cash
in the amount of $2,356,250. Of the 596,592 Units issued in connection with
the Contribution Transaction to the existing owners of AMC, 424,671 Units,
representing a 3.82% interest in the Operating Partnership, will be issued
to two existing owners of AMC who are not, and will not be, affiliated with
the Company. The remaining 171,921 Units will be issued to Mr. Walden.
(3) After the Recapitalization and the AMC stock purchase by Mr. Day, 100% of
AMC's non-voting common stock, representing a 97% economic interest therein,
will be held by the Operating Partnership and 100% of AMC's voting common
stock, representing a 3% economic interest therein, will be held by Messrs.
Day and Walden.
7
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THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Shares Offered by the Company....................... 10,000,000 Shares
Common Shares to be Outstanding after the Offering(1)...... 11,096,592 Shares
Use of Proceeds............................................ To provide funding for the Company's Portfolio
Operations, to acquire a portion of the shares of AMC
(from persons other than Messrs. Day and Walden) and
for general corporate purposes.
New York Stock Exchange Symbol............................. "EJS"
</TABLE>
- ------------------------
(1) Includes 1,096,592 Units which are redeemable for shares of the Company on a
one-for-one basis. Does not include 975,000 shares reserved for issuance
pursuant to the Company's 1997 Share Incentive Plan (the "1997 Plan") or
25,000 shares reserved for issuance under the Trustees' Plan. Options to
acquire 685,000 shares were granted pursuant to the 1997 Plan to the
executive officers, and employees of the Company prior to this Offering at a
per share exercise price equal to the Offering Price. Options to acquire
15,000 shares will be granted pursuant to the Trustees' Share Incentive Plan
(the "Trustees' Plan") to Independent Trustees of the Company at the
effective date of this Offering at a per share exercise price equal to the
Offering Price. See "Capitalization," "Management--1997 Share Incentive
Plan" and "Description of Shares of Beneficial Interest."
TAX STATUS OF THE COMPANY
The Company intends to qualify and will elect to be taxed as a REIT under
Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the
"Code"), commencing with its taxable year ending December 31, 1997. As a REIT,
the Company generally will not be subject to federal income tax on the net
income it distributes currently to its shareholders. To maintain REIT status,
the Company must meet a number of organizational and operational requirements,
including a requirement that it currently distribute at least 95% of its taxable
income (determined without regard to the dividends paid deduction and excluding
net capital gains) to its shareholders. If the Company fails to qualify as a
REIT in any taxable year, it will be subject to federal income tax at regular
corporate rates. See "Federal Income Tax Considerations" and "Risk Factors--Tax
Risks--Failure to Qualify as a REIT May Cause Company to be Taxed as a
Corporation." Even if the Company qualifies for taxation as a REIT, the Company
may be subject to certain federal, state and local taxes on its income. In
addition, AMC is subject to federal and state income tax at regular corporate
rates on its net income.
LACK OF VOTING CONTROL OF AMC
The Company will hold all of AMC's non-voting common stock, representing a
97% economic interest therein. Messrs. Day and Walden will hold all of AMC's
voting common stock, representing a 3% economic interest therein. The Company
expects to utilize AMC's Loan Trading, Loan Origination and Loan Servicing
Operations to help facilitate its investment objectives. Without voting control
of AMC, there is no assurance that AMC will provide, indefinitely, these
services to the Company. Messrs. Day and Walden act as directors of both the
Company and AMC. Because Messrs. Day and Walden own economic interests in both
the Company and AMC, however, they have an interest in increasing the value of
the Company's shares and thus are expected to operate AMC in a manner consistent
with the Company's operating strategies.
8
<PAGE>
BENEFITS TO INSIDERS
In connection with the formation of the Company, Mr. Walden will receive
Units as founder's equity and as compensation in exchange for his shares in AMC,
representing the right to acquire 255,000 and 171,921 shares in the Company
having a value, at the Offering Price, of $4,845,000 and $3,266,500,
respectively. Mr. Day also will retain 245,000 Units in founder's equity
representing a right to acquire 245,000 shares in the Company having a value, at
the Offering price, of $4,655,000. See "Operating Partnership
Agreement--Redemption Rights" herein.
DISTRIBUTION POLICY
The Company is required to distribute 95% or more of its annual taxable
income (which does not necessarily equal net income as calculated in accordance
with GAAP, but instead equals taxable income under the Code, as adjusted in
certain respects) to its shareholders each year so as to comply with the REIT
provisions of the Code. The Company intends to declare and pay regular quarterly
distributions. The Company intends to declare and pay its initial distribution
for the partial quarterly period beginning on the closing of this Offering. The
distribution policy is subject to revision at the discretion of the Board of
Trustees. All distributions in excess of those required for the Company to
maintain REIT status will be made by the Company at the discretion of the Board
of Trustees and will depend on the taxable earnings of the Company, the
financial condition of the Company and such other factors as the Board of
Trustees deems relevant. See "Federal Income Tax Considerations."
9
<PAGE>
RISK FACTORS
Before investing in the Common Shares offered hereby, prospective investors
should give special consideration to the information set forth below, in
addition to the information set forth elsewhere in this Prospectus. The
following risk factors are interrelated and, consequently, investors should
treat such risk factors as a whole.
This Prospectus contains forward-looking statements that inherently involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth in the following risk factors and
elsewhere in this Prospectus.
SUBSTANTIAL LEVERAGE AND POTENTIAL NET INTEREST AND OPERATING LOSSES IN
CONNECTION WITH BORROWINGS
GENERAL
The Company currently has no debt; however, after the closing of the
Offering, it intends to employ its financing strategy to increase the size of
its Mortgage Asset investment portfolio by borrowing a substantial portion
(which may vary depending upon the mix of the Mortgage Assets in the Company's
portfolio) of the market value of its Mortgage Assets. The Company expects
generally to maintain a ratio of its total book capital base (book value of
capital accounts, retained earnings and subordinated debt deemed by management
to qualify as capital for this purpose, taking into account valuation
adjustments) to book value of total assets of between 10% and 20%, although the
percentage may vary from time to time depending upon market conditions and other
factors deemed relevant by management and as approved by the Board of Trustees.
However, the Company is not limited under its Bylaws in respect of the amount of
its borrowings, whether secured or unsecured, and the aggregate percentage of
total equity capital could at times be lower than 10%. If the returns on the
Mortgage Assets purchased with borrowed funds fail to cover the cost of the
borrowings, the Company will experience net interest losses and may experience
net losses. In addition, through increases in collateralization requirements,
decreases in the market value of the Company's Mortgage Assets, increases in
interest rate volatility, availability of financing in the market, circumstances
then applicable in the lending market and other factors, the Company may not be
able to achieve the degree of leverage necessary to optimize the returns on its
portfolio, which may adversely affect the Company's operating results.
FAILURE TO REFINANCE OUTSTANDING BORROWINGS ON FAVORABLE TERMS MAY ADVERSELY
AFFECT RESULTS
The ability of the Company to achieve its investment objectives depends on
its ability to borrow money in sufficient amounts on favorable terms and to
replace on a continuing basis its maturing short-term borrowings. In the event
the Company is not able to renew or replace maturing borrowings in sufficient
amounts, the Company could be required to sell Mortgage Assets under adverse
market conditions and could incur losses as a result. In addition, in such
event, the Company may be required to terminate hedge positions, which could
result in further costs to the Company. An event or development such as a sharp
rise in interest rates or increasing market concern about the value or liquidity
of a type or types of Mortgage Loans or Agency Certificates in which the
Company's portfolio is concentrated likely would reduce the market value of the
Mortgage Assets, which may cause lenders to require additional collateral. At
the same time, the market value of the assets in which the Company's liquidity
capital is invested may have decreased. A number of such factors in combination
may cause difficulties for the Company, including a possible liquidation of a
major portion of the Company's Mortgage Assets at disadvantageous prices with
consequent losses, which could have a material adverse effect on the Company and
its solvency.
A majority of the Company's borrowings are, and are expected to continue to
be, collateralized borrowings, primarily in the form of reverse repurchase
agreements and, to a lesser extent, dollar reverse repurchase agreements, the
availability of which is based on the market value of the Mortgage Assets
10
<PAGE>
pledged to secure the specific borrowings, availability of such financing in the
market, circumstances then applicable in the lending market and other factors.
In a reverse repurchase agreement, the Company sells a security in its porfolio
to a securities dealer or other party, generally at a discount from market
value, and simultaneously commits itself to repurchase the identical security on
a specified date in the future (usually, 30 days later) at that same price plus
interest on that amount. A reverse repurchase agreement generally is
characterized for federal income tax purposes as a loan secured by a pledge of
the security, rather than as a sale of the security. In a dollar reverse
repurchase agreement, the Company sells a security that it currently owns to a
third party and simultaneously enters into a forward contract to purchase a
"substantially similar" (but not identical) security for future delivery (e.g.,
in 30 days). A dollar reverse repurchase agreement generally is characterized
for federal income tax purposes as a sale of a security. Additional borrowings
may be obtained through loan agreements, lines of credit, and other credit
facilities with institutional lenders or the issuance of debt securities. The
cost of borrowings under reverse repurchase and dollar reverse repurchase
agreements generally corresponds to LIBOR plus or minus a margin, although most
of such agreements do 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 vary
depending upon 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. If the actual cash flow characteristics are other than
as expected, the Company may experience reduced net interest income or a net
loss may occur.
ADVERSE IMPACT OF DECLINE IN MARKET VALUE OF MORTGAGE ASSETS; MARGIN CALLS
Certain of the Company's Mortgage Assets may be 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 Assets to re-establish the ratio of the amount of
the borrowing to the value of the collateral). Fixed-rate Mortgage Assets of the
type expected to be acquired by the Company, may be more susceptible to margin
calls as increases in interest rates tend to more negatively affect the market
value of fixed-rate Mortgage Assets than Mortgage Assets bearing an adjustable
rate. This remains true despite effective hedging against such fluctuations as
the hedging instruments normally will not be part of the collateral securing the
collateralized borrowings. The Company could be required to sell Mortgage Assets
under adverse market conditions in order to maintain liquidity. Such sales may
be effected by management when deemed necessary by it 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 Assets, the Company would experience losses. A
default by the Company under its collateralized borrowings also could 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
amounts borrowed. Additionally, in the event of a bankruptcy of the Company,
certain reverse repurchase and dollar reverse 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 had entered into a reverse repurchase or dollar
reverse 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 bankruptcy 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
reverse repurchase and dollar reverse 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. To the extent the Company is compelled to liquidate Mortgage
Assets
11
<PAGE>
to repay borrowings, the Company may be unable to comply with one or more of the
income and asset tests for REIT status under the Code.
Certain of the Company's investments, in particular, its investments in
Seasoned Mortgage Loans and Owner-Financed Mortgage Loans may lack a regular
trading market and be illiquid. In addition, during turbulent market conditions,
the liquidity of all of the Company's Mortgage Assets may be adversely impacted.
There is no limit to the percentage of the Company's investments that may be
invested in illiquid Mortgage Loans. In the event the Company requires
additional cash as a result of a margin call pursuant to its financing
agreements or otherwise, the Company may be required to liquidate Mortgage Loans
on unfavorable terms. The Company's inability to liquidate Mortgage Loans could
render it insolvent.
INABILITY TO ESTABLISH CREDIT LINES AND HEDGING AGREEMENTS MAY REDUCE YIELD
TO INVESTORS
In order to achieve its investment plan and implement its hedging program,
the Company must be able to establish and maintain business relationships with
approved counterparties which will include primary and secondary securities
dealers and commercial banks. Since the Company will effectively be in a
start-up status, there can be no assurance that such firms will enter into
transactions with the Company in the size or form contemplated by the Company.
This could cause growth in the Company's Mortgage Assets to occur over a longer
period of time than forecasted, which could result in a lower yield to the
shareholders.
FAILURE TO HEDGE AGAINST INTEREST RATE CHANGES EFFECTIVELY MAY ADVERSELY AFFECT
RESULTS OF OPERATIONS
The Company's operating strategy subjects it to interest rate risks as
described under "--Interest Rate Fluctuations May Cause Decrease in Net Interest
Income" below. The Company has established an asset/ liability management
program intended to protect against interest rate changes and prepayments. See
"Business--Portfolio Operations--Financing Strategies." Nevertheless, 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, 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.
The Company intends to purchase from time to time interest rate caps,
interest rate swaps and similar financial instruments in which a counterparty
contractually agrees to assume some of the risk of rising interest rates to
attempt to mitigate certain of the risks of increases in the cost of its
variable rate liabilities. In this way, the Company intends generally to hedge
as much of the interest rate risk as management determines is in the best
interests of the shareholders of the Company given the cost of such hedging
transactions and the need to maintain the Company's status as a REIT.
COUNTERPARTY DEFAULTS MAY ADVERSELY IMPACT HEDGING EFFECTIVENESS
In the event that the Company purchases interest rate caps or enters into
other interest rate agreements 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.
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<PAGE>
INTEREST RATE FLUCTUATIONS MAY CAUSE DECREASE IN NET INTEREST INCOME
The Company expects that a substantial portion of its Mortgage Assets will
bear fixed interest or pass-through rates, and substantially all of the
Company's borrowings will bear interest at short-term rates and will have
maturities of less than one year. Consequently, changes in short-term interest
rates may significantly influence the Company's net interest income. Rising
short-term rates will increase the costs of borrowings by the Company which will
be utilized to fund the Mortgage Assets and the Company's net interest income
may be reduced or a net loss may result. No assurance can be given as to the
amount or timing of changes in interest rates or their effect on the Company's
Mortgage Assets or net interest income.
CHANGES IN ANTICIPATED PREPAYMENT RATES MAY ADVERSELY AFFECT NET INTEREST INCOME
Prepayment rates vary from time to time and may cause changes in the amount
of the Company's net interest income. Prepayments of Mortgage Loans and Mortgage
Assets usually can be expected to increase when mortgage interest rates fall
below the then-current interest rates on such Mortgage Loans and decrease when
mortgage interest rates exceed the then-current interest rate on the Mortgage
Loans, although such effects are not predictable. Prepayment experience also may
be affected by the geographic location of the property securing the mortgage
loans, the assumability of the mortgage loans, conditions in the housing and
financial markets and general economic conditions.
Changes in anticipated prepayment rates of Mortgage Assets could affect the
Company in several ways. Faster than anticipated prepayment of any Mortgage
Asset that had been purchased at a premium by the Company would generally result
in faster than anticipated write-off of any remaining capitalized premium amount
and consequent reduction of the Company's net interest income by such amount. In
addition, to the extent the prepayments increase at a time when interest rates
have decreased, the Company may not be able to reinvest such amounts in similar
yielding Mortgage Assets. Conversely, if the prepayment rates are slower than
anticipated in times of generally increasing interest rates, the average life of
such Mortgage Assets may be extended beyond periods for which the Company had
anticipated, resulting in difficulty in effectively hedging any interest in
short term borrowing rates relating to the Company's financings of such assets.
DEPENDENCE ON KEY PERSONNEL FOR SUCCESSFUL OPERATIONS
The success of the Company's operations depends, to a large extent, upon the
management, trading, hedging and risk analysis, lending and credit analysis and
business skills of the senior level management of the Company. If members of
senior management were for some reason unable to perform their duties or were,
for any reason, to leave the Company, there can be no assurance that the Company
would be able to find capable replacements. The Company has entered into
employment agreements with Messrs. Day and Walden which provide for initial
terms through November, 2001. The employment agreements contain compensation
arrangements including base salaries, incentive bonuses and severance
arrangements. Each employment agreement also provides that if the employee
terminates his employment without "good reason" prior to expiration of the term
of the agreement, certain incentive and severance benefits will be forfeited and
a restriction against competing with the Company will become effective. Although
the Company believes these forfeiture and non-compete provisions would generally
be enforceable, there can be no assurance that the employee will not elect to
terminate the agreement early despite these provisions and no longer remain in
the Company employ.
The Company is also dependent on other key personnel and on its ability to
continue to attract, retain and motivate qualified personnel. The loss of any
key person could have a material adverse effect on the Company's business,
financial condition and results of operations.
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NEWLY-ORGANIZED ENTITY WITH NO HISTORY OF OPERATIONS
The Company is a newly-organized entity with no history of operations.
Additionally, Management has no experience in managing a REIT. There can be no
assurance that the past experience of the Management will be appropriate to the
business of the Company. In particular, Management has no experience in
operating a public company such as the Company, or significant experience in the
origination of subprime mortgage loans.
Although the Company expects to invest a substantial majority of the net
proceeds of this Offering in Agency Certificates, the Company has not yet
purchased or entered into any commitments to purchase any Mortgage Assets nor
does the Company have any commitments from lenders or brokers sufficient to
obtain and hold the Mortgage Assets. In addition, a portion of the Company's
business strategy depends on AMC's ability to implement its growth strategy (see
"--Additional Risks Relating to AMC's Operations--INABILITY OF AMC TO IMPLEMENT
ITS GROWTH STRATEGY"). There can be no assurance that the Company will be able
to successfully obtain appropriate Mortgage Assets or otherwise operate its
business as described in this Prospectus.
COMPETITION MAY ADVERSELY IMPACT OPERATIONS
The Company's net income will depend, in large part, on the Company's
ability to acquire Mortgage Assets at favorable spreads over the Company's
borrowing costs. In acquiring Mortgage Assets, the Company will compete with
other REITs, investment banking firms, savings and loan associations, conduit
programs, banks, mortgage bankers, insurance companies, mutual funds, other
lenders, GNMA, FNMA, FHLMC and other entities purchasing Mortgage Assets, 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 Assets suitable for
purchase by the Company.
The availability for acquisition of Mortgage Loans meeting the Company's
criteria will be dependent upon, among other things, the size and level of
activity in the residential real estate lending market. This activity depends on
various factors including the level of interest rates, regional and national
economic conditions and inflation and deflation in residential property values
as well as the general regulatory, accounting and tax environment as it relates
to mortgage lending. Whether the Company can acquire the projected levels of
Seasoned Mortgage Loans and Owner-Financed Mortgage Loans is also dependent upon
its ability to identify such loans and loan packages available for sale, because
the market is fragmented. To the extent the Company is unable to obtain
sufficient Mortgage Loans meeting its criteria, the Company's business may be
adversely affected.
There can be no assurance that the Company will be able to acquire
sufficient Mortgage Assets from mortgage suppliers at sufficient spreads above
the Company's cost of funds. The Company also will 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 OPERATING RISKS
The results of the Company's operations will be affected by various factors,
many of which will be beyond the control of the Company. The results of the
Company's operations will depend on, among other things, the level of net
interest income generated by the Company's Mortgage Assets, the market value of
such Mortgage Assets and the supply of and demand for such Mortgage Assets. The
Company's net interest income will vary primarily as a result of changes in
short-term interest rates, borrowing costs and prepayment rates, the behavior of
which involve various risks and uncertainties as set forth below. Prepayment
rates, interest rates, borrowing costs and credit losses depend upon the nature
and terms of the Mortgage Assets, the geographic location of the properties
securing the Mortgage Loans included in or
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underlying the Mortgage Assets, 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. Because changes in interest rates may significantly affect the
Company's activities, the operating results of the Company will 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.
LOSSES ON MORTGAGE ASSETS
GENERAL
The Company intends to acquire Owner-Financed Mortgage Loans and Seasoned
Mortgage Loans, and to a lesser extent, Non-Conforming Mortgage Loans which may
include, among other types, mortgage loans to subprime borrowers, loans in
excess of $207,000 and loans with limited documentation which do not comply with
requirements for inclusion in credit support programs sponsored by GNMA, FHLMC
or FNMA. Some of these may be insured or guaranteed by VA, FHA, or some other
third party while others will not have any insurance, guarantee or credit
enhancement. During the time it holds Mortgage Loans for which third party
insurance is not obtained, the Company will be subject to risks of borrower
defaults and bankruptcies and special hazard losses not covered by standard
hazard insurance. In the event of default on any Mortgage Loan held by the
Company, it would bear the risk of loss of principal to the extent of any
deficiency between the value of the related mortgage property and the amount
owing on the Mortgage Loan. A defaulted Mortgage Loan may no longer be eligible
as collateral for borrowings and may have to be financed by the Company out of
other funds until it is liquidated. In addition, the Company will be dependent
upon AMC and other third parties to service its Mortgage Loans. To the extent
that such servicer or servicers improperly administer their servicing duties,
the Company may experience delays in collections or foreclosures, which may
adversely affect the operations of the Company.
AGENCY CERTIFICATES
The Company intends to purchase Mortgage Assets issued by GNMA, FNMA or
FHLMC. Each of these entities provides guarantees against risk of loss for
securities issued by it. In the case of GNMA, the timely payment of principal
and interest on its certificates is guaranteed by the full faith and credit of
the United States government. FNMA guarantees the scheduled payments of interest
and principal and the full principal amount of any mortgage loan foreclosed or
liquidated. FHLMC guarantees the timely payment of interest and ultimate
collection of principal on its obligations. For FNMA and FHLMC, payment of
principal and interest on its certificates are guaranteed only by the respective
entity and not by the full faith and credit of the United States government.
MORTGAGE LOANS
The Mortgage Loans targeted for acquisition by the Company may have greater
risk of default than Conforming Mortgage Loans. For example, Owner-Financed
Mortgage Loans are originated by the seller in connection with the sale of real
estate and the Company would not typically obtain borrower applications,
complete appraisals of the underlying property or verify income or employment
and may not perform other investigations into the credit quality of the
borrower. Additionally, Seasoned Mortgage Loans and Owner-Financed Mortgage
Loans generally will not contain the documentation which would be typical for a
mortgage loan originated in accordance with FNMA, FHLMC or GNMA guidelines.
Moreover, in the event that such Mortgage Loan files contain any borrower
information or appraisals on the underlying properties, such information may be
outdated. In connection with proposed acquisitions, it is unlikely that the
Company will obtain additional or updated credit information concerning the
borrowers and current appraisals may be limited to drive-by appraisals in which
the appraiser does not have access to the interior of the property. Similarly,
the underwriting standards with respect to Non-Conforming
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Mortgage Loans are, under certain circumstances, less stringent than the
standards required for Conforming Mortgage Loans. For example, Non-Conforming
Mortgage Loans may allow for a greater loan amount, have higher loan-to-value
ratios, require less documentation, have more lenient credit standards, include
properties other than owner-occupied, or allow for borrowers with bankruptcies
or limited credit histories. To the extent there are any losses on such Mortgage
Loans, the net interest income would be reduced.
LIMITATION ON ABILITY TO ENFORCE MORTGAGE LOANS
The enforcement of Mortgage Loans, whether secured by mortgages, deeds of
trust or land sale contracts, is generally subject to equitable principles under
foreclosure or other proceedings. These equitable principles are generally
designed to relieve the obligor from the legal effect of his or her default
under loan documents or land sale contracts. In other situations, statutes limit
the right of a mortgagee to obtain a deficiency judgment against the mortgagor
following foreclosure or sale under a deed of trust. The application of such
principles or statutes with respect to any Mortgage Loan may result in a loss to
the Company or a delay in the receipt of funds to which it is otherwise
entitled.
TAX RISKS
FAILURE TO QUALIFY AS A REIT MAY CAUSE COMPANY TO BE TAXED AS A REGULAR
CORPORATION
The Company intends to operate so as to qualify as a REIT for federal income
tax purposes. Although the Company has not requested, and does not expect to
request, a ruling from the U.S. Internal Revenue Service (the "Service") that it
qualifies as a REIT, it has received an opinion of Hunton & Williams that, based
on certain assumptions and representations, it so qualifies. Such opinion has
been filed as an exhibit to this Prospectus. Investors should be aware, however,
that opinions of counsel are not binding on the Service or any court. The REIT
qualification opinion only represents the view of counsel to the Company based
on counsel's review and analysis of existing law, which includes no controlling
precedent with respect to REITs that are organized and operated in the same
manner as the Company will be organized and operated. Furthermore, both the
validity of the opinion and the qualification of the Company as a REIT will
depend on the Company's continuing ability to meet various requirements
concerning, among other things, the ownership of its outstanding shares, the
nature of its assets, the sources of its income, and the amount of its
distributions to its shareholders. See "Federal Income Tax
Considerations--Taxation of the Company."
If the Company were to fail to qualify as a REIT for any taxable year, the
Company would not be allowed a deduction for distributions to its shareholders
in computing its taxable income and would be subject to federal income tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Unless entitled to relief under certain Code
provisions, the Company also would be disqualified from treatment as a REIT for
the four taxable years following the year during which qualification was lost.
As a result, funds available to make required payments on indebtedness and cash
available for distribution would be reduced for each of the years involved.
Although the Company intends to operate in a manner designed to qualify as a
REIT, it is possible that future economic, market, legal, tax or other
considerations may cause the Board of Trustees, with the consent of shareholders
holding at least two-thirds of all the outstanding Common Shares, to revoke the
REIT election. See "Federal Income Tax Considerations."
REIT MINIMUM DISTRIBUTION REQUIREMENTS MAY REQUIRE INCURRENCE OF ADDITIONAL
DEBT
In order to qualify as a REIT, the Company generally will be required each
year to distribute to its shareholders at least 95% of its REIT taxable income
(excluding any net capital gain). In addition, the Company will be subject to a
4% nondeductible excise tax on the amount, if any, by which certain
distributions paid by it with respect to any calendar year are less than the sum
of (i) 85% of its ordinary
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income for that year, (ii) 95% of its capital gain net income for that year, and
(iii) 100% of its undistributed taxable income from prior years.
The Company intends to make distributions to its shareholders to comply with
the 95% distribution requirement and to avoid the nondeductible excise tax. The
Company's income will consist primarily of its share of the income of the
Operating Partnership, and the cash available for distribution by the Company to
its shareholders will consist primarily of its share of cash distributions from
the Operating Partnership. The Company may invest in residual interests in real
estate mortgage investment conduits ("REMICs"), which may generate taxable
income in excess of cash flow or economic income. Certain taxable income
produced by a REMIC residual interest (i.e., excess inclusion income) also may
cause the Company's shareholders to suffer certain adverse tax consequences. See
"Federal Income Tax Considerations." Differences in timing between the
recognition of taxable income and the actual receipt of cash could require the
Company, through the Operating Partnership, to borrow funds on a short-term
basis or sell assets to meet the 95% distribution requirement and to avoid the
nondeductible excise tax. The requirement to distribute a substantial portion of
the Company's net taxable income could cause the Company to distribute amounts
that otherwise would be spent on additional Mortgage Assets.
POTENTIAL CHARACTERIZATION OF DISTRIBUTIONS AS UBTI MAY BE ADVERSE TO
TAX-EXEMPT INVESTORS
In the event that (i) the Company is subject to the rules relating to
taxable mortgage pools (discussed below), (ii) the Company is a "pension-held
REIT," (iii) a tax-exempt shareholder has incurred indebtedness to purchase or
hold Common Shares or is exempt from federal income taxation under paragraph
(7), (9), (17) or (20) of Code section 501(c), or (iv) the Company owns REMIC
residual interests, distributions to and, in the case of a shareholder described
in clause (iii), gains realized on the sale of Common Shares by, a tax-exempt
shareholder may be subject to federal income tax as unrelated business taxable
income ("UBTI"), as defined in section 512 of the Code. See "Federal Income Tax
Considerations--Taxation of Tax-Exempt Shareholders."
TAXABLE MORTGAGE POOL CHARACTERIZATION MAY HAVE ADVERSE CONSEQUENCES FOR
SHAREHOLDERS
If a REIT issues debt obligations with two or more maturities collateralized
by assets such as the Mortgage Assets and does not make a REMIC election with
respect to the assets securing the debt obligations ("Non-REMIC Transactions"),
such assets may be treated 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 with respect to a pool of its Mortgage Assets, the
Company's status as a REIT would not be impaired but a portion or all of the
taxable income generated by such Mortgage Assets (after deducting interest and
other expenses associated with financing the Mortgage Assets) may, under
regulations to be issued by the Treasury Department, be characterized as "excess
inclusion" income and be allocated pro rata to the Company's shareholders. Any
such excess inclusion income (i) would not be allowed to be offset by the net
operating losses of a shareholder, (ii) would be subject to tax as UBTI in the
hands of a tax-exempt shareholder and (iii) would not be eligible for exemption
from the 30% withholding tax on dividends paid to non-US shareholders or for any
reduced treaty rate. See "Federal Income Tax Considerations."
If the Company issues debt obligations in Non-REMIC Transactions, it will do
so either directly or through a wholly-owned subsidiary, instead of through the
Operating Partnership in order to avoid certain adverse tax consequences under
the taxable mortgage pool rules. The Company also intends to enter into master
reverse repurchase agreements pursuant to which the Company may borrow funds
with differing maturity dates which are cross-collateralized by specific
Mortgage Assets. Although the Treasury Department has recently issued
regulations that adopt a broad view of what may constitute a taxable mortgage
pool, the Company does not believe that the use of master reverse repurchase
agreements, dollar reverse repurchase agreements or bank warehouse financing
arrangements should cause the related Mortgage Assets to be treated as a taxable
mortgage pool. No assurances can be given, however, that the Service
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might not successfully maintain that the Mortgage Assets collateralizing such
master reverse repurchase agreements or other financing arrangements constitute
a taxable mortgage pool.
IMPACT OF INVESTMENT COMPANY ACT
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 securities represent all the certificates issued with
respect to an underlying pool of mortgages, such mortgage 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. The
Company's ownership of certain Mortgage Assets therefore 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 may consider privately
issued certificates issued with respect to an underlying pool of Mortgage Assets
as to which the Company holds all issued certificates as Qualifying Interests.
If the 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 privately issued certificates did not comply
with the interpretation. Such a restructuring could require the sale of a
substantial amount of privately issued certificates held by the Company at a
time it would not otherwise do so. Further, in order to ensure 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 Loans and investments in mortgage-
backed securities than would otherwise be the case and may be precluded from
acquiring certain types of such Mortgage Assets whose yields are somewhat higher
than the yield on assets that could be purchased in a manner consistent with the
exemption. The net effect of these factors will be to lower at times the
Company's net interest income, although the Company does not expect the effect
to be material. 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 would have a material adverse effect
on the Company.
FUTURE REVISIONS IN POLICIES AND STRATEGIES AT THE DISCRETION OF THE BOARD OF
TRUSTEES
The Board of Trustees 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. With respect to other
matters, the Company may, in the future, but currently has no present plans to,
invest in the securities of other REITs for the purpose of exercising control,
offer securities in exchange for property or offer to repurchase or otherwise
reacquire its shares or other securities. However, any of the policies,
strategies and activities referenced above or described in this Prospectus may
be modified or waived by the Board of Trustees without shareholder consent.
ADVERSE CONSEQUENCES OF LACK OF CONTROL OVER THE BUSINESS OF AMC
The capital stock of AMC will be divided into two classes: voting common
stock, all of which will be owned by Messrs. Day and Walden, and nonvoting
common stock, all of which will be held by the Company, through the Operating
Partnership. The voting common stock and the nonvoting common stock represent 3%
and 97%, respectively, of the ownership interests in AMC. Messrs. Day and
Walden, as the holders of all of AMC's voting common stock, will have the
ability to elect the directors of AMC. The
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Company will not be able to elect directors and, therefore, will not be able to
influence the day-to-day management decisions of such entity. As a result, the
board of directors and management of AMC may implement business policies or
decisions that would not have been implemented by persons controlled by the
Company, that may be inconsistent with the Company's operating policies and
strategies and that are adverse to the interests of the Company or that lead to
adverse financial results, which could adversely impact the Company's net
operating income and cash flow.
IMPACT OF ERISA PROVISIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and section 4975 of the Code prohibit certain transactions that involve (i)
certain pension, profit-sharing, employee benefit, or retirement plans or
individual retirement accounts (each, a "Plan") and (ii) the assets of a Plan. A
"party in interest" or "disqualified person" with respect to a Plan will be
subject to (x) an initial 5% excise tax on the amount involved in any prohibited
transaction involving the assets of the Plan and (y) an excise tax equal to 100%
of the amount involved if any prohibited transaction is not corrected.
Consequently, the fiduciary of a Plan contemplating an investment in the Common
Shares should consider whether the Company, any other person associated with the
issuance of the Common Shares, or any affiliate of the foregoing is or might
become a "party in interest" or "disqualified person" with respect to the Plan.
In such a case, the acquisition or holding of Common Shares by or on behalf of
the Plan could be considered to give rise to a prohibited transaction under
ERISA and the Code. See "ERISA Considerations-- Employee Benefit Plans, Tax
Qualified Retirement Plans, and IRA."
Regulations of the Department of Labor that define "plan assets" (the "Plan
Asset Regulations") provide that in some situations, when a Plan acquires an
equity interest in an entity, the Plan's assets include both the equity interest
and an undivided interest in each of the underlying assets of the entity, unless
one or more exceptions specified in the Plan Asset Regulations are satisfied. In
such a case, 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. The assets of the Company should not be
deemed to be "plan assets" of any Plan that invests in the Common Shares. See
"ERISA Considerations-- Status of the Company and the Operating Partnership
under ERISA."
ADDITIONAL RISKS RELATING TO AMC'S OPERATIONS
COMPETITION
As an originator of Mortgage Loans, AMC faces intense competition, primarily
from mortgage banking companies, commercial banks, credit unions, thrift
institutions and finance companies. Many of these competitors are substantially
larger and have more capital and other resources than AMC and may have lower
costs of funds than AMC. In addition, increased competition may reduce AMC's
ability to charge its customary origination fees and interest rates. Mortgage
lending businesses may be operated through mortgage brokers and correspondents
requiring a substantially smaller commitment of capital and personnel resources
than a direct lending business. This relatively low barrier to entry permits new
competitors to enter this market quickly, particularly existing lenders that
directly lend to borrowers, as they can draw upon existing branch networks and
personnel in seeking to sell products through independent mortgage brokers. In
addition, greater investor acceptance of securities backed by non-conforming
loans comparable to AMC's Mortgage Loans and greater availability of information
regarding the prepayment and default experience of such loans creates greater
efficiencies in the market for such securities. Such efficiencies may create a
desire among investors for larger transactions giving companies with greater
volumes of originations or acquisitions than AMC a competitive advantage.
Increased competition could have the possible effects of lowering yields or
gains that may be realized on AMC's loan sales (and securitizations) and
reducing the volume of AMC's loan acquisitions, originations and subsequent loan
sales. There can be no assurance that AMC will be able to continue to compete
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successfully in the markets it serves or expand to other markets. Inability to
compete successfully would have a material adverse effect on AMC's results of
operations, which in turn may adversely affect the Company's Cash Available for
Distribution.
ECONOMIC SLOWDOWN AND DECLINE IN REAL ESTATE VALUES MAY ADVERSELY AFFECT
VOLUME OF LOANS
Periods of economic slowdown may reduce the demand for Mortgage Loans as
people elect not to purchase new homes due to economic uncertainty and also may
adversely affect the financial condition of potential borrowers so that they do
not meet AMC's underwriting criteria. In addition, economic slowdowns may cause
a decline in real estate values. Any material decline in real estate values
increases the loan-to-value ratios of Mortgage Loans held by AMC, thereby
weakening collateral coverage and increasing the possibility of a loss or
liquidation of a Mortgage Loan in the event of a borrower default. Further,
delinquencies, foreclosures and losses generally occur with greater frequency
during economic slowdowns or recessions. Any sustained period of such increased
delinquencies, foreclosures or losses could adversely affect AMC's results of
operations and negatively impact the financial condition of the Company.
LAWS AND REGULATIONS MAY ADVERSELY AFFECT LENDING OPERATIONS
AMC's Loan Origination Operations are subject to extensive regulation,
supervision and licensing by federal, state and local governmental authorities
and are subject to various laws and judicial and administrative decisions
imposing requirements and restrictions on a substantial portion of its
operations. For example, AMC's consumer lending activities are subject to the
Federal Truth-in-Lending Act and Regulation Z (including the Home Ownership and
Equity Protection Act of 1994), the Federal Equal Credit Opportunity Act and
Regulation B, as amended, the Fair Credit Reporting Act of 1970, as amended, the
Federal Real Estate Settlement Procedures Act of 1974, as amended ("RESPA"), and
the Department of Housing and Urban Development's Regulation X, the Fair Housing
Act, the Home Mortgage Disclosure Act and Regulation C and the Federal Fair Debt
Collection Practices Act. AMC is also subject to the rules and regulations of
and examinations by HUD and state regulatory authorities with respect to
originating, processing, underwriting, selling and servicing Mortgage Loans.
There can be no assurance that AMC will maintain compliance with these
requirements in the future without additional expense, or that additional or
more restrictive local, state or federal laws, rules and regulations will not be
adopted or that existing laws or regulations will not be interpreted in a more
restrictive manner, which would make compliance more difficult for AMC. Failure
to comply with these requirements can lead to loss of approved status,
termination or suspension or servicing contracts without compensation to the
servicer, demands for indemnifications or mortgage loan repurchases, certain
rights of rescission for mortgage loans, class action lawsuits and
administrative enforcement actions, any of which could cause a material adverse
effect on AMC's, and consequently the Company's, profitability and financial
condition.
These rules and regulations, among other things, impose licensing
obligations on AMC, prohibit discrimination, provide for inspections and
appraisals of properties, regulate assessment, collection, foreclosure and
claims handling, investment and interest payments on escrow balances and payment
features, mandate certain disclosures and notices to borrowers and, in some
cases, fix maximum interest rates, fees and mortgage loan amounts. Failure to
comply with any of the foregoing state or federal requirements can lead to loss
of approved status, termination or suspension of servicing contracts without
compensation to the servicer, demands for indemnifications or mortgage loan
repurchases, certain rights of rescission for borrowers, usury claims for
damages or other relief, class action lawsuits and administrative enforcement
actions.
Recent federal legislation, the Riegle Community Development and Regulatory
Improvement Act (the "Riegle Act"), has imposed additional regulation on
mortgage loans, like some of those to be made by AMC, bearing relatively higher
origination fees and interest rates than other mortgage loans (including
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conforming mortgage loans). AMC expects this aspect of its business to be the
focus of additional federal and state legislation, regulation and possible
enforcement in the future.
The laws and regulations described above are subject to legislative,
administrative and judicial interpretation, and certain of these laws and
regulations may be ambiguous with respect to permitted conduct. Any such
ambiguity may lead to regulatory investigations, enforcement actions or private
causes of action, such as class action lawsuits, calling into question AMC's
compliance with the applicable laws and regulations. As a mortgage lender, AMC
may be subject to regulatory enforcement actions and private causes of action
from time to time challenging its compliance with applicable laws and
regulations.
LAWSUIT AGAINST AMC RELATING TO PAYMENTS TO BROKERS
During September 1997, a lawsuit was filed in the United States District
Court for the District of Minnesota against AMC purportedly on behalf of a class
of borrowers alleging that AMC has made certain payments to independent mortgage
brokers in violation of state and federal laws, including RESPA. The suit
alleges violations of RESPA and various state laws arising out of AMC's payment
of part of the compensation of mortgage brokers at settlement of certain
mortgage loans. The named plaintiffs have requested that the case be treated as
a class action, but no court has ruled on that request. AMC intends to
vigorously defend this action and, in October 1997, filed its answer to the
complaint denying all allegations of illegal or improper activities.
AMC's broker compensation programs permit AMC to pay some or all of a
mortgage broker's compensation at a loan closing under certain circumstances,
and AMC believes that making these types of payments is consistent with
long-standing industry practice and regulatory interpretations. However, the
laws and regulations relating to mortgage broker compensation programs have not
been definitively interpreted in all relevant respects by the appropriate
authorities and, consequently, there can be no assurance that AMC will prevail.
In the event AMC is not successful in defending this, or similar litigation
which could be filed in the future, AMC's operations could be materially and
adversely affected which, in turn, could materially and adversely affect the
Company.
DEPENDENCE UPON BROKERS AND CORRESPONDENTS
AMC depends on independent mortgage brokers and correspondents for a
substantial majority of its originations and acquisitions of Mortgage Loans.
Substantially all of the mortgage brokers and correspondents with whom AMC does
business deal with multiple loan originators for each prospective borrower. Such
originators, including AMC, compete for business based upon pricing, service,
loan fees and costs and other factors. AMC's competitors also seek to establish
relationships with the same mortgage brokers and correspondents with whom AMC
deals, none of whom is obligated by contract or otherwise to continue to do
business with AMC. Accordingly, there can be no assurance that AMC will be
successful in maintaining its existing relationships or expanding its mortgage
broker and correspondent networks.
INABILITY OF AMC TO IMPLEMENT ITS GROWTH STRATEGY
AMC's growth strategy involves the increased acquisition of Seasoned and
Owner-Financed Mortgage Loans and origination of Non-Conforming Loans.
Implementation of this strategy will depend in large part on AMC's ability to
(i) expand its network of mortgage brokers and correspondents, (ii) establish
direct lending origination activities in markets with a sufficient concentration
of borrowers meeting AMC's underwriting criteria, (iii) hire, train and retain
skilled employees, (iv) continue to expand in the face of increasing competition
from other mortgage lenders and (v) identify and acquire portfolios of Mortgage
Loans.
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AMC's continued growth and expansion will place additional pressures on
AMC's personnel and systems. Any future growth may be limited by, among other
things, AMC's need for continued funding sources, access to capital markets,
ability to retain and attract qualified personnel, sensitivity to economic
slowdowns, fluctuations in interest rates and competition from other consumer
finance companies and from new market entrants. There can be no assurance that
AMC will successfully obtain or apply the human, operational and financial
resources needed to manage a developing and expanding business. Failure by AMC
to manage its growth effectively, or to sustain its historical levels of
performance in credit analysis and transaction structuring with respect to the
increased loan origination and purchase volume, could have a material adverse
effect on AMC's results of operations and the Company's Cash Available for
Distribution.
REPURCHASE OBLIGATIONS OF AMC
AMC currently sells all of its production of Conforming Mortgage Loans and a
portion of its production of Non-Conforming Mortgage Loans to various third
party investors that have purchased the underlying Mortgage Loans. In connection
with such sales, it is expected that AMC will provide the buyers with certain
representations and warranties, the breach of which may require AMC to
repurchase some or all of the sold Mortgage Loans. To the extent that AMC has no
effective recourse to any other party, AMC's results of operations may be
adversely effected.
EFFECT OF FUTURE OFFERINGS ON MARKET PRICE OF COMMON SHARES
The Company in the future may increase its capital resources by making
additional private or public offerings of its Common Shares, securities
convertible into its Common Shares, preferred shares or debt securities. The
actual or perceived effect of such offerings, the timing of which cannot be
predicted, may be the dilution of the book value or earnings per share of the
Common Shares outstanding, which may result in the reduction of the market price
of the Common Shares.
SHARES ELIGIBLE FOR FUTURE SALE
Sale of substantial amounts of the Company's Common Shares in the public
market or the prospect of such sales could materially and adversely affect the
market price of the Common Shares. In addition to the Common Shares issued in
this Offering by the Company, the Operating Partnership has issued 1,096,592
Units in connection with the formation of the Company and the Contribution
Transaction, which are redeemable for cash or, at the option of the Company,
Common Shares on a one-for-one basis. The Company has agreed that it will not,
without the prior written consent of Jefferies & Company, Inc., offer for sale,
contract to sell any Common Shares (other than shares issued pursuant to the
1997 Share Incentive Plan and certain other agreements) or any securities
convertible or exchangeable into Common Shares or sell or grant options, rights
or warrants with respect to any Common Shares, for a period of 180 days after
the consummation of the Offering. In addition, each of the executive officers
and Trustees of the Company who have acquired Units in connection with the
organization of the Company and the Contribution Transaction has entered into
agreements with the Underwriters providing that, subject to certain exceptions,
such holders of Units generally will not sell, transfer, hypothecate, redeem,
exchange or otherwise dispose of, directly or indirectly, any Units prior to the
second anniversary of the Closing Date, without the consent of Jefferies &
Company, Inc. Further, approximately 424,671 Units (based on the Offering Price)
issued in connection with the Contribution Transaction are subject to similar
restrictions for a period of one year from the Closing Date. See "Shares
Eligible for Future Sale" and "Underwriting." Additionally, there are
outstanding share options for 685,000 Common Shares, which have been granted
pursuant to the 1997 Plan at a per share exercise price equal to the Offering
Price to executive officers and employees of the Company, none of which, except
in the event of a change of control of the Company, are exercisable until
November 2000; share options for an additional 15,000 Common Shares have been
granted pursuant to the Trustees' Plan to Independent Trustees of the Company at
a per share exercise
22
<PAGE>
price equal to the Offering Price, none of which, except in the event of a
change of control of the Company, are exercisable until November 2001; and an
additional 290,000 Common Shares and 10,000 Common Shares are reserved for
future issuance pursuant to the 1997 Plan and the Trustees' Plan, respectively.
The Company intends to register under the Securities Act shares reserved for
issuance pursuant to the 1997 Plan. See "Management--1997 Share Incentive Plan."
IMMEDIATE DILUTION
The initial public offering price is higher than the net tangible book value
per Common Share in this Offering. Investors purchasing Common Shares in this
Offering will be subject to immediate dilution of $3.97 per share in net
tangible book value. See "Dilution."
LACK OF ESTABLISHED MARKET FOR COMMON SHARES
Prior to this Offering, there has not been a public market for the Common
Shares, and there can be no assurance that a regular trading market for the
Common Shares offered hereby will develop or, if developed, that any such market
will be sustained. In the absence of a public trading market, an investor may be
unable to liquidate his investment in the Company. The initial public offering
price will be determined by the Company and the representatives of the
Underwriters. There can be no assurance that the price at which the Common
Shares will sell in the public market after the Offering will not be lower than
the price at which they are sold by the Underwriters. While there can be no
assurance that a market for the Company's Common Shares will develop the Company
has applied to list the Common Shares on the New York Stock Exchange under the
symbol "EJS."
In the event that a public market for the Common Shares develops, it is
likely that the market price of the Common Shares will be influenced by any
variation between the net yield on the Company's investments in Mortgage Assets
and prevailing market interest rates. The Company's earnings will be derived
primarily from net interest income earned on its investment portfolio of
Mortgage Assets and gains recognized on the sale of Mortgage Assets. Such
earnings will not necessarily be greater or lesser in high interest rate
environments than in low interest rate environments. Moreover, in periods of
high interest rates, the net income of the Company, and therefore the dividend
yield on the Common Shares, may be less attractive compared with alternative
investments, which could negatively impact the price of the Common Shares. If
the anticipated or actual net yield on the Company's investments in Mortgage
Assets declines or if prevailing market interest rates rise, thereby decreasing
the positive spread between the net yield on such investments and the net cost
of the Company's borrowings, the market price of the Common Shares may be
adversely affected.
ANTI-TAKEOVER EFFECT OF OWNERSHIP LIMIT, STAGGERED BOARD AND POWER TO ISSUE
ADDITIONAL SHARES MAY ADVERSELY AFFECT VALUE OF COMMON SHARES
OWNERSHIP LIMITATION
For the Company to maintain its qualification as a REIT under the Code, not
more than 50% in value of the outstanding shares of beneficial interest of the
Company 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 Company's taxable year (other than the first taxable year for which
the election to be treated as a REIT has been made).
To ensure that the Company will not fail to qualify as a REIT under this and
other share ownership tests under the Code, the Company's Declaration of Trust,
subject to certain exceptions, authorizes the trustees to take such actions as
are necessary and desirable to preserve its qualification as a REIT and limits
direct or indirect ownership by any person to (i) no more than 9.8% of the
number or value (whichever is more restrictive) of outstanding Common Shares and
(ii) no more than 9.8% of the number of outstanding shares of beneficial
interest of the Company (the "Ownership Limit"). The Company's
23
<PAGE>
Board of Trustees, upon receipt of a ruling from the Service, an opinion of
counsel or other evidence satisfactory to the Board and upon such other
conditions as the Board may establish, may exempt a proposed transferee from the
Ownership Limit. However, the Board may not grant an exemption from the
Ownership Limit to any proposed transferee whose ownership, direct or indirect,
of shares in excess of the Ownership Limit would result in the termination of
the Company's status as a REIT. See "Description of Shares of Beneficial
Interest--Restrictions on Transfer." These restrictions on transferability and
ownership will not apply if the Board of Trustees and holders of not less than
two-thirds of the shares entitled to vote on the matter determine that it is no
longer in the best interests of the Company to attempt to qualify, or to
continue to qualify, as a REIT.
The Ownership Limit may have the effect of delaying, deferring or preventing
a transaction or a change in control of the Company that might involve a premium
price for the Common Shares or otherwise be in the best interest of the
shareholders. See "Description of Shares of Beneficial Interest-- Restrictions
on Transfer."
STAGGERED BOARD
The Company's Board of Trustees is divided into three classes of Trustees.
The initial terms of the first, second and third classes will expire in 1998,
1999, and 2000, respectively. Beginning in 1997, trustees of each class will be
chosen for three-year terms upon the expiration of their current terms and each
year one class of trustees will be elected by the shareholders. The staggered
terms of trustees may reduce the possibility of a tender offer or an attempt to
change control of the Company, even though a tender offer or change in control
might be in the best interest of the shareholders. See "Certain Provisions of
Maryland Law and of the Company's Declaration of Trust and
Bylaws--Classification of the Board of Trustees."
ISSUANCE OF ADDITIONAL SHARES
The Company's Declaration of Trust authorizes the Board of Trustees, without
a vote of the shareholders, to (i) amend the Declaration of Trust to increase or
decrease the aggregate number of shares of beneficial interest or the number of
shares of beneficial interest of any class that the Company has the authority to
issue, (ii) cause the Company to issue additional authorized but unissued Common
or Preferred Shares and (iii) classify or reclassify any unissued Common Shares
and Preferred Shares and to set the preferences, rights and other terms of such
classified or unclassified shares. See "Description of Shares of Beneficial
Interest--Preferred Shares." Although the Board of Trustees has no such
intention at the present time, it could establish a series of Preferred Shares
that could, depending on the terms of such series, delay, defer or prevent a
transaction or a change in control of the Company that might involve a premium
price for the Common Shares or otherwise be in the best interest of the
shareholders. The Declaration of Trust and Bylaws of the Company also contain
other provisions that may have the effect of delaying, deferring or preventing a
transaction or a change in control of the Company that might involve a premium
price for the Common Shares or otherwise be in the best interest of the
shareholders. See "Certain Provisions of Maryland Law and of the Company's
Declaration of Trust and Bylaws--Removal of Trustees," "--Control Share
Acquisitions" and "--Advance Notice of Trustee Nominations and New Business."
24
<PAGE>
THE COMPANY
The Company was organized as a Maryland real estate investment trust on
August 13, 1997. The Company intends to operate in a manner that permits it to
qualify, and it intends to elect to be taxed, as a REIT for federal income tax
purposes. The Company expects to generate income for distribution to its
stockholders primarily from the net interest income derived from its Mortgage
Assets and from dividends paid by AMC. As a result of its REIT status, the
Company will be permitted to deduct dividend distributions to shareholders in
calculating its taxable income, thereby effectively eliminating the "double
taxation" that generally results when a corporation earns income and distributes
that income to shareholders in the form of dividends. The Company generally will
not be subject to federal income tax to the extent that certain REIT
requirements under the Code are met. AMC, which is not a qualified REIT
subsidiary, will not be consolidated with the Company for accounting purposes,
because, following the Recapitalization, the Company will not own any of AMC's
voting common stock and will not control AMC. All taxable income of AMC is
subject to federal and state income taxes, where applicable. See "Federal Income
Tax Considerations--Taxation of AMC."
The principal executive offices of the Company are located at 2500 CityWest
Boulevard, Suite 1200, Houston, Texas 77042, telephone (713) 787-0100.
USE OF PROCEEDS
The net proceeds of this Offering are estimated to be $ million (or
$ million if the Underwriters' over-allotment option is exercised in full
at the Offering Price). It is expected that approximately 95% of such proceeds
will be used to purchase Agency Certificates and pay related hedging costs for
the Company's Portfolio Operations and less than 1 1/2% of such proceeds,
$2,356,250, will be used to acquire a portion of the shares of AMC (from a
current owner of AMC unaffiliated with the Company). See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--AMC"
and "Contribution Transaction" herein for a description of AMC and the
Contribution Transaction. The balance of such proceeds will be used for working
capital and general corporate purposes. Pending these uses, the proceeds may be
invested temporarily to the extent consistent with the REIT provisions of the
Code. Such investments may include warehouse loans to AMC, but only to the
extent that the Company's ownership of such loans does not jeopardize its REIT
status.
The Company anticipates that it will initially purchase newly issued Agency
Certificates guaranteed or issued by GNMA or FNMA at then-current market prices;
however, it has not specifically identified any Mortgage Assets in which to
invest the net proceeds of this Offering. The Company anticipates that the net
value of such initial Agency Certificates will represent 85% of the net proceeds
of the Offering.
In connection with the contribution of his common stock in AMC to the
Operating Partnership (the "Contribution Transaction" as described herein), Mr.
Walden will receive 171,921 Units, each of which is redeemable for one common
share of beneficial interest in the Company. In addition, Messrs. Day and Walden
will retain 245,000 and 255,000 Units, respectively as founder's equity for
which they paid nominal consideration.
25
<PAGE>
DISTRIBUTION POLICY
The Company is required to distribute 95% or more of its annual taxable
income (which may not necessarily equal net income as calculated in accordance
with GAAP, but instead equals taxable income under the Code, as adjusted in
certain respects) to its shareholders so as to comply with the REIT provisions
of the Code. The Company intends to declare and pay regular quarterly
distributions. The Company intends to declare and pay its initial distribution
for the partial quarterly period beginning on the closing of this Offering. The
Company's distribution policy is subject to revision at the discretion of the
Board of Trustees. All distributions in excess of those required for the Company
to maintain REIT status will be made by the Company at the discretion of the
Board of Trustees and will depend on the taxable earnings of the Company, the
financial condition of the Company and such other factors as the Board of
Trustees deems relevant. The Board of Trustees has not established a minimum
distribution level. See "Federal Income Tax Considerations."
Distributions to shareholders generally will be taxable 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 will
furnish annually to each of its shareholders and to the Service 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 "Federal Income Tax Considerations--Requirements for
Qualification--Distribution Requirements."
CAPITALIZATION
The capitalization of the Company as of September 30, 1997 (i) prior to
completion of this Offering, (ii) pro forma to reflect the Contribution
Transaction and (iii) as adjusted to reflect the sale of the shares of Common
Shares offered hereby, is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------------------------
PRO AS
ACTUAL FORMA ADJUSTED(1)
--------- ------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Notes payable and warehouse credit facility............................. $ -- $56,745,852 $ 56,745,852
Units................................................................... -- 20,835,248 20,835,248
Minority interest....................................................... -- 94,490 94,490
Shareholders' equity:
Preferred Shares, $.01 par value per share,
20,000,000 shares authorized; no shares issued and outstanding(2)... -- -- --
Common Shares, $.01 par value per share,
100,000,000 shares authorized; no shares (pro forma) and 10,000,000
shares (as adjusted) issued and outstanding(2)...................... 1 1 100,000
Additional paid-in capital............................................ 1,899 1,899 175,851,899
--------- ------------- --------------
Total shareholders' equity........................................ 1,900 96,390 176,046,389
Total capitalization.......................................... $ 1,900 $77,677,490 $ 253,627,489
--------- ------------- --------------
--------- ------------- --------------
</TABLE>
- ------------------------
(1) After deducting estimated underwriting discount and commissions and
estimated offering expenses of $ payable by the Company.
(2) Does not include 2,100,000 Common Shares reserved for issuance (i) upon the
redemption of 1,096,592 Units issued and outstanding as of the closing of
the Offering which may be redeemed on a one-for-one basis for Common Shares,
(ii) pursuant to the 1997 Plan and (iii) pursuant to the Trustees' Plan.
Options to acquire 685,000 Common Shares were granted pursuant to the 1997
Plan to the executive officers and employees of the Company prior to this
Offering at a per share exercise price equal to the Offering Price. Options
to acquire 15,000 Common Shares will be granted pursuant to the Trustees'
Plan to Independent Trustees of the Company at the effective date of this
Offering at a per share exercise price equal to the Offering Price. See
"Management--1997 Share Incentive Plan."
26
<PAGE>
DILUTION
The initial price per share to the public of the Common Shares offered
hereby exceeds the pro forma net tangible book value per share immediately
following consummation of the Offering and the Contribution Transaction and
assumed conversion of the Units. Therefore, the investors and holders of Units
issued in connection with the Contribution Transaction (Messrs. Day and Walden,
directly or indirectly, and other management members) will realize an immediate
increase in the pro forma net tangible book value of their Common Shares and
Units, respectively, while purchasers of the Common Shares in the Offering will
realize an immediate dilution in the pro forma net tangible book value of their
shares. Pro forma net tangible book value per share is determined by subtracting
the Company's total liabilities (excluding the Units outstanding) from its total
tangible assets and dividing the remainder by the number of Common Shares and
Units that will be outstanding after the Offering. The following table
illustrates the dilution to purchasers of shares sold in the Offering, based on
the Offering Price.
<TABLE>
<S> <C> <C>
Initial price per share to the public....................................... $ 19.00
---------
Pro forma net tangible book value per share as of September 30, 1997
prior to the Offering, attributable to Units issued to Messrs. Walden
and Day (other than in connection with the Contribution Transaction).... $ 0.86
---------
Pro forma net tangible book value per share as of September 30, 1997
prior to the Offering, attributable to Common Shares issued to current
owners of AMC pursuant to Contribution Transaction...................... 1.02
---------
Decrease in net tangible book value per share attributable to payments
by purchasers of Common Shares in the Offering.......................... 2.09
---------
Pro forma net tangible book value per share as of September 30, 1997 after
the Offering(1)........................................................... 15.03
---------
Dilution per share sold in the Offering..................................... $ 3.97
---------
---------
</TABLE>
- ------------------------
(1) Based on pro forma shareholders' equity of $176,046,389 and minority
interests in the Operating Partnership of $94,490, net of intangible assets
of $7,000,000, and $2,356,250 paid to shareholders of AMC in connection with
the Contribution Transaction divided by 11,096,592 Common Shares and Units
outstanding. This assumes all Units have been converted into Common Shares.
27
<PAGE>
SELECTED FINANCIAL DATA
The following selected statement of operations and balance sheet data for
each of the years in the three-year period ended December 31, 1996, and as of
December 31, 1994, 1995 and 1996, have been derived from AMC's financial
statements audited by KPMG Peat Marwick LLP, independent certified public
accountants, whose reports with respect thereto appear elsewhere herein. Such
selected financial data should be read in conjunction with those financial
statements and the notes thereto and with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" also included elsewhere
herein. The following selected financial data for the nine-month periods ended
September 30, 1996 and 1997 and as of September 30, 1997 have been derived from
the financial statements of AMC and include adjustments, consisting only of
normal recurring adjustments, which management considers necessary for a fair
presentation of such financial information for those periods. Results for the
nine months ended September 30, 1997 are not necessarily indicative of results
for the year ending December 31, 1997.
28
<PAGE>
AEGIS MORTGAGE CORPORATION (1)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Loan administration................................ $ 1,905 $ 2,016 $ 940 $ 897 $ 500
Loan origination................................... 636 1,440 2,424 1,780 2,107
Interest income.................................... 1,390 2,616 3,902 2,763 3,826
Interest expense................................... 861 2,177 2,963 2,164 3,068
---------- ---------- ---------- ---------- ----------
Net interest income.............................. 529 439 939 599 758
Loan brokerage fees................................ 533 1,390 -- -- --
Gain on sales of mortgage loans.................... 2,161 2,933 4,652 3,397 4,310
Gain on sale of servicing rights................... -- -- 2,498 2,527 --
Other.............................................. 119 258 59 -- --
---------- ---------- ---------- ---------- ----------
Total revenues................................... 5,883 8,476 11,512 9,200 7,675
Expenses:
General and administrative......................... 4,610 6,415 8,848 6,789 6,324
Depreciation and amortization...................... 376 824 288 194 222
Provision for losses on foreclosure................ 1 8 20 -- --
Other.............................................. 244 585 1,111 475 628
---------- ---------- ---------- ---------- ----------
Total expenses................................... 5,231 7,832 10,267 7,458 7,174
---------- ---------- ---------- ---------- ----------
Net income....................................... $ 652 $ 644 $ 1,245 $ 1,742 $ 501
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
OPERATING DATA:
Mortgage loan acquisitions (volume).................. $ 109,949 $ 281,547 $ 447,309 $ 340,222 $ 382,484
Servicing portfolio.................................. 403,041 405,006 123,152 130,408 166,921
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------
1994 1995 1996
---------- ---------- ---------- AT SEPTEMBER 30,
----------------
1997
----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash....................................................... $ 57 $ 286 $ 375 $ 1,059
Accounts receivable, net................................... 896 1,033 1,000 1,236
Real estate held for investment............................ 99 500 403 254
Mortgage loans held for sale, net of discounts of $485,
$394, $2,447 and $2,003 at December 31, 1994, 1995 and
1996 and September 30, 1997, respectively................ 11,165 39,747 52,058 57,760
Mortgage servicing rights, at cost, net of accumulated
amortization............................................. 1,031 618 721 111
Other assets............................................. 717 555 431 565
---------- ---------- ---------- --------
Total assets............................................... 13,965 42,739 54,988 60,985
Total liabilities.......................................... 12,136 40,548 52,339 57,834
Total stockholders' equity................................. $ 1,829 $ 2,191 $ 2,649 $ 3,150
</TABLE>
- ------------------------
(1) The information presented herein relates only to AMC and not the Company,
and should not be read as an indication of expected results for the Company.
It is anticipated that the book value of the Company's investment in AMC
will not represent more than 5% of the total assets of the Company after the
initial investment in Agency Certificates by the Company.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE COMPANY
The Company is a Maryland real estate investment trust that was formed on
August 13, 1997. The Company has been minimally capitalized and does not expect
to commence full operations until the consummation of this Offering. Pursuant to
this Offering, the Company will issue 10,000,000 Common Shares to the public,
the net proceeds from which will be contributed to the Operating Partnership.
After such contribution, the Company will own a 90.12% interest in, and will be
the sole general partner of, the Operating Partnership and Messrs. Day and
Walden will continue to own 245,000 and 255,000 Units, respectively, for which
they paid nominal consideration.
Concurrent with the closing of this Offering, the Contribution Transaction
will occur, pursuant to which the current owners of AMC (including Mr. Walden,
currently a 25% owner of AMC) will contribute 98.5% of the common stock of AMC
to the Operating Partnership in exchange for 596,592 Units (based on the
Offering Price) having a value of $11,335,250 and cash in the amount of
$2,356,250. Mr. Walden will receive 171,921 Units having a value of $3,266,500.
The remaining 424,671 Units and cash in the amount of $2,356,250 will be
distributed to the other two owners of AMC who are not, and will not be,
affiliated with the Company. Immediately therewith, the Recapitalization of AMC
will occur pursuant to which the Operating Partnership will exchange its shares
of AMC voting common stock for shares of AMC non-voting common stock. This will
be followed by the stock purchase by Mr. Day whereby AMC will issue voting
common stock representing slightly less than 50% of such class (and
approximately 1.5% of the value of its total outstanding stock) to Mr. Day in
exchange for a note in the initial aggregate principal amount of $208,500
bearing interest at an annual rate of 6.25% and requiring equal quarterly
payments over 5 years. After the Recapitalization and the AMC stock purchase by
Mr. Day, all of AMC's voting common stock, representing a 3% economic interest
therein, will be held by Messrs. Day and Walden, and all of AMC's non-voting
common stock, representing a 97% economic interest therein, will be held by the
Operating Partnership. The Company, which will not control AMC, will receive
dividends from AMC through the Operating Partnership. At the end of each
calendar quarter, the Company may own no more than 10% of AMC's voting
securities and the value of the Company's ownership interest in AMC may not
exceed 5% of the value of the Company's assets.
AMC
AMC has engaged in the Mortgage Banking and Loan Trading Operations since
1993, and through its predecessor corporation Eastland Mortgage Company, has
operated as a mortgage banking corporation since 1981. In 1990, Liberty
Resources, Inc. acquired the common stock of Eastland Mortgage Company and
renamed it EMC Financial, Inc. ("EMC"). In February 1994, EMC was renamed Aegis
Mortgage Corporation.
AMC's initial strategy was to acquire servicing at discounted prices from
the Resolution Trust Corporation ("RTC"). By 1996, the servicing portfolio had
grown to over 14,000 loans, with an aggregate unpaid principal balance of
approximately $425 million, most of which were Conforming Mortgage Loans
acquired in bulk servicing acquisitions from the RTC. AMC began a loan trading
operation in 1993, focusing on seasoned whole loans and participations in
residential mortgages. AMC has purchased mortgage products from both financial
institutions and the RTC while reselling has been through agency
securitizations, agency cash-window sales whereby AMC directly sells whole loans
to government sponsored agencies, and whole loan transactions with private
investors. During 1994, AMC began wholesale and retail production businesses.
The wholesale loan production business is conducted through a network of
unaffiliated mortgage brokers who provide loans to AMC for sale to permanent
investors. AMC has non-exclusive relationships with over 800 approved mortgage
brokers in 22 states and since January 1, 1996, AMC has funded loans originated
by over 300 of such mortgage brokers. The retail production
30
<PAGE>
business is operated directly by AMC through six retail offices, located
throughout Texas. During 1996, AMC sold approximately 75% of its servicing
portfolio and redeployed the proceeds from the sale into the loan production and
loan trading activities.
LOAN ORIGINATION
AMC originates Mortgage Loans through its wholesale division's network of
mortgage brokers and through its retail branch system. A summary of loan
production by source for the periods indicated is set forth below:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loan Production:
Wholesale Division....................... $ 29,100 $ 212,868 $ 352,954 $ 271,744 317,241
Retail Division.......................... 29,969 40,828 60,205 44,947 54,696
---------- ---------- ---------- ---------- ----------
Total Loan Production.................. $ 59,069 $ 253,696 $ 413,159 $ 316,691 $ 371,937
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
LOAN TRADING
AMC acquires Seasoned Mortgage Loans and participations in residential
Seasoned Mortgage Loans for its Loan Trading Operations. A summary of purchases
for the periods indicated is set forth below:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------- ----------------------
1994 1995 1996 1996 1997
--------- --------- ---------- ---------- ----------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Purchases(1)................................. $ 50,880 $ 27,851 $ 34,150 $ 23,531 $ 10,547
</TABLE>
- ------------------------
(1) Amounts indicate the outstanding principal balance purchased.
RESULTS OF OPERATIONS
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996:
For the nine months ended September 30, 1997, total revenues decreased to
$7.7 million from $9.2 million for the nine months ended September 30, 1996. The
decrease was a result of the gain on sale of servicing rights of $2.5 million
during the nine month period ending September 30, 1996 while there was not any
gain on sale of servicing rights during the nine months ended September 30,
1997. During 1996, AMC sold a substantial portion of its loan servicing
portfolio. This sale also resulted in loan administration fee income declining
from $0.9 million in the nine months ended September 30, 1996 to $0.5 million in
the nine months ended September 30, 1997.
Gain on sales of mortgage loans increased 27% to $4.3 million for the nine
months ended September 30, 1997 from $3.4 million for the nine months ended
September 30, 1996. The gain on the sales of mortgage loans arises from two
sources. The first source is from the loan origination process whereby new loans
are originated and sold to investors and the difference in price is recorded as
a gain or loss. The second source is from the loan trading operations whereby
seasoned loans are purchased from other holders and held for resale at a profit.
The increase of $0.9 million in gain on sale of mortgage loans was primarily
attributable to an increase in gains on sale from the loan trading operations.
Loan origination fees were $2.1 million for the nine months ended September
30, 1997, an 18% increase over the $1.8 million at September 30, 1996. Loan
originations increased 17% to $371.9 million in the first nine months of 1997
from $316.7 million for the same period in 1996.
31
<PAGE>
Net interest income increased 27% to $0.8 million for the nine months ended
September 30, 1997 from $0.6 million for the nine months ended September 30,
1996. The increase in net interest income is attributable to a 23% increase in
the average volume of mortgages held for sale during the first nine months of
1997 versus the first nine months of 1996. AMC's mortgages are generally sold
and replaced within 30 days. AMC generally borrows at rates based upon
short-term indices, while its asset yields are primarily based on long-term
mortgage rates.
A summary of gains on sale of mortgage loans for the periods indicated is
set forth below:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1996 1997
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Gross proceeds on sales of mortgage loans....................... $ 335,309 $ 381,506
Net basis of mortgage loans sold................................ 331,912 377,196
------------- -------------
Net gain on mortgage loans sold................................. $ 3,397 $ 4,310
------------- -------------
------------- -------------
</TABLE>
Total expenses decreased 4% to $7.2 million for the nine months ended
September 30, 1997 from $7.5 million for the prior year nine-month period. The
$0.3 million decrease was primarily attributable to a decrease in personnel
costs to $4.8 million for the first nine months of 1997 from $5.2 million for
the first nine months of 1996. During the first nine months of 1996, bonuses and
other additional compensation were paid to executive officers. There was no
comparable payment made during 1997.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31,
1995:
During 1996, total revenues increased 36% to $11.5 million for the year
ended December 31, 1996 from $8.5 million for the year ended December 31, 1995,
primarily as a result of concentrating AMC's efforts more on loan production and
trading and less on loan servicing.
During 1996, AMC sold a substantial portion of its loan servicing portfolio,
which resulted in a 53% decrease in revenue from loan administration to $0.9
million and an increase in gain on sale of servicing rights to $2.5 million for
the year ended December 31, 1996 from $2.0 million and $0, respectively, for the
year ended December 31, 1995. The impact of AMC's reduced focus on servicing was
a net increase in fees and gain on sale of servicing rights of $1.4 million.
Loan origination fees increased 68% to $2.4 million for the year ended
December 31, 1996 from $1.4 million for the year ended December 31, 1995,
primarily due to an increase in mortgage loans originated in 1996 from 1995.
During 1996, AMC originated $413.2 million in loans, an increase of 63% from
1995. The increased mortgage loan originations were primarily due to an increase
in approved third party brokers included in AMC's network from 544 at December
31, 1995 to 856 at December 31, 1996.
Net interest income increased 113% to $0.9 million for the year ended
December 31, 1996 compared to $0.4 million for the year ended December 31, 1995.
The increase in net interest income is primarily attributable to the 80%
increase in the average volume of mortgages held for sale for 1996 from that of
1995.
Loan brokerage fees decreased to $0 for the year ended December 31, 1996
from $1.4 million for the year ended December 31, 1995. During 1995, AMC
received fees for negotiating the acquisition of a mortgage operation for a
third party. This acquisition was completed in 1995 and since that time AMC has
focused its efforts on production and loan trading.
The gain on sales of mortgage loans increased 59% to $4.7 million for the
year ended December 31, 1996 from $2.9 million for the year ended December 31,
1995. Gains on sales of mortgage loans are
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<PAGE>
generated from the trading operation and the production operation. A summary of
gain on sales of mortgage loans for the periods indicated is set forth below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------
1995 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Gross proceeds on sales of mortgage loans............................. $ 259,182 $ 445,956
Net basis of mortgage loans sold...................................... 256,249 441,304
---------- ----------
Net gain on mortgage loans sold....................................... $ 2,933 $ 4,652
---------- ----------
---------- ----------
</TABLE>
Total expenses increased 31% to $10.3 million for the year ended December
31, 1996 as compared to $7.8 million for the year ended December 31, 1995. This
increase was primarily attributable to the $2.2 million increase in personnel
costs in 1996. The expansion of the wholesale production operation resulted in
an increase in the number of employees at AMC. Total employees increased from
111 at December 31, 1995 to 130 at December 31, 1996. Personnel costs also
increased due to bonuses and other additional compensation paid to executive
officers. Other expenses increased 90% to $1.1 million for the year ended
December 31, 1996 due primarily to an increase in the accrual for loan losses on
repurchases. Depreciation and amortization expense decreased 65% to $0.3 million
for the year ended December 31, 1996 from $0.8 million for the year ended
December 31, 1995. This decrease was due to a reduction in amortization of
mortgage servicing rights in 1996 from 1995 due to the sale in 1996 of a
substantial portion of the servicing portfolio.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31,
1994:
Total revenues increased 44% for the year ended December 31, 1995 to $8.5
million as compared to $5.9 million for the year ended December 31, 1994. This
increase was attributable to increases in loan origination fees, loan brokerage
fees and gain on sales of mortgage loans. Loan origination fees increased to
$1.4 million for the year ended December 31, 1995 from $0.6 million for the year
ended December 31, 1994 as a result of a substantial increase in originations.
Retail originations rose to $40.8 million for the year ended December 31, 1995
from $30.0 million for the year ended December 31, 1994. The predominant rise in
originations came from the wholesale operations which increased 632% from $29.1
million in 1994 to $212.9 million in 1995. AMC's first year of wholesale
operations was in 1994 and the rapid expansion of this operation continued in
1995. Monthly wholesale originations rose from $4.2 million in January 1995 to
$31.1 million in December 1995.
Loan brokerage fees increased to $1.4 million for the year ended December
31, 1995 from $0.5 million for the year ended December 31, 1994. During 1994 and
1995, AMC received fees for negotiating the acquisition of a mortgage operation
for a third party. This engagement began in 1994 and was completed in 1995. The
majority of these fees were received in 1995.
The gain on sales of mortgage loans increased to $2.9 million for the year
ended December 31, 1995 from $2.2 million for the year ended December 31, 1994.
A summary of gains on sale of mortgage loans for the periods indicated is set
forth below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
---------------------
1994 1995
--------- ----------
(IN THOUSANDS)
<S> <C> <C>
Gross proceeds on sales of mortgage loans.............................. $ 73,079 $ 259,182
Net basis of mortgage loans sold....................................... 70,918 256,249
--------- ----------
Net gain on mortgage loans sold........................................ $ 2,161 $ 2,933
--------- ----------
--------- ----------
</TABLE>
33
<PAGE>
Total expenses increased 50% to $7.8 million for the year ended December 31,
1995 as compared to $5.2 million for the year ended December 31, 1994. This
increase was due to increases in personnel costs of $1.5 million, office
supplies and expense of $0.4 million and depreciation and amortization expense
of $0.4 million. Personnel costs and office supplies and expense increased due
to the increase in the size of the wholesale production operations which began
in 1994 but had its first full year of operation in 1995. The increase in
depreciation and amortization of mortgage servicing rights was due to a larger
servicing portfolio in 1995 versus 1994 and increased depreciation on property
and equipment from the wholesale production operation.
FINANCIAL CONDITION
SEPTEMBER 30, 1997 COMPARED TO DECEMBER 31, 1996
Mortgage loans held for sale consist of loans originated in the Loan
Origination Operations that are committed to be sold to investors and loans
acquired by the Loan Trading Operations that will be resold through agency
securitizations, agency cash window sales and in whole loan transactions.
Mortgage loans originated in the Loan Origination Operations remain on the
balance sheet for approximately 30 days until they are sold. The balance in
mortgage loans held for sale generally is equal to the current month's
originations plus loans acquired by Loan Trading Operations that have not been
sold. The balance at September 30, 1997 was $57.8 million, an increase of 11%
from the $52.1 million balance at December 31, 1996. The $5.7 million increase
is attributable to a $11.5 million increase in the balance of originated loans
held for sale and a $5.8 million decrease in loans acquired through Loan Trading
Operations held for sale. The increase in the balance of originated loans was
due to an increase in production to $58.4 million in September 1997 versus $34.6
million in December 1996.
Notes payable represent loans from banks to finance the acquisition of
seasoned loan product, the warehouse line for loan origination and to provide
working capital. The amount of notes payable outstanding is based on the balance
of mortgage loans held for sale. At September 30, 1997 notes payable were $56.7
million versus $51.6 million at December 31, 1996. This $5.1 million increase
was a result of the $5.7 million increase in mortgage loans held for sale during
the same period.
DECEMBER 31, 1996 COMPARED TO DECEMBER 31, 1995
During 1996, AMC experienced a 63% increase in mortgage loan originations
compared to 1995. Mortgage loan production increased to $413.2 million during
1996 from $253.7 million during 1995. At December 31, 1996, AMC had $27.0
million in mortgage loan commitments outstanding. In addition, loans purchased
by AMC's Loan Trading Operations increased 23% to $34.2 million during 1996 from
$27.9 million during 1995.
As a result of the increased activity in these areas, mortgage loans held
for sale increased 31% to $52.1 million at December 31, 1996 as compared to
$39.7 million at December 31, 1995. AMC's servicing portfolio decreased to
$123.0 million at December 31, 1996 as compared to $405.0 million at December
31, 1995. The 70% decrease was due to the sale of a substantial portion of the
servicing portfolio in 1996.
Short-term borrowings, which are AMC's primary source of funds, totalled
$51.6 million at December 31, 1996, as compared to $39.9 million at December 31,
1995, an increase of 29%. This $11.7 million increase was a result of an
increase in mortgage loans held for sale.
LIQUIDITY AND CAPITAL RESOURCES
AMC's primary cash requirements include the funding of mortgage loans for
the loan origination and trading operations, which are met primarily through
short-term borrowings from external sources. AMC has entered into a one year,
$87.0 million warehouse line of credit provided by Bank United that expires in
September 1998. The credit agreement includes covenants requiring AMC to
maintain (i) a minimum
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<PAGE>
adjusted tangible net worth of $4.0 million, (ii) a maximum debt to adjusted
tangible net worth ratio of 20 to 1, (iii) a minimum current ratio of 1.03 to
1.00, and (iv) a minimum servicing portfolio of $100.0 million. In addition, AMC
has a $4.0 million warehouse line of credit with another lender that includes
covenants requiring AMC to (i) limit dividends and distributions to 40% of
year-to-date net income, (ii) limit advances to officers and shareholders to
$100,000, and (iii) maintain minimum tangible net worth plus subordinated debt
of $2.5 million.
AMC was in compliance with the above-mentioned debt covenants at September
30, 1997. AMC does not believe that its existing financial covenants will
restrict its operations or growth. Continued availability of funds under these
agreements is subject to AMC's compliance with such covenants.
Based upon AMC's projected funding and operating levels, AMC believes that
its warehouse lines of credit, together with available cash flow from the
operations of AMC, will be sufficient to meet AMC's short-term liquidity needs
for the foreseeable future.
CASH FLOWS
In the nine months ended September 30, 1997, AMC's operating activities used
cash of $5.0 million primarily for the increase in its mortgage loans held for
sale. Investing activities provided cash of $0.6 million primarily from the
proceeds from the sale of mortgage servicing rights. Net cash provided by
financing activities was $5.1 million as a result of increases in notes payable.
In the nine months ended September 30, 1996, AMC's operating activities used
cash of $7.9 million primarily for the increase in its mortgage loans held for
sale. Investing activities provided cash of $2.8 million primarily from the sale
of mortgage servicing rights of $3.1 million. Net cash provided by financing
activities was $5.3 million as a result of increases in notes payable.
In 1996, AMC's operating activities used cash of $13.2 million primarily for
the increase in its mortgage loans held for sale. Investing activities provided
cash of $2.4 million primarily from the proceeds from the sale of mortgage
servicing rights of $3.1 million. Cash was used in investing activities to
purchase $0.7 million in mortgage servicing rights. Net cash provided by
financing activities was $10.9 million as a result of increases in notes payable
of $11.7 million. Cash was used in financing activities to pay dividends
totalling $0.8 million.
In 1995, AMC's operating activities used cash of $27.2 million primarily for
the increase in its mortgage loans held for sale. The primary investing activity
for which cash was used was for the purchase of real estate held for investment.
Net cash provided by financing activities was $28.0 million primarily as a
result of increases in notes payable.
In 1994, AMC's operating activities used cash of $8.3 million primarily for
the increase in its mortgage loans held for sale. Investing activities provided
cash of $6.9 million from a decrease in short-term investments of $7.7 million
due to the maturity of a certificate of deposit. Cash used in investing
activities was for the purchase of $0.5 million of property and equipment and
$0.2 million of mortgage servicing rights. Net cash provided by financing
activities was $0.8 million as a result of increases in notes payable.
INFLATION
The consolidated financial statements of AMC and notes thereto presented
herein have been prepared in accordance with GAAP, which require the measurement
of financial position and operating results in terms of historical dollars
without considering the changes in the relative purchasing power of money over
time due to inflation. The impact of inflation is reflected in the increased
costs of AMC's operations. Unlike industrial companies, nearly all of the assets
and liabilities of AMC's operations are monetary in nature. As a result,
interest rates have a greater impact on AMC's performance than do the effects of
general levels of inflation. Inflation affects AMC's operations primarily
through its effects on interest rates, since interest rates normally increase
during periods of high inflation and decrease during periods of low inflation.
During periods of increasing interest rates, demand for mortgage loans and a
borrower's ability to qualify for mortgage financing in a purchase transaction
may be adversely affected.
35
<PAGE>
BUSINESS
GENERAL
The Company is a self-managed, self-administered REIT, which has been
recently formed to invest in Mortgage Assets. AMC, an affiliate of the Company,
will engage in Mortgage Banking and Loan Trading Operations that will consist of
the origination, acquisition and servicing of Mortgage Loans. The Company's
mortgage investment operations and AMC's mortgage banking operations will be
complementary and allow for enhanced performance by both operations.
The Company's principal objectives are (i) to provide investors with
attractive returns on equity by purchasing Mortgage Assets for investment and
leveraging available returns with short-term financings, and by hedging a
significant portion of the interest rate risk associated with such financings
through the use of interest rate caps, swaps and similar hedging instruments,
(ii) to identify market opportunities that allow the Company to acquire Mortgage
Assets with attractive, risk adjusted yields, and (iii) to a lesser extent,
benefit from the expansion of the mortgage origination, servicing and trading
businesses of AMC by providing AMC with credit support and a well-financed,
affiliated investor for its Mortgage Asset originations and acquisitions.
The Company, which will not control AMC, will receive dividends from AMC
through the Operating Partnership. At the end of each calendar quarter, the
Company may own no more than 10% of AMC's voting securities and the value of the
Company's ownership interest in AMC may not exceed 5% of the value of the
Company's assets.
BUSINESS STRATEGY
The investment focus of the Company in Portfolio Operations will be
complemented by the asset generating, operating, management and servicing
capabilities of AMC. AMC is expected to provide the Company with the flexibility
and infrastructure to create a mortgage investment vehicle that delivers
attractive, risk adjusted total returns to investors. Substantially all of the
initial investments of the Company will be Agency Certificates which will allow
the Company to deploy capital quickly, with expected returns on equity
consistent with its principal objectives. Upon completion of the Offering, the
Company intends to immediately begin acquiring Mortgage Loans through the Loan
Trading Operations and Loan Origination Operations of AMC.
AMC is expected to identify or directly acquire or originate Mortgage Loans
for purchase by the Company. AMC's Loan Trading and Loan Origination
capabilities complement the investment objectives of the Portfolio Operations by
allowing the Company to diversify its Mortgage Loan investments and acquisition
channels. The Company can also benefit from acquiring portions of pools of
Mortgage Loans it might not otherwise be able to acquire on an attractive, risk
adjusted basis due to AMC's ability to acquire entire pools of Mortgage Loans
and then subsequently resell the portions that do not meet the Company's
investment objectives. In addition, the Company may acquire Non-Conforming
Mortgage Loans originated by AMC at prices that are generally favorable to the
pricing levels for Non-Conforming Mortgage Loans acquired in the secondary
market.
The Company will provide credit support and, through the Portfolio
Operations, an investment capability which is expected to support and enhance
the operations and profitability of the Loan Trading Operations of AMC by
allowing it to acquire larger and more diverse Seasoned Mortgage Loan
portfolios. Management also anticipates that the Company's credit support and
investment capabilities will strengthen the Loan Origination Operations and
improve profitability by allowing AMC to increase its production and diversify
the types of Mortgage Loans it offers through its mortgage broker and retail
networks.
The Loan Servicing Operations allow AMC the flexibility to originate and
purchase a diverse mix of Mortgage Loans and then to effectively service the
Mortgage Loans for the Portfolio Operations.
36
<PAGE>
The primary components of the Company's business objectives and strategy are
summarized as follows:
- Create a high-growth mortgage investment vehicle that delivers attractive,
risk adjusted total returns to investors.
- Structure a tax-advantaged mortgage investment operation by using a REIT
structure.
- Capitalize upon the capabilities of an experienced management team and
maintain a focus on selected assets types and the financing and hedging
strategies with which management has substantial expertise.
- Increase returns on equity through an appropriate use of leverage for each
asset group, while employing hedging strategies designed to manage the
associated interest rate risk.
- Utilize AMC's Mortgage Banking and Loan Trading Operations as a source of
assets for the Company.
- Employ increased capital to expand the Mortgage Banking and Loan Trading
Operations to generate dividend income to the Company from AMC's net
income.
- Diversify the Company's asset base and asset acquisition sources.
MANAGEMENT
The Company's senior management team includes five members and is headed by
James E. Day and Patrick A. Walden, each of whom serves as Managing Director and
Co-Chairman of the Board of Trustees of the Company. Although none of its
members has experience operating a REIT, the Company's senior management team
has extensive experience in acquiring and managing a broad range of Mortgage
Assets for investment and trading, managing credit risk and utilizing hedging
techniques to manage interest rate risk in a variety of interest rate
environments. The members of the Company's senior management team have served in
various executive management positions in the mortgage banking and banking
industries and have between 13 and 29 years of experience.
PORTFOLIO OPERATIONS
GENERAL
The Company's Portfolio Operations will consist of the acquisition of
Mortgage Assets for long-term investment. It is expected that these Mortgage
Assets will be principally fixed-rate Mortgage Loans and Agency Certificates
backed by fixed-rate single family mortgage loans. Cash flow from the Portfolio
Operations will be generated from the difference between (i) the interest income
received by the Company on the Agency Certificates and other Mortgage Assets
acquired and held in its portfolio and (ii) the net interest paid by the
Company, on borrowings used to purchase Agency Certificates and other Mortgage
Assets, net of associated hedging costs and credit losses where applicable.
Mortgage Asset investments will be financed with a portion of the Company's
capital, as well as with borrowings provided through reverse repurchase and
dollar reverse repurchase agreements, bank warehouse financings, other
short-term borrowings and securitizations.
AGENCY CERTIFICATES
Upon the closing of this Offering, the Company anticipates that over 95% of
its investments in Mortgage Assets will be comprised of Agency Certificates
primarily issued by GNMA, and to a lesser extent FNMA and FHLMC. The Agency
Certificates to be acquired by the Company generally will represent interests in
fixed-rate mortgage loans secured primarily by first priority liens on
single-family (one-to-four units) residential properties. The Company also may
invest in Agency Certificates that
37
<PAGE>
represent interests in adjustable rate Mortgage Loans ("ARMs") secured by liens
on single-family residential properties or Agency Certificates representing
interests in Mortgage Loans secured by liens on other types of properties and
second priority liens on residential properties. The Company expects that GNMA
Certificates will comprise a substantial majority of its Agency Certificate
investments.
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 that represent a pool of mortgage loans 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 IRS'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." To meet its obligations under its guaranties,
GNMA is authorized under Section 306(d) of the Housing Act, to borrow from the
United States Treasury with no limitation as to amount. An opinion, dated
December 1, 1969, of an Assistant Attorney General of the United States provides
that such guarantees under Section 306(g) of GNMA Certificates of the type that
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."
It is expected that substantially all of the GNMA Certificates to be
acquired by Company will be recently issued and backed by pools of fixed rate
residential Mortgage Loans. To the extent deemed appropriate by management, the
Company may acquire GNMA Certificates backed by pools of ARM's.
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. Section 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.
It is expected that any FNMA Certificates to be acquired by the Company will
be backed by pools of single-family residential mortgage loans. The original
terms to maturity of the underlying mortgage loans generally will not exceed 40
years. The Company expects to invest primarily in FNMA Certificates that pay
interest at a fixed rate, although FNMA Certificates backed by ARMs also may be
purchased.
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. Sections 1451-1459), on July 24,
1970. The 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 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
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<PAGE>
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.
It is expected that any FHLMC Certificates to be acquired by the Company
will be backed by pools of single-family residential mortgage loans. Such
underlying mortgage loans generally will have original terms to maturity of up
to 40 years. FHLMC Certificates may be issued under Cash Programs (comprised of
mortgage loans purchased from a number of sellers) or Guarantor Programs
(comprised of mortgage loans purchased from one seller in exchange for
participation certificates representing interests in the Mortgage Loans
purchased). Any FHLMC Certificates to be acquired by the Company generally will
pay interest at a fixed rate, although FHLMC Certificates backed by ARMs also
may be purchased.
MORTGAGE LOAN INVESTMENTS
The Company also plans to acquire, through AMC's network of mortgage brokers
and retail branches or in the secondary market, Owner-Financed Mortgage Loans
and Seasoned Mortgage Loans, and to a lesser extent, Non-Conforming Mortgage
Loans. Initially, the Company anticipates that Mortgage Loans will represent
less than 5% of the value of the Portfolio Operations; however, as the Company
matures it is anticipated that the value of the Mortgage Loans as a percentage
of the Portfolio Operations will increase.
Owner-Financed Mortgage Loans are available for investment at attractive
risk-adjusted yields because they are generally sold on a loan-by-loan basis by
individual brokers with the pricing of each loan individually negotiated. This
results in a secondary market for such loans that is private and relatively
inefficient when compared with the market for Conforming Mortgage Loans. In
addition, the documentation and underwriting of such loans typically do not meet
the standards of the established secondary mortgage market. These market and
loan characteristics tend to limit the number of institutional buyers actively
participating in this market, resulting in non-competitive pricing for this type
of Mortgage Loan. The Loan Trading Operation of AMC has both the experience and
market presence to effectively acquire Owner-Financed Mortgage Loans. By
correcting deficiencies in collateral documentation, providing experienced loan
servicing, using a consistent approach to evaluating and re-underwriting and
consolidating such mortgage loans into pools suitable for the broader secondary
market, the Company expects that AMC has both the experience and operating
capabilities to increase the market value of the Owner-Financed Mortgage Loans
acquired by the Company.
Similarly, the secondary market for Seasoned Mortgage Loans is fragmented
and such Mortgage Loans are available at attractive risk-adjusted yields;
however, at yields somewhat less than expected for Owner-Financed Mortgage
Loans. Seasoned Mortgage Loans are generally offered on a pool rather than on a
loan-by-loan basis by thrifts, banks, insurance companies and other financial
institutions. Often the pools of Seasoned Mortgage Loans are unable to be sold
in traditional secondary mortgage markets due to the limited size of a pool or
because the Mortgage Loans within a pool differ in certain respects including
documentation quality, underwriting standards, loan-to-value ratio, loan type,
property type or payment history. Similar to Owner-Financed Mortgage Loans, the
Company anticipates that it can acquire Seasoned Mortgage Loans at attractive
risk-adjusted yields and enhance the value of such Mortgage Loans by engaging
AMC to correct deficiencies through its Loan Origination and Loan Servicing
Operations, if necessary, and pooling them by similar attributes whereby the
Company may either sell such pools in the established secondary mortgage market
to government sponsored agencies or nationwide mortgage conduits or hold such
pools for investment.
To a lesser extent, the Company may also acquire higher yielding mortgage
loans, which may include among other types, mortgage loans in excess of
$207,000, loans with limited documentation and loans to subprime borrowers, all
of which do not comply with requirements for inclusion in credit support
programs sponsored by GNMA, FHLMC or FNMA ("Non-Conforming Mortgage Loans"). As
described more fully
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<PAGE>
herein, the Company expects that the Non-Conforming Mortgage Loans may provide
the Company with an attractive and additional source of higher yielding Mortgage
Loans.
The Mortgage Loans targeted for acquisition by the Company may have greater
risk of default than Conforming Mortgage Loans. For example, Owner-Financed
Mortgage Loans are originated by the seller in connection with the sale of real
estate and the Company is not expecting to obtain borrower applications,
complete appraisals of the underlying property or verify income or employment
and may not perform other investigations into the credit quality of the
borrower. Seasoned Mortgage Loans and Owner-Financed Mortgage Loans generally
will not contain the documentation which would be typical for a mortgage loan
originated in accordance with FNMA, FHLMC or GNMA guidelines. In the event that
such Mortgage Loan files contain any borrower information or appraisals on the
underlying properties, such information may be outdated. In connection with
proposed acquisitions, it is unlikely that the Company will obtain additional or
updated credit information concerning the borrowers and current appraisals may
be limited to drive-by appraisals in which the appraiser does not have access to
the interior of the property. The underwriting standards with respect to
Non-Conforming Mortgage Loans are, under certain circumstances, less stringent
than the standards required for Conforming Mortgage Loans. For example,
Non-Conforming Mortgage Loans may allow for a greater loan amount, have higher
loan-to-value ratios, require less documentation, have more lenient credit
standards, include properties other than owner-occupied, or allow for borrowers
with bankruptcies or limited credit histories. To the extent there are any
losses on such Mortgage Loans, the net interest income would be reduced.
OTHER MORTGAGE ASSETS
Subject to the approval of the Board of Trustees and consistent with its
REIT status, the Company may invest in other Mortgage Assets. Such other
Mortgage Assets may include, among other things, larger commercial Mortgage
Loans, mortgage derivative securities, such as interest only and principal only
securities, mortgage-backed securities that represent subordinated interests in
pools of Mortgage Loans, whole-loan participations and collateralized mortgage
obligations, in each case, as the Board of Trustees deems appropriate.
AFFILIATE PURCHASES POLICY
The Company expects that substantially all of its Mortgage Assets will be
acquired either directly from AMC or indirectly from sources identified by AMC.
The Company's Board of Trustees has adopted a policy pursuant to which certain
purchases of Mortgage Assets directly from AMC must be approved by the
Independent Trustees. In deciding whether to approve such a transaction, the
Independent Trustees will consider whether the terms and conditions of such
transaction are no less favorable than the Company would obtain in arms length
negotiations with an unrelated similarly situated party.
FINANCING STRATEGIES
The Company intends to employ a leveraging strategy to increase its
investment assets by borrowing against existing Mortgage Assets and using the
proceeds to acquire additional Mortgage Assets. By leveraging its Mortgage Asset
investments in this manner, the Company expects initially that approximately 85%
of the Company's total Mortgage Assets may be financed with borrowed funds. The
Company set this level of borrowing to provide it with a reasonable capital base
as a hedge against interest rate environments in which the Company's net
borrowing costs, net of associated hedging costs and credit losses, might exceed
its interest income from Mortgage Assets. These conditions could occur when the
weighted interest rate of the Company's variable rate borrowings exceeds the
weighted interest rate of the Company's Mortgage Assets. See "Risk
Factors--Substantial Leverage and Potential Net Interest and Operating Losses in
Connection with Borrowings." The Company intends to enter into the
collateralized borrowings described herein only with institutions that meet the
credit standards approved by the Company's Board of Trustees.
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<PAGE>
The Company's Mortgage Asset acquisitions will be financed primarily at
short-term borrowing rates through reverse repurchase agreements and, to a
lesser extent, dollar reverse repurchase agreements, bank warehouse financing
and borrowings under lines of credit and other collateralized financings which
the Company may establish with approved institutional lenders. It is expected
that reverse repurchase agreements and, to a lesser extent, dollar reverse
repurchase agreements will be the principal financing devices utilized by the
Company to leverage its portfolio of Mortgage Assets. The Company anticipates
that upon repayment of each reverse repurchase agreement or dollar reverse
repurchase agreement, the underlying collateral normally will be pledged
immediately to secure a new reverse repurchase agreement or will be sold
pursuant to a new dollar reverse repurchase agreement.
A reverse repurchase agreement, although structured as a sale and repurchase
obligation, is treated as a financing transaction for tax and GAAP purposes,
pursuant to which the Company will pledge the Mortgage Assets it purchases as
collateral to secure a short-term loan. Generally, the other party to the
agreement will make the loan in an amount equal to a percentage of the market
value of the pledged collateral. At the maturity of the reverse repurchase
agreement, the Company is required to repay the loan and correspondingly
receives back its collateral. The Company continues to receive the principal and
interest paid on the Mortgage Assets while pledged. The Company intends to enter
into reverse repurchase agreements primarily with national broker/dealers,
commercial banks and other lenders which typically offer such financing. The
Company believes that the firms selected to provide such financing will be
financially sound institutions meeting the Company's approved credit standards.
Similar to a reverse repurchase agreement as a method of financing Mortgage
Assets, a dollar reverse repurchase agreement is a transaction in which the
Company sells mortgage securities for delivery on a specified future date and
simultaneously contracts to repurchase the same or substantially the same type
of security on a specified future date. During the roll period, the Company
forgoes the principal and interest payments on the security. The Company,
however, is compensated by the interest earned on the cash proceeds of the
initial sale and by the typically lower repurchase price of the security at the
future date. Because such agreement provides funds to the Company for the period
of the agreement, its value can be expressed in terms of an "implied financing
rate." This method of financing is favorable to the Company when the repurchase
price is low enough in comparison to the initial sale price so that the implied
financing rate is below other alternative short-term borrowing rates (e.g., the
rate for reverse repurchase agreements or other short-term borrowings). Because
dollar reverse repurchase agreements generally are treated as sales and
repurchases, rather than as borrowings, for federal income tax purposes, the
Company's ability to enter into dollar reverse repurchase agreements may be
limited in order to enable the Company to satisfy the 75% asset test. In
addition, the Company's ability to enter into dollar reverse repurchase
agreements may be limited in order to avoid being treated as an investment
company for purposes of the Investment Company Act. See "Federal Income Tax
Considerations--Requirements for Qualification--Asset Tests" and "--Taxation of
AMC" and "Risk Factors--Impact of Investment Company Act."
The Company expects generally to maintain a ratio of its total book capital
base (book value of capital accounts, retained earnings and subordinated debt
deemed by management to qualify as capital for this purpose, taking into account
valuation adjustments) to book value of total assets of between 10% and 20%,
although the percentage may vary from time to time depending upon market
conditions and other factors deemed relevant by management and as approved by
the Board of Trustees. However, the Company is not limited under its Bylaws in
respect of the amount of its borrowings, whether secured or unsecured, and the
aggregate percentage of total equity capital could at times be lower than 10%.
If the returns on the Mortgage Assets purchased with borrowed funds fail to
cover the cost of the borrowings, the Company will experience net interest
losses and may experience net losses. In addition, through increases in
collateralization requirements, decreases in the market value of the Company's
Mortgage Assets, increases in interest rate volatility, availability of
financing in the market, circumstances then applicable in the lending market
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and other factors, the Company may not be able to achieve the degree of leverage
necessary to optimize the returns on its portfolio, which may adversely affect
the Company's operating results.
HEDGING
The Company intends to enter into hedging transactions against the
variable-rate indebtedness incurred by the Company to finance its acquisition of
Mortgage Assets to provide protection from interest rate fluctuations or other
market movements. The Company does not intend to hedge for speculative purposes.
With respect to indebtedness, hedging can be used to limit, fix, or cap the
interest rate on variable interest rate indebtedness. The Company also intends
to utilize asset-liability management techniques to mitigate the effects of
interest rate fluctuations on its interest income.
The Company's hedging activities may include interest rate swaps, the
purchase of interest rate caps or floors (or options to purchase such
instruments), futures contracts, and the purchase of REMIC interests ("Mortgage
Derivative Securities"). The Company intends to hedge against interest rate
increases primarily by purchasing Qualified Hedges. A "Qualified Hedge" for this
purpose is a bona fide interest rate swap or cap agreement, option, futures
contract, forward rate agreement, or any similar financial instrument entered
into by the Company to hedge any variable rate indebtedness that the Company
incurs to acquire or carry assets that are "real estate assets" for purposes of
Code section 856(c)(6). Income and gain from Qualified Hedges are qualifying
income for purposes of the 95%, but not the 75% gross income test. See "Federal
Income Tax Considerations--Requirements for Qualification--Income Tests."
In a typical interest rate cap (or floor) agreement, the cap (or floor)
purchaser makes an initial lump sum cash payment to the cap (or floor) seller in
exchange for the seller's promise to make cash payments to the purchaser on
fixed dates during the contract term if prevailing interest rates exceed (or are
less than) the rate specified in the contract. Financial futures contracts
typically involve such instruments as Treasury Bills or Eurodollar contracts. A
futures contract creates the obligation to receive or deliver a specific
financial instrument at a specified future date and price or pay the cash
settlement price with respect to those instruments which are settled in cash.
Options on financial futures contracts are similar to options on securities
except that a futures option gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract and obligates the
seller to deliver that position. Financial futures contracts and options on
financial futures contracts are classified as "commodities" under the U.S.
Commodity Exchange Act and may also be classified as "securities" for securities
law purposes. The Company does not intend to invest in any other types of
commodities and will not engage in commodities trading. 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 Commodities Exchange Act or otherwise complies with the provisions of that
Act. The purchase of Mortgage Derivative Securities can be an effective hedging
strategy in certain situations, as these investments tend to increase in value
and their yields tend to increase as interest rates rise. The Company intends to
limit its purchases of Mortgage Derivative Securities to those investments
qualifying as real estate assets. Income from such investments generally is
qualifying income for purposes of the 95% and 75% gross income tests. See
"Federal Income Tax Considerations--Requirements for Qualification--Income
Tests."
These hedging transactions are designed to preserve the value of the
Company's portfolio in changing interest rate environments. However, no hedging
strategy can completely insulate the Company from such risks. The Company
intends to carefully monitor and may have to limit its hedging strategies to
assure that it does not realize excessive hedging income, or hold hedging assets
having excess value in relation to total assets, which could 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 the Code, provided such failure was due to reasonable cause. See "Federal
Income Tax Considerations--Requirements for Qualification Income Tests."
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In addition, hedging involves transaction costs, and such costs increase
dramatically as the period covered by the hedging protection increases.
Therefore, the Company may be prevented from effectively hedging its
variable-rate indebtedness incurred to acquire Mortgage Assets. Certain losses
incurred in connection with hedging activities may be capital losses that would
not be deductible to offset ordinary REIT income. In such a situation, the
Company would have incurred an economic loss of capital that would not be
deductible to offset the ordinary income from which dividends must be paid. See
"Federal Income Tax Considerations--Requirements for Qualification--Distribution
Requirements."
The Company also intends to manage its assets and liabilities in a manner
designed to mitigate the effects of interest rate fluctuations on its interest
income from Mortgage Assets. For example, the Company may acquire principal-only
mortgage related securities as a means of mitigating the effects of Mortgage
Loan prepayments, which generally increase during periods of declining interest
rates.
In addition, 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.
MORTGAGE BANKING AND LOAN TRADING OPERATIONS
BUSINESS
AMC is a full-service mortgage banking firm that was formed in 1981. AMC's
three primary businesses are its (i) Loan Trading Operations, (ii) Loan
Origination Operations, and (iii) Loan Servicing Operations. AMC historically
has focused its origination, investment, trading and servicing operations on the
residential mortgage loan market.
LOAN TRADING OPERATIONS. In 1993, AMC established its Loan Trading
Operations. To date, such operations have focused on acquiring, for trade and
investment, Seasoned Mortgage Loans and participations in residential Seasoned
Mortgage Loans. Since inception, AMC has traded Mortgage Loans and
participations with a principal amount in excess of $120.0 million. AMC has
recently expanded its acquisition of Owner-Financed Mortgage Loans.
AMC generally acquires Seasoned Mortgage Loans in bulk or in portfolio
sales. The majority of AMC's Seasoned Mortgage Loan acquisitions are secured by
first priority liens on one-to-four unit single family residential properties
with values at origination of less than $250,000. A portfolio typically includes
both fixed and adjustable rate Mortgage Loans, but with a strong concentration
of fixed rate loans. Seasoned Mortgage Loan portfolios are purchased from
various sellers who, in some cases, have originated the loans; but in many cases
such sellers have acquired the loan portfolios in bulk purchases or as the
result of company acquisitions or mergers.
Typically a seller offers a Seasoned Mortgage Loan portfolio for sale in
order to provide liquidity, to meet regulatory requirements, to liquidate
assets, to restructure its portfolio, or for other business reasons. AMC
actively solicits brokers and lenders for Seasoned Mortgage Loans, and over the
years has built relationships with several brokers and lenders who provide a
regular flow of potential acquisitions to the Loan Trading Operations. AMC
generates other potential acquisitions of Seasoned Mortgage Loans from investor
contact through its Servicing Operations or through its direct marketing
operations that contact lending institutions located throughout the United
States.
AMC considers several factors in evaluating and pricing Mortgage Loans and
performs comprehensive due diligence on each Mortgage Loan portfolio that it
purchases. These procedures consist of reviewing and analyzing all, or in cases
of larger portfolios a representative sample, of the Mortgage Loans in the
portfolio and are typically performed by AMC employees. The underwriter takes
into account many
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factors in analyzing the Mortgage Loans in the subject portfolio, including the
general economic conditions in the geographic area or areas in which the
underlying properties are situated, the original loan-to-value ratios, the
payment histories of the borrowers, and other pertinent statistics. In addition,
the underwriter attempts to verify the extent to which the mortgage loan
documentation conforms to the standards for loan documentation set by FNMA and
FHLMC. In cases where a significant portion of the portfolio Mortgage Loan
contains non-conforming documentation, AMC assesses the additional risk involved
in purchasing such Mortgage Loans. Once the underwriting and due diligence
process is complete, AMC determines whether the Mortgage Loan portfolio meets
its acquisition criteria and, if it does, the range of appropriate pricing.
In many cases, the Seasoned Mortgage Loan portfolios that AMC acquires are
purchased at a discount to the outstanding principal balance thereof. In a
typical portfolio, most of the Mortgage Loans are performing, with the majority
being of Conforming Mortgage Loan quality. Some Mortgage Loans may have had
payment problems and/or document deficiencies in the past. Document deficiencies
are identified in the due diligence process and, to the extent practical, are
cured by AMC prior to reselling the loans. Ineffective servicing or several
servicing transfers of the loans over a short period of time may result in
payment deficiencies. Because many considerations may impact pricing or yield,
each Mortgage Loan package evaluated is priced based on the specific underlying
loan characteristics.
Owner-Financed Mortgage Loans represent obligations of a purchaser of real
estate and are created by the seller thereof to finance the purchaser's
acquisition. The substantial majority of Owner-Financed Mortgage Loans are first
lien priority, fixed rate and fully amortizing. These Owner-Financed Mortgage
Loans are secured by residential, multi-family, commercial and retail property
as well as unimproved land. It is expected that the majority of the
Owner-Financed Mortgage Loans AMC will identify or acquire will be secured by
residential real estate. Owner-Financed Mortgage Loans are generally purchased
at a discount from their outstanding balance to achieve a desired yield to
maturity. A purchaser may acquire the entire Owner-Financed Mortgage Loan, or
instead may acquire a partial stream of the remaining payments where the
seller's right to the unsold portion of the Owner-Financed Mortgage Loan balance
is subordinate to the stream of payments purchased.
Due to the non-uniform characteristics applicable to the Owner-Financed
Mortgage Loans, the secondary market for such Mortgage Loans is largely private
in nature with only a few major participants. As a consequence, there is no
widely accepted information or data base on the total size of the market for any
specific period or the aggregate number of Owner-Financed Mortgage Loans
available for sale at any time. The Company believes that the current management
team has developed a sufficient network of sources of Owner-Financed Mortgage
Loans to successfully implement its business strategy relating to Owner-Financed
Mortgage Loans.
AMC intends to acquire Owner-Financed Mortgage Loans through a multi-channel
acquisition program which will be conducted on a nationwide basis and primarily
focused on acquisitions from independent mortgage brokers, that currently are
the predominant source of Owner-Financed Mortgage Loans. This source of
Owner-Financed Mortgage Loans will be identified from AMC's existing database of
such mortgage brokers, or solicited through advertisements in trade
publications, or from attendance at trade shows. AMC also will utilize its
wholesale Loan Origination Operations network of over 800 approved mortgage
brokers to solicit for Owner-Financed Mortgage Loans. AMC also may acquire
directly from sellers of property, or through contacts with developers,
accountants, probate attorneys, bank trust officers and others. AMC believes its
efficient underwriting guidelines and the ability to close transactions in a
timely manner will allow it to effectively acquire Owner-Financed Mortgage
Loans.
Because Owner-Financed Mortgage Loans are originated by the seller of a
property, they typically are subject to terms and conditions negotiated to
satisfy the unique needs of a particular private transaction and the particular
requirements of the buyer and seller. Therefore, the re-underwriting of these
loans requires careful evaluation of the related loan documentation and terms.
AMC's acquisition of Owner-
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Financed Mortgage Loans is distinguishable from the origination or acquisition
of Conforming Mortgage Loans which involves standardized documentation and
terms, substantial contact by lenders with each borrower and the ability to
perform extensive property evaluation prior to granting a loan.
Once AMC identifies an Owner-Financed Mortgage Loan through its marketing
channels, it gives the information to one of AMC's contract buyers. The contract
buyer makes an initial evaluation of the Owner-Financed Mortgage Loan's
characteristics to verify that it satisfies the requirements for the particular
type of submission and submits it to its underwriting department. The
underwriters evaluate the available information concerning the Owner-Financed
Mortgage Loans including proposed loan amount to collateral value, the property
type, the proposed discount factor, the payor's credit and payment history, the
interest rate, the demographics of the region where the collateral is located,
and the potential for environmental risks. Currently, the ratio of the total
investment in an Owner-Financed Mortgage Loan compared to the value of the
property which collateralized the Owner-Financed Mortgage Loan generally will
not exceed 70% to 80% on Owner-Financed Mortgage Loans collateralized by single
family residences; 30% to 70% on Owner-Financed Mortgage Loan's collateralized
by other types of improved property such as commercial property; and 55% on
unimproved land. AMC's underwriting guidelines with respect to Owner-Financed
Mortgage Loans are necessarily flexible in nature. Given the unique nature of
each transaction involving an Owner-Financed Mortgage Loan, it is impracticable
for AMC to set specific limits for any particular loan or property
characteristic. For example, AMC may accept an Owner-Financed Mortgage Loan with
a relatively low interest rate if the borrower has an outstanding payment
history or low loan-to-value ratio.
Based upon AMC's underwriting guidelines, the underwriters may approve the
acquisition or change the terms of the acquisition, such as limiting the
acquisition to a partial purchase in order to decrease its total investment risk
and improve the related collateral ratio. Once the Owner-Financed Mortgage Loan
is approved in principle, a current market valuation of the collateral is
determined. These valuations generally consist of (i) an appraisal by an
approved licensed appraiser or brokers price opinion, or (ii) review of the
county tax property value assessment records or (iii) a review of comparable
sales data in the area. When traditional appraisals are obtained, they are
generally based on a drive-by inspection of the collateral and comparative sales
analysis. The appraiser generally does not have access to the property for an
interior inspection.
The approved Owner-Financed Mortgage Loan is provided to AMC's closing
department where the property title is evaluated and the legal documents and the
valuation of collateral are reviewed. Upon completion of the underwriting
process and review, appropriate closing and transfer documents are executed by
the seller and/or mortgage broker, transfer documents are recorded, and the
transaction is closed.
LOAN ORIGINATION OPERATIONS. AMC commenced its Loan Origination Operations
in 1993. AMC originates loans on both the wholesale and retail level. AMC's
wholesale Loan Origination Operations are conducted in over 22 states through a
network of over 800 approved mortgage brokers who provide Conforming and
Non-Conforming Mortgage Loans to AMC for sale to permanent investors, who
generally service the loans. Since January 1, 1996, AMC has funded loans from
over 300 of such mortgage brokers. AMC also originates primarily Conforming
Mortgage Loans through a network of six retail sales offices throughout Texas
for sale to permanent investors, who generally service the loans. Retail
Mortgage Loans historically have accounted for approximately 15% of AMC's total
loan production. The majority of the Mortgage Loans originated by AMC will be
Conforming Mortgage Loans, although AMC recently has begun to originate
Non-Conforming Mortgage Loans including Mortgage Loans to Borrowers with
impaired or subprime credit characteristics.
Conforming Mortgage Loans comply with the requirements for inclusion in a
loan guarantee program sponsored by either FHLMC or FNMA. AMC also may originate
or acquire FHA Loans or VA Loans, which qualify for inclusion in a pool of
Mortgage Loans guaranteed by GNMA. Under current regulations,
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the maximum principal balance allowed on conforming Mortgage Loans ranges from
$207,000 ($310,500 for loans secured by properties located in either Alaska or
Hawaii) for one-unit to $397,800 ($596,700 for Mortgage Loans secured by
properties located in either Alaska or Hawaii) for four-unit residential loans.
Nonconforming Mortgage Loans are single or multi-family Mortgage Loans that do
not qualify in one or more respects for purchase by FNMA or FHLMC.
Non-Conforming Mortgage Loans are primarily originated through AMC's
wholesale operations. Historically, AMC originated Non-Conforming Mortgage Loans
to credit-worthy borrowers that did not meet the qualifications necessary for
classification as a Conforming Loan, for reasons such as loan size, limited
employment history or self employment, property status (i.e., vacation home) and
limited or no-documentation programs. The specific criteria for each type of
Non-Conforming Mortgage Loans are dictated by the institutional purchaser that
has committed to purchase such loan.
AMC has recently begun to originate subprime mortgage loans for borrowers
with impaired credit risk characteristics for sale to institutional purchasers.
Loan applications received from potential borrowers are classified according to
certain characteristics, including, but not limited to, the condition of the
underlying property, credit history of the applicant, ability to pay,
loan-to-value ratio and general stability of the applicant in terms of
employment history and time in residence. AMC has adopted classifications with
respect to the credit profile of an applicant that are in conformity with the
requirements of a national mortgage conduit specializing in the purchase of
"subprime" mortgage loans. Each loan is placed into one of five rating
categories, each denominated by a letter: "A-1," "A-2," "B," "C" or "D". The
classification grades denote the relative status of an applicant as a subprime
borrowing candidate in accordance with AMC's criteria; accordingly an "A-1" or
"A-2" classification does not mean that the applicant is a candidate for a
Conforming Mortgage Loan. Terms of loans, as well as maximum loan-to-value
ratios and debt-to-income ratios, vary depending on the applicant's
classification. Loan applicants with less favorable credit classifications are
generally offered loans with higher interest rates and lower loan-to-value
ratios than applicants with more favorable credit classifications. AMC uses the
foregoing categories and characteristics as guidelines only and may modify or
change them in the future. On a case-by-case basis, AMC may determine that a
prospective borrower warrants an exception if sufficient compensating factors
exist. Examples of such compensating factors are: low loan-to-value ratio, low
debt ratio, long-term stability of employment and/or residence, excellent
payment history on past mortgages, or a significant reduction in monthly housing
expenses.
Prior to originating or purchasing Mortgage Loans, AMC obtains a purchase
commitment from an institutional purchaser. AMC generally delivers loans and
receives payments for the loans shortly after funding. The Company currently
sells most of its Mortgage Loans to national mortgage banks such as Norwest
Mortgage, Inc. Following the completion of the offering, the Company may be the
permanent investor for a limited amount of AMC's Non-Conforming Mortgage Loans.
The presence of the Company, as an additional well-financed investor for a
portion of AMC's Mortgage Loan originations, may enable AMC to increase its
Mortgage Loan production and to achieve certain operating efficiencies. For the
year ended December 31, 1996, AMC funded Mortgage Loans in an aggregate
principal amount of $413 million.
LOAN SERVICING OPERATIONS. Upon acquisition by Liberty Resources, Inc. in
1990, AMC's primary business was its Loan Servicing Operations, which consisted
of the acquisition of servicing portfolios from the Resolution Trust
Corporation. By 1993, AMC was servicing over 14,000 loans with an aggregate
unpaid principal balance of approximately $425 million. In 1996, AMC sold a
substantial portion of its servicing portfolio because of the premium valuations
being placed on servicing portfolios and AMC's desire to focus its investment
activities on loan production and trading. Currently, AMC's servicing operations
are utilized primarily as support for its production and investment operations.
While the Company believes that the current returns on newly-originated
servicing are not attractive, AMC may in the future selectively invest in
servicing portfolios where management believes that the returns are consistent
with AMC's and the Company's operating policies and strategies, which require
that any such investment provide more
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superior returns than may be achieved from alternative mortgage related
investments available from time to time. Any such decision will be made by the
board of directors of AMC.
At September 30, 1997, AMC serviced approximately 4,800 mortgage loans with
an aggregate principal balance of approximately $167 million, which included
approximately 1,300 mortgage loans with an aggregate principal balance of $17
million for its own account.
Servicing mortgage loans involves an agreement with the owner of a mortgage
loan, the investor, to receive a fee for processing and administering loan
payments. This processing involves collecting monthly mortgage payments on
behalf of investors, reporting information to those investors on a monthly
basis, and maintaining custodial escrow accounts for the payment of principal
and interest to investors and property taxes and insurance premiums on behalf of
borrowers. Servicing mortgage loans also involves foreclosure or workouts with
the borrower on behalf of investors for defaulted loans.
As compensation for its mortgage servicing activities, AMC receives
servicing fees, typically ranging from 0.25% to 0.75% per annum of the loan
balances serviced, plus any late charges collected from delinquent borrowers and
other fees incidental to the services provided. In the event of a default in
payment by the borrower, AMC receives no servicing fees until the default is
cured.
Mortgage Loan servicing is provided on a nonrecourse or recourse basis. To
the extent that servicing is done on a recourse basis, the servicer is exposed
to credit risk with respect to the underlying loan in the event of default.
AMC's policy is to accept only a limited number of servicing assets on a
recourse basis and currently has virtually no recourse servicing. Additionally,
many of the nonrecourse mortgage servicing contracts owned by AMC require it to
advance all or part of the scheduled payments to the related investor in the
event of a default in payment by the borrower. Certain investors also require
AMC to advance insurance premiums and tax payments on a scheduled basis out of
its own funds. AMC, therefore, bears the funding costs associated with making
such advances. If the delinquent mortgage loan does not become current, these
advances are typically not recovered until foreclosure or final liquidation of
the mortgage loan.
Mortgage servicing rights represent a contract right to service a mortgage
loan and not a beneficial ownership interest in such mortgage loan. Servicing
rights are generally terminable at the option of the investor and failure to
service the loans in accordance with contract requirements may lead to the
termination of the servicing rights and the loss of future servicing fees in
addition to any other liability that may result from such failure. To date,
AMC's mortgage servicing rights have not been terminated by any related investor
due to any failure by AMC to service the loans in accordance with its
contractual obligations.
AMC utilizes an internal data processing system licensed by FICS, one of the
most widely used personal computer based mortgage banking servicing systems in
the United States, to administer its servicing portfolio. Management believes
that this system provides AMC with sufficient capacity to support expansion of
its residential mortgage loans servicing portfolio to 50,000 loans, which is
substantially in excess of AMC's current mortgage loan servicing portfolio of
approximately 4,800 loans as of September 30, 1997.
EMPLOYEES
AMC currently has 130 employees and believes that its relationships with its
employees are good. AMC is not a party to any collective bargaining agreement.
It is expected that a majority of the employees of AMC will also be employees of
the Company.
FACILITIES
The Company's executive offices and administrative facilities are located
within AMC's 22,500 square feet of office space in Houston, Texas. The Company
subleases its facilities from AMC pursuant to a
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Sublease Agreement expiring in February 1998. The aggregate monthly rental of
the facility is $13,074. AMC conducts its servicing operations in Oklahoma City,
Oklahoma, subleasing a 7,427 square feet facility for a base rent of $5,106
pursuant to a Sublease Agreement expiring November 30, 1998. AMC's retail
operations are located in six branch offices throughout Texas with lease
expiration terms ranging from November 25, 1997 to January 31, 2000, and one
lease with a month to month renewal option. The aggregate base rent under such
leases is $9,103 per month. Finally, AMC conducts its wholesale operations from
six branch offices located throughout the United States with an aggregate
monthly rent of $7,556. Management believes that the terms of the sublease are
as least as favorable as could have been obtained from an unaffiliated third
party. Management believes that these facilities are adequate for the Company's
and AMC's foreseeable needs, and that alternate space at comparable rental rates
is available, if necessary.
LEGAL PROCEEDING
Lawsuits have been filed on behalf of purported classes of borrowers against
several mortgage lenders, including AMC, alleging that such lenders have made
certain payments to independent mortgage brokers in violation of state and
federal laws, including RESPA. AMC is the defendant in a lawsuit of this type
filed in September 1997 in the United States District Court for the District of
Minnesota. The suit alleges violations of RESPA and various state laws arising
out of AMC's payment of part of the compensation of mortgage brokers at
settlement of certain mortgage loans. The named plaintiffs have requested that
the case be treated as a class action, but no court has ruled on that request.
AMC intends to defend this action vigorously and, in October 1997, filed its
answer to the complaint denying all allegations of illegal or improper
activities.
AMC's broker compensation programs permit AMC to pay some or all of a
mortgage broker's compensation at a loan closing under certain circumstances,
and AMC believes that making these types of payments is consistent with
long-standing industry practice and regulatory interpretations. However, the
laws and regulations relating to mortgage broker compensation programs have not
been definitively interpreted in all relevant respects by the appropriate
authorities, and consequently, there can be no assurance that AMC and others in
the mortgage industry who are defending similar actions will prevail. If the
lawsuit against AMC and similar cases of this type are resolved against the
lenders, it may cause an industry-wide change in the way independent mortgage
brokers are compensated. Such a change may have a material adverse effect on AMC
and the entire mortgage lending industry. See "Risk Factors--Lawsuit Against AMC
Relating to Payments to Brokers."
EFFECTS OF INTEREST RATE FLUCTUATIONS
The Company expects that a substantial portion of its Mortgage Assets will
bear fixed interest or pass-through rates, and substantially all of the
Company's borrowings will bear interest at short-term rates and will have
maturities of less than one year. Consequently, changes in short-term interest
rates may significantly influence the Company's net interest income. Rising
short-term rates will increase the costs of borrowings by the Company which will
be utilized to fund the Mortgage Assets and the Company's net interest income
may be reduced or a net loss may result. No assurance can be given as to the
amount or timing of changes in interest rates or their effect on the Company's
Mortgage Assets or net interest income.
COMPETITIVE CONDITIONS IN THE MORTGAGE INDUSTRY
The Company and AMC currently, and will in the future, encounter
competition, primarily from commercial banks, savings and loans, other
independent mortgage lenders and certain other mortgage REITs. With respect to
the acquisition of Owner-Financed Mortgage Loans and Seasoned Mortgage Loans,
the markets are fragmented with no recognizable dominant players. To the extent
well financed players enter and create a more efficient market, however, AMC may
be at a competitive disadvantage.
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The entrance of these competitors into AMC's market could have a material
adverse effect upon the Company's results of operations and financial condition.
With respect to the acquisition of Non-Conforming Mortgage Loans, the
Company and AMC will face a highly competitive market with many dominant well
financed participants. The existence of these dominant competitors also could
have a material adverse effect upon the Company's results of operations and
financial condition.
As AMC expands into additional geographic markets and expands its product
offering, it will face competition with respect to the acquisition of Mortgage
Loans from lenders with established positions in these locations and with
significant experience with such products. Competition can take place on various
levels, including convenience in obtaining a loan, service, marketing,
origination channels and pricing. In addition, increased competition may also
increase the demand for AMC's experienced personnel and the potential that such
personnel will leave AMC for its competitors. There can be no assurance that AMC
will be able to compete successfully in this market environment and any failure
in this regard could have a material effect on the Company's results of
operations and financial condition.
49
<PAGE>
MANAGEMENT
TRUSTEES AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
Trustees, Trustee nominees and executive officers of the Company immediately
after the closing of the Offering:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------- --- -----------------------------------------------------------
<S> <C> <C>
James E. Day 41 Managing Director, Co-Chairman of the Board of Trustees
(Term will expire in 2000)
Patrick A. Walden 43 Managing Director, Co-Chairman of the Board of Trustees
(Term will expire in 2000)
* Independent Trustee (Term will expire in 1999)
* Independent Trustee (Term will expire in 1999)
* Independent Trustee (Term will expire in 1998)
</TABLE>
- ------------------------
* Has agreed to be nominated as a Trustee, but is not expected to become a
Trustee until immediately after the consummation of the Offering.
The following are biographical summaries of the Trustees, Trustee nominees
and executive officers of the Company:
JAMES E. DAY has served as a Managing Director, Trustee and Co-Chairman of
the Board of Trustees of the Company since its formation on August 13, 1997. Mr.
Day is also a Managing Director and director of AMC. From 1985 through 1996, Mr.
Day was the Chief Financial Officer of Guardian Savings and Loan Association, a
Houston, Texas based savings and loan association, and also held the title of
Executive Vice President prior to his leaving the company. Mr. Day's
responsibilities at Guardian included management of its $3 billion mortgage
backed securities portfolio. From 1984 to 1985, Mr. Day served as the Senior
Vice President--Finance of First South Savings Association. Previously, he was
an accountant with Arthur Young and Company in Houston. Mr. Day holds B.A. and
M.A. degrees from Rice University.
PATRICK A. WALDEN has served as a Managing Director, Trustee and Co-Chairman
of the Board of Trustees of the Company since its formation on August 13, 1997.
Mr. Walden also serves as a Managing Director and Chief Executive Officer and
Director of AMC and has been involved with AMC since 1993. From 1986 to 1993,
Mr. Walden served in executive vice president positions in the mortgage banking
and residential loan operations for First Gibraltar Bank, FSB and its
subsidiaries and predecessors. Most recently, Mr. Walden served as Executive
Vice President and Chief Portfolio Acquisition and Management Officer of First
Gibraltar Mortgage Corporation responsible for residential loan and servicing
acquisitions and sales, and management of its $2 billion residential mortgage
loan portfolio. Previously, he was an accountant for Arthur Young & Company in
Houston. Mr. Walden has a B.S. degree from Indiana State University and served
four years in the U.S. Air Force.
BOARD OF TRUSTEES
The business and affairs of the Company will be managed under the direction
of a Board of Trustees which will initially have five members, three of whom
will be Independent Trustees. Messrs. Day and Walden presently serve as
Co-Chairman of the Board of Trustees of the Company. Immediately following the
closing of the Offering, Messrs. , and will
become Trustees.
Pursuant to the terms of the Company's Declaration of Trust, the Trustees
are divided into three classes. One class will hold office initially for a term
expiring at the annual meeting of shareholders to be held in 1998, a second
class will hold office initially for a term expiring at the annual meeting of
shareholders to be held in 1999, and a third class will hold office initially
for a term expiring at the annual meeting of shareholders to be held in 2000. At
each annual meeting of the shareholders of the Company,
50
<PAGE>
the successors to the class of Trustees whose terms expire at that meeting will
be elected to hold office for a term continuing until the annual meeting of
shareholders held in the third year following the year of their election and the
election and qualification of their successors. See "Certain Provisions of
Maryland Law and of the Company's Declaration of Trust and Bylaws."
COMMITTEES OF THE BOARD OF TRUSTEES
AUDIT COMMITTEE. Within 30 days following consummation of the Offering, the
Board of Trustees of the Company will establish an Audit Committee that will
consist of two Independent Trustees. The Audit Committee will make
recommendations concerning the engagement of independent public accountants,
review with the independent public accountants the plans and results of the
audit engagement, approve professional services provided by the independent
public accountants, review the independence of the independent public
accountants, consider the range of audit and non-audit fees and review the
adequacy of the Company's internal accounting controls.
EXECUTIVE COMPENSATION COMMITTEE. The Board of Trustees will also establish
a Compensation Committee (the "Compensation Committee") comprised of two or more
of the Independent Trustees to determine compensation for the Company's
executive officers and to implement the 1997 Plan.
The Board of Trustees does not have a standing nominating committee. The
full Board of Trustees performs the functions of such a committee.
COMPENSATION OF TRUSTEES
The Company intends to pay its Trustees who are not officers of the Company
fees for their services as trustees. Each such Trustee will receive annual
compensation of $20,000, payable quarterly, plus expenses for attendance in
person at each meeting of the Board of Trustees. In addition, each such Trustee
will receive options under the 1997 Trustees' Share Incentive Plan (the
"Trustees' Plan") to purchase 5,000 Common Shares at an exercise price equal to
the Offering Price, which options will vest in equal installments over a
four-year period on the anniversary of the date of grant. Officers of the
Company who are Trustees will not be paid any trustee fees.
EXECUTIVE COMPENSATION
The Company was organized as a Maryland real estate investment trust in
August 1997, and paid no cash compensation to its executive officers for the
year ended December 31, 1996.
The following table sets forth the base compensation to be awarded to the
executive officers of the Company during the fiscal year ending December 31,
1997.
<TABLE>
<CAPTION>
ANNUAL SHARES
COMPENSATION SUBJECT TO
NAME AND PRINCIPAL POSITION SALARY(1) OPTIONS
- ------------------------------------------------------------------------------------ ------------- -------------
<S> <C> <C>
James E. Day ....................................................................... $ 225,000 200,000
Managing Director, Co-Chairman of the Board of Trustees
Patrick A. Walden .................................................................. $ 225,000 200,000
Managing Director, Co-Chairman of the Board of Trustees
</TABLE>
- ------------------------
(1) Amounts given are annualized projections for fiscal year 1997, which ends
December 31, 1997. Does not include bonuses paid in accordance with the
applicable Employment Agreement that may be paid to the above individuals.
See "Employment Agreements."
EMPLOYMENT AGREEMENTS
The Company will enter into employment agreements with each of Messrs.
Walden and Day. Each such agreement will provide for an initial term of four
years, which will be automatically renewed for
51
<PAGE>
successive one year periods unless otherwise terminated. Each agreement will
provide for initial annual base compensation of $225,000. Each agreement also
will provide for quarterly incentive compensation equal to 7.5% of the amount by
which the Company's return on average outstanding book common equity exceeds the
average yield on the 10-year Treasury Note for the applicable period plus 200
basis points. Each agreement provides that upon termination other than for
cause, the terminated officer will be entitled to receive severance benefits in
an amount equal to two times such officer's combined base salary and bonus for
the preceding fiscal year. If either officer resigns for any other reason, there
is no severance payment and the officer is prohibited from competing with the
Company for a period of two years following the resignation. Although the
Company believes these forfeiture and non-compete provisions would generally be
enforceable, there can be no assurance that such officer will not elect to
terminate the agreement early despite these provisions and no longer remain in
the Company's employ. Any modification of an employment agreement, including any
adjustments to compensations, waivers or other amendment, must be approved by
the Compensation Committee. The Compensation Committee will have sole discretion
in such regard, but it is expected that any such modifications will be based on
prior or potential performance, market conditions and general economic levels.
1997 SHARE INCENTIVE PLAN
Prior to the Offering, the Board of Trustees will adopt, and the sole
shareholder of the Company will approve, the 1997 Plan. The 1997 Plan will be
administered by the Compensation Committee, or its delegate. The Compensation
Committee may not delegate its authority with respect to individuals subject to
Section 16 of the Securities Exchange Act of 1934, as amended. As used in this
summary, the term "Administrator" means the Compensation Committee or its
delegate, as appropriate.
Officers and other employees of the Company and "parent" and "subsidiary"
corporations (within the meaning of Code Section 424) of the Company, will be
eligible to participate in the 1997 Plan. Under Code Section 424, a "parent"
corporation generally is a corporation possessing at least 50 percent of the
total combined voting power of all classes of shares of the Company (or of any
other "parent" corporation), and a "subsidiary" corporation generally is a
corporation of which the Company (or any other "subsidiary" of the Company) owns
at least 50 percent of the total combined voting power of all classes of stock.
The Administrator will select the individuals who will participate in the 1997
Plan ("Participants").
The 1997 Plan authorizes the issuance of up to 975,000 Common Shares, no
more than 250,000 of which may be issued pursuant to Restricted Share Awards and
in settlement of Performance Shares. The Plan provides for the grant of (i)
share options intended to qualify as incentive share options under Section 422
of the Code ("ISOs") and options not so qualifying ("nonqualified options").
Code section 422 imposes various requirements in order for an option to qualify
as an ISO-e.g., maximum ten year term of the option, option price not less than
the fair market value of the underlying shares on the date of grant. In
addition, under Code section 422, no Participant may receive ISOs (under all
incentive share option plans of the Company and its parent or subsidiary
corporations) which are first exercisable in any calendar year for Shares having
an aggregate fair market value (determined as of the date the ISO is granted)
that exceeds $100,000 (the "$100,000 Limit"). To the extent options first become
exercisable by a Participant in any calendar year for a number of shares in
excess of the $100,000 Limit, they will be treated as nonqualified options. The
principal difference between options qualifying as ISOs under Code section 422
and nonqualified options is that a Participant generally will not recognize
ordinary income at the time an ISO is granted or exercised, but rather at the
time the Participant disposes of shares acquired under the ISO. In contrast, the
exercise of a nonqualified stock option generally is a taxable event that
requires the Participant to recognize, as ordinary income, the difference
between the shares' fair market value and the option price. The employer will
not be entitled to a federal income tax deduction on account of the grant or the
exercise of an ISO, whereas the employer is entitled to a federal income tax
deduction on account of the exercise of a nonqualified option equal to the
ordinary income recognized by the Participant. The employer may claim a federal
income tax deduction on account of certain dispositions of shares acquired
52
<PAGE>
upon the exercise of an ISO. The Administrator may also grant performance based
dividend equivalent rights in tandem with options, which entitle the Participant
to a cash payment for dividends that would have been paid on each Share for
which the related Option is exercised had the Share been outstanding prior to
exercise.
The Plan also provides for the grant of (i) Performance Shares, (ii) SARs,
issued alone or in tandem with options, (iii) Restricted Share Awards, the
vesting of which is contingent upon the attainment of performance goals, or
subject to employment or other requirements, and (iv) cash incentive awards. The
Administrator shall prescribe terms and conditions of all awards under the Plan
including the conditions which must occur for Restricted Shares to vest and for
Performance Shares, performance based dividend equivalent rights and cash
incentive awards to be earned; provided that upon, or on certain events leading
to, a Change of Control of the Company (as defined in the 1997 Plan), all
Restricted Shares will vest, all Performance Shares and cash incentive awards
will be earned, and all options and SARs will become exercisable.
No Participant who receives an award of Restricted Shares will be permitted
to make an election to recognize income upon issuance of the Restricted Shares
under Section 83(b) of the Code. Code Section 83 sets forth the timing rules for
recognition of income and an employer's deduction with respect to transfers of
property in connection with the performance of services. A Code Section 83(b)
election generally would permit the recipient of Restricted Shares to accelerate
the time at which income is recognized with respect to the Restricted Shares,
with the effect that the amount of income recognized (and deduction available to
the employer) would be limited to the fair market value of the Restricted Shares
on the date they are issued. Without this election, the general timing rules
apply. Thus, under the 1997 Plan, income is recognized and a deduction may be
taken as of the first date that the Restricted Shares are transferable or not
subject to a substantial risk of forfeiture, in an amount equal to the fair
market value of the Restricted Shares on that date. As to other awards, no
income is recognized upon the grant of an SAR. The exercise of an SAR generally
is a taxable event. A Participant generally must recognize income equal to any
cash that is paid and the fair market value of Shares received in settlement of
an SAR. A Participant will recognize income on account of the settlement of a
Performance Share award equal to any cash that is paid and the fair market value
of Shares (on the date the Shares are first transferable or not subject to a
substantial risk of forfeiture) received in settlement of the award. A
Participant will recognize ordinary income equal to the value of any cash
incentive award paid. The employer will be entitled to claim a federal income
tax deduction on account of the exercise of a SAR and the settlement of a
Performance Share award or cash incentive award. The amount of the deduction is
equal to the ordinary income recognized by the Participant.
On the effective date of the Offering, options for 200,000 Common Shares
will be granted to each of Messrs. Walden and Day at an exercise price equal to
the Offering Price. The options will become exercisable in three annual
installments beginning on the first anniversary of the date grant and will have
a term of ten years. The options will be granted as ISOs to the maximum extent
permitted by the $100,000 Limit of Code Section 422, described above, given the
three year period over which the options will become exercisable. The balance of
the option grant will take the form of a nonqualified option.
THE TRUSTEES' PLAN
Prior to the Offering, the Board of Trustees will also adopt, and the
Company's sole shareholder will approve, the Trustees' Plan to provide
incentives to attract and retain non-employee Trustees.
The Trustees' Plan provides for the grant of nonqualified options and the
award of Common Shares to each eligible Trustee of the Company. No Trustee who
is an employee of the Company or a "parent" or "subsidiary" corporation (within
the meaning of Code Section 424) of the Company is eligible to participate in
the Trustees' Plan. Under Code Section 424, a "parent" corporation generally is
a corporation possessing at least 50 percent of the total combined voting power
of all classes of shares of the
53
<PAGE>
Company (or of any other "parent" corporation), and a "subsidiary" corporation
generally is a corporation of which the Company (or any other "subsidiary" of
the Company) owns at least 50 percent of the total combined voting power of all
classes of stock.
The Trustees' Plan authorizes the issuance of up to 25,000 Common Shares and
provides that each eligible Trustee who is a member of the Board of Trustees on
the effective date of the Offering (a "Founding Trustee") will be granted a
nonqualified option for 5,000 Common Shares at an exercise price equal to the
Offering Price. Each eligible Trustee who is not a Founding Trustee will receive
an option for 5,000 Common Shares on the earlier of (i) the date of the first
Board of Trustees meeting following the annual meeting of shareholders (each
such date, an "Award Date") at which the Trustee is first elected to the Board
of Trustees or (ii) the date the Trustee is first elected or appointed to the
Board. An option granted under the Trustees' Plan shall become exercisable for
1,250 shares on each of the first through fourth anniversaries following the
date of grant, provided that Trustee is a member of the Board of Trustees on the
applicable anniversary. A Trustee's outstanding options will become fully
exercisable if the Trustee ceases to serve on the Board due to death or
disability or upon certain events leading to a Change of Control of the Company
(as defined in the Trustees' Plan). The exercise price of options granted in
accordance with the preceding sentence shall be the fair market value of a
Common Share on the date of grant. Options issued under the Trustees' Plan are
exercisable for ten years from the date of grant.
INDEMNIFICATION
For a description of the limitation of liability and indemnification rights
of the Company's officers and Trustees, see "Certain Provisions of Maryland Law
and of the Company's Declaration of Trust and Bylaws--Limitation of Liability
and Indemnification."
AMC
The following table sets forth information with respect to the executive
officers of AMC immediately after the closing of the Offering:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Patrick A. Walden (1) 43 Managing Director and Chief Executive Officer
James E. Day (1) 41 Managing Director
George E. Ford 57 Executive Vice President-Loan Servicing
Gary M. James 51 Executive Vice President-Retail Lending
Robert C. Ward 46 Executive Vice President-Wholesale Lending
</TABLE>
(1) See "Management--Trustees and Executive Officers."
GEORGE E. FORD has served as Executive Vice President-Loan Servicing of AMC
from May 1994 to the present. Mr. Ford is responsible for managing the Loan
Administration and Accounting departments of AMC. Mr. Ford was the President of
AMC from 1990 to 1994, and has served in senior or executive vice presidents
positions with AMC since 1987. From 1983 to 1987, Mr. Ford was employed by
Midland Mortgage Company, specializing in marketing as well as the
administration of mortgage loans. Prior to 1983, Mr. Ford served for 21 years in
the U.S. Air Force and retired as a Lieutenant Colonel. Mr. Ford has a B.S.
degree in Chemistry from Rutgers University and an M.S. degree in Business
Administration and Logistics Management from the Air Force Institute of
Technology.
GARY M. JAMES has served as Executive Vice President-Retail Lending of AMC
from November, 1993 to the present. Mr. James is responsible for all retail
branch production operations. From May 1987 to November 1993, Mr. James acted as
President and Chief Executive Officer of Valley Mortgage Company, Inc., a
mortgage banking company based in McAllen, Texas. From 1985 to 1987, Mr. James
served as Senior Vice President-Real Estate Lending of Plains National Bank in
Lubbock, Texas. From 1968 to 1985,
54
<PAGE>
Mr. James served in various executive positions in the mortgage banking and
banking industries. Mr. James has a bachelor's degree in Business Administration
and Commercial Science from the Oklahoma School of Accountancy and is a graduate
of the Northwestern University School of Mortgage Banking.
ROBERT C. WARD has served as Executive Vice President--Wholesale Lending of
AMC since 1994. Mr. Ward is responsible for AMC's nationwide wholesale lending
operations, loan processing and underwriting, loan delivery and secondary
marketing operations. From 1991 to 1994, Mr. Ward was a Vice President and
Branch Manager for Troy & Nichols, a nationwide mortgage banking firm. Prior to
that, Mr. Ward was President of American Security Mortgage Company from 1989 to
1991. From 1982 to 1989, Mr. Ward held two loan production management positions
with North American Mortgage Company. From 1987 to 1989 he was the manager in
charge of the wholesale and correspondent lending operations for the Western
region of the United States and from 1982 to 1987 he served as Regional Vice
President for Central Texas retail loan production. Mr. Ward has a B.S. degree
from the University of Texas at Austin.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
CONTRIBUTION TRANSACTION
The Contribution Transaction and this Offering will close concurrently. The
current owners of AMC (including Mr. Walden, currently a 25% owner of AMC) will
contribute 98.5% of the common stock of AMC to the Operating Partnership in
exchange for 596,592 Units (based on the Offering Price) having a value of
$11,335,250 and cash in the amount of $2,356,250. Mr. Walden will contribute
common stock representing 23.5% of the total common stock of AMC outstanding and
will receive 171,921 Units having a value of $3,266,500. The remaining
shareholders of AMC will contribute all of their holdings representing 75% of
the outstanding common stock in exchange for 424,671 Units having a value of
$8,068,749 and cash in the amount of $2,356,250. Neither of such owners will be
affiliated with the Company. AMC will effect the Recapitalization (as defined
herein) pursuant to which the Operating Partnership will exchange its shares of
AMC voting common stock for shares of AMC non-voting common stock. This will be
followed by a stock purchase by Mr. Day whereby AMC will issue voting common
stock representing slightly less than 50% of such class and approximately 1.5%
of the value of its total outstanding stock to Mr. Day in exchange for a note in
the initial aggregate principal amount of $208,500 bearing interest at an annual
rate of 6.25% and requiring equal quarterly payments over five years. After the
Recapitalization and the AMC stock purchase by Mr. Day, all of AMC's voting
common stock, representing a 3% economic interest, will be held by Messrs. Day
and Walden, and all of AMC's non-voting stock, representing a 97% economic
interest, will be held by the Operating Partnership. The Company will have no
voting control over AMC.
PRINCIPAL AND MANAGEMENT SHAREHOLDERS
The following table sets forth the beneficial ownership of Common Shares of
(i) each person who is a shareholder of the Company owning more than 5% of the
beneficial interest in the Company, (ii) each person who is a trustee, trustee
nominee or executive officer of the Company and (iii) the trustees, trustee
nominees and executive officers of the Company as a group. Unless otherwise
indicated in the footnotes, all of such interests are owned directly, and the
indicated person or entity has sole voting and investment power. The number of
shares represents the number of Common Shares the person is expected to hold
plus the number of shares for which Units expected to be held by the person are
redeemable (if the
55
<PAGE>
Company elects to issue Common Shares rather than pay cash upon such
redemption). The extent to which the persons will hold Common Shares as opposed
to Units is set forth in the notes.
<TABLE>
<CAPTION>
NUMBER OF SHARES AND
UNITS BENEFICIALLY
OWNED AFTER THE PERCENT OF ALL COMMON PERCENT OF ALL COMMON
NAME OF BENEFICIAL OWNER OFFERING SHARES AND UNITS(1) SHARES(1)
- ------------------------------------------------ -------------------- ------------------------ ---------------------
<S> <C> <C> <C>
James E. Day.................................... 245,000 2.21% 2.39%
Patrick A. Walden (2)........................... 426,921 3.85% 4.09%
All Trustees and executive officers
(5 persons)................................... 671,921 6.06% 6.30%
</TABLE>
- ------------------------
* Less than 1%.
(1) Assumes that all Units held by the person are redeemed for Common Shares.
The total number of Common Shares outstanding used in calculating the
percentage of all Common Shares and Units assumes that all of the Units held
by other persons are redeemed for Common Shares. The total number of Common
Shares outstanding used in calculating the percentage of all Common Shares
assumes that none of the Units held by other persons are redeemed for Common
Shares.
(2) The Units issued to Mr. Walden in connection with the Contribution
Transaction were issued in exchange for his 23.5% interest in AMC.
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
The following summary of the terms of the shares of beneficial interest of
the Company does not purport to be complete and is subject to and qualified in
its entirety by reference to the Declaration of Trust and Bylaws of the Company,
copies of which are exhibits to the Registration Statement of which this
Prospectus is a part. See "Additional Information."
GENERAL
The Declaration of Trust of the Company provides that the Company may issue
up to 100,000,000 Common Shares of beneficial interest, $0.01 par value per
share ("Common Shares"), and 20,000,000 preferred shares of beneficial interest,
$0.01 par value per share ("Preferred Shares"). Upon completion of this
Offering, 10,000,000 Common Shares will be issued and outstanding (11,500,000
shares if the Underwriters' overallotment option is exercised in full) and no
Preferred Shares will be issued and outstanding. As permitted by Maryland REIT
Law, the Declaration of Trust contains a provision permitting the Board of
Trustees, without any action by the shareholders of the Company, to amend the
Declaration of Trust to increase or decrease the aggregate number of shares of
beneficial interest or the number of shares of any class of shares of beneficial
interest that the Trust has authority to issue.
Both the Maryland REIT Law and the Company's Declaration of Trust provide
that no shareholder of the Company will be personally liable for any obligation
of the Company solely as a result of his status as a shareholder of the Company.
The Company's Bylaws further provide that the Company shall indemnify each
shareholder against any claim or liability to which the shareholder may become
subject by reason of his being or having been a shareholder or former
shareholder and that the Company shall pay or reimburse each shareholder or
former shareholder for all legal and other expenses reasonably incurred by him
in connection with any claim or liability. Inasmuch as the Company carries
public liability insurance which it considers adequate, any risk of personal
liability to shareholders is limited to situations in which the Company's assets
plus its insurance coverage would be insufficient to satisfy the claims against
the Company and its shareholders.
56
<PAGE>
COMMON SHARES
All Common Shares offered hereby will be duly authorized, fully paid and
nonassessable. Subject to the preferential rights of any other class or series
of beneficial interest and to the provisions of the Company's Declaration of
Trust regarding the restriction of the transfer of shares of beneficial
interest, holders of Common Shares are entitled to receive dividends on shares
if, as and when authorized and declared by the Board of Trustees of the Company
out of assets legally available therefor and to share ratably in the assets of
the Company legally available for distribution to its shareholders in the event
of its liquidation, dissolution or winding-up after payment of, or adequate
provision for, all known debts and liabilities of the Company.
Subject to the provisions of the Declaration of Trust regarding the
restriction of the transfer of shares of beneficial interest, each outstanding
Common Share entitles the holder to one vote on all matters submitted to a vote
of shareholders, including the election of trustees, and, except as provided
with respect to any other class or series of shares, the holders of such Common
Shares will possess the exclusive voting power. There is no cumulative voting in
the election of trustees, which means that the holders of a majority of the
outstanding Common Shares can elect all of the trustees then standing for
election and the holders of the remaining shares will not be able to elect any
trustees.
Holders of Common Shares have no preference, conversion, sinking fund,
redemption or appraisal rights and have no preemptive rights to subscribe for
any securities of the Company. Subject to the provisions of the Declaration of
Trust regarding the restriction on transfer of shares of beneficial interest,
Common Shares have equal dividend, distribution, liquidation and other rights.
Under the Maryland REIT Law, a Maryland real estate investment trust
generally cannot dissolve, amend its declaration of trust or merge unless
approved by the affirmative vote of shareholders holding at least two-thirds of
the shares entitled to vote on the matter unless a lesser percentage (but not
less than a majority of all the votes entitled to be cast on the matter) is set
forth in the real estate investment trust's declaration of trust. The Company's
Declaration of Trust provides for a lesser percentage in such situations except
with respect to: (a) the intentional disqualification of the Company as a real
estate investment trust or revocation of its election to be taxed as a real
estate investment trust (which requires the affirmative vote of the holders of
two-thirds of the number of Common Shares entitled to vote on such matter at a
meeting of the Shareholders of the Company); (b) the election of trustees (which
requires a plurality of all the votes cast at a meeting of shareholders of the
Company at which a quorum is present); (c) the removal of trustees (which
requires the affirmative vote of the holders of 75% of the outstanding voting
shares of the Company); (d) the amendment or repeal of the Independent Trustee
provision in the Declaration of Trust (which requires the affirmative vote of
85% of the Trustees and two-thirds of the outstanding shares entitled to vote on
the matter); (e) the amendment of the Declaration of Trust by shareholders
(which requires the affirmative vote of a majority of votes entitled to be cast
on the matter, except under certain circumstances specified in the Declaration
of Trust which require the affirmative vote of two-thirds of all the votes
entitled to be cast on the matter); and (f) the dissolution of the Company
(which requires the affirmative vote of two-thirds of all the votes entitled to
be cast on the matter). Under the Maryland REIT Law, a declaration of trust may
permit the trustees by a two-thirds vote to amend the declaration of trust from
time to time to qualify as a real estate investment trust under the Code or the
Maryland REIT Law without the affirmative vote or written consent of the
shareholders. The Company's Declaration of Trust permits such action by the
Board of Trustees.
The Company's Declaration of Trust authorizes the Trustees to classify or
reclassify any unissued Common Shares into one or more classes or series of
shares of beneficial interest by setting or changing the preferences, conversion
or other rights, voting powers, restrictions, limitations as to dividends or
distributions, qualifications or terms or conditions of redemption of such new
class or series of shares of beneficial interest.
57
<PAGE>
PREFERRED SHARES
The Declaration of Trust authorizes the Board of Trustees to classify any
unissued Preferred Shares and to reclassify any previously classified but
unissued Preferred Shares of any series from time to time in one or more classes
or series, as authorized by the Board of Trustees. Prior to issuance of shares
of each series, the Board of Trustees is required by the Maryland REIT Law and
the Company's Declaration of Trust to set, subject to the provisions of the
Company's Declaration of Trust regarding the restriction on transfer of shares
of beneficial interest, the terms, the preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends or other distributions,
qualifications and terms or conditions of redemption for each such class or
series. Thus, the Board of Trustees could authorize the issuance of Preferred
Shares with terms and conditions which could have the effect of delaying,
deferring or preventing a transaction or a change in control of the Company that
might involve a premium price for holders of Common Shares or otherwise might be
in their best interest. As of the date hereof, no Preferred Shares are
outstanding and the Company has no present plans to issue any Preferred Shares.
RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT under the Code, it must meet certain
requirements concerning the ownership of its outstanding shares of beneficial
interest. Specifically, not more than 50% in value of the Company's outstanding
shares of beneficial interest may be owned, directly or indirectly, by five or
fewer individuals (as defined in the Code to include certain entities) during
the last half of a taxable year (other than the first year for which an election
to be a REIT has been made), and the Company must be beneficially owned by 100
or more persons during at least 335 days of a taxable year of 12 months (other
than the first year for which an election to be a REIT has been made) or during
a proportionate part of a shorter taxable year. See "Federal Income Tax
Considerations--Requirements for Qualification."
Because the Board of Trustees believes it is essential for the Company to
continue to qualify as a REIT, the Declaration of Trust provides that no person
may own, or be deemed to own by virtue of the attribution provisions of sections
318 and 544 of the Code, more than 9.8% of (i) the number or value (whichever is
more restrictive) of outstanding Common Shares or (ii) the number of outstanding
shares of beneficial interest of the Company (the "Ownership Limitation"). Any
transfer of Common or Preferred Shares that would (i) result in any person
owning, directly or indirectly, Common or Preferred Shares in excess of the
Ownership Limitation, (ii) result in the Common and Preferred Shares being owned
by fewer than 100 persons (determined without reference to any rules of
attribution), or (iii) result in the Company being "closely held" within the
meaning of Section 856(h) of the Code, shall be null and void, and the intended
transferee will acquire no rights in such Common or Preferred Shares.
If any purported transfer of Common or Preferred Shares would (i) result in
the Common and Preferred Shares being owned by fewer than 100 persons
(determined without reference to any rules of attribution), (ii) result in any
person owning, directly or indirectly, Common or Preferred Shares in excess of
the Ownership Limitation or (iii) result in the Company being "closely held"
within the meaning of Section 856(h) of the Code, the Common or Preferred Shares
will be designated as "Shares-in-Trust" and transferred automatically to a trust
(the "Share Trust") effective on the day before the purported transfer of such
Common or Preferred Shares. The record holder of the Common or Preferred Shares
that are designated as Shares-in-Trust (the "Prohibited Owner") will be required
to submit such number of Common or Preferred Shares to the Company for
registration in the name of the Share Trust. The Share Trustee will be
designated by the Company, but will not be affiliated with the Company. The
beneficiary of the Share Trust (the "Beneficiary") will be one or more
charitable organizations that are named by the Company.
Shares-in-Trust will remain issued and outstanding Common or Preferred
Shares and will be entitled to the same rights and privileges as all other
shares of the same class or series. The Share Trust will receive all dividends
and distributions on the Shares-in-Trust and will hold such dividends and
distributions in trust
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for the benefit of the Beneficiary. The Share Trustee will vote all
Shares-in-Trust. The Share Trustee will designate a permitted transferee of the
Shares-in-Trust, provided that the permitted transferee (i) purchases such
Shares-in-Trust for valuable consideration and (ii) acquires such
Shares-in-Trust without such acquisition resulting in a transfer to another
Share Trust and resulting in the redesignation of such Common or Preferred
Shares as Shares-in-Trust.
The Prohibited Owner with respect to Shares-in-Trust will be required to
repay to the Share Trust the amount of any dividends or distributions received
by the Prohibited Owner (i) that are attributable to any Shares-in-Trust and
(ii) the record date of which was on or after the date that such shares became
Shares-in-Trust. The Prohibited Owner generally will receive from the Share
Trustee the lesser of (i) the price per share such Prohibited Owner paid for the
Common or Preferred Shares that were designated as Shares-in-Trust (or, in the
case of a gift devise, or other event not involving the purchase or sale of the
Common or Preferred Shares that were designated as Shares-in-Trust, the Market
Price (as defined below) per share on the date of such transfer) and (ii) the
price per share received by the Share Trustee from the sale of such
Shares-in-Trust. Any amounts received by the Share Trustee in excess of the
amounts to be paid to the Prohibited Owner will be distributed to the
Beneficiary.
The Shares-in-Trust will be deemed to have been offered for sale to the
Company, or its designee, at a price per share equal to the lesser of (i) the
price per share in the transaction that created such Shares-in-Trust (or, in the
case of a gift, devise or other event not involving the purchase or sale of the
Common or Preferred Shares that were designated as Shares-in-Trust the Market
Price per share on the date of such transfer) or (ii) the Market Price per share
on the date that the Company, or its designee, accepts such offer. The Company
will have the right to accept such offer for a period of ninety days after the
later of (i) the date of the purported transfer which resulted in such
Shares-in-Trust and (ii) the date the Company determines in good faith that a
transfer resulting in such Shares-in-Trust occurred.
"Market Price" on any date shall mean, with respect to the Common or
Preferred Shares, the Closing Price (as defined below) for the Common or
Preferred Shares on such date. The "Closing Price" on any date shall mean the
last sale price, regular way, or, in case no such sale takes place on such day,
the average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the NYSE or, if the Common or
Preferred Shares are not listed or admitted to trading on the NYSE, as reported
in the principal consolidated transaction reporting system with respect to
securities listed on the principal national securities exchange on which the
Common or Preferred Shares are listed or admitted to trading or, if the Common
or Preferred Shares are not listed or admitted to trading on any national
securities exchange, the last quoted price, or if not so quoted, the average of
the high bid and low asked prices in the over-the-counter market, as reported by
the National Association of Securities Dealers, Inc. Automated Quotation System
or, if such system is no longer in use, the principal automated quotations
system that may then be in use or, if the Common or Preferred Shares are not
quoted by any such organization, the average of the closing bid and asked prices
as furnished by a professional market maker making a market in the Common or
Preferred Shares selected by the Board of Trustees or, in the event that no
trading price is available for the Common or Preferred Shares, the fair market
value of such shares, as determined in good faith by the Board of Trustees.
"Trading Day" shall mean a day on which the principal national securities
exchange on which the Common or Preferred Shares are listed or admitted to
trading is open for the transaction of business or, if the Common or Preferred
Shares are not listed or admitted to trading on any national securities
exchange, shall mean any day other than a Saturday, a Sunday or a day on which
banking institutions in the State of New York are authorized or obligated by law
or executive order to close.
Any person who acquires or attempts to acquire Common or Preferred Shares in
violation of the foregoing restrictions, or any person who owned Common or
Preferred Shares that were transferred to a Share Trust, will be required (i) to
give immediately written notice to the Company of such event and (ii) to
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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.
The Declaration of Trust requires all persons who own, directly or
indirectly, more than 5% (or such lower percentages as required pursuant to
regulations under the Code) of the outstanding Common and Preferred Shares,
within 30 days after January 1 of each year, to provide to the Company a written
statement or affidavit stating the name and address of such direct or indirect
owner, the number of Common and Preferred Shares owned directly or indirectly,
and a description of how such shares are held. In addition, each direct or
indirect shareholder shall provide to the Company such additional information as
the Company may request in order to determine the effect, if any, of such
ownership on the Company's status as a REIT and to ensure compliance with the
Ownership Limitation.
The Ownership Limitation generally will not apply to the acquisition of
Common or Preferred Shares by an underwriter that participates in a public
offering of such shares. In addition, the Board of Trustees, upon receipt of a
ruling from the Service or an opinion of counsel and upon such other conditions
as the Board of Trustees may direct, may exempt a person from the Ownership
Limitation under certain circumstances. The foregoing restrictions will continue
to apply until the Board of Trustees determines that it is no longer in the best
interests of the Company to attempt to qualify, or to continue to qualify, as a
REIT.
The Ownership Limitation could delay, defer or prevent a transaction or a
change in control of the Company that might involve a premium price for the
Common Shares or otherwise be in the best interest of the shareholders of the
Company.
All certificates representing Common or Preferred Shares will bear a legend
referring to the restrictions described above.
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CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S
DECLARATION OF TRUST AND BYLAWS
The following summary of certain provisions of Maryland law and of the
Declaration of Trust and Bylaws of the Company is subject to and qualified in
its entirety by reference to Maryland law and to the Declaration of Trust and
Bylaws of the Company, copies of which are exhibits to the Registration
Statement of which this Prospectus is a part. See "Additional Information."
CLASSIFICATION OF THE BOARD OF TRUSTEES
The Bylaws provide that the number of trustees of the Company may be
established by the Board of Trustees but may not be fewer than three nor more
than nine. At the closing of the Offering, there will be five Trustees. The
Trustees may increase or decrease the number of Trustees by a vote of at least
80% of the members of the Board of Trustees, provided that the number of
Trustees shall never be less than the number required by Maryland law and that
the tenure of office of a Trustee shall not be affected by any decrease in the
number of Trustees. Any vacancy (including a vacancy created by an increase in
the number of Trustees) will be filled at any regular meeting or at any special
meeting called for that purpose, by a majority of the Trustees.
Pursuant to the Declaration of Trust, the Board of Trustees is divided into
three classes of trustees. The initial terms of the first, second and third
class will expire in 1998, 1999 and 2000, respectively. Beginning in 1998,
Trustees of each class will be chosen for three-year terms upon the expiration
of their current terms and each year one class of trustees will be elected by
the shareholders. The Company believes that classification of the Board of
Trustees will help to assure the continuity and stability of the Company's
business strategies and policies as determined by the Board of Trustees. Holders
of Common Shares will have no right to cumulative voting in the election of
Trustees. Consequently, at each annual meeting of shareholders, the holders of a
majority of the Common Shares will be able to elect all of the successors of the
class of trustees whose terms expire at that meeting.
The classified board provision could have the effect of making the
replacement of incumbent trustees more time-consuming and difficult. At least
two annual meetings of shareholders, instead of one, will generally be required
to effect a change in a majority of the Board of Trustees. Thus, the classified
board provision could increase the likelihood that incumbent trustees will
retain their positions. The staggered terms of Trustees may delay, defer or
prevent a tender offer or an attempt to change control of the Company or other
transaction that might involve a premium price for holders of Common Shares,
even though a tender offer, change of control or other transaction might be in
the best interest of the shareholders.
REMOVAL OF TRUSTEES
The Declaration of Trust provides that a Trustee may be removed, only for
cause, upon the affirmative vote of holders of at least 75% of the shares
entitled to be cast in the election of Trustees. This provision, when coupled
with the provision in the Bylaws authorizing the Board of Trustees to fill
vacant trusteeships, precludes shareholders from removing incumbent Trustees,
except upon a substantial affirmative vote, and filling the vacancies created by
such removal with their own nominees.
BUSINESS COMBINATIONS
Under the MGCL, as applicable to Maryland real estate investment trusts,
certain "business combinations" (including a merger, consolidation, share
exchange or, in certain circumstances, an asset transfer or issuance or
reclassification of equity securities) between a Maryland real estate investment
trust and any person who beneficially owns ten percent or more of the voting
power of the trust's shares or an affiliate of the trust who, at any time within
the two-year period prior to the date in question, was the beneficial owner of
ten percent or more of the voting power of the then outstanding voting shares of
beneficial interest of
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the Trust (an "Interested Shareholder") or an affiliate of the Interested
Shareholder are prohibited for five years after the most recent date on which
the Interested Shareholder becomes an Interested Shareholder. Thereafter, any
such business combination must be recommended by the board of trustees of such
trust and approved by the affirmative vote of at least (a) 80% of the votes
entitled to be cast by holders of outstanding voting shares of beneficial
interest of the trust and (b) two-thirds of the votes entitled to be cast by
holders of voting shares of the trust other than shares held by the Interested
Shareholder with whom (or with whose affiliate) the business combination is to
be effected, unless, among other conditions, the trust's common shareholders
receive a minimum price (as defined in the MGCL) for their shares and the
consideration is received in cash or in the same form as previously paid by the
Interested Shareholder for its shares. These provisions of the MGCL do not
apply, however, to business combinations that are approved or exempted by the
board of trustees of the trust prior to the time that the Interested Shareholder
becomes an Interested Shareholder.
The Declaration of Trust contains a provision exempting from the business
combination statute any and all acquisitions by any person of the Company's
Common or Preferred Shares and the Declaration of Trust further provides that
this provision may not be amended without approval of a majority of the
Company's shareholders.
CONTROL SHARE ACQUISITIONS
The MGCL, as applicable to Maryland real estate investment trusts, provides
that control shares (as defined below) of a Maryland real estate investment
trust 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 beneficial interest owned by the acquiror, by
officers or by trustees who are employees of the trust. "Control Shares" are
voting shares of beneficial interest which, if aggregated with all other such
shares of beneficial interest previously acquired by the acquiror or in respect
of which the acquiror is able to exercise or direct the exercise of voting power
(except solely by virtue of a revocable proxy), would entitle the acquiror to
exercise voting power in electing trustees 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 the acquiring person is then entitled to
vote as a result of having previously obtained shareholder approval. A "control
share acquisition" means the acquisition of Control Shares, subject to certain
exceptions.
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 trustees of the trust to call a special meeting of
shareholders 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 trust may itself present
the question at any shareholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the trust 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 the absence of voting
rights for the Control Shares, as of the date of the last control share
acquisition by the acquiror or of any meeting of shareholders at which the
voting rights of such shares are considered and not approved. If voting rights
for Control Shares are approved at a shareholders meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to vote, all other
shareholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the control share acquisition.
The control share acquisition statute does not apply (a) to shares acquired
in a merger, consolidation or share exchange if the trust is a party to the
transaction or (b) to acquisitions approved or exempted by the declaration of
trust or bylaws of the trust.
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The Bylaws of the Company contain a provision exempting from the control
share acquisition statute any and all acquisitions by any person of the
Company's Common or Preferred Shares and the Bylaws further provide that this
provision may not be amended without approval of a majority of the Company's
shareholders.
AMENDMENT
The Declaration of Trust may be amended with the approval of at least a
majority of all of the votes entitled to be cast on the matter with the
exception of certain provisions of the Declaration of Trust regarding: (i) the
intentional disqualification of the Company as a real estate investment trust or
revocation of its election to be taxed as a real estate investment trust (which
requires the affirmative vote of the holders of two-thirds of the number of
Common Shares entitled to vote on such matter at a meeting of the shareholders
of the Company); (ii) the election of Trustees (which requires a plurality of
all the votes cast at a meeting of shareholders of the Company at which a quorum
is present); (iii) the removal of Trustees (which requires the affirmative vote
of the holders of 75% of the outstanding voting shares of the Company); (iv) the
amendment or repeal of the Independent Trustee provision in the Declaration of
Trust (which requires the affirmative vote of 85% of the Trustees and two-thirds
of the outstanding shares entitled to vote on the matter); (v) the amendment of
the Declaration of Trust by shareholders (which requires the affirmative vote of
a majority of votes entitled to be cast on the matter, except under certain
circumstances specified in the Declaration of Trust which require the
affirmative vote of two-thirds of all the votes entitled to be cast on the
matter); and (vi) the dissolution of the Company (which requires the affirmative
vote of two-thirds of all the votes entitled to be cast on the matter). In
addition, the Declaration of Trust may be amended by the Board of Trustees,
without shareholder approval to conform the Declaration of Trust to the Code and
the Maryland REIT Law. Except as otherwise expressly provided, the Company's
Bylaws may be amended or altered exclusively by the Board of Trustees.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Maryland REIT Law permits a Maryland real estate investment trust to
include in its Declaration of Trust a provision limiting the liability of its
trustees and officers to the trust and its shareholders for money damages except
for liability resulting from (a) actual receipt of an improper benefit or profit
in money, property or services or (b) active and deliberate dishonesty
established by a final judgment as being material to the cause of action. The
Declaration of Trust of the Company contains such a provision which eliminates
such liability to the maximum extent permitted by the Maryland REIT Law.
The Declaration of Trust of the Company authorizes it, to the maximum extent
permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former Trustee or officer or (b) any individual who, while a
Trustee of the Company and at the request of the Company, serves or has served
another real estate investment trust, corporation, partnership, joint venture,
trust, employee benefit plan or any other enterprise as a trustee, director,
officer or partner of such real estate investment trust, corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
from and against any claim or liability to which such person may become subject
or which such person may incur by reason of his or her status as a present or
former Trustee or officer of the Company. The Bylaws of the Company obligate it,
to the maximum extent permitted by Maryland law, to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former Trustee or officer who is made a party to the
proceeding by reason of his service in that capacity or (b) any individual who,
while a Trustee of the Company and at the request of the Company, serves or has
served another real estate investment trust, corporation, partnership, joint
venture, trust, employee benefit plan or any other enterprise as a trustee,
director, officer or partner of such real estate investment trust, corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise and
who is made a party to the proceeding by reason of his service in that capacity,
against any claim or liability to which he may become
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subject by reason of such status. The Declaration of Trust and Bylaws also
permit the Company to indemnify and advance expenses to any person who served a
predecessor of the Company in any of the capacities described above and to any
employee or agent of the Company or a predecessor of the Company. The Bylaws
require the Company to indemnify a Trustee or officer who has been successful,
on the merits or otherwise, in the defense of any proceeding to which he is made
a party by reason of his service in that capacity.
The Maryland REIT Law permits a Maryland real estate investment trust to
indemnify and advance expenses to its trustees, officers, employees and agents
to the same extent as permitted by the MGCL for directors and officers of
Maryland corporations. The MGCL 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, (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. However, under the MGCL,
a Maryland corporation may not indemnify for an adverse judgment in a suit by or
in the right of the corporation or for a judgment of liability on the basis that
personal benefit was improperly received, unless in either case a court orders
indemnification and then only for expenses. In addition, the MGCL permits a
corporation to advance reasonable expenses to a director or officer upon the
corporation's receipt of (a) a written affirmation by the director or officer of
his good faith belief that he has met the standard of conduct necessary for
indemnification by the corporation and (b) a written undertaking by or on his
behalf to repay the amount paid or reimbursed by the corporation if it shall
ultimately be determined that the standard of conduct was not met.
OPERATIONS
The Company is generally prohibited from engaging in certain activities,
including acquiring or holding property or engaging in any activity that would
cause the Company to fail to qualify as a real estate investment trust.
DISSOLUTION OF THE COMPANY
Pursuant to the Company's Declaration of Trust, the dissolution of the
Company must be approved by the affirmative vote of the holders of not less than
two-thirds of all of the votes entitled to be cast on the matter.
ADVANCE NOTICE OF TRUSTEES NOMINATIONS AND NEW BUSINESS
The Bylaws of the Company provide that (a) with respect to an annual meeting
of shareholders, nominations of persons for election to the Board of Trustees
and the proposal of business to be considered by shareholders may be made only
(i) pursuant to the Company's notice of the meeting, (ii) by or at the direction
of the Board of Trustees or (iii) by a shareholder who is entitled to vote at
the meeting and has complied with the advance notice procedures set forth in the
Bylaws and (b) with respect to special meetings of Shareholders, only the
business specified in the Company's notice of meeting may be brought before the
meeting of shareholders and nominations of persons for election to the Board of
Trustees may be made only (i) pursuant to the Company's notice of the meeting,
(ii) by or at the direction of the Board of Trustees or, (iii) provided that the
Board of Trustees has determined that Trustees shall be elected at such meeting,
by a shareholder who is entitled to vote at the meeting and has complied with
the advance notice provisions set forth in the Bylaws.
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ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE
DECLARATION OF TRUST AND BYLAWS
If the applicable provision in the Declaration of Trust (as to certain
business combinations) and the Bylaws (as to control share acquisitions) are
rescinded, the business combination and control share acquisition provisions of
the MGCL, the provisions of the Declaration of Trust on classification of the
Board of Trustees, the removal of Trustees and the advance notice provisions of
the Bylaws could delay, defer or prevent a change in control of the Company or
other transaction that might involve a premium price for holders of Common
Shares or otherwise be in their best interest.
MARYLAND ASSET REQUIREMENTS
To maintain its qualification as a Maryland real estate investment trust,
the Maryland REIT Law requires that the Company hold, either directly or
indirectly, at least 75% of the value of its assets in real estate assets,
mortgages or mortgage-related securities, government securities, cash and cash
equivalent items, including high-grade short-term securities and receivables.
The Maryland REIT Law also prohibits using or applying land for farming,
agriculture, horticulture or similar purposes.
TRANSFER AGENT
The transfer agent and registrar for the Company's Common Shares is
.
SHARES AVAILABLE FOR FUTURE SALE
Upon the closing of the Offering and the Contribution Transaction, the
Company will have 10,000,000 Common Shares issued and outstanding (11,500,000
Common Shares if the Underwriters' overallotment option is exercised in full),
1,100,000 Common Shares will be reserved for issuance upon redemption of Units,
975,000 Common Shares will be reserved for issuance under the 1997 Share
Incentive Plan and 25,000 Common Shares will be reserved for issuance under the
Trustees' Plan. The Common Shares issued in the Offering will be freely
tradeable by persons other than "Affiliates" of the Company without restriction
under the Securities Act of 1933, as amended (the "Securities Act"), subject to
certain limitations on ownership set forth in the Declaration of Trust. See
"Description of Shares of Beneficial Interest--Restrictions on Transfer."
Pursuant to the Operating Partnership Agreement, the Limited Partners have
Redemption Rights which enable them to cause the Operating Partnership to redeem
their Units for cash or, at the option of the Company, Common Shares on a
one-for-one basis, provided, however, that the Units may not be exchanged for
cash or Common Shares until at least one year after the date of issuance of the
Units.
The Common Shares that will be issuable to holders of Units upon exercise of
the Redemption Rights will be "restricted" securities under the meaning of Rule
144 promulgated under the Securities Act ("Rule 144") and may not be sold in the
absence of registration under the Securities Act unless an exemption from
registration is available, including exemptions contained in Rule 144. As
described below, the Company has granted the holders registration rights with
respect to such Common Shares.
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 the Securities
Act, the acquiror or subsequent holder thereof is entitled to sell within any
three-month period a number of shares that does not exceed the greater of 1% of
the then outstanding Common Shares or the average weekly trading volume of the
Common Shares during the four calendar weeks preceding the date on which notice
of the sale is filed with the Securities and Exchange Commission (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
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Company, and the acquiror or subsequent holder thereof is deemed not to have
been an Affiliate of the Company at any time during the three months preceding a
sale, such person would be entitled to sell such shares in the public market
under Rule 144(k) without regard to the volume limitations, manner of sale
provisions, public information requirements or notice requirements.
The Company has agreed to file, as soon as practicable after the second
anniversary of the Closing Date, a registration statement with the Commission
for the purpose of registering the sale of 671,921 Common Shares to be issuable
upon redemption of the Units held by Messrs. Walden and Day. The Company will
use its best efforts to have the registration statement declared effective and
to keep it effective for a period of two years. Upon effectiveness of the
registration statement, those persons holding Common Shares upon redemption of
the applicable Units other than "Affiliates" of the Company, as that term is
defined under the Securities Act may sell such shares in the secondary market
without being subject to the volume limitations or other requirements of Rule
144. The Operating Partnership will bear expenses incident to the registration
requirements, except that such expenses shall not include any underwriting
discounts or commissions, Commission or state securities registration fees,
transfer taxes or certain other fees or taxes relating to such shares.
Prior to the Offering there has been no public market for the Common Shares.
The Company intends to apply to list the Common Shares on the New York Stock
Exchange.
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 of the Common Shares prevailing from time to time. Sales of substantial
amounts of Common Shares, or the perception that such sales could occur, may
affect adversely prevailing market prices of the Common Shares. See "Risk
Factors--Effect of Future Offerings on Market Price of Common Shares" and
"Operating Partnership Agreement--Transferability of Interests."
For a description of certain restrictions on transfers of Common Shares held
by certain shareholders of the Company, see "Underwriting."
OPERATING PARTNERSHIP AGREEMENT
The following summary of the Operating Partnership Agreement, and the
descriptions of certain provisions thereof set forth elsewhere in this
Prospectus, is qualified in its entirety by reference to the Operating
Partnership Agreement, which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
MANAGEMENT
The Operating Partnership has been organized as a Delaware limited
partnership pursuant to the terms of the First Amended and Restated Agreement of
Limited Partnership of the Operating Partnership (the "Operating Partnership
Agreement"). Pursuant to the Operating Partnership Agreement, the Company, as
the sole general partner of the Partnership, has full, exclusive and complete
responsibility and discretion in the management and control of the Operating
Partnership, and the Limited Partners have no authority in their capacity as
Limited Partners to transact business for, or participate in the management
activities or decisions of, the Operating Partnership except as required by
applicable law. However, any amendment to the Operating Partnership Agreement
that would (i) adversely affect the Redemption Rights, (ii) adversely affect the
Limited Partners' rights to receive cash distributions, (iii) alter the
Operating Partnership's allocations of income or loss, or (iv) impose on the
Limited Partners any obligations to make additional contributions to the capital
of the Operating Partnership, requires the consent of Limited Partners holding
more than two-thirds of the Units held by such partners.
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TRANSFERABILITY OF INTERESTS
The Company may not voluntarily withdraw from the Operating Partnership or
transfer or assign its interest in the Operating Partnership unless the
transaction in which such withdrawal or transfer occurs results in the Limited
Partners receiving property in an amount equal to the amount they would have
received had they exercised their Redemption Rights immediately prior to such
transaction, or unless the successor to the Company contributes substantially
all of its assets to the Operating Partnership in return for an interest in the
Operating Partnership. With certain limited exceptions, the Limited Partners may
not transfer their interests in the Operating Partnership, in whole or in part,
without the written consent of the Company, which consent the Company may
withhold in its sole discretion. The Company may not consent to any transfer
that would cause the Operating Partnership to be treated as a corporation for
federal income tax purposes.
CAPITAL CONTRIBUTION
The Company will contribute to the Operating Partnership substantially all
of the net proceeds of the Offering in exchange for a 90.12% partnership
interest in the Operating Partnership based on the Offering Price. After the
completion of the Offering, the Company will have issued a total of 10,000,000
Common Shares and will own 10,000,000 Units. Although the Operating Partnership
will receive the net proceeds of the Offering, the Company will be deemed to
have made a capital contribution to the Operating Partnership in the amount of
the gross proceeds of the Offering and the Operating Partnership will be deemed
simultaneously to have paid the underwriters' discount and other expenses paid
or incurred in connection with the Offering. Following the closing of the
Offering, the Limited Partners (other than the Company), will collectively own
approximately 9.88% of the outstanding Units based on the Offering Price. The
Operating Partnership Agreement provides that if the Operating Partnership
requires additional funds at any time or from time to time in excess of funds
available to the Operating Partnership from borrowing or capital contributions,
the Company may borrow such funds from a financial institution or other lender
and lend such funds to the Operating Partnership on the same terms and
conditions as are applicable to the Company's borrowing of such funds. Moreover,
the Company is authorized to cause the Operating Partnership to issue
partnership interests for less than fair market value if (i) it has concluded in
good faith that such issuance is in the best interest of the Company and the
Operating Partnership and (ii) the Company makes a capital contribution in an
amount equal to the proceeds of such issuance. Under the Operating Partnership
Agreement, the Company generally is obligated to contribute the proceeds of a
share offering by the Company as additional capital to the Operating
Partnership. Upon such contribution, the Company, as applicable, will receive
additional Units and the Company's percentage interest in the Operating
Partnership will be increased on a proportionate basis based upon the amount of
such additional capital contributions. Conversely, the percentage interests of
the Limited Partners will be decreased on a proportionate basis in the event of
additional capital contributions by the Company. In addition, if the Company
contributes additional capital to the Operating Partnership, the Company will
revalue the property of the Operating Partnership to its fair market value (as
determined by the Company) and the capital accounts of the partners will be
adjusted to reflect the manner in which the unrealized gain or loss inherent in
such property (that has not been reflected in the capital accounts previously)
would be allocated among the partners under the terms of the Operating
Partnership Agreement if there were a taxable disposition of such property for
such fair market value on the date of the revaluation.
REDEMPTION RIGHTS
Pursuant to the Operating Partnership Agreement, the Limited Partners (other
than the Company) have redemption rights ("Redemption Rights") that enable them
to cause the Operating Partnership to redeem their Units for cash, or at the
option of the Company, Common Shares on a one-for-one basis. The redemption
price will be paid in cash in the event that the issuance of Common Shares to
the redeeming Limited Partner would (i) result in any person owning, directly or
indirectly, Common Shares in excess of
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the Ownership Limitation, (ii) result in shares of beneficial interest of the
Company being owned by fewer than 100 persons (determined without reference to
any rules of attribution), (iii) result in the Company being "closely held"
within the meaning of Section 856(h) of the Code, or (iv) cause the acquisition
of Common Shares by such redeeming Limited Partner to be "integrated" with any
other distribution of Common Shares for purposes of complying with the
Securities Act. The Redemption Rights may be exercised by the Limited Partners
at any time beginning one year after the date of the closing of the Offering,
provided that not more than two redemptions may occur during each calendar year
and each Limited Partner may not exercise the Redemption Right for less than
1,000 Units or, if such Limited Partner holds less than 1,000 Units, all of the
Units held by such Limited Partner. After the closing of the Offering, the
aggregate number of Common Shares issuable upon exercise of the Redemption
Rights will be approximately 1,096,592. The number of Common Shares issuable
upon exercise of the Redemption Rights will be adjusted upon the occurrence of
share splits, mergers, consolidations or similar pro rata share transactions,
which otherwise would have the effect of diluting the ownership interests of the
Limited Partners or the shareholders of the Company.
If the Company decides to securitize some or all of its Mortgage Assets
through the issuance of non-REMIC collateralized mortgage obligations with
multiple maturities ("CMOs"), it is anticipated that the Mortgage Assets will be
distributed to AEGIS Investment Trust in order to prevent the Mortgage Assets
from being treated as a taxable mortgage pool for federal income tax purposes
upon the issuance of the CMOs. Accordingly, it is anticipated that AEGIS
Investment Trust will have the right to redeem a portion of its partnership
interest in the Operating Partnership in exchange for Mortgage Assets to the
extent necessary to facilitate such a securitization transaction. The portion of
AEGIS Investment Trust's partnership interest that is redeemed will be based on
the fair market value of the Mortgage Assets distributed, as determined by AEGIS
Investment Trust, but subject to review by the Independent Trustee.
REGISTRATION RIGHTS
For a description of certain registration rights held by the Limited
Partners, see "Shares Available for Future Sale."
OPERATIONS
The Operating Partnership Agreement requires that the Operating Partnership
be operated in a manner that will enable the Company to satisfy the requirements
for being classified as a REIT for federal tax purposes, to avoid any federal
income or excise tax liability imposed by the Code, and to ensure that the
Operating Partnership will not be classified as a "publicly traded partnership"
for purposes of Section 7704 of the Code.
In addition to the administrative and operating costs and expenses incurred
by the Operating Partnership, the Operating Partnership will pay all
administrative costs and expenses of the Company (collectively, the "Company
Expenses") and the Company Expenses will be treated as expenses of the Operating
Partnership. The Company Expenses generally will include (i) all expenses
relating to the formation and continuity of existence of the Company and, (ii)
all expenses relating to the public offering and registration of securities by
the Company, (iii) all expenses associated with the preparation and filing of
any periodic reports by the Company under federal, state or local laws or
regulations, (iv) all expenses associated with compliance by the Company with
laws, rules and regulations promulgated by any regulatory body and (v) all other
operating or administrative costs of the Company incurred in the ordinary course
of its business on behalf of the Operating Partnership.
DISTRIBUTIONS
The Operating Partnership Agreement provides that the Operating Partnership
shall distribute cash from operations (including net sale or refinancing
proceeds, but excluding net proceeds from the sale of
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the Operating Partnership's property in connection with the liquidation of the
Operating Partnership) on a quarterly (or, at the election of the Company, more
frequent) basis, in amounts determined by the Company in its sole discretion, to
the partners in accordance with their respective percentage interests in the
Operating Partnership. Upon liquidation of the Operating Partnership, after
payment of, or adequate provision for, debts and obligations of the Operating
Partnership, including any partner loans, any remaining assets of the Operating
Partnership will be distributed to all partners with positive capital accounts
in accordance with their respective positive capital account balances. If the
Company has a negative balance in its capital account following a liquidation of
the Operating Partnership, it will be obligated to contribute cash to the
Operating Partnership equal to the negative balance in its capital account.
ALLOCATIONS
Income, gain and loss of the Operating Partnership for each fiscal year
generally is allocated among the partners in accordance with their respective
interests in the Operating Partnership, subject to compliance with the
provisions of Code Sections 704(b) and 704(c) and Treasury Regulations
promulgated thereunder.
TERM
The Operating Partnership shall continue until December 31, 2050, or until
sooner dissolved upon (i) the sale or other disposition of all or substantially
all the assets of the Operating Partnership, (ii) the redemption of all limited
partnership interests in the Operating Partnership (other than those held by the
Company, if any), or (iii) the election by the Company.
FIDUCIARY DUTY
The Limited Partners have agreed that in the event of any conflict in the
fiduciary duties owed by the Company to its shareholders and to such Limited
Partners, the Company will fulfill its fiduciary duties to such Limited Partners
by acting in the best interests of the Company's shareholders.
TAX MATTERS
Pursuant to the Operating Partnership Agreement, the Company is the tax
matters partner of the Operating Partnership and, as such, has authority to
handle tax audits and to make tax elections under the Code on behalf of the
Operating Partnership.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of material federal income tax considerations
that may be relevant to a prospective holder of the Common Shares. Hunton &
Williams has acted as counsel to the Company and has reviewed this summary and
has rendered an opinion that the descriptions of the law and the legal
conclusions contained herein are correct in all material respects, and the
discussions hereunder fairly summarize the federal income tax considerations
that are likely to be material to the Company and a holder of the Common Shares.
The discussion contained herein does not address all aspects of taxation that
may be relevant to particular shareholders in light of their personal investment
or tax circumstances, or to certain types of shareholders (including insurance
companies, tax-exempt organizations, financial institutions or broker-dealers,
and, except to the extent discussed below, foreign corporations and persons who
are not citizens or residents of the United States) subject to special treatment
under the federal income tax laws.
The statements in this discussion and the opinion of Hunton & Williams are
based on current provisions of the Code, existing, temporary, and currently
proposed Treasury Regulations promulgated under the Code ("Treasury
Regulations"), the legislative history of the Code, existing administrative
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rulings and practices of the Service, and judicial decisions. No assurance can
be given that future legislative, judicial, or administrative actions or
decisions, which may be retroactive in effect, will not affect the accuracy of
any statements in this Prospectus with respect to the transactions entered into
or contemplated prior to the effective date of such changes.
EACH PROSPECTIVE PURCHASER IS URGED TO CONSULT HIS OWN TAX ADVISOR REGARDING
THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP, AND SALE OF THE
COMMON SHARES AND OF THE TAX CONSEQUENCES TO HIM OF THE COMPANY'S ELECTION TO BE
TAXED AS A REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX
CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE, AND ELECTION, AND OF POTENTIAL
CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
The Company currently has in effect an election to be taxed as a
pass-through entity under subchapter S of the Code, but intends to revoke its S
election on the day prior to the closing of the Offering. In addition, the
Company's current shareholders intend to elect on the day prior to the closing
of the Offering to close the Company's books upon the revocation of the S
election. The Company plans to make an election to be taxed as a REIT under
sections 856 through 860 of the Code, commencing with its short taxable year
beginning on the day prior to the closing and ending on December 31, 1997.
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its shareholders. The discussion is qualified in its
entirety by the applicable Code provisions, Treasury Regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all of
which are subject to change prospectively or retroactively.
Hunton & Williams has acted as counsel to the Company in connection with the
Offering and the Company's election to be taxed as a REIT. In the opinion of
Hunton & Williams, assuming that the elections and other procedural steps
described in this discussion of "Federal Income Tax Considerations" are
completed by the Company in a timely fashion, commencing with the Company's
short taxable year beginning the day prior to the closing of the Offering and
ending December 31, 1997, the Company will qualify to be taxed as a REIT
pursuant to sections 856 through 860 of the Code, and the Company's organization
and proposed method of operation will enable it to continue to meet the
requirements for qualification and taxation as a REIT under the Code. Investors
should be aware, however, that opinions of counsel are not binding upon the
Service or any court. It must be emphasized that Hunton & Williams' opinion is
based on various assumptions and is conditioned upon certain representations
made by the Company as to factual matters, including representations regarding
the nature of the Company's assets and the future conduct of its business. Such
factual assumptions and representations are described below in this discussion
of "Federal Income Tax Considerations" and are set out in the federal income tax
opinion that will be delivered by Hunton & Williams at the closing of the
Offering. Moreover, such qualification and taxation as a REIT depends upon the
Company's ability to meet on a continuing basis, through actual annual operating
results, distribution levels, and share ownership, the various qualification
tests imposed under the Code discussed below. Hunton & Williams will not review
the Company's compliance with those tests on a continuing basis. Accordingly, no
assurance can be given that the actual results of the Company's operations for
any particular taxable year will satisfy such requirements. For a discussion of
the tax consequences of failure to qualify as a REIT, see "Federal Income Tax
Considerations--Failure to Qualify."
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income tax on its net income that is distributed
currently to its shareholders. That treatment substantially eliminates the
"double taxation" (i.e., taxation at both the corporate and shareholder levels)
that generally results from an investment in a corporation. However, the Company
will be subject to federal income tax in
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the following circumstances. First, the Company will be taxed at regular
corporate rates on any undistributed REIT taxable income, including
undistributed net capital gains. Second, under certain circumstances, the
Company may be subject to the "alternative minimum tax" on its undistributed
items of tax preference, if any. Third, if the Company has (i) net income from
the sale or other disposition of "foreclosure property" that is held primarily
for sale to customers in the ordinary course of business or (ii) other
nonqualifying income from foreclosure property, it will be subject to tax at the
highest corporate rate on such income. Fourth, if the Company has net income
from prohibited transactions (which are, in general, certain sales or other
dispositions of property (other than foreclosure property) held primarily for
sale to customers in the ordinary course of business), such income will be
subject to a 100% tax. Fifth, if the Company should fail to satisfy the 75%
gross income test or the 95% gross income test (as discussed below), and
nonetheless has maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on an amount equal
to (i) the gross income attributable to the greater of the amount by which the
Company fails the 75% or 95% gross income test, multiplied by (ii) a fraction
intended to reflect the Company's profitability. Sixth, if the Company should
fail to distribute during each calendar year at least the sum of (i) 85% of its
REIT ordinary income for such year, (ii) 95% of its REIT capital gain net income
for such year, and (iii) any undistributed taxable income from prior periods,
the Company would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. Seventh, as described in
"--Taxation of Taxable U.S. Shareholders," the Company may elect to retain and
pay income tax on its net long-term capital gain. Finally, if the Company
acquires any asset from a C corporation (i.e., a corporation generally subject
to full corporate-level tax) in a merger or other transaction in which the basis
of the asset in the Company's hands is determined by reference to the basis of
the asset (or any other asset) in the hands of the C corporation and the Company
recognizes gain on the disposition of such asset during the 10-year period
beginning on the date on which it acquired such asset, then to the extent of
such asset's "built-in-gain" (i.e., the excess of the fair market value of such
asset at the time of acquisition by the Company over the adjusted basis in such
asset at such time), the Company will be subject to tax at the highest regular
corporate rate applicable (as provided in Treasury Regulations that have not yet
been promulgated). The results described above with respect to the tax on
"built-in-gain" assume that the Company will elect pursuant to IRS Notice 88-19
to be subject to the rules described in the preceding sentence if it were to
make any such acquisition. Finally, the Company will be subject to tax at the
highest marginal corporate rate on the portion of any excess inclusion income
derived by the Company from REMIC residual interests equal to the percentage of
the shares of the Company held by the United States, any state or political
subdivision thereof, any foreign government, any international organization, any
agency or instrumentality of any of the foregoing, any other tax-exempt
organization (other than a farmer's cooperative described in section 521 of the
Code) that is exempt from taxation under the UBTI provisions of the Code, or any
rural electrical or telephone cooperative (each, a "Disqualified Organization").
Any such tax on the portion of any excess inclusion income allocable to shares
of the Company held by a Disqualified Organization would reduce the cash
available for distribution from the Company to all shareholders.
REQUIREMENTS FOR QUALIFICATION
The Code defines a REIT as a corporation, trust, or association (i) that is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation, but
for sections 856 through 860 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons; (vi) not
more than 50% in value of the outstanding shares of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of each taxable year (the "5/50 Rule");
(vii) that makes an election to be a REIT (or has made such election for a
previous taxable year) and satisfies all relevant filing and other
administrative requirements established by the Service that must be met in order
to elect and maintain REIT status; (viii) that uses a calendar year for
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federal income tax purposes and complies with the recordkeeping requirements of
the Code and Treasury Regulations; and (ix) that meets certain other tests,
described below, regarding the nature of its income and assets. The Code
provides that conditions (i) to (iv), inclusive, must be met during the entire
taxable year and that condition (v) must be met during at least 335 days of a
taxable year of 12 months, or during a proportionate part of a taxable year of
less than 12 months. Conditions (v) and (vi) will not apply until after the
first taxable year for which an election is made by the Company to be taxed as a
REIT. A REIT that complies with all the requirements for ascertaining the
ownership of its outstanding shares in a taxable year and does not have reason
to know that it violated the 5/50 Rule will be deemed to have satisfied the 5/50
Rule for such taxable year. For purposes of determining share ownership under
the 5/50 Rule, a supplemental unemployment compensation benefits plan, a private
foundation, or a portion of a trust permanently set aside or used exclusively
for charitable purposes generally is considered an individual. A trust that is a
qualified trust under Code section 401(a), however, generally is not considered
an individual and beneficiaries of such trust are treated as holding shares of a
REIT in proportion to their actuarial interests in such trust for purposes of
the 5/50 Rule.
Prior to the consummation of the Offering, the Company did not satisfy
conditions (v) and (vi) in the preceding paragraph. The Company anticipates
issuing sufficient Common Shares with sufficient diversity of ownership pursuant
to the Offering to allow it to satisfy requirements (v) and (vi). In addition,
the Company's Declaration of Trust provides for restrictions regarding the
transfer of the Common Shares that are intended to assist the Company in
continuing to satisfy the share ownership requirements described in clauses (v)
and (vi) above. Such transfer restrictions are described in "Description of
Shares of Beneficial Interest--Restrictions on Transfer."
The Company currently does not have any corporate subsidiaries, but may have
corporate subsidiaries in the future. Code section 856(i) provides that a
corporation that is a "qualified REIT subsidiary" shall not be treated as a
separate corporation, and all assets, liabilities, and items of income,
deduction, and credit of a "qualified REIT subsidiary" shall be treated as
assets, liabilities, and items of income, deduction, and credit of the REIT. A
"qualified REIT subsidiary" is a corporation, all of the capital stock of which
is owned by the REIT. Thus, in applying the requirements described herein, any
"qualified REIT subsidiaries" of the Company will be ignored, and all assets,
liabilities, and items of income, deduction, and credit of such subsidiaries
will be treated as assets, liabilities, and items of income, deduction, and
credit of the Company.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the gross
income of the partnership attributable to such share. In addition, the assets
and gross income of the partnership will retain the same character in the hands
of the REIT for purposes of section 856 of the Code, including satisfying the
gross income and asset tests described below. Thus, the Company's proportionate
share of the assets and gross income of the Operating Partnership will be
treated as assets and gross income of the Company for purposes of applying the
requirements described herein.
INCOME TESTS
In order for the Company to qualify and to maintain its qualification as a
REIT, two requirements relating to the Company's gross income must be satisfied
annually. First, at least 75% of the Company's gross income (excluding gross
income from prohibited transactions) for each taxable year must consist of
defined types of income derived directly or indirectly from investments relating
to real property or mortgages on real property (including "rents from real
property" and interest on obligations secured by mortgages on real property or
on interests in real property) or temporary investment income. Second, at least
95% of the Company's gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived from such real property,
interests in mortgages on real property, or temporary investments, and from
dividends, other types of interest, and gain from the sale or disposition of
stock or
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securities, or from any combination of the foregoing. The specific application
of these tests to the Company is discussed below.
The term "interest," as defined for purposes of the 75% and 95% gross income
tests, generally does not include any amount received or accrued (directly or
indirectly) if the determination of such amount depends in whole or in part on
the income or profits of any person. However, an amount received or accrued
generally will not be excluded from the term "interest" solely by reason of
being based on a fixed percentage or percentages of receipts or sales. In
addition, an amount received or accrued generally will not be excluded from the
term "interest" solely by reason of being based on the income or profits of a
debtor if the debtor derives substantially all of its gross income from the
related property through the leasing of substantially all of its interests in
the property, to the extent the amounts received by the debtor would be
characterized as "rents from real property" if received by a REIT. Furthermore,
to the extent that interest from a loan that is based on the cash proceeds from
the sale of the property securing the loan constitutes a "shared appreciation
provision" (as defined in the Code), income attributable to such participation
feature will be treated as gain from the sale of the secured property, which
generally is qualifying income for purposes of the 75% and 95% gross income
tests.
Interest on obligations secured by mortgages on real property or on
interests in real property generally is qualifying income for purposes of the
75% gross income test. However, if the Company receives interest income with
respect to a Mortgage Loan that is secured by both real property and other
property and the highest principal amount of the loan outstanding during a
taxable year exceeds the fair market value of the real property on the date the
Company purchased the Mortgage Loan, the interest income from the loan will be
apportioned between the real property and the other property, which
apportionment may cause the Company to recognize income that is not qualifying
income for purposes of the 75% gross income test.
Hunton & Williams is of the opinion that the interest, original issue
discount ("OID"), and market discount income that the Company derives from its
Mortgage Assets generally will be qualifying interest income for purposes of
both the 75% and the 95% gross income tests. In some cases, however, the loan
amount of a Mortgage Loan may exceed the value of the real property securing the
loan, which will result in a portion of the income from the loan being
classified as qualifying income for purposes of the 95% gross income test, but
not for purposes of the 75% gross income test. It is also possible that, in some
instances, the interest income from a Mortgage Loan may be based in part on the
borrower's profits or net income, which generally will disqualify the income
from the loan for purposes of both the 75% and the 95% gross income tests. The
Company also will receive dividend income from AMC, which will be qualifying
income for purposes of the 95% gross income test, but not the 75% gross income
test. The Company may receive income not described above that is not qualifying
income for purposes of the gross income tests. The Company will monitor the
amount of nonqualifying income produced by its assets and has represented that
it will manage its portfolio in order to comply at all times with the gross
income tests.
If the Company acquires any real property and leases such property to
tenants, the rent the Company receives will qualify as "rents from real
property" in satisfying the 75% and 95% gross income tests only if several
conditions are met. First, the amount of rent must not be based, in whole or in
part, on the income or profits of any person. However, an amount received or
accrued generally will not be excluded from the term "rents from real property"
solely by reason of being based on a fixed percentage or percentages of receipts
or sales. Second, the rent received from a tenant will not qualify as "rents
from real property" in satisfying the gross income tests if the Company, or a
direct or indirect owner of 10% or more of the Company, owns 10% or more of such
tenant (a "Related Party Tenant"), taking into account both direct and
constructive ownership. Third, if rent attributable to personal property leased
in connection with a lease of real property, is greater than 15% of the total
rent received under the lease, then the portion of rent attributable to such
personal property will not qualify as "rents from real property." Finally, for
the rent to qualify as "rents from real property," the Company generally must
not operate or manage the real property or furnish or render services to the
tenants of such real property, other than through an "independent contractor"
who is adequately compensated and from whom the Company derives no
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revenue. The "independent contractor" requirement, however, does not apply to
the extent the services provided by the Company are "usually or customarily
rendered" in connection with the rental of space for occupancy only and are not
otherwise considered "rendered to the occupant." In addition, the Company may
render a de minimis amount of non-customary services to its tenants, or manage
or operate property, as long as the amount received with respect to the services
or management does not exceed 1% of the Company's income from the property. The
Company has represented that, to the extent that it acquires and leases real
property, it will manage such property so that the rent it receives from the
property qualifies as "rents from real property."
REITs generally are subject to tax at the maximum corporate rate on any
income from foreclosure property (other than income that would be qualifying
income for purposes of the 75% gross income test), less expenses directly
connected with the production of such income. "Foreclosure property" is defined
as any real property (including interests in real property) and any personal
property incident to such real property (i) that is acquired by a REIT as the
result of such REIT having bid in such property at foreclosure, or having
otherwise reduced such property to ownership or possession by agreement or
process of law, after there was a default (or default was imminent) on a lease
of such property or on an indebtedness owed to the REIT that such property
secured, (ii) for which the related loan was acquired by the REIT at a time when
default was not imminent or anticipated, and (iii) for which such REIT makes a
proper election to treat such property as foreclosure property. The Company does
not anticipate that it will receive any income from foreclosure property that is
not qualifying income for purposes of the 75% gross income test, but, if the
Company does receive any such income, the Company will make an election to treat
the related property as foreclosure property.
If property is not eligible for the election to be treated as foreclosure
property ("Ineligible Property") because the related loan was acquired by the
REIT at a time when default was imminent or anticipated, income received with
respect to such Ineligible Property may not be qualifying income for purposes of
the 75% or 95% gross income test. The Company anticipates that any income it
receives with respect to Ineligible Property will be qualifying income for
purposes of the 75% and 95% gross income tests.
The net income derived from a prohibited transaction is subject to a 100%
tax. The term "prohibited transaction" generally includes a sale or other
disposition of property (other than foreclosure property) that is held primarily
for sale to customers in the ordinary course of a trade or business. The Company
believes that no asset owned by the Company or the Operating Partnership will be
held for sale to customers and that a sale of any such asset will not be in the
ordinary course of the Company's or the Operating Partnership's business.
Whether an asset is held "primarily for sale to customers in the ordinary course
of a trade or business" depends, however, on the facts and circumstances in
effect from time to time, including those related to a particular asset.
Nevertheless, the Company will attempt to comply with the terms of safe-harbor
provisions in the Code prescribing when asset sales will not be characterized as
prohibited transactions. Complete assurance cannot be given, however, that the
Company can comply with the safe-harbor provisions of the Code or avoid owning
property that may be characterized as property held "primarily for sale to
customers in the ordinary course of a trade or business."
From time to time, the Company will enter into hedging transactions with
respect to one or more of its assets or liabilities. The Company's hedging
activities may include interest rate swaps, caps, and floors (or options to
purchase such items), and futures and forward contracts. To the extent that the
Company enters into an interest rate swap or cap contract, option, futures
contract, forward rate agreement, or any similar financial instrument to hedge
the Company's indebtedness incurred or to be incurred, any periodic income or
gain from the disposition of such contract should be qualifying income for
purposes of the 95% gross income test, but not the 75% gross income test. To the
extent that the Company hedges with other types of financial instruments, or in
other situations, it may not be entirely clear how the income from those
transactions will be treated for purposes of the various income tests that apply
to REITs under the Code. The Company intends to structure any hedging
transactions in a manner that does not jeopardize its status as a REIT.
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If the Company fails to satisfy one or both of the 75% and 95% gross income
tests for any taxable year, it nevertheless may qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. Those relief
provisions generally will be available if the Company's failure to meet such
tests is due to reasonable cause and not due to willful neglect, the Company
attaches a schedule of the sources of its income to its return, and any
incorrect information on the schedule was not due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances the
Company would be entitled to the benefit of those relief provisions. As
discussed above in "Federal Income Tax Considerations-- Taxation of the
Company," even if those relief provisions apply, a 100% tax would be imposed on
an amount equal to (i) the gross income attributable to the greater of the
amount by which the Company fails the 75% or 95% gross income test, multiplied
by (ii) a fraction intended to reflect the Company's profitability.
ASSET TESTS
The Company, at the close of each quarter of each taxable year, also must
satisfy two tests relating to the nature of its assets. First, at least 75% of
the value of the Company's total assets must be represented by cash or cash
items (including certain receivables), government securities, "real estate
assets," or, in cases where the Company raises new capital through equity or
long-term (at least five-year) debt offerings, temporary investments in stock or
debt instruments during the one-year period following the Company's receipt of
such capital. The term "real estate assets" includes interests in real property,
interests in mortgages on real property, regular or residual interests in a
REMIC (except that, if less than 95% of the assets of a REMIC consists of "real
estate assets" (determined as if the Company held such assets), the Company will
be treated as holding directly its proportionate share of the assets of such
REMIC), and shares of other REITs. For purposes of the 75% asset test, the term
"interest in real property" includes an interest in mortgage loans or land and
improvements thereon, such as buildings or other inherently permanent structures
(including items that are structural components of such buildings or
structures), a leasehold of real property, and an option to acquire real
property (or a leasehold of real property). To the extent that the fair market
value of the real property securing a loan equals or exceeds the outstanding
principal balance of the loan, the loan will qualify as a real estate asset.
However, if the outstanding principal balance of a loan exceeds the fair market
value of the real property securing the loan, such loan may not be a qualifying
"real estate asset" to the extent that the loan amount exceeds the value of the
associated real property, although the matter is not free from doubt. Second, of
the investments not included in the 75% asset class, the value of any one
issuer's securities owned by the Company may not exceed 5% of the value of the
Company's total assets, and the Company may not own more than 10% of any one
issuer's outstanding voting securities (except for its interests in the
Operating Partnership and any qualified REIT subsidiary).
The Company's Mortgage Assets generally will be qualifying assets for
purposes of the 75% asset test. However, if the outstanding principal balance of
a Mortgage Loan exceeds the fair market value of the real property securing the
loan, such Mortgage Loan will not be a qualifying "real estate asset" to the
extent that the loan amount exceeds the value of the associated real property.
To the extent that the Company pledges Mortgage Assets to another party in
connection with a reverse repurchase agreement, the Mortgage Assets will
continue to be qualifying assets for purposes of the 75% asset test because such
transaction will be treated as a borrowing for federal income tax purposes.
However, to the extent that the Company transfers Mortgage Assets to another
party in connection with a dollar reverse repurchase agreement, the Mortgage
Assets may not be considered an asset of the Company because such transaction
most likely would be treated as a sale of the Mortgage Assets for federal income
tax purposes. The margin account (and any cash or investments held in such
account) associated with a dollar reverse repurchase agreement, however, will be
considered an asset of the Company. Accordingly, the Company will monitor its
participation in dollar reverse repurchase agreements and the types of assets
held in the related margin accounts to ensure that its REIT status will not be
jeopardized thereby.
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The Operating Partnership will own 100% of the nonvoting common stock of
AMC, representing in the aggregate a 97% economic interest therein. By virtue of
its ownership of the Operating Partnership, the Company will be considered to
own its pro rata share of such stock. After the Recapitalization, the Company
will not own, directly or through the Operating Partnership, any of the voting
common stock of AMC. In addition, the Company believes that its proportionate
share of the value of the stock of AMC held by the Operating Partnership will
not exceed 5% of the total value of the Company's assets. Any hedging
instruments owned by the Company generally will not be qualifying assets for
purposes of the 75% asset test. In addition, because hedging instruments may be
considered securities of the entity issuing such instruments, the Company's
ownership of hedging instruments may be subject to the 5% asset test. The
Company anticipates that the value of its hedging instruments issued by any one
entity will not exceed 5% of the value of its total assets. To the extent,
however, that such hedging activities could cause REIT qualification problems,
the Company may conduct some or all of its hedging activities through AMC or
another corporate subsidiary that is fully subject to federal corporate income
tax. The Company will monitor the status of the assets that it acquires for
purposes of the various asset tests and has represented that it will manage its
portfolio in order to comply at all times with such tests.
If the Company should fail to satisfy the asset tests at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status if
(i) it satisfied the asset tests at the close of the preceding calendar quarter
and (ii) the discrepancy between the value of the Company's assets and the asset
test requirements arose from changes in the market values of its assets and was
not wholly or partly caused by the acquisition of one or more non-qualifying
assets. If the condition described in clause (ii) of the preceding sentence were
not satisfied, the Company still could avoid disqualification by eliminating any
discrepancy within 30 days after the close of the calendar quarter in which it
arose.
DISTRIBUTION REQUIREMENTS
The Company, in order to avoid corporate income taxation of the earnings
that it distributes, is required to distribute with respect to each taxable year
dividends (other than capital gain dividends) to its shareholders in an
aggregate amount at least equal to (i) the sum of (A) 95% of its "REIT taxable
income" (computed without regard to the dividends paid deduction and its net
capital gain or loss) and (B) 95% of the net income (after tax), if any, from
foreclosure property, minus (ii) the sum of certain items of noncash income.
Such distributions must be paid in the taxable year to which they relate, or in
the following taxable year if declared before the Company timely files its
federal income tax return for such year and if paid on or before the first
regular dividend payment date after such declaration. To the extent that the
Company does not distribute all of its net capital gain or distributes at least
95%, but less than 100%, of its "REIT taxable income," as adjusted, it will be
subject to tax thereon at regular ordinary and capital gains corporate tax
rates. Furthermore, if the Company should fail to distribute during each
calendar year (or, in the case of distributions with declaration and record
dates falling in the last three months of the calendar year, by the end of
January immediately following such year) at least the sum of (i) 85% of its REIT
ordinary income for such year, (ii) 95% of its REIT capital gain income for such
year, and (iii) any undistributed taxable income from prior periods, the Company
would be subject to a 4% nondeductible excise tax on the excess of such required
distribution over the amounts actually distributed. The Company may elect to
retain and pay income tax on the net long-term capital gain it receives in a
taxable year. In that case, the Company's shareholders would include in income
their proportionate share of the Company's undistributed long-term capital gain.
In addition, the shareholders would be deemed to have paid their proportionate
share of the tax paid by the Company, which would be credited or refunded to the
shareholders. Each shareholder's basis in his shares would be increased by the
amount of the undistributed long-term capital gain included in the shareholder's
income, less the shareholder's share of the tax paid by the Company. Such amount
would be treated as having been distributed for purposes of the 4% excise tax
described above. The Company intends to make timely distributions sufficient to
satisfy the annual distribution requirements.
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It is possible that, from time to time, the Company may experience timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of that income and deduction of such
expenses in arriving at its REIT taxable income. For example, capital losses
recognized by the Company may not be deducted from its "REIT taxable income." In
addition, the Company will recognize taxable income in advance of the related
cash flow if its Mortgage Assets are deemed to have OID. OID generally will be
accrued using a constant yield methodology that takes into account projected
prepayments but that does not allow credit losses to be reflected until they are
actually incurred. For example, pursuant to Treasury Regulations, the Company
may be required to recognize the amount of any payment projected to be made
pursuant to a shared appreciation provision over the term of the related
Mortgage Loan using the constant yield method. The Company also may recognize
taxable market discount income upon the receipt of proceeds from the disposition
of, or principal payments on, Mortgage Assets that are "market discount bonds"
(i.e., obligations with a stated redemption price at maturity that is greater
than the Company's tax basis in such obligations), although such proceeds often
will be used to make non-deductible principal payments on related borrowings.
The Company also may recognize excess inclusion or other "phantom" taxable
income from REMIC residual interests and issuances of multiple-class,
multiple-maturity collateralized mortgage obligations for which no REMIC
election is made ("Non-REMIC Transactions"). Finally, the Company may recognize
taxable income without receiving a corresponding cash distribution if it
forecloses on or makes a "significant modification" (as defined in Treasury
Regulations section 1.1001-3) to a Mortgage Loan, to the extent that the fair
market value of the underlying property or the principal amount of the modified
loan, as applicable, exceeds the Company's basis in the original loan.
Therefore, the Company may have less cash than is necessary to meet its annual
95% distribution requirement or to avoid corporate income tax or the excise tax
imposed on certain undistributed income. In such a situation, the Company may
find it necessary to arrange for short-term (or possibly long-term) borrowings
or to raise funds through the issuance of Preferred Shares or additional Common
Shares.
Under certain circumstances, the Company may be able to rectify a failure to
meet the distribution requirements for a year by paying "deficiency dividends"
to its shareholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Although the Company may be
able to avoid being taxed on amounts distributed as deficiency dividends, it
will be required to pay to the Service interest based upon the amount of any
deduction taken for deficiency dividends.
RECORDKEEPING REQUIREMENTS
Pursuant to applicable Treasury Regulations, in order to be able to elect to
be taxed as a REIT, the Company must maintain certain records. In addition, in
order to avoid a penalty, the Company must request on an annual basis certain
information from its shareholders designed to disclose the actual ownership of
its outstanding shares. The Company intends to comply with such requirements.
PARTNERSHIP ANTI-ABUSE RULE
The U.S. Department of the Treasury has issued a final regulation (the
"Anti-Abuse Rule") under the partnership provisions of the Code (the
"Partnership Provisions") that authorizes the Service, in certain abusive
transactions involving partnerships, to disregard the form of the transaction
and recast it for federal tax purposes as the Service deems appropriate. The
Anti-Abuse Rule applies where a partnership is formed or utilized in connection
with a transaction (or series of related transactions) with a principal purpose
of substantially reducing the present value of the partners' aggregate federal
tax liability in a manner inconsistent with the intent of the Partnership
Provisions. The Anti-Abuse Rule states that the Partnership Provisions are
intended to permit taxpayers to conduct joint business (including investment)
activities though a flexible arrangement that accurately reflects the partners'
economic agreement and clearly reflects the partners' income without incurring
any entity-level tax. The purposes for structuring a transaction involving a
partnership are determined based on all of the facts and circumstances,
including a
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comparison of the purported business purpose for a transaction and the claimed
tax benefits resulting from the transaction. A reduction in the present value of
the partners' aggregate federal tax liability through the use of a partnership
does not, by itself, establish inconsistency with the intent of the Partnership
Provisions.
The Anti-Abuse Rule contains an example in which a corporation that elects
to be treated as a REIT contributes substantially all of the proceeds from a
public offering to a partnership in exchange for a general partnership interest.
The limited partners of the partnership contribute real property assets to the
partnership, subject to liabilities that exceed their respective aggregate bases
in such property. In addition, some of the limited partners have the right,
beginning two years after the formation of the partnership, to require the
redemption of their limited partnership interests in exchange for cash or REIT
stock (at the REIT's option) equal to the fair market value of their respective
interests in the partnership at the time of the redemption. The example
concludes that the use of the partnership is not inconsistent with the intent of
the Partnership Provisions and, thus, cannot be recast by the Service. However,
the Redemption Rights associated with the Units will not conform in all respects
to the redemption rights contained in the foregoing example. Moreover, the
Anti-Abuse Rule is extraordinarily broad in scope and is applied based on an
analysis of all of the facts and circumstances. As a result, there can be no
assurance that the Service will not attempt to apply the Anti-Abuse Rule to the
Company. If the conditions of the Anti-Abuse Rule are met, the Service is
authorized to take appropriate enforcement action, including disregarding the
Operating Partnership for federal tax purposes or treating one or more of the
partners as nonpartners. Any such action potentially could jeopardize the
Company's status as a REIT because the partners of the Operating Partnership
(other than the Company) could be treated as shareholders of the Company, which
could cause the Company to fail to satisfy the share ownership requirements for
REIT status.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to the Company's shareholders in any year
in which the Company fails to qualify will not be deductible by the Company nor
will they be required to be made. In such event, to the extent of the Company's
current and accumulated earnings and profits, all distributions to shareholders
will be taxable as ordinary income and, subject to certain limitations of the
Code, corporate distributees may be eligible for the dividends received
deduction. Unless entitled to relief under specific statutory provisions, the
Company also will be disqualified from taxation as a REIT for the four taxable
years following the year during which the Company ceased to qualify as a REIT.
It is not possible to state whether in all circumstances the Company would be
entitled to such statutory relief.
TAXATION OF TAXABLE U.S. SHAREHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. shareholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends or retained long-term
capital gains) will be taken into account by such U.S. shareholders as ordinary
income and will not be eligible for the dividends received deduction generally
available to corporations. As used herein, the term "U.S. shareholder" means a
holder of Common Shares that for U.S. federal income tax purposes is (i) a
citizen or resident of the U.S., (ii) a corporation, partnership, or other
entity created or organized in or under the laws of the U.S. or of an political
subdivision thereof, (iii) an estate whose income from sources without the
United States is includible in gross income for U.S. federal income tax purposes
regardless of its connection with the conduct of a trade or business within the
United States, or (iv) any trust with respect to which (A) a U.S. court is able
to exercise primary supervision over the administration of such trust and (B)
one or more U.S. fiduciaries have the authority to control all substantial
decisions of the trust. Distributions that are designated as capital gain
dividends will be taxed as long-term capital gains (to the extent they do not
exceed the Company's actual net capital gain for the taxable year) without
regard to the period for which the shareholder has held his Common Shares.
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However, corporate shareholders may be required to treat up to 20% of certain
capital gain dividends as ordinary income. The Company also may elect to retain
and pay income tax on the net long-term capital gain that it receives in a
taxable year. In that case, the Company's shareholders would include in income
as long-term capital gain their proportionate share of the Company's
undistributed long-term capital gain. In addition, the shareholders would be
deemed to have paid their proportionate share of the tax paid by the Company,
which would be credited or refunded to the shareholders. Each shareholder's
basis in his shares would be increased by the amount of the undistributed
long-term capital gain included in the shareholder's income, less the
shareholder's share of the tax paid by the Company.
Distributions in excess of current and accumulated earnings and profits will
not be taxable to a shareholder to the extent that they do not exceed the
adjusted basis of the shareholder's Common Shares, but rather will reduce the
adjusted basis of such shares. To the extent that such distributions in excess
of current and accumulated earnings and profits exceed the adjusted basis of a
shareholder's Common Shares, such distributions will be included in income as
long-term capital gain (or short-term capital gain if the Common Shares had been
held for one year or less), assuming the Common Shares are a capital asset in
the hands of the shareholder. In addition, any distribution declared by the
Company in October, November, or December of any year and payable to a
shareholder of record on a specified date in any such month shall be treated as
both paid by the Company and received by the shareholder on December 31 of such
year, provided that the distribution is actually paid by the Company during
January of the following calendar year.
Shareholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company. Instead, such losses would be
carried over by the Company for potential offset against its future income
(subject to certain limitations). Taxable distributions from the Company and
gain from the disposition of the Common Shares will not be treated as passive
activity income and, therefore, shareholders generally will not be able to apply
any "passive activity losses" (such as losses from certain types of limited
partnerships in which a shareholder is a limited partner) against such income.
In addition, taxable distributions from the Company generally will be treated as
investment income for purposes of the investment interest limitations. Capital
gains from the disposition of Common Shares (or distributions treated as such),
however, will be treated as investment income only if the shareholder so elects,
in which case such capital gains will be taxed at ordinary income rates. The
Company will notify shareholders after the close of the Company's taxable year
as to the portions of the distributions attributable to that year that
constitute ordinary income or capital gain dividends.
The Company's investment in Mortgage Assets may cause it under certain
circumstances to recognize taxable income in excess of its economic income
("phantom income") and to experience an offsetting excess of economic income
over its taxable income in later years. As a result, shareholders may from time
to time be required to pay federal income tax on distributions that economically
represent a return of capital, rather than a dividend. Such distributions would
be offset in later years by distributions representing economic income that
would be treated as returns of capital for federal income tax purposes.
Accordingly, if the Company receives phantom income, its shareholders may be
required to pay federal income tax with respect to such income on an accelerated
basis (i.e., before such income is realized by the shareholders in an economic
sense). Taking into account the time value of money, such an acceleration of
federal income tax liabilities would cause shareholders to receive an after-tax
rate of return on an investment in the Company that would be less than the
after-tax rate of return on an investment with an identical before-tax rate of
return that did not generate phantom income. For example, if an investor subject
to an effective income tax rate of 30% purchased a bond (other than a tax-exempt
bond) with an annual interest rate of 10% for its face value, his before-tax
return on his investment would be 10%, and his after-tax return would be 7%.
However, if the same investor purchased shares of the Company at a time when the
before-tax rate of return was 10%, his after-tax rate of return on his shares
might be somewhat less than 7% as a result of the Company's phantom income. In
general, as the ratio of the Company's phantom income to its total income
increases, the after-tax rate of return received by a taxable
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shareholder of the Company will decrease. The Company will consider the
potential effects of phantom income on its taxable shareholders in managing its
investments.
To the extent that the Company acquires REMIC residual interests, pursuant
to Treasury Regulations to be issued in the future, the Company's shareholders
would not be permitted to offset certain portions of the dividend income they
derive from the Company with their current deductions or net operating loss
carryovers or carrybacks. The portion of a shareholder's dividends that would be
subject to this limitation would equal his allocable share of any excess
inclusion income derived by the Company with respect to its REMIC residual
interests. The Company's excess inclusion income for any calendar quarter will
equal the excess of its income from REMIC residual interests over its "daily
accruals" with respect to such interests for the calendar quarter. Daily
accruals for a calendar quarter are computed by allocating to each day on which
a REMIC residual interest is owned a ratable portion of the product of (i) the
"adjusted issue price" of the REMIC residual interest at the beginning of the
quarter and (ii) 120% of the long-term federal interest rate (adjusted for
quarterly compounding) on the date of issuance of the REMIC residual interest.
The adjusted issue price of a REMIC residual interest at the beginning of a
calendar quarter equals the original issue price of the interest, increased by
the amount of daily accruals for prior quarters and decreased by all prior
distributions to the Company with respect to the REMIC residual interest. To the
extent provided in future Treasury Regulations, if the Company owns REMIC
residual interests that do not have significant value, the excess inclusion
income that the Company derives from such REMIC residual interests will be
deemed to be equal to the entire amount of income derived by the Company from
such REMIC residual interests.
To the extent that the Company (or a qualified REIT subsidiary) acquires
Mortgage Assets and issues debt obligations secured by those assets in Non-REMIC
Transactions, the Company or such Mortgage Assets may be treated as a "taxable
mortgage pool" under the Code if the payments on the debt obligations bear a
relationship to the payments on the underlying Mortgage Assets. In such a case,
the Company's REIT status would not be jeopardized, but to the extent provided
in future Treasury Regulations, a portion or all of the taxable income generated
by the Company's Mortgage Assets constituting a taxable mortgage pool may be
characterized as excess inclusion income and allocated pro rata among the
Company's shareholders. Shareholders would not be permitted to offset certain
portions of the dividend income from the Company that are attributable to the
Non-REMIC Transactions with their current deductions or net operating loss
carryovers or carrybacks. Although no applicable Treasury Regulations have yet
been issued, no assurance can be provided that such regulations will not be
issued in the future or that, if issued, that such regulations will not be
retroactive and will not prevent the Company's shareholders from offsetting some
portion of their dividend income with deductions or losses from other sources.
The Company may enter into master reverse repurchase agreements or other
secured borrowings pursuant to which the Company may borrow funds with differing
maturity dates, all of which are cross-collateralized. The Company does not
believe that the master reverse repurchase agreements or its other financing
arrangements should cause the Company or the related Mortgage Assets to be
treated as a taxable mortgage pool. However, because the Treasury Department has
issued regulations that adopt a broad view of what may constitute a taxable
mortgage pool, no assurances can be given that the Service might not maintain
successfully that the Company or the Mortgage Assets collateralizing such master
reverse repurchase agreements constitute a taxable mortgage pool.
TAXATION OF SHAREHOLDERS ON THE DISPOSITION OF THE COMMON SHARES
In general, any gain or loss realized upon a taxable disposition of the
Common Shares by a shareholder who is not a dealer in securities will be treated
as long-term capital gain or loss if the Common Shares has been held for more
than one year and otherwise as short-term capital gain or loss. However, any
loss upon a sale or exchange of Common Shares by a shareholder who has held such
shares for six months or less (after applying certain holding period rules) will
be treated as a long-term capital loss to the extent of distributions from the
Company required to be treated by such shareholder as long-term capital
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gain. All or a portion of any loss realized upon a taxable disposition of the
Common Shares may be disallowed if other shares of Common Shares are purchased
within 30 days before or after the disposition.
CAPITAL GAINS AND LOSSES
A capital asset generally must be held for more than one year in order for
gain or loss derived from its sale or exchange to be treated as long-term
capital gain or loss. The highest marginal individual income tax rate is 39.6%.
The maximum tax rate on long-term capital gains applicable to individuals is 28%
for sales and exchanges of assets held for more than one year, but not more than
18 months, and 20% for sales and exchanges of assets held for more than 18
months. Thus, the tax rate differential between capital gain and ordinary income
for individuals may be significant. In addition, the characterization of income
as capital gain or ordinary income may affect the deductibility of capital
losses. Capital losses not offset by capital gains may be deducted against an
individual's ordinary income only up to a maximum annual amount of $3,000.
Unused capital losses may be carried forward indefinitely by individuals. All
net capital gain of a corporate taxpayer is subject to tax at ordinary corporate
rates. A corporate taxpayer can deduct capital losses only to the extent of
capital gains, with unused losses being carried back three years and forward
five years.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Company will report to its U.S. shareholders and to the Service the
amount of distributions paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a shareholder may be
subject to backup withholding at the rate of 31% with respect to distributions
paid unless such holder (i) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact or (ii) provides a
taxpayer identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with the applicable requirements of the
backup withholding rules. A shareholder who does not provide the Company with
his correct taxpayer identification number also may be subject to penalties
imposed by the Service. Any amount paid as backup withholding will be creditable
against the shareholder's income tax liability. In addition, the Company may be
required to withhold a portion of capital gain distributions to any shareholders
who fail to certify their nonforeign status to the Company. The Treasury
Department issued proposed regulations in April 1996 regarding the backup
withholding rules as applied to Non-U.S. Shareholders. The proposed regulations
would alter the current system of backup withholding compliance and are proposed
to be effective for distributions made after December 31, 1997. See "--Taxation
of Non-U.S. Shareholders."
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Tax-exempt entities, including qualified employee pension and profit sharing
trusts and individual retirement accounts ("Exempt Organizations"), generally
are exempt from federal income taxation. However, they are subject to taxation
on their UBTI. While many investments in real estate generate UBTI, the Service
has issued a published ruling that dividend distributions from a REIT to an
exempt employee pension trust do not constitute UBTI, provided that the shares
of the REIT are not otherwise used in an unrelated trade or business of the
exempt employee pension trust. Based on that ruling, amounts distributed by the
Company to Exempt Organizations generally should not constitute UBTI. However,
if an Exempt Organization were to finance its acquisition of the Common Shares
with debt, a portion of its income from the Company would constitute UBTI
pursuant to the "debt-financed property" rules. Furthermore, social clubs,
voluntary employee benefit associations, supplemental unemployment benefit
trusts, and qualified group legal services plans that are exempt from taxation
under paragraphs (7), (9), (17), and (20), respectively, of Code section 501(c)
are subject to different UBTI rules, which generally will require them to
characterize distributions from the Company as UBTI. Finally, in certain
circumstances, a pension trust that owns more than 10% of the Company's shares
is required to treat a percentage of the dividends from the Company as UBTI (the
"UBTI Percentage"). The UBTI Percentage
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is the gross income derived by the Company from an unrelated trade or business
(determined as if the Company were a pension trust) divided by the gross income
of the Company for the year in which the dividends are paid. The UBTI rule
applies to a pension trust holding more than 10% of the Company's shares only if
(i) the UBTI Percentage is at least 5%, (ii) the Company qualifies as a REIT by
reason of the modification of the 5/50 Rule that allows the beneficiaries of the
pension trust to be treated as holding shares of the Company in proportion to
their actuarial interests in the pension trust, and (iii) the Company is a
"pension-held REIT" (i.e., either (A) one pension trust owns more than 25% of
the value of the Company's shares or (B) a group of pension trusts individually
holding more than 10% of the value of the Company's shares collectively owns
more than 50% of the value of the Company's shares.) Because the Ownership
Limitation prohibits any shareholder from owning more than 9.8% of (i) the
number of outstanding Common Shares or (ii) the number of outstanding Preferred
Shares of any class or series, the Company should not be a pension-held REIT
and, accordingly, no pension trust should be required to treat a percentage of
the dividends from the Company as UBTI.
Dividends received by an Exempt Organization that are allocable to excess
inclusion income derived by the Company from REMIC residual interests may be
treated as UBTI. In addition, the Company will be subject to tax at the highest
marginal corporate rate on the portion of any such excess inclusion income that
is allocable to shares of the Company held by Disqualified Organizations. Any
such tax would be deductible by the Company against its income that is not
excess inclusion income. If the Company derives excess inclusion income from
REMIC residual interests, a tax similar to the tax on the Company described
above in this paragraph may be imposed on shareholders who are (i) pass-through
entities (i.e., partnerships, estates, trusts, regulated investment companies,
REITs, common trust funds, and certain types of cooperatives (including farmers'
cooperatives described in Code section 521)) in which a Disqualified
Organization is a record holder of shares or interests and (ii) nominees who
hold Common Shares on behalf of Disqualified Organizations. Consequently, a
brokerage firm that holds Common Shares in a "street name" account for a
Disqualified Organization may be subject to federal income tax on the excess
inclusion income derived from those shares.
The U.S. Treasury Department has been authorized to issue regulations
regarding issuances by a REIT of debt obligations in Non-REMIC Transactions. If
such Treasury Regulations are issued in the future preventing taxable
shareholders from offsetting some percentage of the dividends paid by the
Company with deductions or losses from other sources, that same percentage of
the Company's dividends would be treated as UBTI for shareholders that are
Exempt Organizations. See "--Taxation of Taxable U.S. Shareholders."
TAXATION OF NON-U.S. SHAREHOLDERS
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
shareholders (collectively, "Non-U.S. Shareholders") are complex and no attempt
will be made herein to provide more than a summary of such rules. PROSPECTIVE
NON-U.S. SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE
THE IMPACT OF FEDERAL, STATE, AND LOCAL INCOME TAX LAWS WITH REGARD TO AN
INVESTMENT IN THE COMMON SHARES, INCLUDING ANY REPORTING REQUIREMENTS.
Distributions to Non-U.S. Shareholders that are not attributable to gain
from sales or exchanges by the Company of U.S. real property interests and are
not designated by the Company as capital gains dividends or retained long-term
capital gains will be treated as dividends of ordinary income to the extent that
they are made out of the Company's current or accumulated earnings and profits.
Such distributions ordinarily will be subject to a withholding tax equal to 30%
of the gross amount of the distribution unless an applicable tax treaty reduces
or eliminates that tax. However, if income from the investment in the Common
Shares is treated as effectively connected with the Non-U.S. Shareholder's
conduct of a U.S. trade or business, the Non-U.S. Shareholder generally will be
subject to federal income tax at graduated
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rates, in the same manner as U.S. shareholders are taxed with respect to such
distributions (and also may be subject to the 30% branch profits tax in the case
of a Non-U.S. Shareholder that is a non-U.S. corporation). The Company expects
to withhold U.S. income tax at the rate of 30% on the gross amount of any such
distributions made to a Non-U.S. Shareholder unless (i) a lower treaty rate
applies and any required form evidencing eligibility for that reduced rate is
filed with the Company or (ii) the Non-U.S. Shareholder files an IRS Form 4224
with the Company claiming that the distribution is effectively connected income.
The U.S. Treasury Department issued proposed regulations in April 1996 that
would modify the manner in which the Company complies with the withholding
requirements.
If the Company derives excess inclusion income from REMIC residual
interests, the portion of the dividends paid to Non-U.S. Shareholders that is
allocable to the excess inclusion income may not be eligible for exemption from
the 30% withholding tax or a reduced treaty rate. In addition, the U.S. Treasury
Department has been authorized to issue regulations regarding issuances by a
REIT of debt obligations in Non-REMIC Transactions. If Treasury Regulations are
issued in the future preventing taxable shareholders from offsetting some
percentage of the dividends paid by the Company with deductions or losses from
other sources, that same percentage of the Company's dividends would not be
eligible for exemption from the 30% withholding tax or a reduced treaty rate.
See "--Taxation of Taxable U.S. Shareholders."
Distributions in excess of current and accumulated earnings and profits of
the Company will not be taxable to a shareholder to the extent that such
distributions do not exceed the adjusted basis of the shareholder's Common
Shares, but rather will reduce the adjusted basis of such shares. To the extent
that distributions in excess of current and accumulated earnings and profits
exceed the adjusted basis of a Non-U.S. Shareholder's Common Shares, such
distributions will give rise to tax liability if the Non-U.S. Shareholder would
otherwise be subject to tax on any gain from the sale or disposition of his
Common Shares, as described below. Because it generally cannot be determined at
the time a distribution is made whether or not such distribution will be in
excess of current and accumulated earnings and profits, the entire amount of any
distribution normally will be subject to withholding at the same rate as a
dividend. However, amounts so withheld are refundable to the extent it is
determined subsequently that such distribution was, in fact, in excess of the
current and accumulated earnings and profits of the Company.
In August 1996, the U.S. Congress passed the Small Business Job Protection
Act of 1996, which requires the Company to withhold 10% of any distribution in
excess of the Company's current and accumulated earnings and profits.
Consequently, although the Company intends to withhold at a rate of 30% on the
entire amount of any distribution, to the extent that the Company does not do
so, any portion of a distribution not subject to withholding at a rate of 30%
will be subject to withholding at a rate of 10%.
OTHER TAX CONSEQUENCES
The Company, the Operating Partnership, or the Company's shareholders may be
subject to state and local tax in various states and localities, including those
states and localities in which it or they transact business, own property, or
reside. The state and local tax treatment of the Company and its shareholders in
such jurisdictions may differ from the federal income tax treatment described
above. Consequently, prospective shareholders should consult their own tax
advisors regarding the effect of state and local tax laws upon an investment in
the Common Shares.
In particular, the State of Texas imposes a franchise tax upon corporations
and limited liability companies that do business in Texas, including REITs that
are organized as corporations. Entities organized as trusts or partnerships,
however, currently are not subject to the Texas franchise tax. Accordingly,
neither the Company nor the Operating Partnership should be subject to the Texas
franchise tax. There can be no assurance, however, that the Texas legislature
will not expand the scope of the Texas franchise tax to apply to trusts such as
the Company or entities that are organized as partnerships such as the Operating
Partnership.
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AMC is organized as a corporation, conducts business in Texas, and has
registered in the State of Texas as a foreign corporation qualified to transact
business in Texas. Accordingly, AMC is subject to the Texas franchise tax. Such
tax will reduce the amount available for distribution from AMC to the Company,
which, in turn, will reduce the amount available for distribution from the
Company to its shareholders. The Texas franchise tax imposed on a corporation
doing business in Texas generally is equal to the greater of (i) .25% of
"taxable capital" (generally, financial accounting net worth with certain
adjustments) apportioned to Texas, or (ii) 4.5% of "taxable earned surplus"
(generally, federal taxable income with certain adjustments) apportioned to
Texas. A corporation's taxable capital and taxable earned surplus are
apportioned to Texas based upon a fraction, the numerator of which is the
corporation's gross receipts from business transacted in Texas and the
denominator of which is the corporation's gross receipts from all sources.
TAX ASPECTS OF THE OPERATING PARTNERSHIP
The following discussion summarizes the material federal income tax
considerations applicable to the Company's investment in the Operating
Partnership. The discussion does not cover state or local tax laws or any
federal tax laws other than income tax laws.
CLASSIFICATION AS A PARTNERSHIP
The Company will be entitled to include in its income its distributive share
of the Operating Partnership's income and to deduct its distributive share of
the Operating Partnership's losses only if the Operating Partnership is
classified for federal income tax purposes as a partnership rather than as a
corporation or an association taxable as a corporation. An entity will be
classified as a partnership rather than as a corporation or an association
taxable as a corporation for federal income tax purposes if the entity (i) is
treated as a partnership under Treasury Regulations, effective January 1, 1997,
relating to entity classification (the "Check-the-Box Regulations") and (ii) is
not a "publicly traded" partnership.
In general, under the Check-the-Box Regulations, an unincorporated entity
with at least two members may elect to be classified either as an association
taxable as a corporation or as a partnership. If such an entity fails to make an
election, it generally will be treated as a partnership for federal income tax
purposes. The Operating Partnership intends to be treated as a partnership under
the Check-the-Box Regulations and the Company has represented that the Operating
Partnership will not elect to be treated as an association taxable as a
corporation under the Check-the-Box Regulations.
A "publicly traded" partnership is a partnership whose interests are traded
on an established securities market or are readily tradable on a secondary
market (or the substantial equivalent thereof). A publicly traded partnership
will be treated as a corporation for federal income tax purposes unless at least
90% of such partnership's gross income for a taxable year consists of
"qualifying income" under section 7704(d) of the Code, which generally includes
any income that is qualifying income for purposes of the 95% gross income test
applicable to REITs (the "90% Passive-Type Income Exception"). See "Federal
Income Tax Considerations-Requirements for Qualification--Income Tests." The
U.S. Treasury Department has issued regulations effective for taxable years
beginning after December 31, 1995 (the "PTP Regulations") that provide limited
safe harbors from the definition of a publicly traded partnership. Pursuant to
one of those safe harbors (the "Private Placement Exclusion"), interests in a
partnership will not be treated as readily tradable on a secondary market or the
substantial equivalent thereof if (i) all interests in the partnership were
issued in a transaction (or transactions) that was not required to be registered
under the Securities Act of 1933, as amended, and (ii) the partnership does not
have more than 100 partners at any time during the partnership's taxable year.
In determining the number of partners in a partnership, a person owning an
interest in a flow-through entity (i.e., a partnership, grantor trust, or S
corporation) that owns an interest in the partnership is treated as a partner in
such partnership only if (a) substantially all of the value of the owner's
interest in the flow-through entity is attributable to the flow-through entity's
interest (direct or indirect) in the partnership and (b) a principal purpose of
the use of the
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flow-through entity is to permit the partnership to satisfy the 100-partner
limitation. The Operating Partnership qualifies for the Private Placement
Exclusion. If, however, the Operating Partnership is considered a publicly
traded partnership under the PTP Regulations for some reason (e.g. because it is
deemed to have more than 100 partners), the Operating Partnership should not be
treated as a corporation because it should be eligible for the 90% Passive-Type
Income Exception.
The Company has not requested, and does not intend to request, a ruling from
the Service that the Operating Partnership will be classified as a partnership
for federal income tax purposes. However, Hunton & Williams is of the opinion
that, based on certain factual assumptions and representations, the Operating
Partnership will be treated for federal income tax purposes as a partnership and
not as a corporation or an association taxable as a corporation or as a publicly
traded partnership. Unlike a tax ruling, an opinion of counsel is not binding
upon the Service, and no assurance can be given that the Service will not
challenge the status of the Operating Partnership as a partnership for federal
income tax purposes. If such challenge were sustained by a court, the Operating
Partnership would be treated as a corporation for federal income tax purposes,
as described below. In addition, the opinion of Hunton & Williams is based on
existing law, which is to a great extent the result of administrative and
judicial interpretation. No assurance can be given that administrative or
judicial changes would not modify the conclusions expressed in the opinion.
If for any reason the Operating Partnership were taxable as a corporation,
rather than as a partnership, for federal income tax purposes, the Company would
not be able to qualify as a REIT. See "Federal Income Tax
Considerations--Requirements for Qualification--Income Tests" and
"--Requirements for Qualification--Asset Tests." In addition, any change in the
Operating Partnership's status for tax purposes might be treated as a taxable
event, in which case the Company might incur a tax liability without any related
cash distribution. See "Federal Income Tax Considerations--Requirements for
Qualification-- Distribution Requirements." Further, items of income and
deduction of the Operating Partnership would not pass through to its partners,
and its partners would be treated as shareholders for tax purposes.
Consequently, the Operating Partnership would be required to pay income tax at
corporate tax rates on its net income, and distributions to its partners would
constitute dividends that would not be deductible in computing the Operating
Partnership's taxable income.
INCOME TAXATION OF THE OPERATING PARTNERSHIP AND ITS PARTNERS
PARTNERS, NOT THE OPERATING PARTNERSHIP, SUBJECT TO TAX. A partnership is
not a taxable entity for federal income tax purposes. Rather, the Company will
be required to take into account its allocable share of the Operating
Partnership's income, gains, losses, deductions, and credits for any taxable
year of the Operating Partnership ending within or with the taxable year of the
Company, without regard to whether the Company has received or will receive any
distribution from the Operating Partnership.
PARTNERSHIP ALLOCATIONS. Although a partnership agreement generally will
determine the allocation of income and losses among partners, such allocations
will be disregarded for tax purposes under section 704(b) of the Code if they do
not comply with the provisions of section 704(b) of the Code and the Treasury
Regulations promulgated thereunder. If an allocation is not recognized for
federal income tax purposes, the item subject to the allocation will be
reallocated in accordance with the partners' interests in the partnership, which
will be determined by taking into account all of the facts and circumstances
relating to the economic arrangement of the partners with respect to such item.
The Operating Partnership's allocations of taxable income and loss are intended
to comply with the requirements of section 704(b) of the Code and the Treasury
Regulations promulgated thereunder.
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TAX ALLOCATIONS WITH RESPECT TO CONTRIBUTED PROPERTIES. Pursuant to section
704(c) of the Code, income, gain, loss, and deduction attributable to
appreciated or depreciated property that is contributed to a partnership in
exchange for an interest in the partnership must be allocated for federal income
tax purposes in a manner such that the contributor is charged with, or benefits
from, the unrealized gain or unrealized loss associated with the property at the
time of the contribution. The amount of such unrealized gain or unrealized loss
generally is equal to the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution. The Treasury Department has issued
regulations requiring partnerships to use a "reasonable method" for allocating
items affected by section 704(c) of the Code and outlining several reasonable
allocation methods. The Operating Partnership generally will elect to use the
traditional method for allocating Code section 704(c) items with respect to
assets that it acquires in exchange for Units.
BASIS IN PARTNERSHIP INTEREST. The Company's adjusted tax basis in its
partnership interest in the Operating Partnership generally is equal to (i) the
amount of cash and the basis of any other property contributed to the Operating
Partnership by the Company, (ii) increased by (A) its allocable share of the
Operating Partnership's income and (B) its allocable share of indebtedness of
the Operating Partnership, and (iii) reduced, but not below zero, by (A) the
Company's allocable share of the Operating Partnership's loss and (B) the amount
of cash distributed to the Company, including constructive cash distributions
resulting from a reduction in the Company's share of indebtedness of the
Operating Partnership.
If the allocation of the Company's distributive share of the Operating
Partnership's loss would reduce the adjusted tax basis of the Company's
partnership interest in the Operating Partnership below zero, the recognition of
such loss will be deferred until such time as the recognition of such loss would
not reduce the Company's adjusted tax basis below zero. To the extent that the
Operating Partnership's distributions, or any decrease in the Company's share of
the indebtedness of the Operating Partnership (such decrease being considered a
constructive cash distribution to the partners), would reduce the Company's
adjusted tax basis below zero, such distributions (including such constructive
distributions) will constitute taxable income to the Company. Such distributions
and constructive distributions normally will be characterized as capital gain,
and if the Company's partnership interest in the Operating Partnership has been
held for longer than the long-term capital gain holding period (currently one
year), the distributions and constructive distributions will constitute
long-term capital gain.
SALE OF THE COMPANY'S PROPERTY
Generally, any gain realized by the Company or the Operating Partnership on
the sale of property held for more than one year will be long-term capital gain,
except for any portion of such gain that is treated as depreciation or cost
recovery recapture. Any gain recognized by the Operating Partnership on the
disposition of any assets contributed by the Limited Partners will be allocated
first to the contributing Limited Partners under section 704(c) of the Code to
the extent of their "built-in gain" on those assets for federal income tax
purposes. The Limited Partners' "built-in gain" on the assets sold will equal
the excess of the Limited Partners' proportionate share of the book value of
those assets over the Limited Partners' tax basis allocable to those assets at
the time of the sale. Any remaining gain recognized by the Operating Partnership
on the disposition of the assets will be allocated among the partners in
accordance with the Partnership Agreement.
Gain on the sale of any property held by the Company or the Operating
Partnership as inventory or other property held primarily for sale to customers
in the ordinary course of the Company's or the Operating Partnership's trade or
business will be treated as income from a prohibited transaction that is subject
to a 100% penalty tax. Such prohibited transaction income also may have an
adverse effect upon the Company's ability to satisfy the income tests for REIT
status. See "Federal Income Tax Considerations--Requirements For Qualification--
Income Tests" above. The Company, however, does not presently intend to acquire
or hold or to allow the Operating Partnership to acquire or hold any property
that
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represents inventory or other property held primarily for sale to customers in
the ordinary course of the Company's or the Operating Partnership's trade or
business.
TAXATION OF AMC
The Operating Partnership will own 100% of the nonvoting common stock of AMC
representing a 97% economic interest in AMC. By virtue of its ownership of the
Operating Partnership, the Company will be considered to own its pro rata share
of such stock. As noted above, for the Company to qualify as a REIT, its
proportionate share of the value of the stock of AMC held by the Operating
Partnership may not exceed 5% of the total value of the Company's assets. In
addition, the Company may not own more than 10% of the voting stock of AMC.
After the Recapitalization, the Company will not own, directly or through the
Operating Partnership, any of the voting stock of AMC and, therefore, will not
control AMC. In addition, the Company believes that its proportionate share of
the value of the stock of AMC held by the Operating Partnership will not exceed
5% of the total value of the Company's assets. If the Service were to
successfully challenge that determination, however, the Company likely would
fail to qualify as a REIT.
AMC is organized as a corporation and will pay federal, state, and local
income taxes on its taxable income at normal corporate rates. Any such taxes
will reduce amounts available for distribution by AMC which, in turn, will
reduce amounts available for distribution to the Company's shareholders.
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ERISA CONSIDERATIONS
The following is a summary of material considerations arising under the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the
prohibited transaction provisions of section 4975 of the Code that may be
relevant to a prospective purchaser (including, with respect to the discussion
contained in "--Status of the Company and the Operating Partnership under
ERISA," to a prospective purchaser that is not an employee benefit plan, another
tax-qualified retirement plan, or an individual retirement account or an
individual retirement annuity ("IRAs")). The discussion does not purport to deal
with all aspects of ERISA or section 4975 of the Code or, to the extent not
preempted, state law that may be relevant to particular employee benefit plan
shareholders (including plans subject to Title I of ERISA, other retirement
plans and IRAs subject to the prohibited transaction provisions of section 4975
of the Code, and governmental plans or church plans that are exempt from ERISA
and section 4975 of the Code but that may be subject to state law requirements)
in light of their particular circumstances.
The discussion is based on current provisions of ERISA and the Code,
existing and currently proposed regulations under ERISA and the Code, the
legislative history of ERISA and the Code, existing administrative rulings of
the Department of Labor ("DOL") and reported judicial decisions. No assurance
can be given that legislative, judicial, or administrative changes will not
affect the accuracy of any statements herein with respect to transactions
entered into or contemplated prior to the effective date of such changes.
THE FOLLOWING IS INTENDED TO BE A SUMMARY ONLY AND IS NOT A SUBSTITUTE FOR
CAREFUL PLANNING WITH A PROFESSIONAL.
A FIDUCIARY MAKING THE DECISION TO INVEST IN THE COMMON 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 SHARES BY
SUCH PLAN OR IRA. A FIDUCIARY SHOULD ALSO CONSIDER THE ENTIRE DISCUSSION UNDER
THE HEADING "FEDERAL INCOME TAX CONSIDERATIONS," AS MATERIAL CONTAINED THEREIN
IS RELEVANT TO ANY DECISION BY AN EMPLOYEE BENEFIT PLAN OR IRA TO PURCHASE THE
COMMON SHARES.
EMPLOYEE BENEFIT PLANS, TAX-QUALIFIED RETIREMENT PLANS, AND IRAS
Each fiduciary of a pension, profit-sharing, or other employee benefit plan
(a "Plan") subject to Title I of ERISA should consider carefully whether an
investment in the Common Shares is consistent with his or her fiduciary
responsibilities under ERISA. In particular, the fiduciary requirements of Part
4 of Title I of ERISA require an Plan's investment to be (i) prudent and in the
best interests of the Plan, its participants, and its beneficiaries, (ii)
diversified in order to minimize the risk of large losses, unless it is clearly
prudent not to do so, and (iii) authorized under the terms of the Plan's
governing documents (provided the documents are consistent with ERISA). In
determining whether an investment in the Common 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,
the diversification, cash flow, and funding requirements of the Plan's
portfolio. A fiduciary also should take into account the nature of the Company's
business, the management of the Company, the length of the Company's operating
history, the fact that certain investment assets may not have been identified
yet, the possibility of the recognition of UBTI, and other matters described
under "Risk Factors."
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
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Plan") should consider that such an IRA or Non-ERISA Plan may only make
investments that are authorized by the appropriate governing documents and under
applicable state law.
Fiduciaries of Plans and persons making the investment decision for an IRA
or other Non-ERISA Plan should consider the application of the prohibited
transaction provisions of ERISA and the Code in making their investment
decision. A "party in interest" or "disqualified person" with respect to an Plan
or with respect to a Plan or IRA subject to Code section 4975 is subject to (i)
an initial 15% 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 AND THE OPERATING PARTNERSHIP UNDER ERISA
The following section discusses certain principles that apply in determining
whether the fiduciary requirements of ERISA and the prohibited transaction
provisions of ERISA and the Code apply to an entity because one or more
investors in the equity interests in the entity is a Plan or is a Non-ERISA Plan
or IRA subject to section 4975 of the Code. A Plan fiduciary also should
consider the relevance of those principles to ERISA's prohibition on improper
delegation of control over or responsibility for "plan assets" and ERISA's
imposition of co-fiduciary liability on a fiduciary who participates in, permits
(by action or inaction) the occurrence of, or fails to remedy a known breach by
another fiduciary.
If the assets of the Company are deemed to be "plan assets" under ERISA, (i)
the prudence standards and other provisions of Part 4 of Title I of ERISA would
be applicable to any transaction 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 Shares,
and transactions involving the Company's assets undertaken at their direction or
pursuant to their advice might violate their fiduciary responsibilities under
ERISA, especially with regard to conflicts of interest, (iii) a fiduciary
exercising his investment discretion over the assets of a Plan to cause it to
acquire or hold the Common 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 prudence and fiduciary responsibility, and (iv) certain
transactions that the Company might enter into in the ordinary course of its
business and operations might constitute "prohibited transactions" under ERISA
and the Code.
Regulations of the DOL defining "plan assets" (the "Plan Asset Regulations")
generally provide that when a Plan, Non-ERISA Plan or IRA acquires a security
that is an equity interest in an entity and the security is neither a
"publicly-offered security" nor a security issued by an investment company
registered under the Investment Company Act of 1940, the Plan's, Non-ERISA
Plan's, or IRA's assets include both the equity interest and an undivided
interest in each of the underlying assets of the issuer of such equity interest,
unless one or more exceptions specified in the Plan Asset Regulations are
satisfied.
The Plan Asset Regulations define a publicly-offered security as a security
that is "widely-held," "freely transferable," and either part of a class of
securities registered under sections 12(b) or 12(g) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), or sold pursuant to an effective
registration statement under the Securities Act (provided the securities are
registered under the Exchange Act within 120 days after the end of the fiscal
year of the issuer during which the offering occurred, or such longer period as
may be allowed by the Commission). The Common Shares are being sold in an
offering registered under the Securities Act and will be registered under the
Exchange Act. The Plan Asset
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Regulations provide that a security is "widely held" only if it is part of a
class of securities that is owned by 100 or more investors independent of the
issuer and of one another. A security will not fail to be widely held because
the number of independent investors falls below 100 subsequent to the initial
public offering as a result of events beyond the issuer's control. The Company
anticipates that upon completion of this offering, the Common Shares 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 this offering), certain restrictions
ordinarily will not, alone or in combination, affect a finding that such
securities are freely transferable. The restrictions on transfer enumerated in
the Plan Asset Regulations as not affecting that finding include: (i) any
restriction on or prohibition against any transfer or assignment that would
result in the termination or reclassification of an entity for federal or state
tax purposes, or that otherwise would violate any federal or state law or court
order, (ii) any requirement that advance notice of a transfer or assignment be
given to the issuer, (iii) any administrative procedure that establishes an
effective date, or an event (such as completion of an offering), prior to which
a transfer or assignment will not be effective, and (iv) any limitation or
restriction on transfer or assignment that is not imposed by the issuer or a
person acting on behalf of the issuer. The Company believes that the
restrictions imposed under the Declaration of Trust on the transfer of its
shares will not result in the failure of the Common Shares to be "freely
transferable." The Company also is not aware of any other facts or circumstances
limiting the transferability of the Common Shares that are not enumerated in the
Plan Asset Regulations as those not affecting free transferability, but no
assurance can be given that the DOL or the Treasury Department will not reach a
contrary conclusion.
Assuming that the Common Shares will be "widely held" and that no other
facts and circumstances other than those referred to in the preceding paragraph
exist that restrict transferability of the Common Shares, the shares of Common
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 Common Shares.
The Plan Asset Regulations also will apply in determining whether the assets
of the Operating Partnership will be deemed to be "plan assets." The partnership
interests in the Operating Partnership will not be publicly-offered securities.
Nevertheless, if the Common Shares constitute publicly-offered securities, the
indirect investment in the Operating Partnership by ERISA Plans, IRAs, or
Non-ERISA Plans subject to section 4975 of the Code through their ownership of
Common Shares will not cause the assets of the Operating Partnership to be
treated as "plan assets" of such shareholders.
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UNDERWRITING
Subject to the terms and conditions contained in the underwriting agreement
(the "Underwriting Agreement"), the Company has agreed to sell to the
underwriters named below (the "Underwriters"), for whom Jefferies & Company,
Inc. is acting as the representative (the "Representative") and each of the
Underwriters has severally agreed to purchase, the respective number of Common
Shares set forth below opposite their respective names.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- ----------------------------------------------------------------------------------------------- -----------------
<S> <C>
Jefferies & Company, Inc.......................................................................
-----------------
Total...................................................................................... 10,000,000
-----------------
-----------------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
to purchase the Common Shares are subject to certain conditions precedent and
that if any of the foregoing Common Shares are purchased by the Underwriters
pursuant to the Underwriting Agreement, all such Common Shares must be so
purchased.
The Company has been advised by the Underwriters that they propose to offer
the Common Shares directly to the public at the initial public offering price
set forth on the cover page of this Prospectus and to certain dealers at such
public offering price less a concession not in excess of $. per share. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $. per share to certain other underwriters or to certain other brokers or
dealers. After the initial public offering, the public offering price, the
concession to selected dealers and the reallowance to other dealers may be
changed by the Representative.
The Company has granted to the Underwriters an option to purchase up to an
additional 1,500,000 Common Shares at the initial public offering price less
underwriting discounts and commissions, solely to cover overallotments, if any.
The Underwriters may exercise this option at any time up to 30 days after the
date of this Prospectus. To the extent that the Underwriters exercise this
option, each of the Underwriters will be obligated, subject to certain
conditions, to purchase a number of additional Common Shares proportionate to
such Underwriter's initial commitment reflected in the foregoing table.
The Company has agreed that it will not, without the prior written consent
of Jefferies & Company, Inc., offer for sale, contract to sell any Common Shares
(other than shares issued pursuant to the 1997 Share Incentive Plan and certain
other agreements) or any securities convertible or exchangeable into Common
Shares or sell or grant options, rights or warrants with respect to any Common
Shares, for a period of 180 days after the consummation of the Offering. Each of
the executive officers and Trustees of the Company who have acquired Units in
connection with the organization of the Company and the Contribution Transaction
has entered into agreements with the Underwriters providing that, subject to
certain exceptions, such holders of Units generally will not sell, transfer,
hypothecate, redeem, exchange or otherwise dispose of, directly or indirectly,
any Units prior to the second anniversary of the Closing Date, without the
consent of Jefferies & Company, Inc. Further, approximately 424,671 Units (based
on the Offering Price) issued in connection with the Contribution Transaction
are subject to similar restrictions for a period of one year from the Closing
Date.
The Company has agreed to pay Jefferies & Company, Inc. an advisory fee
equal to 0.5% of the gross proceeds of the Offering for the structural and
advisory services rendered in connection with this Offering.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
or to contribute to payments the Underwriters may be required to make in respect
thereof.
Until the distribution of the Common Shares is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and
91
<PAGE>
purchase Common Shares. As an exception to these rules, the Representative is
permitted to engage in certain transactions to stabilize the price of the Common
Shares. Such transactions may consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the Common Shares.
In addition, if the Representative over-allots (i.e., if it sells more
Common Shares that are set forth on the cover page of this Prospectus) and
thereby creates a short position in the Common Shares in connection with the
Offering, the Representative may reduce that short position by purchasing Common
Shares in the open market. The Representative also may reduce that short
position by exercising all or part of the over-allotment option described
herein.
The Representative also may impose a penalty bid on certain Underwriters and
selling group members. This means that if the Representative purchases Common
Shares in the open market to reduce the Underwriters' short position or to
stabilize the price of the Common Shares, it may reclaim the amount of the
selling concession from the Underwriters and selling group members who sold
those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
the Offering.
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
Prior to the Offering, there has been no public market for the Common
Shares. Consequently, the offering price was determined by negotiations between
the Company and the Representative. Among the principal factors considered in
such negotiations were prevailing market and general economic conditions and
estimates of the business potential and earnings prospects of the Company.
Additionally, consideration was given to the general status of the securities
market, the market conditions for new issues of securities and the demand for
securities of comparable companies at the times the offerings are made.
The Company intends to apply to have the Common Shares listed on the NYSE
under the symbol "EJS."
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Hunton &
Williams, Richmond, Virginia, and for the Underwriters by Latham & Watkins,
Costa Mesa, California. Hunton & Williams and Latham & Watkins will rely on
Ballard Spahr Andrews & Ingersoll, Baltimore, Maryland as to certain matters of
Maryland law.
EXPERTS
The balance sheet of the Company as of August 28, 1997 and the financial
statements of AMC as of December 31, 1995 and 1996, and for each of the years in
the three-year period ended December 31, 1996, have been included herein in
reliance upon the reports of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of such firm as
experts in accounting and auditing.
92
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-11 under the Securities Act and the rules and regulations promulgated
thereunder, with respect to the Common Shares offered pursuant to this
Prospectus. This Prospectus, which is part of the Registration Statement, does
not contain all of the information set forth in the Registration Statement and
the exhibits and financial statement schedules thereto. For further information
with respect to the Company and the Common Shares, reference is made to the
Registration Statement and such exhibits and financial statement schedules,
copies of which may be examined without charge at or obtained upon payment of
prescribed fees from, the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and will also be
available for inspection and copying at the regional offices of the Commission
located at 13th Floor, 7 World Trade Center, New York, New York 10048 and at 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. The Commission
maintains a website at http:// www.sec.gov, and reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission (including the Company) can be obtained from that site.
Statements contained in this Prospectus as to the contents of any contract
or other document that is filed as an exhibit to the Registration Statement are
not necessarily complete, and each such statement is qualified in its entirety
by reference to the full text of such contract or document.
The Company will be required to file reports and other information with the
Commission pursuant to the Securities Exchange Act of 1934. In addition to
applicable legal or NYSE requirements, if any, holders of Common Shares will
receive annual reports containing audited financial statements with a report
thereon by the Company's independent certified public accounts.
93
<PAGE>
GLOSSARY
Unless the context otherwise requires, the following capitalized terms shall
have the meanings set forth below for the purposes of this Prospectus.
"5/50 RULE" means the tax rule that no more than 50% in value of the
Company's outstanding shares may be owned, directly or indirectly, by five or
fewer individuals during the last half of each taxable year.
"90% PASSIVE-TYPE INCOME EXCEPTION" means the exception from treatment as a
publicly traded partnership for partnerships at least 90% of whose income for a
taxable year consists of certain passive-type income.
"AFFILIATE" means (i) any person that, directly or indirectly, controls or
is controlled by or is under common control with such person, (ii) any other
person that owns, beneficially, directly or indirectly, five percent (5%) or
more of the outstanding capital stock, shares or equity interests of such
person, or (iii) any officer, director, employee, partner or trustee of such
person or any person controlling, controlled by or under common control with
such person (excluding trustees and persons serving in similar capacities who
are not otherwise an Affiliate of such person). The term "person" means and
includes individuals, corporations, general and limited partnerships, limited
liability companies, limited liability partnerships, stock companies or
associations, joint ventures, associations, companies, trusts, banks, trust
companies, land trusts, business trusts, or other entities and governments and
agencies and political subdivisions thereof. For the purposes of this
definition, "control" (including the correlative meanings of the terms
"controlled by" and "under common control with"), as used with respect to any
person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such person,
through the ownership of voting securities, partnership interests or other
equity interests.
"AGENCY" means FNMA, FHLMC or GNMA.
"AGENCY CERTIFICATES" means Pass-Through Certificates guaranteed by FNMA,
FHLMC or GNMA.
"AMC" means AEGIS Mortgage Corporation.
"AMC'S LOAN TRADING OPERATIONS" means AMC's acquisition of Mortgage Loans
for investment or trading from a nationwide network of financial institutions
and brokers.
"ANTI-ABUSE RULE" means a final regulation issued by the United States
Treasury Department under the Partnership Provisions that authorizes the
Service, in certain "abusive" transactions involving partnerships, to disregard
the form of the transaction and recast it for federal tax purposes as the
Service deems appropriate.
"ARM" means a Mortgage Loan 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.
"BENEFICIARY" means the beneficiary of the Share Trust.
"BYLAWS" means the Company's Bylaws.
"CASH AVAILABLE FOR DISTRIBUTION" means net income (loss) (computed in
accordance with generally accepted accounting principles) of the Company plus
depreciation and amoritization and minority interest minus capital expenditures
and principal payments on indebtness.
"CLOSING DATE" means the date of the closing of the Offering.
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<PAGE>
"CLOSING PRICE" means the last sale price, regular way, or, in case no such
sale takes place on such day, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange or, if the Common or Preferred Shares are
not listed or admitted to trading on the New York Stock Exchange, as reported in
the principal consolidated transaction reporting system with respect to
securities listed on the principal national securities exchange on which the
Common or Preferred Shares are listed or admitted to trading or, if the Common
or Preferred Shares are not listed or admitted to trading on any national
securities exchange, the last quoted price, or if not so quoted, the average of
the high bid and low asked prices in the over-the-counter market, as reported by
the National Association of Securities Dealers, Inc. Automated Quotation System
or, if such system is no longer in use, the principal other automated quotations
system that may then be in use or, if the Common or Preferred Shares are not
quoted by any such organization, the average of the closing bid and asked prices
as furnished by a professional market maker making a market in the Common or
Preferred Shares selected by the Board of Trustees.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMISSION" means the Securities and Exchange Commission.
"COMMON SHARES" means common shares of beneficial interest, par value $.01
per share, of the Company.
"COMPANY" means AEGIS Investment Trust and its subsidiaries on a
consolidated basis.
"COMPANY EXPENSES" means administrative costs and expenses of the Company.
"COMPENSATION COMMITTEE" means the committee comprised of two or more of
the Independent Trustees established by the Board of Trustees to determine
compensation for the Company's executive officers and to implement the Company's
1997 Plan.
"CONFORMING MORTGAGE LOANS" means Mortgage Loans that comply with
requirements for inclusion in credit support programs sponsored by GNMA, FHLMC
or FNMA.
"CONTRIBUTION TRANSACTION" means the transaction pursuant to which AMC was
contributed to the Company.
"CONTROL SHARE ACQUISITION" means the acquisition of Control Shares,
subject to certain exceptions.
"CONTROL SHARES" means shares of beneficial interest that, if aggregated
with all other such shares of beneficial interest of the Company previously
acquired by the acquiror, would entitle the acquiror to exercise voting power in
electing trustees 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 of all voting power, but does not include shares
which the acquiring person is then entitled to vote as a result of having
previously obtained shareholder approval.
"DECLARATION OF TRUST" means the amended and restated Declaration of Trust
of the Company.
"DOLLAR REVERSE REPURCHASE AGREEMENT" means a reverse repurchase
arrangement whereby the third party purchaser agrees to deliver and the seller
agrees to purchase a specified amount of securities, which do not necessarily
need to be the same securities sold by the seller.
"EXEMPT ORGANIZATIONS" means tax-exempt entities, including qualified
employee pension and profit sharing trusts and individual retirement accounts.
"FHA" means the United States Federal Housing Administration.
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<PAGE>
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"FNMA" means the Federal National Mortgage Association.
"GNMA" means the Government National Mortgage Association.
"GAAP" means generally accepted accounting principles consistently applied.
"HUD" means the United States Department of Housing and Urban Development.
"INDEPENDENT TRUSTEES" means a trustee of the Company that is not an
officer or employee of the Company, any affiliate of an officer or employee or
any affiliate of (i) any advisor to the Company under an advisory agreement,
(ii) any lessee of any property of the Company, (iii) any subsidiary of the
Company or (iv) any partnership that is an affiliate of the Company.
"INTERESTED SHAREHOLDER" means a beneficial owner of ten percent or more of
the voting power of the then outstanding voting shares of beneficial interest of
a trust or an affiliate thereof.
"INVESTMENT COMPANY ACT." means the Investment Company Act of 1940, as
amended.
"LIBOR" means the London Interbank Offered Rate.
"LIMITED PARTNERS" means the limited partners of the Operating Partnership
after the completion of the Contribution Transaction.
"LOAN ORIGINATION OPERATIONS" means the origination of Mortgage Loans
through a network of mortgage brokers and retail branches for sale to permanent
investors by AMC.
"MARKET PRICE" means the average of the Closing Price for the five
consecutive Trading Days.
"MARYLAND REIT LAW" means Title 8 of the Corporations and Associations
Article of the Annotated Code of Maryland, as amended.
"MGCL" means the Maryland General Corporation Law, as amended.
"MORTGAGE ASSETS" means Mortgage Loans, Agency Certificates and other
mortgage-related assets.
"MORTGAGE LOANS" means loans secured by liens on real property or other
real estate-related assets.
"NON-CONFORMING MORTGAGE LOANS" means mortgage loans which do not comply
with requirements for inclusion in credit support programs sponsored by GNMA,
FHLMC or FNMA.
"NON-U.S. SHAREHOLDERS" means nonresident alien individuals, foreign
corporations, foreign partnerships and other foreign shareholders.
"NYSE" means the New York Stock Exchange.
"OFFERING" means the offering of Common Shares hereby.
"OFFERING PRICE" means the mid point of the range set forth on the cover of
this Prospectus.
"OPERATING PARTNERSHIP" means AEGIS Operating Partnership, L.P., a Delaware
limited partnership.
"OPERATING PARTNERSHIP AGREEMENT" means the partnership agreement of the
Operating Partnership.
"OWNER-FINANCED MORTGAGE LOANS" means Mortgage Loans originated by the
seller of a property.
"OWNERSHIP LIMITATION" means the ownership of not more than 9.8% of shares
of beneficial interest in the Company.
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<PAGE>
"PARTNERSHIP PROVISIONS" means partnership provisions of the Code.
"PASS-THROUGH CERTIFICATES" means securities (or interests therein) that
evidence undivided ownership interests in a pool of mortgage loans, the holders
of which receive "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. Pass-Through Certificates evidence interests in
mortgage loans secured by single family real estate properties.
"PORTFOLIO OPERATIONS" means the Company's primary business of acquiring
and managing its portfolio of Mortgage Assets.
"PREFERRED SHARES" means the preferred shares of beneficial interest, par
value $0.01 per share, of the Company.
"PRIVATE PLACEMENT EXCLUSION" means the safe harbor from the definition of
a publicly traded partnership as provided for in the PTP Regulations.
"PROHIBITED OWNER" means the record holder of the Common or Preferred
Shares that are designated as Shares-in-Trust.
"PTP REGULATIONS" means regulations recently issued by the United States
Treasury Department effective for taxable years beginning after December 31,
1995 that provide limited safe harbors from the definition of a publicly traded
partnership.
"REDEMPTION RIGHTS" means the rights of the Limited Partners to redeem all
or a portion of their Units for cash or Common Shares on a one-for-one basis
pursuant to the terms of the Operating Partnership Agreement.
"REIT" means real estate investment trust.
"RESTRICTED SHARES" means restricted Common Shares of the Company.
"REVERSE REPURCHASE AGREEMENT" means a borrowing device whereby securities
are sold to a third party, and the seller simultaneously agrees to repurchase
such securities at a specified future date and price, the price difference
representing the financing cost of the borrowing.
"RULE 144" means Rule 144 promulgated under the Securities Act.
"SEASONED MORTGAGE LOANS" means existing residential and commercial
mortgage loans acquired from third parties.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SERVICE" means the U.S. Internal Revenue Service.
"SHARE TRUST" means a trust which holds Common or Preferred Shares of the
Company which have been designated as Shares-in-Trust.
"SHARES-IN-TRUST" means Common or Preferred Shares which are transferred
automatically to the Share Trust.
"TRADING DAY" means a day on which the principal national securities
exchange on which the Common or Preferred Shares are listed or admitted to
trading is open for the transaction of business or, if the Common or Preferred
Shares are not listed or admitted to trading on any national securities
exchange, shall mean any day other than a Saturday, a Sunday or a day on which
banking institutions in the State of New York are authorized or obligated by law
or executive order to close.
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<PAGE>
"TRUSTEES" means trustees of the Company.
"UBTI" means unrelated business taxable income.
"UBTI PERCENTAGE" means the percentage of dividends treated as UBTI in
certain circumstances where a pension trust owns more than 10% of the Company's
shares.
"UNDERWRITERS" means the Underwriters named in this Prospectus.
"UNITS" means units of limited partnership interest in the Operating
Partnership.
"VA" means the United States Department of Veterans Affairs.
98
<PAGE>
INDEX TO THE FINANCIAL STATEMENTS
AEGIS INVESTMENT TRUST
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Independent Auditors' Report............................................................................... F-2
Balance Sheet--August 28, 1997............................................................................. F-3
Notes to Balance Sheet..................................................................................... F-4
</TABLE>
AEGIS MORTGAGE CORPORATION
<TABLE>
<S> <C>
Independent Auditors' Report......................................................... F-5
Balance Sheets--December 31, 1995 and 1996 and September 30, 1997.................... F-6
Statements of Income--Years Ended December 31, 1994, 1995 and 1996 and Nine Months
Ended September 30, 1996 and 1997.................................................. F-7
Statements of Stockholders' Equity--Years Ended December 31, 1994, 1995 and 1996 and
Nine Months Ended September 30, 1997............................................... F-8
Statements of Cash Flows--Years Ended December 31, 1994, 1995 and 1996 and Nine
Months Ended September 30, 1996 and 1997........................................... F-9
Notes to Financial Statements........................................................ F-10
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
AEGIS Investment Trust
We have audited the accompanying balance sheet of AEGIS Investment Trust as
of August 28, 1997. The financial statement is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit of a balance sheet includes examining, on a test basis,
evidence supporting the amounts and disclosures in that balance sheet. An audit
of a balance sheet also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
balance sheet presentation. We believe that our audit of the balance sheet
provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial portion of AEGIS Investment Trust as of August
28, 1997, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
August 28, 1997
F-2
<PAGE>
AEGIS INVESTMENT TRUST
BALANCE SHEET
AUGUST 28, 1997
ASSETS
<TABLE>
<S> <C>
Cash................................................................................ $ 1,900
---------
Total Assets.................................................................... $ 1,900
---------
---------
LIABILITIES AND STOCKHOLDER'S EQUITY
Stockholder's Equity:
Common stock, par value $.01 per share; authorized 100,000,000 shares; issued and
outstanding 100 shares.......................................................... $ 1
Additional paid-in capital.......................................................... 1,899
---------
Total Stockholder's Equity...................................................... $ 1,900
---------
---------
</TABLE>
F-3
<PAGE>
AEGIS INVESTMENT TRUST
NOTES TO BALANCE SHEET
AUGUST 28, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
AEGIS Investment Trust (the "Company") was organized as a Maryland real
estate investment trust on August 13, 1997, and was initially capitalized on
August 28, 1997 through the sale of 100 shares of Common Stock for $1,900. The
Company will seek to invest in mortgage-related assets, with an emphasis on
mortgage backed securities representing interests in pools of single family
residential mortgage loans, and the acquisition and origination of such mortgage
loans.
The Company's sole activity through August 28, 1997, consisted of the
organization and start-up of the Company. Accordingly, no statement of
operations is presented.
TAXES
The Company will elect to be taxed as a real estate investment trust under
the Internal Revenue Code. As a result, the Company will not be subject to
federal income taxation at the corporate level to the extent it distributes
annually its predistribution taxable income of at least 95% of its real estate
investment trust taxable income.
INCOME RECOGNITION
Income and expenses are to be recorded on the accrual basis of accounting.
(2) PUBLIC OFFERING OF COMMON STOCK
The Company is in the process of filing a Registration Statement for sale of
its common stock. Contingent upon the consummation of the public offering, the
Company will be liable for organization and offering expenses in connection with
the sale of the shares offered.
F-4
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Aegis Mortgage Corporation:
We have audited the accompanying balance sheets of Aegis Mortgage Corporation
(the Corporation) as of December 31, 1995 and 1996, and the related statements
of income, stockholders' equity, and cash flows for each of the years in the
three year period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Aegis Mortgage Corporation as
of December 31, 1995 and 1996, and the results of its operations and its cash
flows for each of the years in the three year period ended December 31, 1996 in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Oklahoma City, Oklahoma
March 6, 1997
F-5
<PAGE>
AEGIS MORTGAGE CORPORATION
BALANCE SHEETS
DECEMBER 31, 1995 AND 1996 AND SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
AT
AT DECEMBER 31, SEPTEMBER 30,
---------------------------- -------------
ASSETS 1995 1996 1997
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Cash................................................................ $ 286,191 $ 374,783 $ 1,059,339
Accounts receivable, net............................................ 1,033,407 1,000,403 1,235,945
Mortgage loans held for sale, net of discounts of $393,938,
$2,446,846 and $400,905 at December 31, 1995 and 1996, and
September 30, 1997, respectively.................................. 39,746,886 52,058,032 57,760,155
Mortgage servicing rights, at cost, net of accumulated
amortization...................................................... 617,785 721,291 111,152
Real estate held for investment..................................... 499,655 403,136 254,496
Property and equipment, net......................................... 437,669 401,326 387,430
Other assets........................................................ 117,324 29,149 176,940
------------- ------------- -------------
Total Assets.................................................... $ 42,738,917 $ 54,988,120 $ 60,985,457
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable..................................................... $ 39,924,832 $ 51,634,654 $ 56,745,852
Accounts payable and accrued expenses............................. 623,461 704,865 1,089,970
------------- ------------- -------------
Total liabilities............................................... 40,548,293 52,339,519 57,835,822
------------- ------------- -------------
Stockholders' equity:
Common stock, par value $1 per share; authorized 2,000 shares;
issued and outstanding 500 shares............................... 500 500 500
Additional paid-in capital........................................ 587,939 587,939 587,939
Retained earnings................................................. 1,602,185 2,060,162 2,561,196
------------- ------------- -------------
Total stockholders' equity...................................... 2,190,624 2,648,601 3,149,635
Commitments (notes 4 and 8)
------------- ------------- -------------
Total Liabilities and Stockholders' Equity...................... $ 42,738,917 $ 54,988,120 $ 60,985,457
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
AEGIS MORTGAGE CORPORATION
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 NINE MONTHS ENDED
----------------------------------------- SEPTEMBER 30
1994 1995 1996 --------------------------
------------ ------------ ------------- 1996 1997
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Loan administration..................... $ 1,905,056 $ 2,015,946 $ 940,024 $ 897,486 $ 500,030
Loan origination........................ 635,931 1,439,779 2,423,845 1,779,738 2,107,390
Interest income......................... 1,389,315 2,616,139 3,901,877 2,762,971 3,825,958
Interest expense........................ 860,663 2,177,076 2,963,242 2,163,891 3,067,712
------------ ------------ ------------- ------------ ------------
Net interest income................... 528,652 439,063 938,635 599,080 758,246
Loan brokerage fees..................... 532,755 1,389,898 -- -- --
Gain on sales of mortgage loans......... 2,161,199 2,933,429 4,652,432 3,397,040 4,309,624
Gain on sale of servicing rights........ -- -- 2,498,078 2,526,338 --
Other................................... 119,409 258,015 59,403 -- --
------------ ------------ ------------- ------------ ------------
Total revenues........................ 5,883,002 8,476,130 11,512,417 9,199,682 7,675,290
------------ ------------ ------------- ------------ ------------
Expenses:
Personnel............................... $ 3,382,248 $ 4,834,518 $ 7,010,239 $ 5,226,610 $ 4,758,278
Occupancy............................... 311,125 407,346 447,078 333,058 396,436
Office supplies and expense............. 584,956 965,906 1,092,769 819,664 792,552
Professional fees....................... 235,968 206,812 297,724 210,522 207,433
Depreciation and amortization........... 375,651 824,198 287,818 194,243 222,189
Provision for losses on foreclosures.... 772 8,091 20,837 -- --
Mortgage computer service fees.......... 96,697 -- -- -- --
Other................................... 243,633 585,493 1,111,308 673,308 797,368
------------ ------------ ------------- ------------ ------------
Total expenses........................ 5,231,050 7,832,364 10,267,773 7,457,405 7,174,256
------------ ------------ ------------- ------------ ------------
Net income............................ $ 651,952 $ 643,766 $ 1,244,644 $ 1,742,277 $ 501,034
------------ ------------ ------------- ------------ ------------
------------ ------------ ------------- ------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
AEGIS MORTGAGE CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
----------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993................................... $ 500 $ 587,939 $ 788,944 $1,377,383
Net income..................................................... -- -- 651,952 651,952
Dividends paid................................................. -- -- (200,090) (200,090)
----- ---------- ------------ ------------
Balance at December 31, 1994................................... 500 587,939 1,240,806 1,829,245
Net income..................................................... -- -- 643,766 643,766
Dividends paid................................................. -- -- (282,387) (282,387)
----- ---------- ------------ ------------
Balance at December 31, 1995................................... 500 587,939 1,602,185 2,190,624
Net income..................................................... -- -- 1,244,644 1,244,644
Dividends paid................................................. -- -- (786,667) (786,667)
----- ---------- ------------ ------------
Balance at December 31, 1996................................... 500 587,939 2,060,162 2,648,601
Net income..................................................... -- -- 501,034 501,034
----- ---------- ------------ ------------
Balance at September 30, 1997 (unaudited)...................... $ 500 $ 587,939 $ 2,561,196 $3,149,635
----- ---------- ------------ ------------
----- ---------- ------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
AEGIS MORTGAGE CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
---------------------------------------- --------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income....................................... $651,952 $643,766 $1,244,644 $1,742,277 $501,034
Adjustments to reconcile net income to net cash
used in operating activities:
Provision for depreciation and amortization.... 375,651 824,198 287,818 194,243 222,189
Gain on sale of mortgage servicing rights...... -- -- (2,498,078 ) (2,526,338) --
Gain on sale of real estate held for
investment................................... -- (19,670 ) (21,117 ) -- --
Loss on sale of real estate acquired through
foreclosure.................................. -- 51,681 -- -- --
Sale of mortgage loans held for sale............... 70,918,233 256,248,981 441,304,148 331,912,219 377,195,836
Purchase of mortgage loans held for sale........... (79,549,050 ) (284,886,602) (453,615,294) (340,222,299) (382,897,959)
Gain on sale of common stock included in other
assets....................................... -- (60,132 ) (16,741 ) -- --
(Increase) decrease in accounts receivable..... (333,284 ) (137,215 ) 33,004 286,950 (235,542)
(Decrease) increase in accounts payable and
accrued expenses............................. (289,149 ) 175,712 81,404 605,234 385,105
(Increase) decrease in other assets............ (79,999 ) (15,194 ) (84 ) 81,941 (147,791)
------------ ------------ ------------ ------------ ------------
Net cash used in operating activities........ (8,305,646 ) (27,174,475 ) (13,200,296 ) (7,925,773) (4,977,128)
------------ ------------ ------------ ------------ ------------
Cash flows from investing activities:
Decrease in short-term investments............... 7,650,000 -- -- -- --
Purchase of mortgage servicing rights............ (209,204 ) (173,024 ) (721,291 ) -- --
Purchase of property and equipment............... (488,408 ) (236,010 ) (204,522 ) (133,660) (159,879)
Proceeds from sale of mortgage servicing
rights......................................... -- 3,068,910 3,097,170 561,725
Proceeds from sale of property and equipment..... 9,416 -- -- -- --
Proceeds from sale of real estate held for
investment..................................... -- 278,645 237,992 -- 148,640
Proceeds from sale of real estate acquired
through foreclosure............................ -- 142,281 -- -- --
Proceeds from sale of common stock included in
other assets................................... -- 97,632 105,000 -- --
Cash paid for real estate held for investment.... (98,790 ) (659,840 ) (120,356 ) (113,516) --
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) investing
activities................................. 6,863,014 (550,316 ) 2,365,733 2,849,994 550,486
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities:
Decrease in notes payable secured by certificate
of deposit..................................... (7,500,000 ) -- -- -- --
Proceeds from notes payable...................... 70,576,545 340,488,226 558,725,947 347,971,631 413,635,860
Repayment of notes payable....................... (62,084,838 ) (312,251,401) (547,016,125) (342,396,635) (408,524,662)
Dividends paid................................... (200,090 ) (282,387 ) (786,667 ) (266,667) --
------------ ------------ ------------ ------------ ------------
Net cash provided by financing activities.... 791,617 27,954,438 10,923,155 5,308,329 5,111,198
------------ ------------ ------------ ------------ ------------
Net (decrease) increase in cash.................... (651,015 ) 229,647 88,592 232,550 684,556
Cash, beginning of year............................ 707,559 56,544 286,191 286,191 374,783
------------ ------------ ------------ ------------ ------------
Cash, end of year.................................. $ 56,544 $ 286,191 $ 374,783 $ 518,741 $ 1,059,339
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Supplemental disclosure of noncash investing
activity:
Transfer of mortgage loans held for sale to real
estate acquired through foreclosure............ $ 137,969 $ 55,993 $ -- $ -- $ --
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
AEGIS MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS DECEMBER 31, 1995 AND 1996 AND
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
Aegis Mortgage Corporation ("the Corporation") conducts mortgage banking
activities. The principal activities include mortgage loan origination,
principally in Texas, Georgia, Ohio, Florida, and Arizona, trading activities,
and servicing operations.
The accounting and reporting policies of the Corporation conform to
generally accepted accounting principles and reflect industry practices. The
following represents the more significant of those policies and practices. The
preparation of the 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 at the date of the
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates. Estimates
which are particularly sensitive to change in the near term are the valuations
of mortgage loans held for sale and mortgage servicing rights.
INTERIM FINANCIAL DATA (UNAUDITED)
The accompanying balance sheet and statement of stockholders' equity as of
September 30, 1997 and the accompanying statements of earnings and cash flows
for the nine months ended September 30, 1996 and 1997 have been prepared by the
Corporation without an audit. In the opinion of management, all adjustments
consisting only of normal recurring adjustments, considered necessary for a fair
presentation for such periods have been made. Results for interim periods should
not be considered as indicative of results for a full year.
Footnote disclosures normally included in annual financial statements
prepared in accordance with generally accepted accounting principles have been
omitted herein with respect to the interim financial data. The interim
information herein should be read in conjunction with the annual financial
information presented herein.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are valued at the lower of cost or market as
determined by outstanding commitments from investors or current investor yield
requirements calculated on the aggregate loan basis, net of purchase discounts,
after giving effect to any gains or losses resulting from mortgage loan
commitments and forward sales commitments. The remaining purchase discount is
recognized in income at the time of loan sale or payoff. Gains and losses from
sales of mortgage loans are recognized upon settlement with investors.
LOAN ORIGINATION FEES AND COSTS
Loan origination fees and costs are recognized at the time of sale in the
gain or loss determination. Discounts on mortgage loans are recognized when the
loans are sold.
F-10
<PAGE>
AEGIS MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MORTGAGE SERVICING RIGHTS
Effective January 1, 1996, the Corporation adopted the provisions of
Statement of Financial Accounting Standards (Statement) No. 122, "Accounting for
Mortgage Servicing Rights, an amendment of FASB Statement No. 65, amended
effective January 1, 1997 by FASB Statement No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities." Statements
No. 122 and 125 amend Statement No. 65 to require the Corporation to recognize
as separate assets the rights to service mortgage loans for others, however
those servicing rights are acquired, eliminating the accounting distinction
between servicing rights acquired through purchase transactions and those
acquired through loan originations. Statement No. 122 also requires the
assessment of mortgage servicing rights for impairment to be based on the
current fair value of those rights stratified by significant risk
characteristics. The impact of adoption was not material to the financial
statements.
Mortgage servicing rights are stated at cost and amortized over the
estimated life of the related mortgage loans in proportion to, and over the
period of, estimated net servicing income.
REAL ESTATE ACQUIRED THROUGH FORECLOSURE AND REAL ESTATE HELD FOR INVESTMENT
Real estate acquired through foreclosure and real estate held for investment
are valued at fair value less selling costs. Advances for foreclosure expenses
made by the Corporation in connection with servicing real estate mortgage loans
owned by institutional investors are stated at cost, net of related allowance
for uncollectible advances, and are included in accounts receivable in the
accompanying balance sheets.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated over the estimated
useful lives of the respective assets (principally 3 to 7 years) using the
sum-of-the-years-digits method.
FEDERAL NATIONAL MORTGAGE ASSOCIATION ("FNMA") STOCK
The Corporation's investment in FNMA stock is carried at cost of $41 in
other assets at December 31, 1995 and 1996. The Corporation is required to own
shares of FNMA stock in order to be in compliance with the FNMA servicing
agreement. Accordingly, such stock is considered to be restricted in the
accompanying balance sheets, since sale of this stock would be in violation of
the servicing agreement.
INCOME TAXES
The Corporation is an S corporation and does not provide for federal income
taxes. Taxable income or loss is passed through to the stockholders. The
Corporation has elected to pay Oklahoma state income taxes in lieu of its
stockholders filing Oklahoma income tax returns. State income taxes are not
material.
LOAN ADMINISTRATION INCOME
Loan administration income represents fees earned for servicing real estate
mortgage loans owned by institutional investors. The fees are generally
calculated on the outstanding principal balances of the loans serviced and are
recorded as income when earned.
F-11
<PAGE>
AEGIS MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOAN BROKERAGE FEES
Loan brokerage fees represent fees received by the Corporation for
negotiating the sale of loans or servicing rights between a buyer and seller
whereby no further obligations exist. The fee is recognized when the fee has
been earned.
GAIN ON SALES OF MORTGAGE LOANS
Gains or losses resulting from financial instruments used to hedge market
risk associated with outstanding mortgage loan commitments and mortgage loans
held for sale are recognized on the dates gains or losses on loan sales are
recognized.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the 1996
presentation.
FINANCIAL STATEMENT PRESENTATION
The Corporation prepares its financial statements using an unclassified
balance sheet presentation as is customary in the mortgage banking industry. A
classified balance sheet presentation would have aggregated current assets,
current liabilities, and net working capital as follows:
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Current assets................................................. $ 42,301,248 $ 54,586,794
Current liabilities............................................ 40,548,293 52,339,519
------------- -------------
Net working capital............................................ $ 1,752,955 $ 2,247,275
------------- -------------
------------- -------------
</TABLE>
(2) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates, methods, and assumptions at December 31, are set forth
below for the Corporation's financial instruments:
<TABLE>
<CAPTION>
1995 1996
---------------------------- ----------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Financial assets:
Cash.............................................. $ 286,191 $ 286,191 $ 374,783 $ 374,783
Accounts receivable, net.......................... 1,033,407 1,033,407 1,000,403 1,000,403
Mortgage loans held for sale...................... 39,746,886 40,838,647 52,058,032 53,509,949
Financial liabilities:
Notes payable..................................... 39,924,832 39,924,832 51,634,654 51,634,654
Accounts payable and accrued expenses............. 623,461 623,461 704,865 704,865
Off-balance sheet financial instruments:
Mortgage loan commitments......................... -- -- -- --
Forward commitments............................... -- (311,491) -- (41,000)
</TABLE>
F-12
<PAGE>
AEGIS MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amount for cash, accounts receivable, notes payable, and
accounts payable and accrued expenses approximates fair value due to the short
maturity of these financial instruments. In addition, the majority of the notes
payable have variable interest rates.
The fair values for mortgage loans held for sale are based on the December
31, 1995 and 1996 market values determined as described in note 1.
The carrying value of mortgage loan commitments approximates fair value.
The fair value of forward sales commitments is estimated by obtaining quoted
market prices. This value represents the estimated amount the Corporation would
receive or pay to terminate such agreements, taking into account current
interest rates.
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Corporation's entire holdings of a particular financial
instrument. They also do not reflect income tax considerations.
F-13
<PAGE>
AEGIS MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31, is as follows:
<TABLE>
<CAPTION>
1995 1996
---------- ------------
<S> <C> <C>
Furniture and fixtures.............................................. $ 248,661 $ 301,099
Office and data processing equipment................................ 490,524 610,643
Automobiles......................................................... 60,655 60,655
Leasehold improvements.............................................. 129,964 129,964
---------- ------------
929,804 1,102,361
Less accumulated depreciation and amortization...................... 492,135 701,035
---------- ------------
Total Property and Equipment, net............................... $ 437,669 $ 401,326
---------- ------------
---------- ------------
</TABLE>
(4) MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale consist primarily of mortgages on single family
residences and total approximately $39,747,000 and $52,058,000 at December 31,
1995 and 1996, respectively. The estimated market value of such loans exceeds
cost at December 31, 1995 and 1996; accordingly, no valuation allowance was
recorded at December 31, 1995 and 1996. The Corporation is exposed to credit
risk on these mortgage loans in the event of nonperformance by the mortgagors;
however, this risk is mitigated by collateral consisting of single family
residences. The Corporation requires such collateral on all of its mortgage
loans.
Outstanding mortgage loan commitments were approximately $31,971,000 and
$27,044,000 at December 31, 1995 and 1996, respectively. Such commitments are
usually made for periods of approximately sixty to ninety days. Since some of
the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Corporation evaluates each customer's creditworthiness on a case-by-case basis.
The amount of collateral obtained if deemed necessary by the Corporation upon
extension of credit is based on management's credit evaluation of the
counterparty.
The Corporation is a party to financial instruments with off-balance sheet
risk in the normal course of business to hedge its exposure to fluctuations in
interest rates on outstanding loan commitments with fixed interest rates. These
financial instruments consist of Government National Mortgage Association
("GNMA") and FNMA mortgage-backed security forward sales commitments. The
Corporation was exposed to market risk on approximately $25,500,000 and
$37,250,000 at December 31, 1995 and 1996, respectively, of such forward sales
commitments. Gains or losses associated with forward sales commitments, along
with the market risk of loan commitments discussed in the previous paragraph,
are considered in the Corporation's evaluation of its mortgage loans held for
sale.
F-14
<PAGE>
AEGIS MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(5) MORTGAGE SERVICING RIGHTS
A summary of mortgage servicing rights at December 31, is as follows:
<TABLE>
<CAPTION>
1995 1996
------------ -----------
<S> <C> <C>
Balance at beginning of year, net of accumulated amortization of
$1,288,376 and $1,874,791, respectively.......................... $ 1,031,176 $ 617,785
Purchases.......................................................... 173,024 721,291
Sales.............................................................. -- (570,832)
Amortization....................................................... (586,415) (46,953)
------------ -----------
Balance at end of year, net of accumulated amortization of
$1,874,971 and $0, respectively.................................. $ 617,785 $ 721,291
------------ -----------
------------ -----------
</TABLE>
The estimated fair value of mortgage servicing rights, including rights on
loans for which the Corporation has no basis, at December 31, 1996, approximates
$2,800,000.
F-15
<PAGE>
AEGIS MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) NOTES PAYABLE
Notes payable at December 31, consist of the following:
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Note payable to an individual, interest due in monthly
installments through September 16, 1996, at 10%.............. $ 20,000 $ --
Note payable to an individual, interest due in monthly
installments through September 15, 1996, at 10%.............. 30,000 --
Notes payable to various individuals, interest due in monthly
installments at 10%, principal due on demand................. 323,015 574,358
Note payable to bank, interest due in monthly installments
through September 30, 1997, at LIBOR plus 1.00% (6.62% at
December 31, 1996), secured by mortgage loan inventory;
maximum borrowing is $38,500,000............................. -- 21,517,130
Note payable to bank, interest due in monthly installments
through September 30, 1997, at LIBOR plus 1.50% (7.12% at
December 31, 1996), secured by mortgage loan inventory;
maximum borrowing is $15,000,000............................. -- 4,808,038
Note payable to bank, interest due in monthly installments
through September 30, 1997, at LIBOR plus 2.50% (8.12% at
December 31, 1996), secured by mortgage loan inventory;
maximum borrowing is $20,000,000............................. -- 19,759,118
Note payable to bank, interest due in monthly installments
through September 30, 1997, at LIBOR plus 2.75% (8.37% at
December 31, 1996), secured by mortgage loan inventory;
maximum borrowing is $3,500,000.............................. -- 2,700,000
Notes payable to bank, interest due in monthly installments
through May 31, 1997, at prime rate plus 1% (9.25% at
December 31, 1996), secured by mortgage loan inventory;
maximum borrowing is $4,000,000.............................. -- 2,276,010
Various notes payable to banks................................. 39,551,817 --
------------- -------------
Total Notes Payable........................................ $ 39,924,832 $ 51,634,654
------------- -------------
------------- -------------
</TABLE>
The majority of notes payable to individuals are guaranteed by a stockholder
of the Corporation. In addition, notes payable to individuals are due to
stockholders, executive officers, or immediate relatives of stockholders and
executive officers of the Corporation at December 31, 1995 and 1996.
F-16
<PAGE>
AEGIS MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) NOTES PAYABLE (CONTINUED)
The Corporation paid in cash approximately $771,000, $2,024,000 and
$2,898,000 during the years ended December 31, 1994, 1995, and 1996,
respectively, for interest on notes payable.
(7) LOAN ADMINISTRATION
The Corporation was servicing approximately 12,500 and 4,200 loans owned by
institutional investors aggregating approximately $405,000,000 and $123,000,000
at December 31, 1995 and 1996, respectively, including mortgages securing GNMA
mortgage-backed securities discussed in the subsequent paragraph. Related trust
funds of approximately $8,400,000 and $3,600,000 at December 31, 1995 and 1996,
respectively, on deposit in special bank accounts are not included in the
accompanying financial statements. The Company has fidelity bond and errors and
omissions insurance coverage in the amount of $1,000,000 and $500,000 at
December 31, 1995 and 1996, respectively.
The Corporation has issued mortgage-backed securities guaranteed by GNMA
under the provisions of the National Housing Act. At December 31, 1995 and 1996,
the principal amount of these securities outstanding was approximately
$38,100,000 and $1,400,000, respectively, which also represents the approximate
principal amount of the related mortgages that serve as collateral for the
security and are being serviced under this program.
Included in accounts receivable are advances made by the Corporation on
behalf of institutional investors for foreclosure costs. These advances totaled
approximately $257,000 and $136,000 at December 31, 1995 and 1996, respectively,
and are stated net of an allowance for uncollectible advances of $2,500 and
$4,000 at December 31, 1995 and 1996, respectively. Also included in accounts
receivable are advances on behalf of mortgagors for principal, interest, and
escrow payments totaling approximately $355,000 and $181,000 at December 31,
1995 and 1996, respectively.
(8) COMMITMENTS
The Corporation leases office space and equipment under various operating
leases. Rental expense for operating leases totaled approximately $307,000,
$358,000, and $337,000 for the years ended December 31, 1994, 1995 and 1996,
respectively. Future minimum lease payments required under operating leases are
as follows:
<TABLE>
<S> <C>
1997...................................................... $ 259,808
1998...................................................... 60,141
1999...................................................... 32,253
</TABLE>
(9) RELATED PARTY TRANSACTION
The Corporation has notes receivable from stockholders and employees,
included in accounts receivable, totaling $57,328 and $67,140 at December 31,
1995 and 1996, respectively. At December 31, 1996, the notes are due on demand
with interest paid annually at 10%.
(10) SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
The mortgages that the Corporation services for investors are secured by
single family residences located primarily in Texas, Oklahoma, and Louisiana.
The portfolio of mortgages is comprised of approximately 14% FHA, 10% VA, and
76% conventional. Credit losses arise as mortgagors default on
F-17
<PAGE>
AEGIS MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(10) SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK (CONTINUED)
mortgages and FHA, VA, or other mortgage insurance claims do not cover costs
paid by the Corporation in foreclosing on and disposing of the properties
securing the mortgages.
(11) RETIREMENT PLAN
During 1995, the Corporation established a 401(k) retirement plan. Under the
plan, the Corporation contributes amounts not to exceed 1.5%, dependent on the
employee's level of participation, of the respective employee's base pay to
provide retirement benefits. Employees may contribute up to 15% of their base
pay to the plan. Participants vest at 20% per year with full vesting at the end
of five years. Benefits paid under the plan are limited to the sum of the
employee's and Corporation's contributions and investment earnings on those
contributions. The Corporation contributed approximately $5,260 and $54,467 to
the plan in 1995 and 1996, respectively.
F-18
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT 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 OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------
SUMMARY TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 10
The Company............................................................... 25
Use of Proceeds........................................................... 25
Distribution Policy....................................................... 26
Capitalization............................................................ 26
Dilution.................................................................. 27
Selected Financial Information............................................ 28
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 30
Business.................................................................. 36
Management................................................................ 50
Certain Relationships and Transactions.................................... 55
Principal and Management Shareholders..................................... 55
Description of Shares of Beneficial Interest.............................. 56
Certain Provisions of Maryland Law and of the Company's Declaration of
Trust and Bylaws........................................................ 61
Shares Available for Future Sale.......................................... 65
Operating Partnership Agreement........................................... 66
Federal Income Tax Considerations......................................... 69
ERISA Considerations...................................................... 88
Underwriting.............................................................. 91
Legal Matters............................................................. 92
Experts................................................................... 92
Additional Information.................................................... 93
Glossary.................................................................. 94
Financial Statements...................................................... F-1
</TABLE>
---------------------
UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE SHARES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF THE DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
10,000,000 SHARES
AEGIS
INVESTMENT TRUST
COMMON SHARES OF
BENEFICIAL INTEREST
PROSPECTUS
JEFFERIES & COMPANY, INC.
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate of the approximate amount of the fees and
expenses (other than underwriting commissions and discounts) payable by the
Registrant in connection with the issuance and distribution of the Shares.
<TABLE>
<S> <C>
Securities and Exchange Commission, registration fee....................... $ 69,697
NASD filing fee............................................................
New York Stock Exchange listing fee........................................
Printing and mailing.......................................................
Financial Advisory fee.....................................................
Accountant's fees and expenses.............................................
Blue Sky fees and expenses.................................................
Counsel fees and expenses..................................................
Miscellaneous..............................................................
---------
Total..................................................................
---------
---------
</TABLE>
ITEM 31. SALES TO SPECIAL PARTIES
See Item 32.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES
On August 28, 1997, the Company was capitalized with the issuance to Kyle
Longhofer of 100 Common Shares for a purchase price of $19.00 per share for an
aggregate purchase price of $1,900.00. The Common Shares were purchased for
investment and for the purpose of organizing the Company. The Company issued
these Common Shares in reliance on an exemption from registration under Section
4(2) of the Securities Act.
ITEM 33. INDEMNIFICATION OF TRUSTEES AND OFFICERS
The Maryland REIT Law permits a Maryland real estate investment trust to
include in its Declaration of Trust a provision limiting the liability of its
trustees and officers to the trust and its shareholders for money damages except
for liability resulting from (a) actual receipt of an improper benefit or profit
in money, property or services or (b) active and deliberate dishonesty
established by a final judgment as being material to the cause of action. The
Declaration of Trust of the Company contains such a provision which eliminates
such liability to the maximum extent permitted by the Maryland REIT Law.
The Declaration of Trust of the Company authorizes it, to the maximum extent
permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former Trustee or officer or (b) any individual who, while a
Trustee of the Company and at the request of the Company, serves or has served
another real estate investment trust, corporation, partnership, joint venture,
trust, employee benefit plan or any other enterprise as a trustee, director,
officer or partner of such real estate investment trust, corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
from and against any claim or liability to which such person may become subject
or which such person may incur by reason of his or her status as a present or
former Trustee or officer of the Company. The Bylaws of the Company obligate it,
to the maximum extent permitted by Maryland law, to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former Trustee or officer who is made a party to the
proceeding by reason of his service in that capacity or (b) any individual who,
while a
II-1
<PAGE>
Trustee of the Company and at the request of the Company, serves or has served
another real estate investment trust, corporation, partnership, joint venture,
trust, employee benefit plan or any other enterprise as a trustee, director,
officer or partner of such real estate investment trust, corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise and
who is made a party to the proceeding by reason of his service in that capacity,
against any claim or liability to which he may become subject by reason of such
status. The Declaration of Trust and Bylaws also permit the Company to indemnify
and advance expenses to any person who served a predecessor of the Company in
any of the capacities described above and to any employee or agent of the
Company or a predecessor of the Company. The Bylaws require the Company to
indemnify a Trustee or officer who has been successful, on the merits or
otherwise, in the defense of any proceeding to which he is made a party by
reason of his service in that capacity.
The Maryland REIT Law permits a Maryland real estate investment trust to
indemnify and advance expenses to its trustees, officers, employees and agents
to the same extent as permitted by the MGCL for directors and officers of
Maryland corporations. The MGCL 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, (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. However, under the MGCL,
a Maryland corporation may not indemnify for an adverse judgment in a suit by or
in the right of the corporation or for a judgment of liability on the basis that
personal benefit was improperly received, unless in either case a court orders
indemnification and then only for expenses. In addition, the MGCL permits a
corporation to advance reasonable expenses to a director or officer upon the
corporation's receipt of (a) a written affirmation by the director or officer of
his good faith belief that he has met the standard of conduct necessary for
indemnification by the corporation and (b) a written undertaking by or on his
behalf to repay the amount paid or reimbursed by the corporation if it shall
ultimately be determined that the standard of conduct was not met.
ITEM 34. TREATMENT OF PROCEEDS FROM SHARES BEING REGISTERED
None.
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
</TABLE>
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<PAGE>
ITEM 16. EXHIBITS
EXHIBITS
<TABLE>
<C> <C> <S>
1.1*** -- Form of Underwriting Agreement
3.1** -- Form of Amended and Restated Declaration of Trust of the Registrant
3.2** -- Bylaws of the Registrant
4.1** -- Form of Common Share certificate
5.1** -- Form of Opinion of Hunton & Williams
8.1** -- Form of Opinion of Hunton & Williams as to Tax Matters
10.1** -- Form of First Amended and Restated Agreement of Limited Partnership of
AEGIS Operating Partnership, L.P.
10.2** -- Form of 1997 Plan
10.3* -- Form of Stock Contribution Agreement
10.4** -- Form of Trustees' Plan
21 ** -- List of Subsidiaries of Registrant
23.1** -- Consent of Hunton & Williams (included in Exhibits 5.1 and 8.1)
23.2** -- Consent of KPMG Peat Marwick LLP
23.3*** -- Consent of to being named as a Trustee nominee
23.4*** -- Consent of to being named as a Trustee nominee
23.5*** -- Consent of to being named as a Trustee nominee
24.1* -- Powers of Attorney (included on signature page)
</TABLE>
- ------------------------
* Filed previously.
** Filed herewith.
*** To be filed by amendment.
ITEM 36. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to trustees, officers and controlling persons of the
Registrant pursuant to the provisions referred to in Item 33 of this
Registration Statement, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a trustee,
officer, or controlling person of the Registrant in the successful defense of
any action, suit, or proceeding) is asserted by such trustee, officer, or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question as to 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 to provide to the underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of Prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrant pursuant to Rule 424(b) (1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
Prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial BONA FIDE offering thereof.
II-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 Amendment No. 1 to
the registration statement to be signed on its behalf by the undersigned
thereunto duly authorized, in the City of Houston, State of Texas, on the 24th
day of October 1997.
<TABLE>
<S> <C> <C>
AEGIS INVESTMENT TRUST
A MARYLAND REAL ESTATE INVESTMENT TRUST
(REGISTRANT)
By: /s/ PATRICK A. WALDEN
-----------------------------------------
Patrick A. Walden
MANAGING DIRECTOR
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below on the 24th day of October 1997 by
the following persons in the capacities indicated.
SIGNATURE TITLE
- ------------------------------ --------------------------
Managing Director, Trustee
/s/ PATRICK A. WALDEN and Co-Chairman of Board
- ------------------------------ of Trustees (Principal
Patrick A. Walden Executive Officer)
Managing Director, Trustee
and Co-Chairman of Board
/s/ JAMES E. DAY of Trustees (Principal
- ------------------------------ Financial Officer and
James E. Day Principal Accounting
Officer)
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<PAGE>
AEGIS INVESTMENT TRUST
FORM OF AMENDED AND RESTATED DECLARATION OF TRUST
AEGIS Investment Trust, a Maryland real estate investment trust (the
"Trust") under Title 8 of the Corporations and Associations Article of the
Annotated Code of Maryland ("Title 8"), desires to amend and restate its
Declaration of Trust as currently in effect and as hereinafter amended.
The following provisions are all the provisions of the Declaration of
Trust currently in effect and as hereinafter amended:
ARTICLE I
FORMATION
The Trust is a real estate investment trust within the meaning of
Title 8. The Trust shall not be deemed to be a general partnership, limited
partnership, joint venture, joint stock company or a corporation (but nothing
herein shall preclude the Trust from being treated for tax purposes as an
association under the Code).
ARTICLE II
NAME
The name of the Trust is: AEGIS Investment Trust
Under circumstances in which the Board of Trustees of the Trust (the
"Board of Trustees" or "Board") determines that the use of the name of the Trust
is not practicable, the Trust may use any other designation or name for the
Trust.
<PAGE>
ARTICLE III
PURPOSES AND POWERS
Section 3.1 PURPOSES. The purposes for which the Trust is formed are
to invest in and to acquire, hold, manage, administer, control and dispose of
property or interests therein, including, without limitation or obligation,
engaging in business as a real estate investment trust under the Internal
Revenue Code of 1986, as amended (the "Code").
Section 3.2 POWERS. The Trust shall have all of the powers granted
to real estate investment trusts by Title 8 and all other powers set forth in
the Declaration of Trust which are not inconsistent with law and are appropriate
to promote and attain the purposes set forth in the Declaration of Trust.
ARTICLE IV
RESIDENT AGENT
The name of the resident agent of the Trust in the State of Maryland
is James J. Hanks, Jr., whose post office address is c/o Ballard Spahr Andrews &
Ingersoll, 300 East Lombard Street, Baltimore, Maryland 21202. The resident
agent is a citizen of and resides in the State of Maryland. The Trust may have
such offices or places of business within or outside the State of Maryland as
the Board of Trustees may from time to time determine.
- 2 -
<PAGE>
ARTICLE V
BOARD OF TRUSTEES
Section 5.1 POWERS. Subject to any express limitations contained in
this Declaration of Trust or in the Bylaws, (a) the business and affairs of the
Trust shall be managed under the direction of the Board of Trustees and (b) the
Board shall have full, exclusive and absolute power, control and authority over
any and all property of the Trust. The Board may take any action as in its sole
judgment and discretion is necessary or appropriate to conduct the business and
affairs of the Trust. The Declaration of Trust shall be construed with the
presumption in favor of the grant of power and authority to the Board. Any
construction of the Declaration of Trust or determination made in good faith by
the Board concerning its powers and authority hereunder shall be conclusive.
The enumeration and definition of particular powers of the Trustees included in
the Declaration of Trust or in the Bylaws shall in no way be limited or
restricted by reference to or inference from the terms of this or any other
provision of the Declaration of Trust or the Bylaws or construed or deemed by
inference or otherwise in any manner to exclude or limit the powers conferred
upon the Board or the Trustees under the general laws of the State of Maryland
or any other applicable laws.
The Board, without any action by the shareholders of the Trust, shall
have and may exercise, on behalf of the Trust, without limitation, the power to
adopt, amend and repeal Bylaws;
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<PAGE>
to elect officers in the manner prescribed in the Bylaws; to solicit proxies
from holders of shares of beneficial interest of the Trust; and to do any other
acts and deliver any other documents necessary or appropriate to the foregoing
powers.
Section 5.2 NUMBER AND CLASSIFICATION. The number of Trustees
(hereinafter the "Trustees") initially shall be 5, which number may be increased
or decreased pursuant to the Bylaws of the Trust. The Trustees shall be elected
at every third annual meeting of shareholders in the manner provided in the
Bylaws or, in order to fill any vacancy on the Board of Trustees, in the manner
provided in the Bylaws. The election of Trustees requires a plurality of all
the votes case at a meeting of shareholders of the Trust at which a quorum is
present. The names and addresses of the Trustees who shall serve until the
first annual meeting of shareholders and until their successors are duly elected
and qualify are:
Name Address
Patrick A. Walden 2500 CityWest Boulevard,
Suite 1200
Houston, Texas 77042
James E. Day 2500 CityWest Boulevard,
Suite 1200
Houston, Texas 77042
Independent Trustee
Independent Trustee
Independent Trustee
These Trustees may increase the number of Trustees and fill any vacancy, whether
resulting from an increase in the number of
- 4 -
<PAGE>
Trustees or otherwise, on the Board of Trustees prior to the first annual
meeting of shareholders in the manner provided in the Bylaws. Independent
Trustees shall nominate replacements for vacancies among the Independent
Trustees positions. In the event that, after the closing of the Initial Public
Offering, a majority of the Board of Trustees are not Independent Trustees by
reason of the resignation or removal of one or more Independent Trustees or
otherwise, the remaining Independent Trustees (or, if there are no Independent
Trustees, the remaining members of the Board of Trustees) shall promptly elect
that number of Independent Trustees necessary to cause the Board of Trustees to
include a majority of Independent Trustees. It shall not be necessary to list
in the Declaration of Trust the names and addresses of any Trustees hereinafter
elected.
At any meeting of shareholders, the Trustees (other than any Trustee
elected solely by holders of one or more classes or series of Preferred Shares)
may be classified, with respect to the terms for which they severally hold
office, into three classes, one class to hold office initially for a term
expiring at the next succeeding annual meeting of shareholders, another class to
hold office initially for a term expiring at the second succeeding annual
meeting of shareholders and another class to hold office initially for a term
expiring at the third succeeding annual meeting of shareholders, with the
Trustees of each class to hold office until their successors are duly elected
and qualify. At each annual meeting of shareholders, the successors to the
- 5 -
<PAGE>
class of Trustees whose term expires at such meeting shall be elected to hold
office for a term expiring at the annual meeting of shareholders held in the
third year following the year of their election.
Section 5.3 RESIGNATION, REMOVAL OR DEATH. Any Trustee may resign by
written notice to the Board, effective upon execution and delivery to the Trust
of such written notice or upon any future date specified in the notice. Subject
to the rights of holders of one or more classes or series of Preferred Shares to
elect one or more Trustees, a Trustee may be removed at any time, only for
cause, at a meeting of the shareholders, by the affirmative vote of the holders
of not less than 75% of the Shares then outstanding and entitled to vote
generally in the election of Trustees.
Section 5.4 INDEPENDENT TRUSTEES. Notwithstanding anything herein to
the contrary, at all times (except during a period not to exceed sixty (60) days
following the death, resignation, incapacity or removal from office of a Trustee
prior to expiration of the Trustee's term of office), a majority of the Board of
Trustees shall be comprised of persons who are not affiliated with any officers
or employees of the Trust or Affiliates of (i) any subsidiary of the Trust or
(ii) any partnership which is an affiliate of the Trust (each such person
serving on the Board of Trustees being an "Independent Trustee"). Amendment or
repeal of this provision shall require the affirmative vote of 85% of the
Trustees or two-thirds of the
- 6 -
<PAGE>
outstanding shares entitled to vote on the matter.
ARTICLE VI
SHARES OF BENEFICIAL INTEREST
Section 6.1 AUTHORIZED SHARES. The beneficial interest of the Trust
shall be divided into shares of beneficial interest (the "Shares"). The Trust
has authority to issue 120,000 shares of beneficial interest, consisting of
100,000,000 common shares of beneficial interest, $.01 par value per share
("Common Shares"), AND 20,000,000 preferred shares of beneficial interest, $.01
par value per share ("Preferred Shares"). The Board of Trustees, without any
action by the shareholders of the Trust, may amend the Declaration of Trust from
time to time to increase or decrease the aggregate number of Shares or the
number of Shares of any class that the Trust has authority to issue. If shares
of one class of beneficial interest are classified or reclassified into shares
of another class of beneficial interest pursuant to Sections 6.2, 6.3 or 6.4 of
this Article VI, the number of authorized shares of the former class shall be
automatically decreased and the number of shares of the latter class shall be
automatically increased, in each case by the number of shares so classified or
reclassified, so that the aggregate number of shares of beneficial interest of
all classes that the Trust has authority to issue shall not be more than the
total number of shares of beneficial interest set forth in the second sentence
of this paragraph.
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<PAGE>
Section 6.2 COMMON SHARES. Subject to the provisions of Article VII,
each Common Share shall entitle the holder thereof to one vote on each matter
upon which holders of Common Shares are entitled to vote. The Board of Trustees
may reclassify any unissued Common Shares from time to time in one or more
classes or series of Shares.
Section 6.3 PREFERRED SHARES. The Board of Trustees may classify any
unissued Preferred Shares and reclassify any previously classified but unissued
Preferred Shares of any series from time to time, in one or more classes or
series of Shares.
Section 6.4 CLASSIFIED OR RECLASSIFIED SHARES. Prior to issuance of
classified or reclassified Shares of any class or series, the Board of Trustees
by resolution shall (a) designate that class or series to distinguish it from
all other classes and series of Shares; (b) specify the number of Shares to be
included in the class or series; (c) set, subject to the provisions of Article
VII and subject to the express terms of any class or series of Shares
outstanding at the time, the preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends or other distributions,
qualifications and terms and conditions of redemption for each class or series;
and (d) cause the Trust to file articles supplementary with the State Department
of Assessments and Taxation of Maryland (the "SDAT"). Any of the terms of any
class or series of Shares set pursuant to clause (c) of this Section 6.4 may be
made dependent upon facts ascertainable outside the Declaration of Trust
- 8 -
<PAGE>
(including the occurrence of any event, including a determination or action by
the Trust or any other person or body) and may vary among holders thereof,
provided that the manner in which such facts or variations shall operate upon
the terms of such class or series of Shares is clearly and expressly set forth
in the articles supplementary filed with the SDAT.
Section 6.5 AUTHORIZATION BY BOARD OF SHARE ISSUANCE. The Board of
Trustees may authorize the issuance from time to time of Shares of any class or
series, whether now or hereafter authorized, or securities or rights convertible
into Shares of any class or series, whether now or hereafter authorized, for
such consideration (whether in cash, property, past or future services,
obligation for future payment or otherwise) as the Board of Trustees may deem
advisable (or without consideration in the case of a Share split or Share
dividend), subject to such restrictions or limitations, if any, as may be set
forth in the Declaration of Trust or the Bylaws of the Trust.
Section 6.6 DIVIDENDS AND DISTRIBUTIONS. The Board of Trustees may
from time to time authorize and declare to shareholders such dividends or
distributions, in cash or other assets of the Trust or in securities of the
Trust or from any other source as the Board of Trustees in its discretion shall
determine. The Board of Trustees shall endeavor to authorize and declare such
dividends and distributions as shall be necessary for the Trust to qualify as a
real estate investment trust under the Code; however, shareholders shall have no
right to any dividend or
- 9 -
<PAGE>
distribution unless and until authorized and declared by the Board. The
exercise of the powers and rights of the Board of Trustees pursuant to this
Section 6.6 shall be subject to the provisions of any class or series of Shares
at the time outstanding. Notwithstanding any other provision in the Declaration
of Trust, no determination shall be made by the Board of Trustees nor shall any
transaction be entered into by the Trust which would cause any Shares or other
beneficial interest in the Trust not to constitute "transferable shares" or
"transferable certificates of beneficial interest" under Section 856(a)(2) of
the Code or which would cause any distribution to constitute a preferential
dividend as described in Section 562(c) of the Code.
Section 6.7 GENERAL NATURE OF SHARES. All Shares shall be personal
property entitling the shareholders only to those rights provided in the
Declaration of Trust. The shareholders shall have no interest in the property
of the Trust and shall have no right to compel any partition, division, dividend
or distribution of the Trust or of the property of the Trust. The death of a
shareholder shall not terminate the Trust. The Trust is entitled to treat as
shareholders only those persons in whose names Shares are registered as holders
of Shares on the beneficial interest ledger of the Trust.
Section 6.8 FRACTIONAL SHARES. The Trust may, without the consent or
approval of any shareholder, issue fractional Shares, eliminate a fraction of a
Share
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<PAGE>
by rounding up or down to a full Share, arrange for the disposition of a
fraction of a Share by the person entitled to it, or pay cash for the fair value
of a fraction of a Share.
Section 6.9 DECLARATION AND BYLAWS. All shareholders are subject to
the provisions of the Declaration of Trust and the Bylaws of the Trust.
Section 6.10 DIVISIONS AND COMBINATIONS OF SHARES. Subject to an
express provision to the contrary in the terms of any class or series of
beneficial interest hereafter authorized, the Board of Trustees shall have the
power to divide or combine the outstanding shares of any class or series of
beneficial interest, without a vote of shareholders, so long as the number of
shares combined into one share in any such combination or series of combinations
within any period of twelve months is not greater than _____.
ARTICLE VII
RESTRICTION ON TRANSFER AND OWNERSHIP OF SHARES
Section 7.1 DEFINITIONS. For the purpose of this Article VII, the
following terms shall have the following meanings:
AGGREGATE SHARE OWNERSHIP LIMIT. The term "Aggregate Share Ownership
Limit" shall mean not more than 9.8% percent in value of the aggregate of the
outstanding Equity Shares. The value of the outstanding Equity Shares shall be
determined by the Board of Trustees in good faith, which determination shall be
conclusive for all purposes hereof.
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<PAGE>
BENEFICIAL OWNERSHIP. The term "Beneficial Ownership" shall mean
ownership of Equity Shares by a Person, whether the interest in Equity Shares is
held directly or indirectly (including by a nominee), and shall include
interests that would be treated as owned through the application of Section 544
of the Code, as modified by Section 856(h)(1)(B) of the Code. The terms
"Beneficial Owner," "Beneficially Owns" and "Beneficially Owned" shall have the
correlative meanings.
BUSINESS DAY. The term "Business Day" shall mean any day, other than
a Saturday or Sunday, that is neither a legal holiday nor a day on which banking
institutions in New York City are authorized or required by law, regulation or
executive order to close.
CHARITABLE BENEFICIARY. The term "Charitable Beneficiary" shall mean
one or more beneficiaries of the Charitable Trust as determined pursuant to
Section 7.3.6, provided that each such organization must be described in
Section 501(c)(3) of the Code and contributions to each such organization must
be eligible for deduction under each of Sections 170(b)(1)(A), 2055 and 2522 of
the Code.
CHARITABLE TRUST. The term "Charitable Trust" shall mean any trust
provided for in Section 7.3.1.
CODE. The term "Code" shall mean the Internal Revenue Code of 1986,
as amended from time to time.
COMMON SHARE OWNERSHIP LIMIT. The term "Common Share Ownership Limit"
shall mean not more than 9.8 percent (in value or
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<PAGE>
in number of shares, whichever is more restrictive) of the aggregate of the
outstanding Common Shares. The number and value of outstanding Common Shares
shall be determined by the Board of Trustees in good faith, which determination
shall be conclusive for all purposes hereof.
CONSTRUCTIVE OWNERSHIP. The term "Constructive Ownership" shall mean
ownership of Equity Shares by a Person, whether the interest in Equity Shares is
held directly or indirectly (including by a nominee), and shall include
interests that would be treated as owned through the application of
Section 318(a) of the Code, as modified by Section 856(d)(5) of the Code. The
terms "Constructive Owner," "Constructively Owns" and "Constructively Owned"
shall have the correlative meanings.
DECLARATION OF TRUST. The term "Declaration of Trust" shall mean this
Amended and Restated Declaration of Trust as filed for record with the SDAT, and
any amendments thereto.
EQUITY SHARES. The term "Equity Shares" shall mean all classes or
series of Shares, including, without limitation, Common Shares and Preferred
Shares.
EXCEPTED HOLDER. The term "Excepted Holder" shall mean a shareholder
of the Trust for whom an Excepted Holder Limit is created by this Article VII or
by the Board of Trustees pursuant to Section 7.2.7.
EXCEPTED HOLDER LIMIT. The term "Excepted Holder Limit" shall mean,
provided that the affected Excepted Holder agrees to comply with the
requirements established by the Board of
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<PAGE>
Trustees pursuant to Section 7.2.7, and subject to adjustment pursuant to
Section 7.2.8, the percentage limit established by the Board of Trustees
pursuant to Section 7.2.7.
INITIAL DATE. The term "Initial Date" shall mean the date upon which
this Amended and Restated Declaration of Trust containing this Article VII is
filed for record with the SDAT.
MARKET PRICE. The term "Market Price" on any date shall mean, with
respect to any class or series of outstanding Equity Shares, the Closing Price
for such Equity Shares on such date. The "Closing Price" on any date shall mean
the last sale price for such Equity Shares, regular way, or, in case no such
sale takes place on such day, the average of the closing bid and asked prices,
regular way, for such Equity Shares, in either case as reported in the principal
consolidated transaction reporting system with respect to securities listed or
admitted to trading on the NYSE or, if such Equity Shares are not listed or
admitted to trading on the NYSE, as reported on the principal consolidated
transaction reporting system with respect to securities listed on the principal
national securities exchange on which such Equity Shares are listed or admitted
to trading or, if such Equity Shares are not listed or admitted to trading on
any national securities exchange, the last quoted price, or, if not so quoted,
the average of the high bid and low asked prices in the over-the-counter market,
as reported by the National Association of Securities Dealers, Inc. Automated
Quotation System or, if such system is no longer in use, the principal other
automated quotation system that
- 14 -
<PAGE>
may then be in use or, if such Equity Shares are not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in such Equity Shares selected by the
Board of Trustees or, in the event that no trading price is available for such
Equity Shares, the fair market value of Equity Shares, as determined in good
faith by the Board of Trustees.
NYSE. The term "NYSE" shall mean the New York Stock Exchange.
PERSON. The term "Person" shall mean an individual, corporation,
partnership, estate, trust (including a trust qualified under Sections 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 and also
includes a group as that term is used for purposes of Section 13(d)(3) of the
Securities Exchange Act of 1934, as amended, and a group to which an Excepted
Holder Limit applies.
PROHIBITED OWNER. The term "Prohibited Owner" shall mean, with
respect to any purported Transfer, any Person who, but for the provisions of
Section 7.2.1, would Beneficially Own or Constructively Own Equity Shares, and
if appropriate in the context, shall also mean any Person who would have been
the record owner of Equity Shares that the Prohibited Owner would have so owned.
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<PAGE>
REIT. The term "REIT" shall mean a real estate investment trust
within the meaning of Section 856 of the Code.
RESTRICTION TERMINATION DATE. The term "Restriction Termination Date"
shall mean the first day after the Initial Date on which the Board of Trustees
determines that it is no longer in the best interests of the Trust to attempt
to, or continue to, qualify as a REIT or that compliance with the restrictions
and limitations on Beneficial Ownership, Constructive Ownership and Transfers of
Equity Shares set forth herein is no longer required in order for the Trust to
qualify as a REIT.
SDAT. The term "SDAT" shall mean the State Department of Assessments
and Taxation of Maryland.
TRANSFER. The term "Transfer" shall mean any issuance, sale,
transfer, gift, assignment, devise or other disposition, as well as any other
event that causes any Person to acquire Beneficial Ownership or Constructive
Ownership, or any agreement to take any such actions or cause any such events,
of Equity Shares or the right to vote or receive dividends on Equity Shares,
including (a) the granting or exercise of any option (or any disposition of any
option), (b) any disposition of any securities or rights convertible into or
exchangeable for Equity Shares or any interest in Equity Shares or any exercise
of any such conversion or exchange right and (c) Transfers of interests in other
entities that result in changes in Beneficial or Constructive Ownership of
Equity Shares; in each case, whether voluntary or involuntary, whether owned of
record, Constructively
- 16 -
<PAGE>
Owned or Beneficially Owned and whether by operation of law or otherwise. The
terms "Transferring" and "Transferred" shall have the correlative meanings.
TRUSTEE. The term "Trustee" shall mean the Person unaffiliated with
the Trust and a Prohibited Owner, that is appointed by the Trust to serve as
trustee of the Charitable Trust.
Section 7.2 EQUITY SHARES.
Section 7.2.1 OWNERSHIP LIMITATIONS. During the period
commencing on the Initial Date and prior to the Restriction Termination Date:
(a) BASIC RESTRICTIONS.
(i) (1) No Person, other than an Excepted Holder,
shall Beneficially Own or Constructively Own Equity Shares in excess of the
Aggregate Share Ownership Limit, (2) no Person, other than an Excepted Holder,
shall Beneficially Own or Constructively Own Common Shares in excess of the
Common Share Ownership Limit and (3) no Excepted Holder shall Beneficially Own
or Constructively Own Equity Shares in excess of the Excepted Holder Limit for
such Excepted Holder.
(ii) No Person shall Beneficially or Constructively Own
Equity Shares to the extent that such Beneficial or Constructive Ownership of
Equity Shares would result in the Trust being "closely held" within the meaning
of Section 856(h) of the Code (without regard to whether the ownership interest
is held during the last half of a taxable
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year), or otherwise failing to qualify as a REIT (including, but not limited to,
Beneficial or Constructive Ownership that would result in the Trust owning
(actually or Constructively) an interest in a tenant that is described in
Section 856(d)(2)(B) of the Code if the income derived by the Trust from such
tenant would cause the Trust to fail to satisfy any of the gross income
requirements of Section 856(c) of the Code).
(iii) Notwithstanding any other provisions contained
herein, any Transfer of Equity Shares (whether or not such Transfer is the
result of a transaction entered into through the facilities of the NYSE or any
other national securities exchange or automated inter-dealer quotation system)
that, if effective, would result in Equity Shares being beneficially owned by
less than 100 Persons (determined under the principles of Section 856(a)(5) of
the Code) shall be void AB INITIO, and the intended transferee shall acquire no
rights in such Equity Shares.
(b) TRANSFER IN TRUST. If any Transfer of Equity Shares
(whether or not such Transfer is the result of a transaction entered into
through the facilities of the NYSE or any other national securities exchange or
automated inter-dealer quotation system) occurs which, if effective, would
result in any Person Beneficially Owning or Constructively Owning Equity Shares
in violation of Section 7.2.1(a)(i) or (ii),
(i) then that number of Equity Shares the Beneficial
or Constructive Ownership of which otherwise would
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cause such Person to violate Section 7.2.1(a)(i) or (ii)(rounded to the nearest
whole share) shall be automatically transferred to a Charitable Trust for the
benefit of a Charitable Beneficiary, as described in Section 7.3, effective as
of the close of business on the Business Day prior to the date of such Transfer,
and such Person shall acquire no rights in such Equity Shares; or
(ii) if the transfer to the Charitable Trust described
in clause (i) of this sentence would not be effective for any reason to prevent
the violation of Section 7.2.1(a)(i) or (ii), then the Transfer of that number
of Equity Shares that otherwise would cause any Person to violate
Section 7.2.1(a)(i) or (ii) shall be void AB INITIO, and the intended transferee
shall acquire no rights in such Equity Shares.
Section 7.2.2 REMEDIES FOR BREACH. If the Board of Trustees or
any duly authorized committee thereof shall at any time determine in good faith
that a Transfer or other event has taken place that results in a violation of
Section 7.2.1 or that a Person intends to acquire or has attempted to acquire
Beneficial or Constructive Ownership of any Equity Shares in violation of
Section 7.2.1 (whether or not such violation is intended), the Board of Trustees
or a committee thereof shall take such action as it deems advisable to refuse to
give effect to or to prevent such Transfer or other event, including, without
limitation, causing the Trust to redeem Equity Shares, refusing to give effect
to such Transfer on the books of the Trust or instituting proceedings to enjoin
such Transfer or other event; PROVIDED, HOWEVER, that any
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Transfer or attempted Transfer or other event in violation of Section 7.2.1
shall automatically result in the transfer to the Charitable Trust described
above, and, where applicable, such Transfer (or other event) shall be void AB
INITIO as provided above irrespective of any action (or non-action) by the Board
of Trustees or a committee thereof.
Section 7.2.3 NOTICE OF RESTRICTED TRANSFER. Any Person who
acquires or attempts or intends to acquire Beneficial Ownership or Constructive
Ownership of Equity Shares that will or may violate Section 7.2.1(a) or any
Person who would have owned Equity Shares that resulted in a transfer to the
Charitable Trust pursuant to the provisions of Section 7.2.1(b), shall
immediately give written notice to the Trust of such event, or in the case of
such a proposed or attempted transaction, give at least 15 days prior written
notice, and shall provide to the Trust such other information as the Trust may
request in order to determine the effect, if any, of such Transfer on the
Trust's status as a REIT.
Section 7.2.4 OWNERS REQUIRED TO PROVIDE INFORMATION. From the
Initial Date and prior to the Restriction Termination Date:
(a) every owner of more than five percent (or such lower
percentage as required by the Code or the Treasury Regulations promulgated
thereunder) of the outstanding Equity Shares, within 30 days after the end of
each taxable year, shall give written notice to the Trust stating the name and
address of such owner, the number of Equity Shares and other Equity Shares
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Beneficially Owned and a description of the manner in which such shares are
held. Each such owner shall provide to the Trust such additional information as
the Trust may request in order to determine the effect, if any, of such
Beneficial Ownership on the Trust's status as a REIT and to ensure compliance
with the Aggregate Share Ownership Limit; and
(b) each Person who is a Beneficial or Constructive Owner
of Equity Shares and each Person (including the shareholder of record) who is
holding Equity Shares for a Beneficial or Constructive Owner shall provide to
the Trust such information as the Trust may request, in good faith, in order to
determine the Trust's status as a REIT and to comply with requirements of any
taxing authority or governmental authority or to determine such compliance.
Section 7.2.5 REMEDIES NOT LIMITED. Subject to Section 5.1 of
the Declaration of Trust, nothing contained in this Section 7.2 shall limit the
authority of the Board of Trustees to take such other action as it deems
necessary or advisable to protect the Trust and the interests of its
shareholders in preserving the Trust's status as a REIT.
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Section 7.2.6 AMBIGUITY. In the case of an ambiguity in the
application of any of the provisions of this Section 7.2, Section 7.3 or any
definition contained in Section 7.1, the Board of Trustees shall have the power
to determine the application of the provisions of this Section 7.2 or
Section 7.3 with respect to any situation based on the facts known to it. In
the event Section 7.2 or 7.3 requires an action by the Board of Trustees and the
Declaration of Trust fails to provide specific guidance with respect to such
action, the Board of Trustees shall have the power to determine the action to be
taken so long as such action is not contrary to the provisions of Sections 7.1,
7.2 or 7.3.
Section 7.2.7 EXCEPTIONS.
(a) Subject to Section 7.2.1(a)(ii), the Board of Trustees,
in its sole discretion, may exempt a Person from the Aggregate Share Ownership
Limit and the Common Share Ownership Limit, as the case may be, and may
establish or increase an Excepted Holder Limit for such Person if:
(i) the Board of Trustees obtains such representations
and undertakings from such Person as are reasonably necessary to ascertain that
no individual's Beneficial or Constructive Ownership of such Equity Shares will
violate Section 7.2.1(a)(ii);
(ii) such Person does not and represents that it will
not own, actually or Constructively, an interest in a tenant of the Trust (or a
tenant of any entity owned or controlled
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by the Trust) that would cause the Trust to own, actually or Constructively,
more than a 9.8% interest (as set forth in Section 856(d)(2)(B) of the Code) in
such tenant and the Board of Trustees obtains such representations and
undertakings from such Person as are reasonably necessary to ascertain this fact
(for this purpose, a tenant from whom the Trust (or an entity owned or
controlled by the Trust) derives (and is expected to continue to derive) a
sufficiently small amount of revenue such that, in the opinion of the Board of
Trustees, rent from such tenant would not adversely affect the Trust's ability
to qualify as a REIT, shall not be treated as a tenant of the Trust); and
(iii) such Person agrees that any violation or
attempted violation of such representations or undertakings (or other action
which is contrary to the restrictions contained in Sections 7.2.1 through 7.2.6)
will result in such Equity Shares being automatically transferred to a
Charitable Trust in accordance with Sections 7.2.1(b) and 7.3.
(b) Prior to granting any exception pursuant to
Section 7.2.7(a), the Board of Trustees may require a ruling from the Internal
Revenue Service, or an opinion of counsel, in either case in form and substance
satisfactory to the Board of Trustees in its sole discretion, as it may deem
necessary or advisable in order to determine or ensure the Trust's status as a
REIT. Notwithstanding the receipt of any ruling or opinion, the Board of
Trustees may impose such conditions or restrictions as it deems appropriate in
connection with granting such exception.
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(c) Subject to Section 7.2.1(a)(ii), an underwriter which
participates in a public offering or a private placement of Equity Shares (or
securities convertible into or exchangeable for Equity Shares) may Beneficially
Own or Constructively Own Equity Shares (or securities convertible into or
exchangeable for Equity Shares) in excess of the Aggregate Share Ownership
Limit, the Common Share Ownership Limit or both such limits, but only to the
extent necessary to facilitate such public offering or private placement.
(d) The Board of Trustees may only reduce the Excepted
Holder Limit for an Excepted Holder: (1) with the written consent of such
Excepted Holder at any time, or (2) pursuant to the terms and conditions of the
agreements and undertakings entered into with such Excepted Holder in connection
with the establishment of the Excepted Holder Limit for that Excepted Holder.
No Excepted Holder Limit shall be reduced to a percentage that is less than the
Common Share Ownership Limit.
Section 7.2.8 INCREASE IN AGGREGATE SHARE OWNER-SHIP AND COMMON
SHARE OWNERSHIP LIMITS. The Board of Trustees may from time to time increase
the Common Share Ownership Limit and the Aggregate Share Ownership Limit.
Section 7.2.9 LEGEND. Each certificate for Equity Shares shall
bear substantially the following legend:
The shares represented by this certificate are subject to
restrictions on Beneficial and Constructive Ownership and
Transfer for the purpose of the Trust's maintenance of its status
as a Real Estate Investment Trust (a
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"REIT") under the Internal Revenue Code of 1986, as amended (the
"Code"). Subject to certain further restrictions and except as
expressly provided in the Trust's Declaration of Trust, (i) no Person
may Beneficially or Constructively Own Common Shares of the Trust in
excess of 9.8 percent (in value or number of shares) of the
outstanding Common Shares of the Trust unless such Person is an
Excepted Holder (in which case the Excepted Holder Limit shall be
applicable); (ii) no Person may Beneficially or Constructively Own
Equity Shares of the Trust in excess of 9.8 percent of the value of
the total outstanding Equity Shares of the Trust, unless such Person
is an Excepted Holder (in which case the Excepted Holder Limit shall
be applicable); (iii) no Person may Beneficially or Constructively Own
Equity Shares that would result in the Trust being "closely held"
under Section 856(h) of the Code or otherwise cause the Trust to fail
to qualify as a REIT; and (iv) no Person may Transfer Equity Shares if
such Transfer would result in Equity Shares of the Trust being owned
by fewer than 100 Persons. Any Person who Beneficially or
Constructively Owns or attempts to Beneficially or Constructively Own
Equity Shares which cause or will cause a Person to Beneficially or
Constructively Own Equity Shares in excess or in violation of the
above limitations must immediately notify the Trust. If any of the
restrictions on transfer or ownership are violated, the Equity Shares
represented hereby will be automatically transferred to a Trustee of a
Charitable Trust for the benefit of one or more Charitable
Beneficiaries. In addition, upon the occurrence of certain events,
attempted Transfers in violation of the restrictions described above
may be void AB INITIO. All capitalized terms in this legend have the
meanings defined in the Trust's Declaration of Trust, as the same may
be amended from time to time, a copy of which, including the
restrictions on transfer and ownership, will be furnished to each
holder of Equity Shares of the Trust on request and without charge.
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Instead of the foregoing legend, the certificate may state that
the Trust will furnish a full statement about certain restrictions on
transferability to a shareholder on request and without charge.
Section 7.3 TRANSFER OF EQUITY SHARES IN TRUST.
Section 7.3.1 OWNERSHIP IN TRUST. Upon any purported Transfer
or other event described in Section 7.2.1(b) that would result in a transfer of
Equity Shares to a Charitable Trust, such Equity Shares shall be deemed to have
been transferred to the Trustee as trustee of a Charitable Trust for the
exclusive benefit of one or more Charitable Beneficiaries. Such transfer to the
Trustee shall be deemed to be effective as of the close of business on the
Business Day prior to the purported Transfer or other event that results in the
transfer to the Charitable Trust pursuant to Section 7.2.1(b). The Trustee
shall be appointed by the Trust and shall be a Person unaffiliated with the
Trust and any Prohibited Owner. Each Charitable Beneficiary shall be designated
by the Trust as provided in Section 7.3.6.
Section 7.3.2 STATUS OF SHARES HELD BY THE TRUSTEE. Equity
Shares held by the Trustee shall be issued and outstanding Equity Shares of the
Company. The Prohibited Owner shall have no rights in the shares held by the
Trustee. The Prohibited Owner shall not benefit economically from ownership of
any shares held in trust by the Trustee, shall have no rights to dividends or
other distributions and shall not possess any rights
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to vote or other rights attributable to the shares held in the Charitable Trust.
Section 7.3.3 DIVIDEND AND VOTING RIGHTS. The Trustee shall
have all voting rights and rights to dividends or other distributions with
respect to Equity Shares held in the Charitable Trust, which rights shall be
exercised for the exclusive benefit of the Charitable Beneficiary. Any dividend
or other distribution paid prior to the discovery by the Trust that Equity
Shares have been transferred to the Trustee shall be paid with respect to such
Equity Shares to the Trustee upon demand and any dividend or other distribution
authorized but unpaid shall be paid when due to the Trustee. Any dividends or
distributions so paid over to the Trustee shall be held in trust for the
Charitable Beneficiary. The Prohibited Owner shall have no voting rights with
respect to shares held in the Charitable Trust and, subject to Maryland law,
effective as of the date that Equity Shares have been transferred to the
Trustee, the Trustee shall have the authority (at the Trustee's sole discretion)
(i) to rescind as void any vote cast by a Prohibited Owner prior to the
discovery by the Trust that Equity Shares have been transferred to the Trustee
and (ii) to recast such vote in accordance with the desires of the Trustee
acting for the benefit of the Charitable Beneficiary. Notwithstanding the
provisions of this Article VII, until the Trust has received notification that
Equity Shares have been transferred into a Charitable Trust, the Trust shall be
entitled to rely on its share transfer and other shareholder records for
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purposes of preparing lists of shareholders entitled to vote at meetings,
determining the validity and authority of proxies and otherwise conducting votes
of shareholders.
Section 7.3.4 SALE OF SHARES BY TRUSTEE. Within 20 days of
receiving notice from the Trust that Equity Shares have been transferred to the
Charitable Trust, the Trustee of the Charitable Trust shall sell the shares held
in the Charitable Trust to a person, designated by the Trustee, whose ownership
of the shares will not violate the ownership limitations set forth in
Section 7.2.1(a). Upon such sale, the interest of the Charitable Beneficiary in
the shares sold shall terminate and the Trustee shall distribute the net
proceeds of the sale to the Prohibited Owner and to the Charitable Beneficiary
as provided in this Section 7.3.4. The Prohibited Owner shall receive the
lesser of (1) the price paid by the Prohibited Owner for the shares or, if the
Prohibited Owner did not give value for the shares in connection with the event
causing the shares to be held in the Charitable Trust (E.G., in the case of a
gift, devise or other such transaction), the Market Price of the shares on the
day of the event causing the shares to be held in the Charitable Trust and (2)
the price per share received by the Trustee from the sale or other disposition
of the shares held in the Charitable Trust. Any net sales proceeds in excess of
the amount payable to the Prohibited Owner shall be immediately paid to the
Charitable Beneficiary. If, prior to the discovery by the Trust that Equity
Shares have been transferred to the Trustee, such shares are sold
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by a Prohibited Owner, then (i) such shares shall be deemed to have been sold on
behalf of the Charitable Trust and (ii) to the extent that the Prohibited Owner
received an amount for such shares that exceeds the amount that such Prohibited
Owner was entitled to receive pursuant to this Section 7.3.4, such excess shall
be paid to the Trustee upon demand.
Section 7.3.5 PURCHASE RIGHT IN SHARES TRANSFERRED TO THE
TRUSTEE. Equity Shares transferred to the Trustee shall be deemed to have been
offered for sale to the Trust, or its designee, at a price per share equal to
the lesser of (i) the price per share in the transaction that resulted in such
transfer to the Charitable Trust (or, in the case of a devise or gift, the
Market Price at the time of such devise or gift) and (ii) the Market Price on
the date the Trust, or its designee, accepts such offer. The Trust shall have
the right to accept such offer until the Trustee has sold the shares held in the
Charitable Trust pursuant to Section 7.3.4. Upon such a sale to the Trust, the
interest of the Charitable Beneficiary in the shares sold shall terminate and
the Trustee shall distribute the net proceeds of the sale to the Prohibited
Owner.
Section 7.3.6 DESIGNATION OF CHARITABLE BENEFICIARIES. By
written notice to the Trustee, the Trust shall designate one or more nonprofit
organizations to be the Charitable Beneficiary of the interest in the Charitable
Trust such that (i) Equity Shares held in the Charitable Trust would not violate
the restrictions set forth in Section 7.2.1(a) in the hands of such
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Charitable Beneficiary and (ii) each such organization must be described in
Section 501(c)(3) of the Code and contributions to each such organization must
be eligible for deduction under each of Sections 170(b)(1)(A), 2055 and 2522 of
the Code.
Section 7.4 NYSE TRANSACTIONS. Nothing in this Article VII shall
preclude the settlement of any transaction entered into through the facilities
of the NYSE or any other national securities exchange or automated inter-dealer
quotation system. The fact that the settlement of any transaction is so
permitted shall not negate the effect of any other provision of this Article VII
and any transferee in such a transaction shall be subject to all of the
provisions and limitations set forth in this Article VII.
Section 7.5 ENFORCEMENT. The Trust is authorized specifically to
seek equitable relief, including injunctive relief, to enforce the provisions of
this Article VII.
Section 7.6 NON-WAIVER. No delay or failure on the part of the Trust
or the Board of Trustees in exercising any right hereunder shall operate as a
waiver of any right of the Trust or the Board of Trustees, as the case may be,
except to the extent specifically waived in writing.
ARTICLE VIII
SHAREHOLDERS
Section 8.1 MEETINGS. There shall be an annual meeting of the
shareholders, to be held on proper notice at such time (after the delivery of
the annual report) and convenient
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location as shall be determined by or in the manner prescribed in the Bylaws,
for the election of the Trustees, if required, and for the transaction of any
other business within the powers of the Trust. Except as otherwise provided in
the Declaration of Trust, special meetings of shareholders may be called in the
manner provided in the Bylaws. If there are no Trustees, the officers of the
Trust shall promptly call a special meeting of the shareholders entitled to vote
for the election of successor Trustees. Any meeting may be adjourned and
reconvened as the Trustees determine or as provided in the Bylaws.
Section 8.2 VOTING RIGHTS. Subject to the provisions of any class or
series of Shares then outstanding, the shareholders shall be entitled to vote
only on the following matters: (a) election of Trustees as provided in
Section 5.2 and the removal of Trustees as provided in Section 5.3; (b)
amendment or repeal of the Independent Trustee provision in Section 5.4; (c)
amendment of the Declaration of Trust as provided in Article X; (d) termination
of the Trust as provided in Section 10.3; (e) merger or consolidation of the
Trust, or the sale or disposition of substantially all of the Trust Property, as
provided in Article XI; and (f) such other matters with respect to which the
Board of Trustees has adopted a resolution declaring that a proposed action is
advisable and directing that the matter be submitted to the shareholders for
approval or ratification. Except with respect to the foregoing matters, no
action taken by the shareholders at any meeting shall in any way bind the Board
of Trustees.
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Section 8.3 PREEMPTIVE AND APPRAISAL RIGHTS. Except as may be
provided by the Board of Trustees in setting the terms of classified or
reclassified Shares pursuant to Section 6.4 or as may otherwise be provided by
contract, no holder of Shares shall, as such holder, (a) have any preemptive
right to purchase or subscribe for any additional Shares of the Trust or any
other security of the Trust which it may issue or sell or (b), except as
expressly required by Title 8, have any right to require the Trust to pay him
the fair value of his Shares in an appraisal or similar proceeding.
Section 8.4 EXTRAORDINARY ACTIONS. Except with respect to Sections
5.3 (relating to removal of Trustees), 5.2 (relating to election of Trustees),
5.4 (relating to Independent Trustees), 12.2 (relating to termination of the
Trust), and 10.1 (relating to amendment of the Declaration of Trust),
notwithstanding any provision of law permitting or requiring any action to be
taken or authorized by the affirmative vote of the holders of a greater number
of votes, any such action shall be effective and valid if taken or authorized by
the affirmative vote of holders of Shares entitled to cast a majority of all the
votes entitled to be cast on the matter.
Section 8.5 BOARD APPROVAL. The submission of any action to the
shareholders for their consideration shall first be approved by the Board of
Trustees.
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Section 8.6 ACTION BY SHAREHOLDERS WITHOUT A MEETING. The Bylaws of
the Trust may provide that any action required or permitted to be taken by the
shareholders may be taken without a meeting by the written consent of the
shareholders entitled to cast a sufficient number of votes to approve the matter
as required by statute, the Declaration of Trust or the Bylaws of the Trust, as
the case may be.
ARTICLE IX
LIABILITY LIMITATION, INDEMNIFICATION
AND TRANSACTIONS WITH THE TRUST
Section 9.1 LIMITATION OF SHAREHOLDER LIABILITY. No shareholder
shall be liable for any debt, claim, demand, judgment or obligation of any kind
of, against or with respect to the Trust by reason of his being a shareholder,
nor shall any shareholder be subject to any personal liability whatsoever, in
tort, contract or otherwise, to any person in connection with the property or
the affairs of the Trust by reason of his being a shareholder.
Section 9.2 LIMITATION OF TRUSTEE AND OFFICER LIABILITY. To the
maximum extent that Maryland law in effect from time to time permits limitation
of the liability of trustees and officers of a real estate investment trust, no
Trustee or officer of the Trust shall be liable to the Trust or to any
shareholder for money damages. Neither the amendment nor repeal of this
Section 9.2, nor the adoption or amendment of any other provision of the
Declaration of Trust inconsistent with this Section 9.2, shall apply to or
affect in any respect the applicability of the
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preceding sentence with respect to any act or failure to act which occurred
prior to such amendment, repeal or adoption. In the absence of any Maryland
statute limiting the liability of trustees and officers of a Maryland real
estate investment trust for money damages in a suit by or on behalf of the Trust
or by any shareholder, no Trustee or officer of the Trust shall be liable to the
Trust or to any shareholder for money damages except to the extent that (a) the
Trustee or officer 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 (b) a judgment or other final
adjudication adverse to the Trustee or officer is entered in a proceeding based
on a finding in the proceeding that the Trustee's or officer'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.
Section 9.3 INDEMNIFICATION. The Trust shall have the power, to the
maximum extent permitted by Maryland law in effect from time to time, to
obligate itself to indemnify, and to pay or reimburse reasonable expenses in
advance of final disposition of a proceeding to, (a) any individual who is a
present or former shareholder, Trustee or officer of the Trust or (b) any
individual who, while a Trustee of the Trust and at the request of the Trust,
serves or has served as a director, officer, partner, trustee, employee or agent
of another real estate investment trust, corporation, partnership, joint
venture, trust, employee benefit
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plan or any other enterprise from and against any claim or liability to which
such person may become subject or which such person may incur by reason of his
status as a present or former shareholder, Trustee or officer of the Trust. The
Trust shall have the power, with the approval of its Board of Trustees, to
provide such indemnification and advancement of expenses to a person who served
a predecessor of the Trust in any of the capacities described in (a) or (b)
above and to any employee or agent of the Trust or a predecessor of the Trust.
Section 9.4 TRANSACTIONS BETWEEN THE TRUST AND ITS TRUSTEES,
OFFICERS, EMPLOYEES AND AGENTS. Subject to any express restrictions in the
Declaration of Trust or adopted by the Trustees in the Bylaws or by resolution,
the Trust may enter into any contract or transaction of any kind with any
person, including any Trustee, officer, employee or agent of the Trust or any
person affiliated with a Trustee, officer, employee or agent of the Trust,
whether or not any of them has a financial interest in such transaction.
ARTICLE X
AMENDMENTS
Section 10.1 GENERAL. The Trust reserves the right from time to time
to make any amendment to the Declaration of Trust, now or hereafter authorized
by law, including any amendment altering the terms or contract rights, as
expressly set forth in the Declaration of Trust, of any Shares. All rights and
powers conferred by the Declaration of Trust on shareholders, Trustees
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and officers are granted subject to this reservation. An amendment to the
Declaration of Trust (a) shall be signed and acknowledged by at least a majority
of the Trustees, or an officer duly authorized by at least a majority of the
Trustees, (b) shall be filed for record as provided in Section 13.5 and (c)
shall become effective as of the later of the time the SDAT accepts the
amendment for record or the time established in the amendment, not to exceed 30
days after the amendment is accepted for record. All references to the
Declaration of Trust shall include all amendments thereto.
Section 10.2 BY TRUSTEES. The Trustees may amend the Declaration of
Trust from time to time, in the manner provided by Title 8, without any action
by the shareholders, to qualify as a real estate investment trust under the Code
or under Title 8 and as otherwise provided in the Declaration of Trust.
Section 10.3 BY SHAREHOLDERS. Any amendment to Sections 5.2, 5.3,
5,4, 10.2, 10.3, and 12.2 of the Declaration of Trust shall be valid only if
approved by the affirmative vote of two-thirds of all the votes entitled to be
cast on the matter.
ARTICLE XI
MERGER, CONSOLIDATION OR SALE OF TRUST PROPERTY
Subject to the provisions of any class or series of Shares at the time
outstanding, the Trust may (a) merge the Trust into another entity, (b)
consolidate the Trust with one or more other entities into a new entity or (c)
sell, lease, exchange or otherwise transfer all or substantially all of the
Trust Property.
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ARTICLE XII
DURATION AND TERMINATION OF TRUST
Section 12.1 DURATION. The Trust shall continue perpetually unless
terminated pursuant to Section 12.2 or pursuant to any applicable provision of
Title 8.
Section 12.2 TERMINATION.
(a) Subject to the provisions of any class or series of Shares
at the time outstanding, the Trust may be terminated at any meeting of
shareholders, by the affirmative vote of two-thirds of all the votes entitled to
be cast on the matter. Upon the termination of the Trust:
(i) The Trust shall carry on no business except for the
purpose of winding up its affairs.
(ii) The Trustees shall proceed to wind up the affairs of
the Trust and all of the powers of the Trustees under the Declaration of Trust
shall continue, including the powers to fulfill or discharge the Trust's
contracts, collect its assets, sell, convey, assign, exchange, transfer or
otherwise dispose of all or any part of the remaining property of the Trust to
one or more persons at public or private sale for consideration which may
consist in whole or in part of cash, securities or other property of any kind,
discharge or pay its liabilities and do all other acts appropriate to liquidate
its business.
(iii) After paying or adequately providing for the payment
of all liabilities, and upon receipt of such releases, indemnities and
agreements as they deem necessary
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for their protection, the Trust may distribute the remaining property of the
Trust among the shareholders so that after payment in full or the setting apart
for payment of such preferential amounts, if any, to which the holders of any
Shares at the time outstanding shall be entitled, the remaining property of the
Trust shall, subject to any participating or similar rights of Shares at the
time outstanding, be distributed ratably among the holders of Common Shares at
the time outstanding.
(b) After termination of the Trust, the liquidation of its
business and the distribution to the shareholders as herein provided, a majority
of the Trustees shall execute and file with the Trust's records a document
certifying that the Trust has been duly terminated, and the Trustees shall be
discharged from all liabilities and duties hereunder, and the rights and
interests of all shareholders shall cease.
ARTICLE XIII
MISCELLANEOUS
Section 13.1 GOVERNING LAW. The Declaration of Trust is executed by
the undersigned Trustees and delivered in the State of Maryland with reference
to the laws thereof, and the rights of all parties and the validity,
construction and effect of every provision hereof shall be subject to and
construed according to the laws of the State of Maryland without regard to
conflicts of laws provisions thereof.
Section 13.2 RELIANCE BY THIRD PARTIES. Any certificate shall be
final and conclusive as to any person dealing
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with the Trust if executed by the Secretary or an Assistant Secretary of the
Trust or a Trustee, and if certifying to: (a) the number or identity of
Trustees, officers of the Trust or shareholders; (b) the due authorization of
the execution of any document; (c) the action or vote taken, and the existence
of a quorum, at a meeting of the Board of Trustees or shareholders; (d) a copy
of the Declaration of Trust or of the Bylaws as a true and complete copy as then
in force; (e) an amendment to the Declaration of Trust; (f) the termination of
the Trust; or (g) the existence of any fact relating to the affairs of the
Trust. No purchaser, lender, transfer agent or other person shall be bound to
make any inquiry concerning the validity of any transaction purporting to be
made by the Trust on its behalf or by any officer, employee or agent of the
Trust.
Section 13.3 SEVERABILITY.
(a) The provisions of the Declaration of Trust are severable,
and if the Board of Trustees shall determine, with the advice of counsel, that
any one or more of such provisions (the "Conflicting Provisions") are in
conflict with the Code, Title 8 or other applicable federal or state laws, the
Conflicting Provisions, to the extent of the conflict, shall be deemed never to
have constituted a part of the Declaration of Trust, even without any amendment
of the Declaration of Trust pursuant to Article X and without affecting or
impairing any of the remaining provisions of the Declaration of Trust or
rendering invalid or improper any action taken or omitted prior to such
determination.
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No Trustee shall be liable for making or failing to make such a determination.
In the event of any such determination by the Board of Trustees, the Board shall
amend the Declaration of Trust in the manner provided in Section 10.2.
(b) If any provision of the Declaration of Trust shall be held
invalid or unenforceable in any jurisdiction, such holding shall apply only to
the extent of any such invalidity or unenforceability and shall not in any
manner affect, impair or render invalid or unenforceable such provision in any
other jurisdiction or any other provision of the Declaration of Trust in any
jurisdiction.
Section 13.4 CONSTRUCTION. In the Declaration of Trust, unless the
context otherwise requires, words used in the singular or in the plural include
both the plural and singular and words denoting any gender include all genders.
The title and headings of different parts are inserted for convenience and shall
not affect the meaning, construction or effect of the Declaration of Trust. In
defining or interpreting the powers and duties of the Trust and its Trustees and
officers, reference may be made by the Trustees or officers, to the extent
appropriate and not inconsistent with the Code or Title 8, to Titles 1 through 3
of the Corporations and Associations Article of the Annotated Code of Maryland.
In furtherance and not in limitation of the foregoing, in accordance with the
provisions of Title 3, Subtitles 6 and 7, of the Corporations and Associations
Article of the Annotated Code of Maryland, the Trust shall be included within
the definition of
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"corporation" for purposes of such provisions.
Section 13.5 RECORDATION. The Declaration of Trust and any amendment
hereto shall be filed for record with the SDAT and may also be filed or recorded
in such other places as the Trustees deem appropriate, but failure to file for
record the Declaration of Trust or any amendment hereto in any office other than
in the State of Maryland shall not affect or impair the validity or
effectiveness of the Declaration of Trust or any amendment hereto. A restated
Declaration of Trust shall, upon filing, be conclusive evidence of all
amendments contained therein and may thereafter be referred to in lieu of the
original Declaration of Trust and the various amendments thereto.
IN WITNESS WHEREOF, this Amended and Restated Declaration of Trust has
been signed on this ______ day of ____________, 1997
by the undersigned President of the Trust and witnessed by the undersigned
Secretary of the Trust, each of whom acknowledges, that this document is his
free act and deed, and that to the best of his knowledge, information, and
belief, the matters and facts set forth herein are true in all material respects
and that the statement is made under the penalties for perjury.
ATTEST: AEGIS INVESTMENT TRUST
--------------
By:
- ------------------------- --------------------------
Secretary Managing Director
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AEGIS INVESTMENT TRUST
BYLAWS
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICE. The principal office of the Trust shall be
located at such place or places as the Trustees may designate.
Section 2. ADDITIONAL OFFICES. The Trust may have additional offices at
such places as the Board of Trustees may from time to time determine or the
business of the Trust may require.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. PLACE. All meetings of shareholders shall be held at the
principal office of the Trust or at such other place within the United States as
shall be stated in the notice of the meeting.
Section 2. ANNUAL MEETING. An annual meeting of the shareholders for the
election of Trustees and the transaction of any business within the powers of
the Trust shall be held during the month of May of each year, after the delivery
of the annual report, referred to in Section 12 of this Article II, at a
convenient location and on proper notice, on a date and at the time set by the
Trustees, beginning with the year 1998. Failure to hold an annual meeting does
not invalidate the Trust's existence or affect any otherwise valid acts of the
Trust.
Section 3. SPECIAL MEETINGS. The chairman of the board or the president
or one-third of the Trustees may call special meetings of the shareholders.
Special meetings of shareholders shall also be called by the secretary upon the
written request of the holders of shares entitled to cast not less than a
majority of all the votes entitled to be cast at such meeting. Such request
shall state the purpose of such meeting and the matters proposed to be acted on
at such meeting. The secretary shall inform such shareholders of the reasonably
estimated cost of preparing and mailing notice of the meeting and, upon payment
by such shareholders to the Trust of such costs, the secretary shall give notice
to each shareholder entitled to notice of the meeting. Unless requested by
shareholders entitled to cast a majority of all the votes entitled to be cast at
such meeting, a special meeting
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need not be called to consider any matter which is substantially the same as a
matter voted on at any meeting of the shareholders held during the preceding
twelve months.
Section 4. NOTICE. Not less than ten nor more than 90 days before each
meeting of shareholders, the secretary shall give to each shareholder entitled
to vote at such meeting and to each shareholder not entitled to vote who is
entitled to notice of the meeting written or printed notice stating the time and
place of the meeting and, in the case of a special meeting or as otherwise may
be required by any statute, the purpose for which the meeting is called, either
by mail or by presenting it to such shareholder personally or by leaving it at
his residence or usual place of business. If mailed, such notice shall be
deemed to be given when deposited in the United States mail addressed to the
shareholder at his post office address as it appears on the records of the
Trust, with postage thereon prepaid.
Section 5. SCOPE OF NOTICE. Any business of the Trust may be transacted
at an annual meeting of shareholders without being specifically designated in
the notice, except such business as is required by any statute to be stated in
such notice. No business shall be transacted at a special meeting of
shareholders except as specifically designated in the notice.
Section 6. ORGANIZATION. At every meeting of the shareholders, 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 shareholders
entitled to cast a majority of the votes which all shareholders present in
person or by proxy are entitled to cast, shall act as Chairman, and the
Secretary, or, in his absence, an assistant secretary, or in the absence of both
the Secretary and assistant secretaries, a person appointed by the Chairman
shall act as Secretary.
Section 7. QUORUM. At any meeting of shareholders, the presence in person
or by proxy of shareholders entitled to cast a majority of all the votes
entitled to be cast at such meeting shall constitute a quorum; but this section
shall not affect any requirement under any statute or the Declaration of Trust
for the vote necessary for the adoption of any measure. If, however, such
quorum shall not be present at any meeting of the shareholders, the shareholders
entitled to vote at such meeting, present in person or by proxy, shall have the
power to adjourn the meeting from time to time to a date not more than 120 days
after the original record date without notice other than announcement at the
meeting. At such adjourned meeting at which a quorum shall be present, any
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business may be transacted which might have been transacted at the meeting as
originally notified.
Section 8. VOTING. A plurality of all the votes cast at a meeting of
shareholders duly called and at which a quorum is present shall be sufficient to
elect a Trustee. Each share may be voted for as many individuals as there are
Trustees to be elected and for whose election the share is entitled to be voted.
A majority of the votes cast at a meeting of shareholders duly called and at
which a quorum is present shall be sufficient to approve any other matter which
may properly come before the meeting, unless more than a majority of the votes
cast is required herein or by statute or by the Declaration of Trust. Unless
otherwise provided in the Declaration of Trust, each outstanding share,
regardless of class, shall be entitled to one vote on each matter submitted to a
vote at a meeting of shareholders.
Section 9. PROXIES. A shareholder may cast the votes entitled to be cast
by the shares owned of record by him either in person or by proxy executed in
writing by the shareholder or by his duly authorized agent. Such proxy shall be
filed with the secretary of the Trust before or at the time of the meeting. No
proxy shall be valid after eleven months from the date of its execution, unless
otherwise provided in the proxy.
Section 10. VOTING OF SHARES BY CERTAIN HOLDERS. Shares of the Trust
registered in the name of a corporation, partnership, trust or other entity, if
entitled to be voted, may be voted by the president or a vice president, a
general partner or trustee thereof, as the case may be, or a proxy appointed by
any of the foregoing individuals, unless some other person who has been
appointed to vote such shares pursuant to a bylaw or a resolution of the
governing board of such corporation or other entity or agreement of the partners
of the partnership presents a certified copy of such bylaw, resolution or
agreement, in which case such person may vote such shares. Any trustee or other
fiduciary may vote shares registered in his name as such fiduciary, either in
person or by proxy.
Shares of the Trust directly or indirectly owned by it shall not be voted
at any meeting and shall not be counted in determining the total number of
outstanding shares entitled to be voted at any given time, unless they are held
by it in a fiduciary capacity, in which case they may be voted and shall be
counted in determining the total number of outstanding shares at any given time.
The Trustees may adopt by resolution a procedure by which a shareholder may
certify in writing to the Trust that any shares registered in the name of the
shareholder are held for the account
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of a specified person other than the shareholder. The resolution shall set
forth the class of shareholders who may make the certification, the purpose for
which the certification may be made, the form of certification and the
information to be contained in it; if the certification is with respect to a
record date or closing of the share transfer books, the time after the record
date or closing of the share transfer books within which the certification must
be received by the Trust; and any other provisions with respect to the procedure
which the Trustees consider necessary or desirable. On receipt of such
certification, the person specified in the certification shall be regarded as,
for the purposes set forth in the certification, the shareholder of record of
the specified shares in place of the shareholder who makes the certification.
Notwithstanding any other provision contained herein or in the Declaration
of Trust or these Bylaws, Title 3, Subtitle 7 of the Corporations and
Associations Article of the Annotated Code of Maryland (or any successor
statute) shall not apply to any acquisition by any person of shares of
beneficial interest of the Trust. This section may be repealed, in whole or in
part, at any time, whether before or after an acquisition of control shares and,
upon such repeal, may, to the extent provided by any successor bylaw, apply to
any prior or subsequent control share acquisition with the approval of a
majority of the Company's shareholders entitled to vote on such matter.
Section 11. INSPECTORS. At any meeting of shareholders, the chairman of
the meeting may appoint one or more persons as inspectors for such meeting.
Such inspectors shall ascertain and report the number of shares represented at
the meeting based upon their determination of the validity and effect of
proxies, count all votes, report the results and perform such other acts as are
proper to conduct the election and voting with impartiality and fairness to all
the shareholders.
Each report of an inspector shall be in writing and signed by him or by a
majority of them if there is more than one inspector acting at such meeting. If
there is more than one inspector, the report of a majority shall be the report
of the inspectors. The report of the inspector or inspectors on the number of
shares represented at the meeting and the results of the voting shall be PRIMA
FACIE evidence thereof.
Section 12. REPORTS TO SHAREHOLDERS.
The Trustees shall submit to the shareholders at or before the annual
meeting of shareholders a report of the business and operations of the Trust
during such fiscal year, containing a balance sheet and a statement of income
and surplus of the Trust,
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accompanied by the certification of an independent certified public accountant,
and such further information as the Trustees may determine is required pursuant
to any law or regulation to which the Trust is subject. Within the earlier of
20 days after the annual meeting of shareholders or 120 days after the end of
the fiscal year of the Trust, the Trustees shall place the annual report on file
at the principal office of the Trust and with any governmental agencies as may
be required by law and as the Trustees may deem appropriate.
Section 13. NOMINATIONS AND PROPOSALS BY SHAREHOLDERS.
(a) ANNUAL MEETINGS OF SHAREHOLDERS. (1) Nominations of persons for
election to the Board of Trustees and the proposal of business to be considered
by the shareholders may be made at an annual meeting of shareholders (i)
pursuant to the Trust's notice of meeting, (ii) by or at the direction of the
Trustees or (iii) by any shareholder of the Trust who was a shareholder of
record both at the time of giving of notice provided for in this Section 13(a)
and at the time of the annual meeting, who is entitled to vote at the meeting
and who complied with the notice procedures set forth in this Section 13(a).
(2) For nominations or other business to be properly brought
before an annual meeting by a shareholder pursuant to clause (iii) of paragraph
(a) (1) of this Section 13, the shareholder must have given timely notice
thereof in writing to the secretary of the Trust and such other business must
otherwise be a proper matter for action by shareholders. To be timely, a
shareholder's notice shall be delivered to the secretary at the principal
executive offices of the Trust not later than the close of business on the 60th
day nor earlier than the close of business on the 90th day prior to the first
anniversary of the preceding year's annual meeting; provided, however, that in
the event that the date of the annual meeting is advanced by more than 30 days
or delayed by more than 60 days from such anniversary date or if the Trust has
not previously held an annual meeting, notice by the shareholder to be timely
must be so delivered not earlier than the close of business on the 90th day
prior to such annual meeting and not later than the close of business on the
later of the 60th day prior to such annual meeting or the tenth day following
the day on which public announcement of the date of such meeting is first made
by the Trust. In no event shall the public announcement of a postponement or
adjournment of an annual meeting to a later date or time commence a new time
period for the giving of a shareholder's notice as described above. Such
shareholder's notice shall set forth (i) as to each person whom the shareholder
proposes to nominate for election or reelection as a Trustee all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of Trustees in an election contest, or is otherwise
required, in each case pursuant to
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Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") (including such person's written consent to being named in the
proxy statement as a nominee and to serving as a Trustee if elected); (ii) as to
any other business that the shareholder proposes to bring before the meeting, a
brief description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and any material interest in
such business of such shareholder and of the beneficial owner, if any, on whose
behalf the proposal is made; and (iii) as to the shareholder giving the notice
and the beneficial owner, if any, on whose behalf the nomination or proposal is
made, (x) the name and address of such shareholder, as they appear on the
Trust's books, and of such beneficial owner and (y) the number of each class of
shares of the Trust which are owned beneficially and of record by such
shareholder and such beneficial owner.
(3) Notwithstanding anything in the second sentence of paragraph
(a) (2) of this Section 13 to the contrary, in the event that the number of
Trustees to be elected to the Board of Trustees is increased and there is no
public announcement by the Trust naming all of the nominees for Trustee or
specifying the size of the increased Board of Trustees at least 70 days prior to
the first anniversary of the preceding year's annual meeting, a shareholder's
notice required by this Section 13(a) shall also be considered timely, but only
with respect to nominees for any new positions created by such increase, if it
shall be delivered to the secretary at the principal executive offices of the
Trust not later than the close of business on the tenth day following the day on
which such public announcement is first made by the Trust.
(b) SPECIAL MEETINGS OF SHAREHOLDERS. Only such business shall be
conducted at a special meeting of shareholders as shall have been brought before
the meeting pursuant to the Trust's notice of meeting. Nominations of persons
for election to the Board of Trustees may be made at a special meeting of
shareholders at which Trustees are to be elected (i) pursuant to the Trust's
notice of meeting (ii) by or at the direction of the Board of Trustees or (iii)
provided that the Board of Trustees has determined that Trustees shall be
elected at such special meeting, by any shareholder of the Trust who was a
shareholder of record both at the time of giving of notice provided for in this
Section 13(b) and at the time of the special meeting, who is entitled to vote at
the meeting and who complied with the notice procedures set forth in this
Section 13(b). In the event the Trust calls a special meeting of shareholders
for the purpose of electing one or more Trustees to the Board of Trustees, any
such shareholder may nominate a person or persons (as the case may be) for
election to such position as specified in the Trust's notice of meeting, if the
shareholder's notice containing the information required by paragraph (a) (2) of
this Section 13 shall be delivered to the
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secretary at the principal executive offices of the Trust not earlier than the
close of business on the 90th day prior to such special meeting and not later
than the close of business on the later of the 60th day prior to such special
meeting or the tenth day following the day on which public announcement is first
made of the date of the special meeting and of the nominees proposed by the
Trustees to be elected at such meeting. In no event shall the public
announcement of a postponement or adjournment of a special meeting to a later
date or time commence a new time period for the giving of a shareholder's notice
as described above.
(c) GENERAL. (1) Only such persons who are nominated in accordance
with the procedures set forth in this Section 13 shall be eligible to serve as
Trustees and only such business shall be conducted at a meeting of shareholders
as shall have been brought before the meeting in accordance with the procedures
set forth in this Section 13. The chairman of the meeting shall have the power
and duty to determine whether a nomination or any business proposed to be
brought before the meeting was made or proposed, as the case may be, in
accordance with the procedures set forth in this Section 13 and, if any proposed
nomination or business is not in compliance with this Section 13, to declare
that such nomination or proposal shall be disregarded.
(2) For purposes of this Section 13, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable news service or in a document publicly filed by
the Trust with the Securities and Exchange Commission pursuant to Section 13, 14
or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Section 13,
a shareholder shall also comply with all applicable requirements of state law
and of the Exchange Act and the rules and regulations thereunder with respect to
the matters set forth in this Section 13. Nothing in this Section 13 shall be
deemed to affect any rights of shareholders to request inclusion of proposals
in, nor the right of the Trust to omit a proposal from, the Trust's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.
Section 14. INFORMAL ACTION BY SHAREHOLDERS. Any action required or
permitted to be taken at a meeting of shareholders may be taken without a
meeting if a consent in writing, setting forth such action, is signed by
shareholders entitled to cast a sufficient number of votes to approve the
matter, as required by statute, the Declaration of Trust of the Trust or these
Bylaws, and such consent is filed with the minutes of proceedings of the
shareholders.
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Section 15. VOTING BY BALLOT. Voting on any question or in any election
may be VIVA VOCE unless the presiding officer shall order or any shareholder
shall demand that voting be by ballot.
ARTICLE III
TRUSTEES
Section 1. GENERAL POWERS; QUALIFICATIONS; TRUSTEES HOLDING OVER. The
business and affairs of the Trust shall be managed under the direction of its
Board of Trustees. A Trustee shall be an individual at least 21 years of age
who is not under legal disability. In case of failure to elect Trustees at an
annual meeting of the shareholders, the Trustees holding over shall continue to
direct the management of the business and affairs of the Trust until their
successors are elected and qualify.
Section 2. NUMBER. The number of Trustees of the Trust shall not be less
than three (3) or more than nine (9). At any regular meeting or at any special
meeting called for that purpose, at least 80% of the entire Board of Trustees
may establish, increase or decrease the number of Trustees, provided, that the
number of Trustees may not be fewer than the number required by Maryland law and
further provided that the tenure of office of a Trustee shall not be affected by
any decrease in the number of Trustees. Trustees need not be shareholders of
the Trust.
Section 3. ANNUAL AND REGULAR MEETINGS. An annual meeting of the Trustees
shall be held immediately after and at the same place as the annual meeting of
shareholders, no notice other than this Bylaw being necessary. The Trustees may
provide, by resolution, the time and place, either within or without the State
of Maryland, for the holding of regular meetings of the Trustees without other
notice than such resolution.
Section 4. SPECIAL MEETINGS. Special meetings of the Trustees may be
called by or at the request of the chairman of the board or the president or by
a majority of the Trustees then in office. The person or persons authorized to
call special meetings of the Trustees may fix any place, either within or
without the State of Maryland, as the place for holding any special meeting of
the Trustees called by them.
Section 5. NOTICE. Notice of any special meeting shall be given by
written notice delivered personally, telegraphed, facsimile-transmitted or
mailed to each Trustee at his business or residence address. Personally
delivered or telegraphed notices shall be given at least two days prior to the
meeting. Notice by mail shall be given at least five days prior to the meeting.
Telephone or facsimile-transmission notice shall be given at least
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24 hours prior to the meeting. If mailed, such notice shall be deemed to be
given when deposited in the United States mail properly addressed, with postage
thereon prepaid. If given by telegram, such notice shall be deemed to be given
when the telegram is delivered to the telegraph company. Telephone notice
shall be deemed given when the Trustee is personally given such notice in a
telephone call to which he is a party. Facsimile-transmission notice shall be
deemed given upon completion of the transmission of the message to the number
given to the Trust by the Trustee and receipt of a completed answer-back
indicating receipt. Neither the business to be transacted at, nor the purpose
of, any annual, regular or special meeting of the Trustees need be stated in the
notice, unless specifically required by statute or these Bylaws.
Section 6. QUORUM. A majority of the Trustees shall constitute a quorum
for transaction of business at any meeting of the Trustees, provided that, if
less than a majority of such Trustees are present at said meeting, a majority of
the Trustees present may adjourn the meeting from time to time without further
notice, and provided further that if, pursuant to the Declaration of Trust or
these Bylaws, the vote of a majority of a particular group of Trustees is
required for action, a quorum must also include a majority of such group.
The Trustees present at a meeting which has been duly called and convened
may continue to transact business until adjournment, notwithstanding the
withdrawal of enough Trustees to leave less than a quorum.
Section 7. VOTING. The action of the majority of the Trustees present at
a meeting at which a quorum is present shall be the action of the Trustees,
unless the concurrence of a greater proportion is required for such action by
applicable statute.
Section 8. TELEPHONE MEETINGS. Trustees 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 these means shall constitute presence in person at
the meeting.
Section 9. INFORMAL ACTION BY TRUSTEES. Any action required or permitted
to be taken at any meeting of the Trustees may be taken without a meeting, if a
consent in writing to such action is signed by each Trustee and such written
consent is filed with the minutes of proceedings of the Trustees.
Section 10. VACANCIES. If for any reason any or all the Trustees cease to
be Trustees, such event shall not terminate the Trust or affect these Bylaws or
the powers of the remaining Trustees hereunder (even if fewer than two Trustees
remain). Any
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vacancy (including a vacancy created by an increase in the number of Trustees)
shall be filled, at any regular meeting or at any special meeting called for
that purpose, by a majority of the Trustees. Any individual so elected as
Trustee shall hold office for the unexpired term of the Trustee he is replacing.
Section 11. COMPENSATION; FINANCIAL ASSISTANCE.
(a) COMPENSATION. Trustees shall not receive any stated salary for their
services as Trustees but, by resolution of the Trustees, may receive
compensation per year and/or per meeting and/or per visit to real property owned
or to be acquired by the Trust and for any service or activity they performed or
engaged in as Trustees. Trustees may be reimbursed for expenses of attendance,
if any, at each annual, regular or special meeting of the Trustees or of any
committee thereof; and for their expenses, if any, in connection with each
property visit and any other service or activity performed or engaged in as
Trustees; but nothing herein contained shall be construed to preclude any
Trustees from serving the Trust in any other capacity and receiving compensation
therefor.
(b) FINANCIAL ASSISTANCE TO TRUSTEES. The Trust may lend money to,
guarantee an obligation of or otherwise assist a Trustee or a trustee of its
direct or indirect subsidiary. The loan, guarantee or other assistance may be
with or without interest, unsecured, or secured in any manner that the Board of
Trustees approves, including a pledge of Shares.
Section 12. REMOVAL OF TRUSTEES. The shareholders may, at any time,
remove any Trustee in the manner provided in the Declaration of Trust.
Section 13. LOSS OF DEPOSITS. No Trustee shall be liable for any loss
which may occur by reason of the failure of the bank, trust company, savings and
loan association, or other institution with whom moneys or shares have been
deposited.
Section 14. SURETY BONDS. Unless required by law, no Trustee shall be
obligated to give any bond or surety or other security for the performance of
any of his duties.
Section 15. RELIANCE. Each Trustee, officer, employee and agent of the
Trust shall, in the performance of his duties with respect to the Trust, be
fully justified and protected with regard to any act or failure to act in
reliance in good faith upon the books of account or other records of the Trust,
upon an opinion of counsel or upon reports made to the Trust by any of its
officers or employees or by the adviser, accountants, appraisers or other
experts or consultants selected by the Trustees or officers of the
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Trust, regardless of whether such counsel or expert may also be a Trustee.
Section 16. INTERESTED TRUSTEE TRANSACTIONS. Section 2-419 of the
Maryland General Corporation Law (the "MGCL") shall be available for and apply
to any contract or other transaction between the Trust and any of its Trustees
or between the Trust and any other trust, corporation, firm or other entity in
which any of its Trustees is a trustee or director or has a material financial
interest.
Section 17. CERTAIN RIGHTS OF TRUSTEES, OFFICERS, EMPLOYEES AND
AGENTS. The Trustees shall have no responsibility to devote their full time to
the affairs of the Trust. Any Trustee or officer, employee or agent of the
Trust (other than a full-time officer, employee or agent of the Trust), in his
personal capacity or in a capacity as an affiliate, employee, or agent of any
other person, or otherwise, may have business interests and engage in business
activities similar or in addition to those of or relating to the Trust.
ARTICLE IV
COMMITTEES
Section 1. NUMBER, TENURE AND QUALIFICATIONS. The Trustees may appoint
from among its members a Compensation Committee, an Audit Committee and other
committees, composed of two or more Independent Trustees, to serve at the
pleasure of the Trustees.
Section 2. POWERS. The Trustees may delegate to committees appointed
under Section 1 of this Article any of the powers of the Trustees, except as
prohibited by law.
Section 3. MEETINGS. In the absence of any member of any such committee,
the members thereof present at any meeting, whether or not they constitute a
quorum, may appoint another Trustee to act in the place of such absent member.
Notice of committee meetings shall be given in the same manner as notice for
special meetings of the Board of Trustees.
One-third, but not less than two, 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 Trustees 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 shall
otherwise provide. In the absence or
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disqualification of any member of any such committee, the members thereof
present at any meeting and not disqualified from voting, whether or not they
constitute a quorum, may unanimously appoint another Trustee to act at the
meeting in the place of such absent or disqualified members.
Each committee shall keep minutes of its proceedings and shall report the
same to the Board of Trustees at the next succeeding meeting, and any action by
the committee shall be subject to revision and alteration by the Board of
Trustees, provided that no rights of third persons shall be affected by any such
revision or alteration.
Section 4. TELEPHONE MEETINGS. Members of a committee of the Trustees 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 these means shall
constitute presence in person at the meeting.
Section 5. INFORMAL ACTION BY COMMITTEES. Any action required or
permitted to be taken at any meeting of a committee of the Trustees may be taken
without a meeting, if a consent in writing to such action is signed by each
member of the committee and such written consent is filed with the minutes of
proceedings of such committee.
Section 6. VACANCIES. Subject to the provisions hereof, the Board of
Trustees shall have the power at any time to change the membership of any
committee, to fill all vacancies, to designate alternate members to replace any
absent or disqualified member or to dissolve any such committee.
ARTICLE V
OFFICERS
Section 1. GENERAL PROVISIONS. The officers of the Trust shall include a
president, a secretary and a treasurer and may include a chairman of the board,
a vice chairman of the board, a chief executive officer, a chief operating
officer, a chief financial officer, one or more vice presidents, one or more
assistant secretaries and one or more assistant treasurers. In addition, the
Trustees may from time to time appoint such other officers with such powers and
duties as they shall deem necessary or desirable. The officers of the Trust
shall be elected annually by the Trustees at the first meeting of the Trustees
held after each annual meeting of shareholders. If the election of officers
shall not be held at such meeting, such election shall be held as soon
thereafter as may be convenient. Each officer shall hold
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office until his successor is elected and qualifies or until his death,
resignation or removal in the manner hereinafter provided. Any two or more
offices except president and vice president may be held by the same person. In
their discretion, the Trustees may leave unfilled any office except that of
president and secretary. Election of an officer or agent shall not of itself
create contract rights between the Trust and such officer or agent.
Section 2. REMOVAL AND RESIGNATION. Any officer or agent of the Trust may
be removed by the Trustees if in their judgment the best interests of the Trust
would be served thereby, but such removal shall be without prejudice to the
contract rights, if any, of the person so removed. Any officer of the Trust may
resign at any time by giving written notice of his resignation to the Trustees,
the chairman of the board, the president or the secretary. Any resignation
shall take effect at any time subsequent to the time specified therein or, if
the time when it shall become effective is not specified therein, immediately
upon its receipt. The acceptance of a resignation shall not be necessary to
make it effective unless otherwise stated in the resignation. Such resignation
shall be without prejudice to the contract rights, if any, of the Trust.
Section 3. VACANCIES. A vacancy in any office may be filled by the
Trustees for the balance of the term.
Section 4. CHIEF EXECUTIVE OFFICER. The Trustees may designate a chief
executive officer from among the elected officers. The chief executive officer
shall have responsibility for implementation of the policies of the Trust, as
determined by the Trustees, and for the administration of the business affairs
of the Trust. In the absence of both the chairman and vice chairman of the
board, the chief executive officer shall preside over the meetings of the
Trustees and of the shareholders at which he shall be present.
Section 5. CHIEF OPERATING OFFICER. The Trustees may designate a chief
operating officer from among the elected officers. Said officer will have the
responsibilities and duties as set forth by the Trustees or the chief executive
officer.
Section 6. CHIEF FINANCIAL OFFICER. The Trustees may designate a chief
financial officer from among the elected officers. Said officer will have the
responsibilities and duties as set forth by the Trustees or the chief executive
officer.
Section 7. CHAIRMAN AND VICE CHAIRMAN OF THE BOARD. The chairman of the
board shall preside over the meetings of the Trustees and of the shareholders at
which he shall be present and shall in general oversee all of the business and
affairs of the Trust. In the absence of the chairman of the board, the vice
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chairman of the board shall preside at such meetings at which he shall be
present. The chairman and the vice chairman of the board may execute any deed,
mortgage, bond, contract or other instrument, except in cases where the
execution thereof shall be expressly delegated by the Trustees or by these
Bylaws to some other officer or agent of the Trust or shall be required by law
to be otherwise executed. The chairman of the board and the vice chairman of
the board shall perform such other duties as may be assigned to him or them by
the Trustees.
Section 8. PRESIDENT. In the absence of the chairman, the vice chairman
of the board and the chief executive officer, the president shall preside over
the meetings of the Trustees and of the shareholders at which he shall be
present. In the absence of a designation of a chief executive officer by the
Trustees, the president shall be the chief executive officer and shall be ex
officio a member of all committees that may, from time to time, be constituted
by the Trustees. The president may execute any deed, mortgage, bond, contract
or other instrument, except in cases where the execution thereof shall be
expressly delegated by the Trustees or by these Bylaws to some other officer or
agent of the Trust or shall be required by law to be otherwise executed; and in
general shall perform all duties incident to the office of president and such
other duties as may be prescribed by the Trustees from time to time.
Section 9. VICE PRESIDENTS. In the absence of the president or in the
event of a vacancy in such office, the vice president (or in the event there be
more than one vice president, the vice presidents in the order designated at the
time of their election or, in the absence of any designation, then in the order
of their election) shall perform the duties of the president and when so acting
shall have all the powers of and be subject to all the restrictions upon the
president; and shall perform such other duties as from time to time may be
assigned to him by the president or by the Trustees. The Trustees may designate
one or more vice presidents as executive vice president or as vice president for
particular areas of responsibility.
Section 10. SECRETARY. The secretary shall (a) keep the minutes of the
proceedings of the shareholders, the Trustees and committees of the Trustees in
one or more books provided for that purpose; (b) see that all notices are duly
given in accordance with the provisions of these Bylaws or as required by law;
(c) be custodian of the trust records and of the seal of the Trust; (d) keep a
register of the post office address of each shareholder which shall be furnished
to the secretary by such shareholder; (e) have general charge of the share
transfer books of the Trust; and (f) in general perform such other duties as
from time to time may be assigned to him by the chief executive officer, the
president or by the Trustees.
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Section 11. TREASURER. The treasurer shall have the custody of the funds
and securities of the Trust and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Trust and shall deposit all
moneys and other valuable effects in the name and to the credit of the Trust in
such depositories as may be designated by the Trustees.
He shall disburse the funds of the Trust as may be ordered by the Trustees,
taking proper vouchers for such disbursements, and shall render to the president
and Trustees, at the regular meetings of the Trustees or whenever they may
require it, an account of all his transactions as treasurer and of the financial
condition of the Trust.
If required by the Trustees, he shall give the Trust a bond in such sum and
with such surety or sureties as shall be satisfactory to the Trustees for the
faithful performance of the duties of his office and for the restoration to the
Trust, in case of his death, resignation, retirement or removal from office, of
all books, papers, vouchers, moneys and other property of whatever kind in his
possession or under his control belonging to the Trust.
Section 12. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The assistant
secretaries and assistant treasurers, in general, shall perform such duties as
shall be assigned to them by the secretary or treasurer, respectively, or by the
president or the Trustees. The assistant treasurers shall, if required by the
Trustees, give bonds for the faithful performance of their duties in such sums
and with such surety or sureties as shall be satisfactory to the Trustees.
Section 13. SALARIES. The salaries and other compensation of the officers
shall be fixed from time to time by the Trustees and no officer shall be
prevented from receiving such salary or other compensation by reason of the fact
that he is also a Trustee.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. CONTRACTS. The Trustees may authorize any officer or agent to
enter into any contract or to execute and deliver any instrument in the name of
and on behalf of the Trust and such authority may be general or confined to
specific instances. Any agreement, deed, mortgage, lease or other document
executed by one or more of the Trustees or by an authorized person shall be
valid and binding upon the Trustees and upon the Trust when authorized or
ratified by action of the Trustees.
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Section 2. CHECKS AND DRAFTS. All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name of
the Trust shall be signed by such officer or agent of the Trust in such manner
as shall from time to time be determined by the Trustees.
Section 3. DEPOSITS. All funds of the Trust not otherwise employed shall
be deposited from time to time to the credit of the Trust in such banks, trust
companies or other depositories as the Trustees may designate.
ARTICLE VII
SHARES
Section 1. CERTIFICATES. Each shareholder shall be entitled to a
certificate or certificates which shall represent and certify the number of
shares of each class of beneficial interests held by him in the Trust. Each
certificate shall be signed by the chief executive officer, the president or a
vice president and countersigned by the secretary or an assistant secretary or
the treasurer or an assistant treasurer and may be sealed with the seal, if any,
of the Trust. The signatures may be either manual or facsimile. Certificates
shall be consecutively numbered; and if the Trust shall, from time to time,
issue several classes of shares, each class may have its own number series. A
certificate is valid and may be issued whether or not an officer who signed it
is still an officer when it is issued. Each certificate representing shares
which are restricted as to their transferability or voting powers, which are
preferred or limited as to their dividends or as to their allocable portion of
the assets upon liquidation or which are redeemable at the option of the Trust,
shall have a statement of such restriction, limitation, preference or redemption
provision, or a summary thereof, plainly stated on the certificate. In lieu of
such statement or summary, the Trust may set forth upon the face or back of the
certificate a statement that the Trust will furnish to any shareholder, upon
request and without charge, a full statement of such information.
Section 2. TRANSFERS. Certificates shall be treated as negotiable and
title thereto and to the shares they represent shall be transferred by delivery
thereof to the same extent as those of a Maryland stock corporation. Upon
surrender to the Trust or the transfer agent of the Trust of a share certificate
duly endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, the Trust shall issue a new certificate to the person
entitled thereto, cancel the old certificate and record the transaction upon its
books.
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The Trust shall be entitled to treat the holder of record of any share or
shares as the holder in fact thereof and, accordingly, 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 the laws of the State of
Maryland.
Notwithstanding the foregoing, transfers of shares of beneficial interest
of the Trust will be subject in all respects to the Declaration of Trust and all
of the terms and conditions contained therein.
Section 3. REPLACEMENT CERTIFICATE. Any officer designated by the
Trustees may direct a new certificate to be issued in place of any certificate
previously issued by the Trust alleged to have been lost, stolen or destroyed
upon the making of an affidavit of that fact by the person claiming the
certificate to be lost, stolen or destroyed. When authorizing the issuance of a
new certificate, an officer designated by the Trustees may, in his discretion
and as a condition precedent to the issuance thereof, require the owner of such
lost, stolen or destroyed certificate or the owner's legal representative to
advertise the same in such manner as he shall require and/or to give bond, with
sufficient surety, to the Trust to indemnify it against any loss or claim which
may arise as a result of the issuance of a new certificate.
Section 4. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. The
Trustees may set, in advance, a record date for the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders or
determining shareholders entitled to receive payment of any dividend or the
allotment of any other rights, or in order to make a determination of
shareholders for any other proper purpose. Such date, in any case, shall not be
prior to the close of business on the day the record date is fixed and shall be
not more than 90 days and, in the case of a meeting of shareholders not less
than ten days, before the date on which the meeting or particular action
requiring such determination of shareholders of record is to be held or taken.
In lieu of fixing a record date, the Trustees may provide that the share
transfer books shall be closed for a stated period but not longer than 20 days.
If the share transfer books are closed for the purpose of determining
shareholders entitled to notice of or to vote at a meeting of shareholders, such
books shall be closed for at least ten days before the date of such meeting.
If no record date is fixed and the share transfer books are not closed for
the determination of shareholders, (a) the record date for the determination of
shareholders entitled to notice of or to vote at a meeting of shareholders shall
be at the
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close of business on the day on which the notice of meeting is mailed or the
30th day before the meeting, whichever is the closer date to the meeting; and
(b) the record date for the determination of shareholders entitled to receive
payment of a dividend or an allotment of any other rights shall be the close of
business on the day on which the resolution of the Trustees, declaring the
dividend or allotment of rights, is adopted.
When a determination of shareholders entitled to vote at any meeting of
shareholders has been made as provided in this section, such determination shall
apply to any adjournment thereof, except when (i) the determination has been
made through the closing of the transfer books and the stated period of closing
has expired or (ii) the meeting is adjourned to a date more than 120 days after
the record date fixed for the original meeting, in either of which case a new
record date shall be determined as set forth herein.
Section 5. STOCK LEDGER. The Trust shall maintain at its principal office
or at the office of its counsel, accountants or transfer agent, an original or
duplicate share ledger containing the name and address of each shareholder and
the number of shares of each class held by such shareholder.
Section 6. FRACTIONAL SHARES; ISSUANCE OF UNITS. The Trustees may issue
fractional shares or provide for the issuance of scrip, all on such terms and
under such conditions as they may determine. Notwithstanding any other
provision of the Declaration of Trust or these Bylaws, the Trustees may issue
units consisting of different securities of the Trust. Any security issued in a
unit shall have the same characteristics as any identical securities issued by
the Trust, except that the Trustees may provide that for a specified period
securities of the Trust issued in such unit may be transferred on the books of
the Trust only in such unit.
ARTICLE VIII
ACCOUNTING YEAR
The Trustees shall have the power, from time to time, to fix the fiscal
year of the Trust by a duly adopted resolution.
ARTICLE IX
DISTRIBUTIONS
Section 1. AUTHORIZATION. Dividends and other distributions upon the
shares of beneficial interest of the Trust may be authorized and declared by the
Trustees, subject to the provisions of law and the Declaration of Trust.
Dividends and
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other distributions may be paid in cash, property or shares of the Trust,
subject to the provisions of law and the Declaration of Trust.
Section 2. CONTINGENCIES. Before payment of any dividends or other
distributions, there may be set aside out of any funds of the Trust available
for dividends or other distributions such sum or sums as the Trustees may from
time to time, in their absolute discretion, think proper as a reserve fund for
contingencies, for equalizing dividends or other distributions, for repairing or
maintaining any property of the Trust or for such other purpose as the Trustees
shall determine to be in the best interest of the Trust, and the Trustees may
modify or abolish any such reserve in the manner in which it was created.
ARTICLE X
PROHIBITED INVESTMENTS AND ACTIVITIES
Notwithstanding anything to the contrary in the Declaration of Trust, the
Trust shall not enter into any transaction referred to in (i), (ii) or (iii)
below which it does not believe is in the best interests of the Trust, and will
not, without the approval of a majority of the Independent Trustees, (i) acquire
from or sell to any Trustee, officer or employee of the Trust, any corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise in
which a Trustee, officer or employee of the Trust owns more than a one percent
interest or any affiliate of any of the foregoing, any of the assets or other
property of the Trust, except for the acquisition directly or indirectly of
certain properties or interest therein, directly or indirectly, through entities
in which it owns an interest in connection with the initial public offering of
shares by the Trust or pursuant to agreements entered into in connection with
such offering, which properties shall be described in the prospectus relating to
such initial public offering, (ii) make any loan to or borrow from any of the
foregoing persons or (iii) engage in any other transaction with any of the
foregoing persons. Each such transaction will be in all respects on such terms
as are, at the time of the transaction and under the circumstances then
prevailing, fair and reasonable to the Trust. Subject to the provisions of the
Declaration of Trust, the Board of Trustees may from time to time adopt, amend,
revise or terminate any policy or policies with respect to investments by the
Trust as it shall deem appropriate in its sole discretion.
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ARTICLE XI
SEAL
Section 1. SEAL. The Trustees may authorize the adoption of a seal by the
Trust. The seal shall have inscribed thereon the name of the Trust and the year
of its formation. The Trustees may authorize one or more duplicate seals and
provide for the custody thereof.
Section 2. AFFIXING SEAL. Whenever the Trust is permitted or required to
affix its seal to a document, it shall be sufficient to meet the requirements of
any law, rule or regulation relating to a seal to place the word "(SEAL)"
adjacent to the signature of the person authorized to execute the document on
behalf of the Trust.
ARTICLE XII
INDEMNIFICATION AND ADVANCE OF EXPENSES
To the maximum extent permitted by Maryland law in effect from time to
time, the Trust shall indemnify (a) any Trustee, officer or shareholder or any
former Trustee, officer or shareholder (including among the foregoing, for all
purposes of this Article XII and without limitation, any individual who, while a
Trustee, officer or shareholder and at the express request of the Trust, serves
or has served another real estate investment trust, corporation, partnership,
joint venture, trust, employee benefit plan or any other enterprise as a
director, officer, shareholder, partner or trustee of such real estate
investment trust, corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise) who has been successful, on the merits or
otherwise, in the defense of a proceeding to which he was made a party by reason
of service in such capacity, against reasonable expenses incurred by him in
connection with the proceeding, (b) any Trustee or officer or any former Trustee
or officer against any claim or liability to which he may become subject by
reason of such status unless it is established that (i) his act or omission 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, (ii) he actually
received an improper personal benefit in money, property or services or (iii) in
the case of a criminal proceeding, he had reasonable cause to believe that his
act or omission was unlawful and (c) each shareholder or former shareholder
against any claim or liability to which he may become subject by reason of such
status. In addition, the Trust shall, without requiring a preliminary
determination of the ultimate entitlement to indemnification, pay or reimburse,
in advance of final disposition of a proceeding, reasonable expenses incurred by
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a Trustee, officer or shareholder or former Trustee, officer or shareholder made
a party to a proceeding by reason such status, provided that, in the case of a
Trustee or officer, the Trust shall have received (i) a written affirmation by
the Trustee or officer of his good faith belief that he has met the applicable
standard of conduct necessary for indemnification by the Trust as authorized by
these Bylaws and (ii) a written undertaking by or on his behalf to repay the
amount paid or reimbursed by the Trust if it shall ultimately be determined that
the applicable standard of conduct was not met. The Trust may, with the
approval of its Trustees, provide such indemnification or payment or
reimbursement of expenses to any Trustee, officer or shareholder or any former
Trustee, officer or shareholder who served a predecessor of the Trust and to any
employee or agent of the Trust or a predecessor of the Trust. Neither the
amendment nor repeal of this Article, nor the adoption or amendment of any other
provision of the Declaration of Trust or these Bylaws inconsistent with this
Article, shall apply to or affect in any respect the applicability of this
Article with respect to any act or failure to act which occurred prior to such
amendment, repeal or adoption.
Any indemnification or payment or reimbursement of the expenses permitted
by these Bylaws shall be furnished in accordance with the procedures provided
for indemnification or payment or reimbursement of expenses, as the case may be,
under Section 2-418 of the MGCL for directors of Maryland corporations. The
Trust may provide to Trustees, officers and shareholders such other and further
indemnification or payment or reimbursement of expenses, as the case may be, to
the fullest extent permitted by the MGCL, as in effect from time to time, for
directors of Maryland corporations.
ARTICLE XIII
WAIVER OF NOTICE
Whenever any notice is required to be given pursuant to the Declaration of
Trust or Bylaws or pursuant to applicable law, a waiver thereof in writing,
signed by the person or persons entitled to such notice, whether before or after
the time stated therein, shall be deemed equivalent to the giving of such
notice. Neither the business to be transacted at nor the purpose of any meeting
need be set forth in the waiver of notice, unless specifically required by
statute. The attendance of any person at any meeting shall constitute a waiver
of notice of such meeting, except where such person attends a meeting for the
express purpose of objecting to the transaction of any business on the ground
that the meeting is not lawfully called or convened.
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ARTICLE XIV
AMENDMENT OF BYLAWS
The Trustees shall have the exclusive power to adopt, alter or repeal any
provision of these Bylaws and to make new Bylaws with the exception of Section
10 of Article II, which may not be amended without the approval of a majority
of the Company's shareholders entitled to vote on such matter.
ARTICLE XV
MISCELLANEOUS
All references to the Declaration of Trust shall include any amendments
thereto.
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<PAGE>
Number *0* Shares *0*
SEE REVERSE FOR
IMPORTANT NOTICE
ON TRANSFER RESTRICTIONS
AND OTHER INFORMATION
THIS CERTIFICATE IS TRANSFERABLE CUSIP ___________
IN THE CITIES OF _________________
AEGIS INVESTMENT TRUST
a Real Estate Investment Trust
Formed Under the Laws of the State of Maryland
THIS CERTIFIES THAT **Specimen**
is the owner of **Zero (0)**
fully paid and nonassessable common shares of beneficial interest, $___ par
value per share, of
Aegis Investment Trust
(the "Trust"), transferable on the books of the Trust by the holder hereof in
person or by its duly authorized attorney upon surrender of this Certificate
properly endorsed. This Certificate and the shares represented hereby are
issued and shall be held subject to all of the provisions of the Declaration
of Trust and Bylaws of the Trust and any amendments thereto. This
Certificate is not valid unless countersigned and registered by the Transfer
Agent and Registrar.
IN WITNESS WHEREOF, the Trust has caused this Certificate to be executed
on its behalf by its duly authorized officers.
DATED __________________
Countersigned and Registered:
[IMPRESSION OF
Transfer Agent TRUST SEAL] ___________________________
and Registrar President
By:___________________________ ___________________________
Authorized Signature Secretary
<PAGE>
IMPORTANT NOTICE
The Trust will furnish to any shareholder, on request and without charge,
a full statement of the information required by Section 8-203(d) of the
Corporations and Associations Article of the Annotated Code of Maryland with
respect to the designations and any preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends and other
distributions, qualifications, and terms and conditions of redemption of the
shares of each class of beneficial interest which the Trust has authority to
issue and, if the Trust is authorized to issue any preferred or special class
in series, (i) the differences in the relative rights and preferences between
the shares of each series to the extent set, and (ii) the authority of the
Board of Trustees to set such rights and preferences of subsequent series.
The foregoing summary does not purport to be complete and is subject to and
qualified in its entirety by reference to the Declaration of Trust of the
Trust, a copy of which will be sent without charge to each shareholder who so
requests. Such request must be made to the Secretary of the Trust at its
principal office or to the Transfer Agent.
The shares represented by this Certificate are subject to restrictions on
Beneficial and Constructive Ownership and Transfer for the purpose of the
Trust's maintenance of its status as a real estate investment trust (a
"REIT") under the Internal Revenue Code of 1986, as amended (the "Code").
Subject to certain further restrictions and except as expressly provided in
the Declaration of Trust of the Trust, (i) no Person may Beneficially or
Constructively Own Common Shares of the Trust in excess of _____ percent (in
value or number of shares) of the outstanding Common Shares of the Trust
unless such Person is an Excepted Holder (in which case the Excepted Holder
Limit shall be applicable); (ii) no Person may Beneficially or Constructively
Own Equity Shares of the Trust in excess of _______ percent of the value of
the total outstanding Equity Shares of the Trust, unless such Person is an
Excepted Holder (in which case the Excepted Holder Limit shall be
applicable); (iii) no Person may Beneficially or Constructively Own Equity
Shares that would result in the Trust being "closely held" under Section
856(h) of the Code or otherwise cause the Trust to fail to qualify as a REIT;
and (iv) no Person may Transfer Equity Shares if such Transfer would result
in Equity Shares of the Trust being owned by fewer than 100 Persons. Any
Person who Beneficially or Constructively Owns or attempts to Beneficially or
Constructively Own Equity Shares which cause or will cause a Person to
Beneficially or Constructively Own Equity Shares in excess or in violation of
the above limitations must immediately notify the Trust. If any of the
restrictions on transfer or ownership are violated, the Equity Shares
represented hereby will be automatically transferred to a Trustee of a Trust
for the benefit of one or more Charitable Beneficiaries. In addition, upon
the occurrence of certain events, attempted Transfers in violation of the
restrictions described above may be void AB INITIO. All capitalized terms in
this legend have the meanings defined in the Declaration of Trust of the
Trust, as the same may be amended from time to time, a copy of which,
including the restrictions on transfer and ownership, will be furnished to
each holder of Equity Shares of the Trust on request and without charge.
Such request must be made to the Secretary of the Trust at its principal
office or to the Transfer Agent.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN
OR DESTROYED, THE TRUST WILL REQUIRE A BOND OF INDEMNITY AS A
CONDITION TO THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
The following abbreviations, when used in the inscription on the face of
this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT____ Custodian_______
TEN ENT - as tenants by the entireties (cust) (Minor)
JT TEN - as joint tenants with right under Uniform Gifts to Minors Act of
of survivorship and not as ___________________________________
tenants in common (State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, __________________ HEREBY SELLS, ASSIGNS AND TRANSFERS UNTO
______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
______________________________________________________________________________
(PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE)
______________________ (_____________) shares of beneficial interest of the
Trust represented by this Certificate and do hereby irrevocably constitute
and appoint_________________________ attorney to transfer the said shares on
the books of the Trust, with full power of substitution in the premises.
Dated _________________ ________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE
OF THIS CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
<PAGE>
EXHIBIT 5.1
October __, 1997
Board of Trustees
AEGIS Investments Trust
2500 City West Boulevard, Suite 1200
Houston, TX 77042
AEGIS INVESTMENT TRUST
REGISTRATION STATEMENT ON FORM S-11
-----------------------------------
Gentlemen:
We have acted as counsel to AEGIS Investment Trust, a Maryland real
investment trust (the "Company"), in connection with the Registration
Statement on Form S-11, that is being filed on the date hereof with the
Securities and Exchange Commission (the "Registration Statement"), with
respect to 10,000,000 shares of the Company's common shares of beneficial
interest, $.01 par value (the "Common Shares"), which are proposed to be
offered and sold as described in the Registration Statement.
In rendering this opinion, we have relied upon, among other things, our
examination of such records of the Company and certificates of its officers
and of public officials as we have deemed necessary.
Based upon the foregoing and having regard for such legal considerations
as we have deemed relevant, we are of the opinion that the issuance of the
Shares as described in the Registration Statement has been validly authorized
and, when issued and sold as described in the Registration Statement, the
Common Shares will be legally issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to the Registration Statement and to the
statement made in reference to this firm under the caption "Legal Matters" in
the Registration Statement.
Very truly yours,
<PAGE>
October 24, 1997
AEGIS Investment Trust
2500 CityWest Blvd., Suite 1200
Houston, Texas 77042
AEGIS INVESTMENT TRUST
QUALIFICATION AS
REAL ESTATE INVESTMENT TRUST
Ladies and Gentlemen:
We have acted as counsel to AEGIS Investment Trust, a Maryland real
estate investment trust (the "Company"), in connection with the preparation of a
Form S-11 registration statement (the "Registration Statement") filed with the
Securities and Exchange Commission ("SEC") on September 12, 1997 (No.
333-35473), as amended through the date hereof, with respect to the offering and
sale (the "Offering") of up to 10,000,000 common shares of beneficial interest,
par value $0.01 per share, of the Company (the "Common Shares"), and the
Company's contribution of the net proceeds of the Offering to AEGIS Operating
Partnership, L.P., a Virginia limited partnership (the "Partnership"), in
exchange for a __% general partnership interest in the Partnership. You have
requested our opinion regarding certain U.S. federal income tax matters in
connection with the Offering.
The Company, through the Partnership, plans to acquire certain
mortgage loans, mortgage-backed securities, and other mortgage-related assets.
The Partnership will invest the Offering proceeds contributed by the Company in
short-term, interest-bearing securities until the Partnership identifies
mortgage-related assets for acquisition. The Partnership will own all of the
nonvoting stock of AEGIS Mortgage Corporation ("AMC"), representing 97% of
the beneficial interests therein. The voting stock of AMC, representing
3% of the beneficial interests therein, will be owned by Messrs. Walden
and Day.
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AEGIS Investment Trust
October 24, 1997
Page 2
In giving this opinion letter, we have examined the following:
1. the Company's Declaration of Trust, as duly filed with the Department of
Assessments and Taxation of the State of Maryland on August 13, 1997;
2. the Company's Amended and Restated Declaration of Trust, a form of which is
filed as an exhibit to the Registration Statement;
3. the Company's Bylaws;
4. the Registration Statement, including the prospectus contained as part of
the Registration Statement (the "Prospectus");
5. the Amended and Restated Limited Partnership Agreement of the Partnership
(the "Partnership Agreement") between the Company, as general partner, and
Messrs. Walden and Day, as limited partners, in the form filed as an exhibit
to the Registration Statement; and
6. such other documents as we have deemed necessary or appropriate for
purposes of this opinion.
In connection with the opinions rendered below, we have assumed, with
your consent, that:
1. each of the documents referred to above has been duly authorized, executed,
and delivered; is authentic, if an original, or is accurate, if a copy; and has
not been amended;
2. during its short taxable year ending December 31, 1997 and future taxable
years, the Company will operate in a manner that will make the representations
contained in a certificate, dated October 24, 1997 and executed by a duly
appointed officer of the Company (the "Officer's Certificate"), true for such
years;
3. the Company will not make any amendments to its organizational documents or
the Partnership Agreement after the date of this opinion that would affect its
qualification as a real estate investment trust (a "REIT") for any taxable year;
and
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AEGIS Investment Trust
October 24, 1997
Page 3
4. no action will be taken by the Company or the Partnership after the date
hereof that would have the effect of altering the facts upon which the opinions
set forth below are based.
In connection with the opinions rendered below, we also have relied
upon the correctness of the representations contained in the Officer's
Certificate. No facts have come to our attention, however, that would cause us
to question the accuracy and completeness of the facts contained in the
documents and assumptions set forth above, the representations set forth in the
Officer's Certificate, or the Prospectus in a material way. In addition, to the
extent that any of the representations provided to us in the Officer's
Certificate are with respect to matters set forth in the Internal Revenue Code
of 1986, as amended (the "Code"), or the Treasury regulations thereunder (the
"Regulations"), we have reviewed with the individuals making such
representations the relevant portions of the Code and the applicable
Regulations.
Based on the documents and assumptions set forth above, the
representations set forth in the Officer's Certificate, and the discussion in
the Prospectus under the caption "Federal Income Tax Considerations" (which is
incorporated herein by reference), we are of the opinion that:
(a) commencing with the Company's short taxable year beginning on the
day before the closing date of the Offering and ending December 31, 1997,
the Company will qualify to be taxed as a REIT pursuant to sections 856
through 860 of the Code, and the Company's organization and proposed method
of operation will enable it to continue to meet the requirements for
qualification and taxation as a REIT under the Code; and
(b) the descriptions of the law and the legal conclusions contained
in the Prospectus under the caption "Federal Income Tax Considerations" are
correct in all material respects, and the discussion thereunder fairly
summarizes the federal income tax considerations that are likely to be
material to a holder of the Common Shares.
We will not review on a continuing basis the Company's compliance with the
documents or assumptions set forth above, or the representations set forth in
the Officer's Certificate. Accordingly, no assurance can be given that the
actual results of the Company's
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AEGIS Investment Trust
October 24, 1997
Page 4
operations for any given taxable year will satisfy the requirements for
qualification and taxation as a REIT.
The foregoing opinions are based on current provisions of the Code and
the Regulations, published administrative interpretations thereof, and published
court decisions. The Internal Revenue Service has not issued Regulations or
administrative interpretations with respect to various provisions of the Code
relating to REIT qualification. No assurance can be given that the law will not
change in a way that will prevent the Company from qualifying as a REIT.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the references to Hunton & Williams
under the caption "Federal Income Tax Considerations" in the Prospectus. In
giving this consent, we do not admit that we are in the category of persons
whose consent is required by Section 7 of the Securities Act of 1933, as
amended, or the rules and regulations promulgated thereunder by the SEC.
The foregoing opinions are limited to the U.S. federal income tax
matters addressed herein, and no other opinions are rendered with respect to
other federal tax matters or to any issues arising under the tax laws of any
other country, or any state or locality. We undertake no obligation to update
the opinions expressed herein after the date of this letter. This opinion
letter is solely for the information and use of the addressee and the purchasers
of the Common Shares pursuant to the Prospectus, and it may not be distributed,
relied upon for any purpose by any other person, quoted in whole or in part or
otherwise reproduced in any document, or filed with any governmental agency
without our express written consent.
Very truly yours,
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AMENDED AND RESTATED AGREEMENT
OF LIMITED PARTNERSHIP
OF
AEGIS OPERATING PARTNERSHIP, L.P.
<PAGE>
TABLE OF CONTENTS
ARTICLE I
DEFINED TERMS................................................................ 1
ARTICLE II
PARTNERSHIP CONTINUATION AND IDENTIFICATION.................................. 8
2.01 CONTINUATION...................................................... 8
2.02 NAME, OFFICE AND REGISTERED AGENT................................. 8
2.03 PARTNERS.......................................................... 9
2.04 TERM AND DISSOLUTION.............................................. 9
2.05 FILING OF CERTIFICATE AND PERFECTION OF LIMITED PARTNERSHIP....... 10
2.06 CERTIFICATES DESCRIBING PARTNERSHIP UNITS......................... 10
ARTICLE III
BUSINESS OF THE PARTNERSHIP.................................................. 10
ARTICLE IV
CAPITAL CONTRIBUTIONS AND ACCOUNTS........................................... 11
4.01 CAPITAL CONTRIBUTIONS............................................. 11
4.02 ADDITIONAL CAPITAL CONTRIBUTIONS AND ISSUANCES OF ADDITIONAL
PARTNERSHIP INTERESTS............................................. 11
4.03 ADDITIONAL FUNDING................................................ 13
4.04 CAPITAL ACCOUNTS.................................................. 14
4.05 PERCENTAGE INTERESTS.............................................. 14
4.06 NO INTEREST ON CONTRIBUTIONS...................................... 14
4.07 RETURN OF CAPITAL CONTRIBUTIONS................................... 14
4.08 NO THIRD PARTY BENEFICIARY........................................ 15
ARTICLE V
PROFITS AND LOSSES; DISTRIBUTIONS............................................ 15
5.01 ALLOCATION OF PROFIT AND LOSS..................................... 15
5.02 DISTRIBUTION OF CASH.............................................. 17
5.03 REIT DISTRIBUTION REQUIREMENTS.................................... 18
5.04 DISTRIBUTIONS IN KIND............................................. 18
5.05 LIMITATIONS ON RETURN OF CAPITAL CONTRIBUTIONS.................... 18
5.06 DISTRIBUTIONS UPON LIQUIDATION.................................... 19
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5.07 SUBSTANTIAL ECONOMIC EFFECT....................................... 19
ARTICLE VI
RIGHTS, OBLIGATIONS AND
POWERS OF THE GENERAL PARTNER................................................ 19
6.01 MANAGEMENT OF THE PARTNERSHIP..................................... 19
6.02 DELEGATION OF AUTHORITY........................................... 22
6.03 INDEMNIFICATION AND EXCULPATION OF INDEMNITEES.................... 22
6.04 LIABILITY OF THE GENERAL PARTNER.................................. 24
6.05 REIMBURSEMENT OF GENERAL PARTNER.................................. 25
6.06 OUTSIDE ACTIVITIES................................................ 25
6.07 EMPLOYMENT OR RETENTION OF AFFILIATES............................. 26
6.08 GENERAL PARTNER PARTICIPATION..................................... 26
6.09 TITLE TO PARTNERSHIP ASSETS....................................... 26
6.10 MISCELLANEOUS..................................................... 27
ARTICLE VII
CHANGES IN GENERAL PARTNER................................................... 27
7.01 TRANSFER OF THE GENERAL PARTNER'S PARTNERSHIP INTEREST............ 27
7.02 ADMISSION OF A SUBSTITUTE OR ADDITIONAL GENERAL................... 29
7.03 EFFECT OF BANKRUPTCY, WITHDRAWAL, DEATH OR DISSOLUTION OF A
GENERAL PARTNER................................................... 30
7.04 REMOVAL OF A GENERAL PARTNER...................................... 30
ARTICLE VIII
RIGHTS AND OBLIGATIONS
OF THE LIMITED PARTNERS...................................................... 31
8.01 MANAGEMENT OF THE PARTNERSHIP..................................... 31
8.02 POWER OF ATTORNEY................................................. 32
8.03 LIMITATION ON LIABILITY OF LIMITED PARTNERS....................... 32
8.04 OWNERSHIP BY LIMITED PARTNER OF CORPORATE GENERAL PARTNER OR
AFFILIATE......................................................... 32
8.05 REDEMPTION RIGHT.................................................. 32
ARTICLE IX
TRANSFERS OF LIMITED PARTNERSHIP INTERESTS................................... 35
9.01 PURCHASE FOR INVESTMENT........................................... 35
9.02 RESTRICTIONS ON TRANSFER OF LIMITED PARTNERSHIP INTERESTS......... 35
9.03 ADMISSION OF SUBSTITUTE LIMITED PARTNER........................... 37
9.04 RIGHTS OF ASSIGNEES OF PARTNERSHIP INTERESTS...................... 38
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9.05 EFFECT OF BANKRUPTCY, DEATH, INCOMPETENCE OR TERMINATION OF A
LIMITED PARTNER................................................... 38
9.06 JOINT OWNERSHIP OF INTERESTS...................................... 39
ARTICLE X
BOOKS AND RECORDS; ACCOUNTING; TAX MATTERS................................... 39
10.01 BOOKS AND RECORDS................................................. 39
10.02 CUSTODY OF PARTNERSHIP FUNDS; BANK ACCOUNTS....................... 39
10.03 FISCAL AND TAXABLE YEAR........................................... 40
10.04 ANNUAL TAX INFORMATION AND REPORT................................. 40
10.05 TAX MATTERS PARTNER; TAX ELECTIONS; SPECIAL BASIS ADJUSTMENTS..... 40
10.06 REPORTS TO LIMITED PARTNERS....................................... 41
ARTICLE XI
AMENDMENT OF AGREEMENT; MERGER............................................... 41
ARTICLE XII
GENERAL PROVISIONS........................................................... 42
12.01 NOTICES........................................................... 42
12.02 SURVIVAL OF RIGHTS................................................ 42
12.03 ADDITIONAL DOCUMENTS.............................................. 42
12.04 SEVERABILITY...................................................... 42
12.05 ENTIRE AGREEMENT.................................................. 42
12.06 PRONOUNS AND PLURALS.............................................. 42
12.07 HEADINGS.......................................................... 42
12.08 COUNTERPARTS...................................................... 43
12.09 GOVERNING LAW..................................................... 43
EXHIBITS
EXHIBIT A - Partners, Capital Contributions and Percentage Interests
EXHIBIT B - Notice of Exercise of Redemption Right
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AMENDED AND RESTATED AGREEMENT
OF LIMITED PARTNERSHIP
OF
AEGIS OPERATING PARTNERSHIP, L.P.
RECITALS
AEGIS Operating Partnership, L.P. (the "Partnership") was formed as a
limited partnership under the laws of the State of Delaware pursuant to a
Certificate of Limited Partnership filed with the Office of the Secretary of
State of the State of Delaware effective as of August __, 1997. This Amended
and Restated Agreement of Limited Partnership is entered into this ___ day of
______ 1997 among AEGIS Investment Trust, a Maryland real estate investment
trust (the "General Partner") and the Limited Partners set forth on Exhibit A
hereto, for the purpose of amending and restating the Limited Partnership
Agreement (the "Initial Agreement").
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, of mutual covenants
between the parties hereto, and of other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree to amend the Initial Agreement to read in its entirety as follows:
ARTICLE I
DEFINED TERMS
The following defined terms used in this Agreement shall have the meanings
specified below:
"ACT" means the Delaware Revised Uniform Limited Partnership Act, as it may
be amended from time to time.
"ADDITIONAL FUNDS" has the meaning set forth in Section 4.03 hereof.
"ADDITIONAL SECURITIES" means any additional REIT Shares (other than REIT
Shares issued in connection with a redemption pursuant to Section 8.05 hereof)
or rights, options, warrants or convertible or exchangeable securities
containing the right to subscribe for or purchase REIT Shares, as set forth in
Section 4.02(a)(ii).
"ADMINISTRATIVE EXPENSES" means (i) all administrative and operating costs
and expenses incurred by the Partnership, (ii) those administrative costs and
expenses of the General Partner, including any salaries or other payments to
directors, trustees, officers or
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employees of the General Partner, and any accounting and legal expenses of the
General Partner, which expenses, the Partners have agreed, are expenses of the
Partnership and not the General Partner, and (iii) to the extent not included in
clause (ii) above, REIT Expenses; PROVIDED, HOWEVER, that Administrative
Expenses shall not include any administrative costs and expenses incurred by the
General Partner that are attributable to Properties or partnership interests in
a Subsidiary Partnership that are owned by the General Partner directly.
"AFFILIATE" means, (i) any Person that, directly or indirectly, controls or
is controlled by or is under common control with such Person, (ii) any other
Person that owns, beneficially, directly or indirectly, 10% or more of the
outstanding capital stock, shares or equity interests of such Person, or
(iii) any officer, director, trustee, employee, partner or trustee of such
Person or any Person controlling, controlled by or under common control with
such Person (excluding trustees and persons serving in similar capacities who
are not otherwise an Affiliate of such Person). For the purposes of this
definition, "control" (including the correlative meanings of the terms
"controlled by" and "under common control with"), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such Person,
through the ownership of voting securities or partnership interests or
otherwise.
"AGREED VALUE" means the fair market value of a Partner's non-cash Capital
Contribution as of the date of contribution as agreed to by such Partner and the
General Partner. The names and addresses of the Partners, number of Partnership
Units issued to each Partner, and the Agreed Value of non-cash Capital
Contributions as of the date of contribution is set forth on EXHIBIT A.
"AGREEMENT" means this Amended and Restated Agreement of Limited
Partnership.
"CAPITAL ACCOUNT" has the meaning provided in Section 4.04 hereof.
"CAPITAL CONTRIBUTION" means the total amount of cash, cash equivalents,
and the Agreed Value of any Property or other asset contributed or agreed to be
contributed, as the context requires, to the Partnership by each Partner
pursuant to the terms of the Agreement. Any reference to the Capital
Contribution of a Partner shall include the Capital Contribution made by a
predecessor holder of the Partnership Interest of such Partner.
"CASH AMOUNT" means an amount of cash per Partnership Unit equal to the
Value of the REIT Shares Amount on the date of receipt by the General Partner of
a Notice of Redemption.
"CERTIFICATE" means any instrument or document that is required under the
laws of the State of Delaware, or any other jurisdiction in which the
Partnership conducts business, to be signed or sworn to by the Partners of the
Partnership (either by themselves or pursuant to the power-of-attorney granted
to the General Partner in Section 8.02 hereof) and filed for
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recording in the appropriate public offices in the State of Delaware or such
other jurisdiction to perfect or maintain the Partnership as a limited
partnership, to effect the admission, withdrawal, or substitution of any Partner
of the Partnership, or to protect the limited liability of the Limited Partners
as limited partners under the laws of the State of Delaware or such other
jurisdiction.
"CODE" means the Internal Revenue Code of 1986, as amended, and as
hereafter amended from time to time. Reference to any particular provision of
the Code shall mean that provision in the Code at the date hereof and any
successor provision of the Code.
"COMMISSION" means the U.S. Securities and Exchange Commission.
"CONVERSION FACTOR" means 1.0, PROVIDED THAT, (a) in the event that the
General Partner (i) declares or pays a dividend on its outstanding REIT Shares
in REIT Shares or makes a distribution to all holders of its outstanding REIT
Shares in REIT Shares, (ii) subdivides its outstanding REIT Shares, or (iii)
combines its outstanding REIT Shares into a smaller number of REIT Shares, the
Conversion Factor shall be adjusted by multiplying the Conversion Factor by a
fraction, the numerator of which shall be the number of REIT Shares issued and
outstanding on the record date for such dividend, distribution, subdivision or
combination (assuming for such purposes that such dividend, distribution,
subdivision or combination has occurred as of such time), and the denominator of
which shall be the actual number of REIT Shares (determined without the above
assumption) issued and outstanding on such date; and (b) in the event that the
General Partner declares or pays a dividend or other distribution on its
outstanding REIT Shares (other than (A) cash dividends payable in the ordinary
course of the General Partner's business or (B) dividends payable in REIT Shares
that give rise to an adjustment in the Conversion Factor under subsection (a)
hereof) and the Value of the REIT Shares on the 20th trading day following the
record date ("Record Date") for such dividend or distribution (the
"Post-Distribution Value") is less than the Value of the REIT Shares on the
business day immediately preceding such Record Date (the "Pre-Distribution
Value"), then the Conversion Factor in effect after the Record Date shall be
adjusted by multiplying the Conversion Factor in effect prior to the Record Date
by a fraction, the numerator of which is the Pre-Distribution Value and the
denominator of which is the Post-Distribution Value, PROVIDED, HOWEVER, that no
adjustment shall be made if (x) with respect to any cash dividend or
distribution with respect to REIT Shares, the Partnership distributes with
respect to each Partnership Unit an amount equal to the amount of such dividend
or distribution multiplied by the Conversion Factor or (y) with respect to any
dividend or distribution of securities or property other than cash, the
Partnership distributes with respect to each Partnership Unit an amount of
securities or other property equal to the amount distributed with respect to
each REIT Share multiplied by the Conversion Ratio or a partnership interest or
other security readily convertible into such securities or other property. Any
adjustment to the Conversion Factor shall become effective immediately after the
effective date of such event retroactive to the record date, if any, for such
event; PROVIDED, HOWEVER, that if the General Partner receives a Notice of
Redemption after the record date, but prior to the effective date of
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such dividend, distribution, subdivision or combination, the Conversion Factor
shall be determined as if the General Partner had received the Notice of
Redemption immediately prior to the record date for such dividend, distribution,
subdivision or combination.
"DECLARATION OF TRUST" means the Declaration of Trust of the General
Partner filed with the Maryland State Department of Assessments and Taxation, as
amended or restated from time to time.
"EVENT OF BANKRUPTCY" as to any Person means the filing of a petition for
relief as to such Person as debtor or bankrupt under the Bankruptcy Code of 1978
or similar provision of law of any jurisdiction (except if such petition is
contested by such Person and has been dismissed within 90 days); insolvency or
bankruptcy of such Person as finally determined by a court proceeding; filing by
such Person of a petition or application to accomplish the same or for the
appointment of a receiver or a trustee for such Person or a substantial part of
his assets; commencement of any proceedings relating to such Person as a debtor
under any other reorganization, arrangement, insolvency, adjustment of debt or
liquidation law of any jurisdiction, whether now in existence or hereinafter in
effect, either by such Person or by another, PROVIDED that if such proceeding is
commenced by another, such Person indicates his approval of such proceeding,
consents thereto or acquiesces therein, or such proceeding is contested by such
Person and has not been finally dismissed within 90 days.
"GENERAL PARTNER" means AEGIS Investment Trust, a Maryland real estate
investment trust, and any Person who becomes a substitute or additional General
Partner as provided herein, and any of their successors as General Partner.
"GENERAL PARTNERSHIP INTEREST" means a Partnership Interest held by the
General Partner that is a general partnership interest.
"INDEMNITEE" means (i) any Person made a party to a proceeding by reason of
its status as the General Partner or a director, trustee, officer or employee of
the Partnership or the General Partner, and (ii) such other Persons (including
Affiliates of the General Partner or the Partnership) as the General Partner may
designate from time to time, in its sole and absolute discretion.
"INDEPENDENT TRUSTEE" means a trustee of the General Partner who is not an
officer or employee of the General Partner, any Affiliate of an officer or
employee or any Affiliate of (i) any lessee of any property of the General
Partner or any Subsidiary of the General Partner, (ii) any Subsidiary of the
General Partner, or (iii) any partnership that is an Affiliate of the General
Partner.
"LIMITED PARTNER" means any Person named as a Limited Partner on EXHIBIT A
attached hereto, and any Person who becomes a Substitute or Additional Limited
Partner, in such Person's capacity as a Limited Partner in the Partnership.
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"LIMITED PARTNERSHIP INTEREST" means the ownership interest of a Limited
Partner in the Partnership at any particular time, including the right of such
Limited Partner to any and all benefits to which such Limited Partner may be
entitled as provided in this Agreement and in the Act, together with the
obligations of such Limited Partner to comply with all the provisions of this
Agreement and of such Act.
"LOSS" has the meaning provided in Section 5.01(f) hereof.
"NOTICE OF REDEMPTION" means the Notice of Exercise of Redemption Right
substantially in the form attached as EXHIBIT B hereto.
"NYSE" means the New York Stock Exchange.
"OFFER" has the meaning set forth in Section 7.01(c) hereof.
"OFFERING" means the initial offer and sale by the General Partner and the
purchase by the Underwriters (as defined in the Prospectus) of REIT Shares for
sale to the public.
"PARTNER" means any General Partner or Limited Partner.
"PARTNER NONRECOURSE DEBT MINIMUM GAIN" has the meaning set forth in
Regulations Section 1.704-2(i). A Partner's share of Partner Nonrecourse Debt
Minimum Gain shall be determined in accordance with Regulations Section
1.704-2(i)(5).
"PARTNERSHIP INTEREST" means an ownership interest in the Partnership held
by either a Limited Partner or the General Partner and includes any and all
benefits to which the holder of such a Partnership Interest may be entitled as
provided in this Agreement, together with all obligations of such Person to
comply with the terms and provisions of this Agreement.
"PARTNERSHIP MINIMUM GAIN" has the meaning set forth in Regulations Section
1.704-2(d). In accordance with Regulations Section 1.704-2(d), the amount of
Partnership Minimum Gain is determined by first computing, for each Partnership
nonrecourse liability, any gain the Partnership would realize if it disposed of
the property subject to that liability for no consideration other than full
satisfaction of the liability, and then aggregating the separately computed
gains. A Partner's share of Partnership Minimum Gain shall be determined in
accordance with Regulations Section 1.704-2(g)(1).
"PARTNERSHIP RECORD DATE" means the record date established by the General
Partner for the distribution of cash pursuant to Section 5.02 hereof, which
record date shall be the same as the record date established by the General
Partner for a distribution to its shareholders of some or all of its portion of
such distribution.
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"PARTNERSHIP UNIT" means a fractional, undivided share of the Partnership
Interests of all Partners issued hereunder. The allocation of Partnership Units
among the Partners shall be as set forth on EXHIBIT A, as may be amended from
time to time.
"PERCENTAGE INTEREST" means the percentage ownership interest in the
Partnership of each Partner, as determined by dividing the Partnership Units
owned by a Partner by the total number of Partnership Units then outstanding.
The Percentage Interest of each Partner shall be as set forth on EXHIBIT A, as
may be amended from time to time.
"PERSON" means any individual, partnership, corporation, joint venture,
trust or other entity.
"PROFIT" has the meaning provided in Section 5.01(f) hereof.
"PROPERTY" means any loan, real property or other investment in which the
Partnership holds an ownership interest.
"PROSPECTUS" means the final prospectus delivered to purchasers of REIT
Shares in the Offering.
"REDEEMING PARTNER" has the meaning provided in Section 8.05(a) hereof.
"REDEMPTION AMOUNT" means either the Cash Amount or the REIT Shares Amount,
as selected by the General Partner in its sole and absolute discretion pursuant
to Section 8.05(b) hereof.
"REDEMPTION RIGHT" has the meaning provided in Section 8.05(a) hereof.
"REGULATIONS" means the Federal Income Tax Regulations issued under the
Code, as amended and as hereafter amended from time to time. Reference to any
particular provision of the Regulations shall mean that provision of the
Regulations on the date hereof and any successor provision of the Regulations.
"REIT" means a real estate investment trust under Sections 856 through 860
of the Code.
"REIT EXPENSES" means (i) costs and expenses relating to the formation and
continuity of existence and operation of the General Partner and any
Subsidiaries thereof (which Subsidiaries shall, for purposes hereof, be included
within the definition of General Partner), including taxes, fees and assessments
associated therewith, any and all costs, expenses or fees payable to any
trustee, officer, or employee of the General Partner, (ii) costs and expenses
relating to any public offering and registration of securities by the General
Partner and all statements, reports, fees and expenses incidental thereto,
including, without limitation,
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underwriting discounts and selling commissions applicable to any such offering
of securities, and any costs and expenses associated with any claims made by any
holders of such securities or any underwriters or placement agents thereof,
(iii) costs and expenses associated with any repurchase of any securities by the
General Partner, (iv) costs and expenses associated with the preparation and
filing of any periodic or other reports and communications by the General
Partner under federal, state or local laws or regulations, including filings
with the Commission, (v) costs and expenses associated with compliance by the
General Partner with laws, rules and regulations promulgated by any regulatory
body, including the Commission and any securities exchange, (vi) costs and
expenses associated with any 401(k) plan, incentive plan, bonus plan or other
plan providing for compensation for the employees of the General Partner, (vii)
costs and expenses incurred by the General Partner relating to any issuing or
redemption of Partnership Interests, and (viii) all other operating or
administrative costs of the General Partner incurred in the ordinary course of
its business on behalf of or in connection with the Partnership.
"REIT SHARE" means a common share of beneficial interest in the General
Partner (or successor Entity, as the case may be).
"REIT SHARES AMOUNT" means a number of REIT Shares equal to the product of
the number of Partnership Units offered for redemption by a Redeeming Partner,
multiplied by the Conversion Factor as adjusted to and including the Specified
Redemption Date; PROVIDED THAT in the event the General Partner issues to all
holders of REIT Shares rights, options, warrants or convertible or exchangeable
securities entitling the shareholders to subscribe for or purchase REIT Shares,
or any other securities or property (collectively, the "rights"), and the rights
have not expired at the Specified Redemption Date, then the REIT Shares Amount
shall also include the rights issuable to a holder of the REIT Shares Amount of
REIT Shares on the record date fixed for purposes of determining the holders of
REIT Shares entitled to rights.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SERVICE" means the Internal Revenue Service.
"SHARE INCENTIVE PLANS" means the AEGIS Investment Trust 1997 Incentive
Plan, as amended from time to time, or any stock incentive plan adopted in the
future by the General Partner.
"SPECIFIED REDEMPTION DATE" means (i) with respect any Notice of Redemption
received by the General Partner after one year following the closing of the
Offering and before one year and one month following the closing of Offering,
the first business day that is at least 30 calendar days after the receipt by
the General Partner of the Notice of Redemption and (ii) with respect any Notice
of Redemption received by the General Partner after one year and one month
following the closing of Offering, the first business day that is at least 15
calendar days after the receipt by the General Partner of the Notice of
Redemption.
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"SUBSIDIARY" means, with respect to any Person, any corporation or other
entity of which a majority of (i) the voting power of the voting equity
securities or (ii) the outstanding equity interests is owned, directly or
indirectly, by such Person.
"SUBSIDIARY PARTNERSHIP" means any partnership of which the partnership
interests therein are owned by the General Partner or a wholly-owned subsidiary
of the General Partner.
"SUBSTITUTE LIMITED PARTNER" means any Person admitted to the Partnership
as a Limited Partner pursuant to Section 9.03 hereof.
"SURVIVING GENERAL PARTNER" has the meaning set forth in Section 7.01(d)
hereof.
"TRANSACTION" has the meaning set forth in Section 7.01(c) hereof.
"TRANSFER" has the meaning set forth in Section 9.02(a) hereof.
"VALUE" means, with respect to any security, the average of the daily
market price of such security for the ten consecutive trading days immediately
preceding the date of such valuation. The market price for each such trading
day shall be: (i) if security is listed or admitted to trading on any securities
exchange or the NYSE, the last reported sale price, regular way, on such day, or
if no such sale takes place on such day, the average of the closing bid and
asked prices, regular way, on such day, (ii) if security is not listed or
admitted to trading on any securities exchange or the NYSE takes place on such
day, the average of the closing bid and asked prices on such day, as reported by
a reliable quotation source designated by the General Partner, or (iii) if
security is not listed or admitted to trading on any securities exchange or the
NYSE and no such last reported sale price or closing bid and asked prices are
available, the average of the reported high bid and low asked prices on such
day, as reported by a reliable quotation source designated by the General
Partner, or if there shall be no bid and asked prices on such day, the average
of the high bid and low asked prices, as so reported, on the most recent day
(not more than ten days prior to the date in question) for which prices have
been so reported; PROVIDED THAT if there are no bid and asked prices reported
during the ten days prior to the date in question, the value of the security
shall be determined by the General Partner acting in good faith on the basis of
such quotations and other information as it considers, in its reasonable
judgment, appropriate. In the event the security includes any additional
rights, then the value of such rights shall be determined by the General Partner
acting in good faith on the basis of such quotations and other information as it
considers, in its reasonable judgment, appropriate.
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ARTICLE II
PARTNERSHIP CONTINUATION AND IDENTIFICATION
2.01 CONTINUATION. The Partners hereby agree to continue the
Partnership pursuant to the Act and upon the terms and conditions set forth in
this Agreement.
2.02 NAME, OFFICE AND REGISTERED AGENT. The name of the Partnership is
AEGIS Operating Partnership, L.P. The specified office and place of business of
the Partnership shall be 2500 CityWest Boulevard, Suite 1200, Houston, Texas
77042. The General Partner may at any time change the location of such office,
PROVIDED the General Partner gives notice to the Partners of any such change.
The initial registered agent is [The Corporation Trust Company, Corporation
Trust Center, 1209 Orange Street, Wilmington, New Castle County, Delaware
19801]. The sole duty of the registered agent as such is to forward to the
Partnership any notice that is served on him as registered agent.
2.03 PARTNERS.
(a) The General Partner of the Partnership is AEGIS Investment
Trust, a Maryland real estate investment trust. Its principal place of business
is the same as that of the Partnership.
(b) The Limited Partners are those Persons identified as Limited
Partners on EXHIBIT A hereto, as amended from time to time.
2.04 TERM AND DISSOLUTION.
(a) The term of the Partnership shall continue in full force and
effect until December 31, 2050, except that the Partnership shall be dissolved
upon the first to occur of any of the following events:
(i) The occurrence of an Event of Bankruptcy as to a
General Partner or the dissolution, death, removal or withdrawal of
a General Partner unless the business of the Partnership is
continued pursuant to Section 7.03(b) hereof; PROVIDED THAT if a
General Partner is on the date of such occurrence a partnership,
the dissolution of such General Partner as a result of the
dissolution, death, withdrawal, removal or Event of Bankruptcy of a
partner in such partnership shall not be an event of dissolution of
the Partnership if the business of such General Partner is
continued by the remaining partner or partners, either alone or
with additional partners, and such General Partner and such
partners comply with any other applicable requirements of this
Agreement;
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(ii) The passage of 90 days after the sale or other
disposition of all or substantially all of the assets of the
Partnership (PROVIDED THAT if the Partnership receives an
installment obligation as consideration for such sale or other
disposition, the Partnership shall continue, unless sooner
dissolved under the provisions of this Agreement, until such time
as such note or notes are paid in full); or
(iii) At any time after 13 months following the closing of
the Offering, the election by the General Partner that the
Partnership should be dissolved.
(b) Upon dissolution of the Partnership (unless the business of
the Partnership is continued pursuant to Section 7.03(b) hereof), the General
Partner (or its trustee, receiver, successor or legal representative) shall
amend or cancel the Certificate and liquidate the Partnership's assets and apply
and distribute the proceeds thereof in accordance with Section 5.06 hereof.
Notwithstanding the foregoing, the liquidating General Partner may either (i)
defer liquidation of, or withhold from distribution for a reasonable time, any
assets of the Partnership (including those necessary to satisfy the
Partnership's debts and obligations), or (ii) distribute the assets to the
Partners in kind.
2.05 FILING OF CERTIFICATE AND PERFECTION OF LIMITED PARTNERSHIP. The
General Partner shall execute, acknowledge, record and file at the expense of
the Partnership, the Certificate and any and all amendments thereto and all
requisite fictitious name statements and notices in such places and
jurisdictions as may be necessary to cause the Partnership to be treated as a
limited partnership under, and otherwise to comply with, the laws of each state
or other jurisdiction in which the Partnership conducts business.
2.06 CERTIFICATES DESCRIBING PARTNERSHIP UNITS. At the request of a
Limited Partner, the General Partner, at its option, may issue a certificate
summarizing the terms of such Limited Partner's interest in the Partnership,
including the number of Partnership Units owned and the Percentage Interest
represented by such Partnership Units as of the date of such certificate. Any
such certificate (i) shall be in form and substance as approved by the General
Partner, (ii) shall not be negotiable and (iii) shall bear a legend to the
following effect:
This certificate is not negotiable. The Partnership
Units represented by this certificate are governed by
and transferable only in accordance with the provisions
of the Agreement of Limited Partnership of AEGIS
Operating Partnership, L.P., as amended from time to
time.
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ARTICLE III
BUSINESS OF THE PARTNERSHIP
The purpose and nature of the business to be conducted by the Partnership
is (i) to conduct any business that may be lawfully conducted by a limited
partnership organized pursuant to the Act, PROVIDED, HOWEVER, that such business
shall be limited to and conducted in such a manner as to permit the General
Partner at all times to qualify as a REIT, unless the General Partner otherwise
ceases to qualify as a REIT, (ii) to enter into any partnership, joint venture
or other similar arrangement to engage in any of the foregoing or the ownership
of interests in any entity engaged in any of the foregoing and (iii) to do
anything necessary or incidental to the foregoing. In connection with the
foregoing, and without limiting the General Partner's right in its sole and
absolute discretion to cease qualifying as a REIT, the Partners acknowledge that
the General Partner's current status as a REIT and the avoidance of income and
excise taxes on the General Partner inures to the benefit of all the Partners
and not solely to the General Partner. Notwithstanding the foregoing, the
Limited Partners agree that the General Partner may terminate its status as a
REIT under the Code at any time to the full extent permitted under its
Declaration of Trust. The General Partner shall also be empowered to do any and
all acts and things necessary or prudent to ensure that the Partnership will not
be classified as a "publicly traded partnership" for purposes of Section 7704 of
the Code.
ARTICLE IV
CAPITAL CONTRIBUTIONS AND ACCOUNTS
4.01 CAPITAL CONTRIBUTIONS. The General Partner and the Limited
Partners have made capital contributions to the Partnership in exchange for the
Partnership Interests set forth opposite their names on EXHIBIT A, as amended
from time to time.
4.02 ADDITIONAL CAPITAL CONTRIBUTIONS AND ISSUANCES OF ADDITIONAL
PARTNERSHIP INTERESTS. Except as provided in this Section 4.02 or in Section
4.03, the Partners shall have no right or obligation to make any additional
Capital Contributions or loans to the Partnership. The General Partner may
contribute additional capital to the Partnership, from time to time, and receive
additional Partnership Interests in respect thereof, in the manner contemplated
in this Section 4.02.
(a) ISSUANCES OF ADDITIONAL PARTNERSHIP INTERESTS.
(i) GENERAL. The General Partner is hereby authorized to
cause the Partnership to issue such additional Partnership Interests in the
form of Partnership Units for any Partnership purpose at any time or from
time to time, to the Partners (including the General Partner) or to other
Persons for such consideration and on such terms and conditions
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as shall be established by the General Partner in its sole and absolute
discretion, all without the approval of any Limited Partners. Any additional
Partnership Interests issued thereby may be issued in one or more classes, or
one or more series of any of such classes, with such designations, preferences
and relative, participating, optional or other special rights, powers and
duties, including rights, powers and duties senior to Limited Partnership
Interests, all as shall be determined by the General Partner in its sole and
absolute discretion and without the approval of any Limited Partner, subject to
Delaware law, including, without limitation, (i) the allocations of items of
Partnership income, gain, loss, deduction and credit to each such class or
series of Partnership Interests; (ii) the right of each such class or series of
Partnership Interests to share in Partnership distributions; and (iii) the
rights of each such class or series of Partnership Interests upon dissolution
and liquidation of the Partnership; PROVIDED, HOWEVER, that no additional
Partnership Interests shall be issued to the General Partner unless:
(1)(A) the additional Partnership Interests are issued in
connection with an issuance of REIT Shares of or other interests in
the General Partner, which shares or interests have designations,
preferences and other rights, all such that the economic interests are
substantially similar to the designations, preferences and other
rights of the additional Partnership Interests issued to the General
Partner by the Partnership in accordance with this Section 4.02 and
(B) the General Partner shall make a Capital Contribution to the
Partnership in an amount equal to the proceeds raised in connection
with the issuance of such shares of stock of or other interests in the
General Partner;
(2) the additional Partnership Interests are issued in
exchange for property owned by the General Partner with a fair market
value, as determined by the General Partner, in good faith, equal to
the value of the Partnership Interests; or
(3) the additional Partnership Interests are issued to all Partners
in proportion to their respective Percentage Interests.
Without limiting the foregoing, the General Partner is expressly authorized to
cause the Partnership to issue Partnership Units for less than fair market
value, so long as the General Partner concludes in good faith that such issuance
is in the best interests of the General Partner and the Partnership.
(ii) UPON ISSUANCE OF ADDITIONAL SECURITIES. The General
Partner shall not issue any additional REIT Shares (other than REIT Shares
issued in connection with a redemption pursuant to Section 8.05 hereof) or
rights, options, warrants or convertible or exchangeable securities containing
the right to subscribe for or purchase REIT Shares (collectively, "Additional
Securities") other than to all holders of REIT Shares, unless (A) the General
Partner shall cause the Partnership to issue to the General Partner Partnership
Interests or rights, options, warrants or convertible or exchangeable securities
of the
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Partnership having designations, preferences and other rights, all such that the
economic interests are substantially similar to those of the Additional
Securities, and (B) the General Partner contributes the proceeds from the
issuance of such Additional Securities and from any exercise of rights contained
in such Additional Securities to the Partnership; PROVIDED, HOWEVER, that the
General Partner is allowed to issue Additional Securities in connection with an
acquisition of a property to be held directly by the General Partner, but if and
only if, such direct acquisition and issuance of Additional Securities have been
approved and determined to be in the best interests of the General Partner and
the Partnership by a majority of the Independent Trustees. Without limiting the
foregoing, the General Partner is expressly authorized to issue Additional
Securities for less than fair market value, and to cause the Partnership to
issue to the General Partner corresponding Partnership Interests, so long as (x)
the General Partner concludes in good faith that such issuance is in the best
interests of the General Partner and the Partnership, including without
limitation, the issuance of REIT Shares and corresponding Partnership Units
pursuant to an employee share purchase plan providing for employee purchases of
REIT Shares at a discount from fair market value or employee stock options that
have an exercise price that is less than the fair market value of the REIT
Shares, either at the time of issuance or at the time of exercise, and (y) the
General Partner contributes all proceeds from such issuance to the Partnership.
For example, in the event the General Partner issues REIT Shares for a cash
purchase price and contributes all of the proceeds of such issuance to the
Partnership as required hereunder, the General Partner shall be issued a number
of additional Partnership Units equal to the product of (A) the number of such
REIT Shares issued by the General Partner, the proceeds of which were so
contributed, multiplied by (B) a fraction, the numerator of which is 100%, and
the denominator of which is the Conversion Factor in effect on the date of such
contribution.
(b) CERTAIN DEEMED CONTRIBUTIONS OF PROCEEDS OF ISSUANCE OF REIT
SHARES. In connection with any and all issuances of REIT Shares, the General
Partner shall make Capital Contributions to the Partnership of the proceeds
therefrom, PROVIDED THAT if the proceeds actually received and contributed by
the General Partner, are less than the gross proceeds of such issuance as a
result of any underwriter's discount or other expenses paid or incurred in
connection with such issuance, then the General Partner shall be deemed to have
made Capital Contributions to the Partnership in the aggregate amount of the
gross proceeds of such issuance and the Partnership shall be deemed
simultaneously to have paid such offering expenses in accordance with Section
6.05 hereof and in connection with the required issuance of additional
Partnership Units to the General Partner for such Capital Contributions pursuant
to Section 4.02(a) hereof.
(c) If the General Partner shall repurchase shares of any class of
the General Partner's capital stock, the purchase price thereof and all costs
incurred in connection with such repurchase shall be reimbursed to the General
Partner by the Partnership pursuant to Section 6.05 hereof and the General
Partner shall cause the Partnership to cancel a number of Partnership Interests
of the appropriate class held by the General Partner equal to the quotient
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of the number of such shares of the General Partner's capital stock divided by
the Conversion Factor.
4.03 ADDITIONAL FUNDING. If the General Partner determines that it is
in the best interests of the Partnership to provide for additional Partnership
funds ("Additional Funds") for any Partnership purpose, the General Partner may
(i) cause the Partnership to obtain such funds from outside borrowings, or (ii)
elect to have the General Partner provide such Additional Funds to the
Partnership through loans or otherwise.
4.04 CAPITAL ACCOUNTS. A separate capital account (a "Capital Account")
shall be established and maintained for each Partner in accordance with
Regulations Section 1.704-1(b)(2)(iv). If (i) a new or existing Partner
acquires an additional Partnership Interest in exchange for more than a DE
MINIMIS Capital Contribution, (ii) the Partnership distributes to a Partner more
than a DE MINIMIS amount of Partnership property as consideration for a
Partnership Interest, or (iii) the Partnership is liquidated within the meaning
of Regulation Section 1.704-1(b)(2)(ii)(g), the General Partner shall revalue
the property of the Partnership to its fair market value (as determined by the
General Partner, in its sole and absolute discretion, and taking into account
Section 7701(g) of the Code) in accordance with Regulations Section
1.704-1(b)(2)(iv)(f). When the Partnership's property is revalued by the
General Partner, the Capital Accounts of the Partners shall be adjusted in
accordance with Regulations Sections 1.704-1(b)(2)(iv)(f) and (g), which
generally require such Capital Accounts to be adjusted to reflect the manner in
which the unrealized gain or loss inherent in such property (that has not been
reflected in the Capital Accounts previously) would be allocated among the
Partners pursuant to Section 5.01 if there were a taxable disposition of such
property for its fair market value (as determined by the General Partner, in its
sole and absolute discretion, and taking into account Section 7701(g) of the
Code) on the date of the revaluation.
4.05 PERCENTAGE INTERESTS. If the number of outstanding Partnership
Units increases or decreases during a taxable year, each Partner's Percentage
Interest shall be adjusted by the General Partner effective as of the effective
date of each such increase or decrease to a percentage equal to the number of
Partnership Units held by such Partner divided by the aggregate number of
Partnership Units outstanding after giving effect to such increase or decrease.
If the Partners' Percentage Interests are adjusted pursuant to this Section
4.05, the Profits and Losses for the taxable year in which the adjustment occurs
shall be allocated between the part of the year ending on the day when the
Partnership's property is revalued by the General Partner and the part of the
year beginning on the following day either (i) as if the taxable year had ended
on the date of the adjustment or (ii) based on the number of days in each part.
The General Partner, in its sole and absolute discretion, shall determine which
method shall be used to allocate Profits and Losses for the taxable year in
which the adjustment occurs. The allocation of Profits and Losses for the
earlier part of the year shall be based on the Percentage Interests before
adjustment, and the allocation of Profits and Losses for the later part shall be
based on the adjusted Percentage Interests.
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4.06 NO INTEREST ON CONTRIBUTIONS. No Partner shall be entitled to
interest on its Capital Contribution.
4.07 RETURN OF CAPITAL CONTRIBUTIONS. No Partner shall be entitled to
withdraw any part of its Capital Contribution or its Capital Account or to
receive any distribution from the Partnership, except as specifically provided
in this Agreement. Except as otherwise provided herein, there shall be no
obligation to return to any Partner or withdrawn Partner any part of such
Partner's Capital Contribution for so long as the Partnership continues in
existence.
4.08 NO THIRD PARTY BENEFICIARY. No creditor or other third party
having dealings with the Partnership shall have the right to enforce the right
or obligation of any Partner to make Capital Contributions or loans or to pursue
any other right or remedy hereunder or at law or in equity, it being understood
and agreed that the provisions of this Agreement shall be solely for the benefit
of, and may be enforced solely by, the parties hereto and their respective
successors and assigns. None of the rights or obligations of the Partners
herein set forth to make Capital Contributions or loans to the Partnership shall
be deemed an asset of the Partnership for any purpose by any creditor or other
third party, nor may such rights or obligations be sold, transferred or assigned
by the Partnership or pledged or encumbered by the Partnership to secure any
debt or other obligation of the Partnership or of any of the Partners. In
addition, it is the intent of the parties hereto that no distribution to any
Limited Partner shall be deemed a return of money or other property in violation
of the Act. However, if any court of competent jurisdiction holds that,
notwithstanding the provisions of this Agreement, any Limited Partner is
obligated to return such money or property, such obligation shall be the
obligation of such Limited Partner and not of the General Partner. Without
limiting the generality of the foregoing, a deficit Capital Account of a Partner
shall not be deemed to be a liability of such Partner nor an asset or property
of the Partnership.
ARTICLE V
PROFITS AND LOSSES; DISTRIBUTIONS
5.01 ALLOCATION OF PROFIT AND LOSS.
(a) GENERAL. Profit and Loss of the Partnership for each fiscal
year of the Partnership shall be allocated among the Partners in accordance with
their respective Percentage Interests.
(b) MINIMUM GAIN CHARGEBACK. Notwithstanding any provision to the
contrary, (i) any expense of the Partnership that is a "nonrecourse deduction"
within the meaning of Regulations Section 1.704-2(b)(1) shall be allocated in
accordance with the Partners' respective Percentage Interests, (ii) any expense
of the Partnership that is a "partner
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nonrecourse deduction" within the meaning of Regulations Section 1.704-2(i)(2)
shall be allocated to the Partner that bears the "economic risk of loss" of such
deduction in accordance with Regulations Section 1.704-2(i)(1), (iii) if there
is a net decrease in Partnership Minimum Gain within the meaning of Regulations
Section 1.704-2(f)(1) for any Partnership taxable year, then, subject to the
exceptions set forth in Regulations Section 1.704-2(f)(2),(3), (4) and (5),
items of gain and income shall be allocated among the Partners in accordance
with Regulations Section 1.704-2(f) and the ordering rules contained in
Regulations Section 1.704-2(j), and (iv) if there is a net decrease in Partner
Nonrecourse Debt Minimum Gain within the meaning of Regulations Section
1.704-2(i)(4) for any Partnership taxable year, then, subject to the exceptions
set forth in Regulations Section 1.704(2)(g), items of gain and income shall be
allocated among the Partners in accordance with Regulations Section
1.704-2(i)(4) and the ordering rules contained in Regulations Section
1.704-2(j). A Partner's "interest in partnership profits" for purposes of
determining its share of the nonrecourse liabilities of the Partnership within
the meaning of Regulations Section 1.752-3(a)(3) shall be such Partner's
Percentage Interest.
(c) QUALIFIED INCOME OFFSET. If a Partner receives in any taxable
year an adjustment, allocation, or distribution described in subparagraphs (4),
(5), or (6) of Regulations Section 1.704-1(b)(2)(ii)(d) that causes or increases
a deficit balance in such Partner's Capital Account that exceeds the sum of such
Partner's shares of Partnership Minimum Gain and Partner Nonrecourse Debt
Minimum Gain, as determined in accordance with Regulations Sections 1.704-2(g)
and 1.704-2(i), such Partner shall be allocated specially for such taxable year
(and, if necessary, later taxable years) items of income and gain in an amount
and manner sufficient to eliminate such deficit Capital Account balance as
quickly as possible as provided in Regulations Section 1.704-1(b)(2)(ii)(d).
After the occurrence of an allocation of income or gain to a Partner in
accordance with this Section 5.01(c), to the extent permitted by Regulations
Section 1.704-1(b), items of expense or loss shall be allocated to such Partner
in an amount necessary to offset the income or gain previously allocated to such
Partner under this Section 5.01(c).
(d) CAPITAL ACCOUNT DEFICITS. Loss shall not be allocated to a
Limited Partner to the extent that such allocation would cause a deficit in such
Partner's Capital Account (after reduction to reflect the items described in
Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6)) to exceed the sum of
such Partner's shares of Partnership Minimum Gain and Partner Nonrecourse Debt
Minimum Gain. Any Loss in excess of that limitation shall be allocated to the
General Partner. After the occurrence of an allocation of Loss to the General
Partner in accordance with this Section 5.01(d), to the extent permitted by
Regulations Section 1.704-1(b), Profit shall be allocated to such Partner in an
amount necessary to offset the Loss previously allocated to each Partner under
this Section 5.01(d).
(e) ALLOCATIONS BETWEEN TRANSFEROR AND TRANSFEREE. If a Partner
transfers any part or all of its Partnership Interest, the distributive shares
of the various items of Profit and Loss allocable among the Partners during such
fiscal year of the Partnership shall be allocated
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between the transferor and the transferee Partner either (i) as if the
Partnership's fiscal year had ended on the date of the transfer, or (ii) based
on the number of days of such fiscal year that each was a Partner without regard
to the results of Partnership activities in the respective portions of such
fiscal year in which the transferor and the transferee were Partners. The
General Partner, in its sole and absolute discretion, shall determine which
method shall be used to allocate the distributive shares of the various items of
Profit and Loss between the transferor and the transferee Partner.
(f) DEFINITION OF PROFIT AND LOSS. "Profit" and "Loss" and any
items of income, gain, expense, or loss referred to in this Agreement shall be
determined in accordance with federal income tax accounting principles, as
modified by Regulations Section 1.704-1(b)(2)(iv), except that Profit and Loss
shall not include items of income, gain and expense that are specially allocated
pursuant to Sections 5.01(b), 5.01(c), or 5.01(d). All allocations of income,
Profit, gain, Loss, and expense (and all items contained therein) for federal
income tax purposes shall be identical to all allocations of such items set
forth in this Section 5.01, except as otherwise required by Section 704(c) of
the Code and Regulations Section 1.704-1(b)(4). The General Partner shall have
the authority to elect the method to be used by the Partnership for allocating
items of income, gain, and expense as required by Section 704(c) of the Code
including a method that may result in a Partner receiving a disproportionately
larger share of the Partnership tax depreciation deductions, and such election
shall be binding on all Partners.
5.02 DISTRIBUTION OF CASH.
(a) The Partnership shall distribute cash on a quarterly (or, at
the election of the General Partner, more frequent) basis, in an amount
determined by the General Partner in its sole and absolute discretion, to the
Partners who are Partners on the Partnership Record Date with respect to such
quarter (or other distribution period) in accordance with their respective
Percentage Interests on the Partnership Record Date; PROVIDED, HOWEVER, that if
a new or existing Partner acquires an additional Partnership Interest in
exchange for a Capital Contribution on any date other than a Partnership Record
Date, the cash distribution attributable to such additional Partnership Interest
relating to the Partnership Record Date next following the issuance of such
additional Partnership Interest shall be reduced in the proportion to (i) the
number of days that such additional Partnership Interest is held by such Partner
bears to (ii) the number of days between such Partnership Record Date and the
immediately preceding Partnership Record Date. The General Partner shall use
its reasonable discretion to distribute an amount of cash on a quarterly (or, at
the election of the General Partner, more frequent) basis so that each Limited
Partner receives under this Section 5.02, with respect to each quarter or more
frequent period, a cash amount equal in value to the aggregate cash dividends
that would have been payable to such Limited Partner in the event that such
Limited Partner owned REIT Shares equal in number to the REIT Shares Amount
during such period of the Partnership (which REIT Shares Amount shall be
determined as if the Specified Redemption Date had occurred prior to the
dividends paid on any REIT Shares
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during such period) reduced, as provided in the first sentence of this Section
5.02(a), to take into account cash distributions attributable to any Partnership
Interests acquired in exchange for a Capital Contribution on any date other than
a Partnership Record Date.
(b) Notwithstanding any other provision of this Agreement, the
General Partner is authorized to take any action that it determines to be
necessary or appropriate to cause the Partnership to comply with any withholding
requirements established under the Code or any other federal, state or local law
including, without limitation, pursuant to Sections 1441, 1442, 1445 and 1446 of
the Code. To the extent that the Partnership is required to withhold and pay
over to any taxing authority any amount resulting from the allocation or
distribution of income to the Partner or assignee (including by reason of
Section 1446 of the Code), either (i) if the actual amount to be distributed to
the Partner (the "Distributable Amount") equals or exceeds the amount required
to be withheld by the Partnership (the "Withheld Amount"), the Withheld Amount
withheld shall be treated as a distribution of cash in the amount of such
withholding to such Partner, or (ii) if the Distributable Amount is less than
the Withheld Amount no amount shall be distributed to the Partner, the
Distributable Amount shall be treated as a distribution of cash to such Partner,
and the excess of the Withheld Amount over the Distributable Amount shall be
treated as a loan (a "Partnership Loan") from the Partnership to the Partner on
the day the Partnership pays over such excess to a taxing authority. A
Partnership Loan may be repaid, at the election of the General Partner in its
sole discretion, either (i) through withholding by the Partnership with respect
to subsequent distributions to the applicable Partner or assignee, or (ii) at
any time more than 12 months after a Partnership Loan arises, by cancellation of
Partnership Units with a value equal to the unpaid balance of the Partnership
Loan (including accrued interest). Any amounts treated as a Partnership Loan
pursuant to this Section 5.02(b) shall bear interest at the lesser of (i) the
base rate on corporate loans at large United States money center commercial
banks, as published from time to time in THE WALL STREET JOURNAL (or an
equivalent successor publication), or (ii) the maximum lawful rate of interest
on such obligation, such interest to accrue from the date the Partnership is
deemed to extend the loan until such loan is repaid in full.
(c) In no event may a Partner receive a distribution of cash
with respect to a Partnership Unit if such Partner is entitled to receive a cash
dividend as the holder of record of a REIT Share for which all or part of such
Partnership Unit has been or will be redeemed.
5.03 REIT DISTRIBUTION REQUIREMENTS. The General Partner shall use its
reasonable efforts to cause the Partnership to distribute amounts sufficient to
enable the General Partner to pay shareholder dividends that will allow the
General Partner to (i) meet its distribution requirement for qualification as a
REIT as set forth in Section 857 of the Code and (ii) avoid any federal income
or excise tax liability imposed by the Code.
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5.04 DISTRIBUTIONS IN KIND. (a) Subject to Subsection (b) hereof, no
Partner shall be entitled to demand property other than cash in connection with
any distributions by the Partnership.
(b) If the General Partner decides to securitize mortgage loans through
the issuance of collateralized mortgage obligations, the General Partner has the
right to redeem a portion of its Partnership Interest in exchange for the
mortgage loans to be securitized. The portion of a Partnership Interest
redeemed pursuant to this Section will be determined based on the fair market
value of the mortgage loans and/or leases distributed to the General Partner.
Such fair market value will be determined by the General Partner, but will be
subject to the review of the Independent Trustees.
5.05 LIMITATIONS ON RETURN OF CAPITAL CONTRIBUTIONS. Notwithstanding any
of the provisions of this Article V, no Partner shall have the right to receive
and the General Partner shall not have the right to make, a distribution that
includes a return of all or part of a Partner's Capital Contributions, unless
after giving effect to the return of a Capital Contribution, the sum of all
Partnership liabilities, other than the liabilities to a Partner for the return
of his Capital Contribution, does not exceed the fair market value of the
Partnership's assets.
5.06 DISTRIBUTIONS UPON LIQUIDATION. Upon liquidation of the
Partnership, after payment of, or adequate provision for, debts and obligations
of the Partnership, including any Partner loans, any remaining assets of the
Partnership shall be distributed to all Partners with positive Capital Accounts
in accordance with their respective positive Capital Account balances. For
purposes of the preceding sentence, the Capital Account of each Partner shall be
determined after all adjustments made in accordance with Sections 5.01 and 5.02
resulting from Partnership operations and from all sales and dispositions of all
or any part of the Partnership's assets. Any distributions pursuant to this
Section 5.06 shall be made by the end of the Partnership's taxable year in which
the liquidation occurs (or, if later, within 90 days after the date of the
liquidation). To the extent deemed advisable by the General Partner,
appropriate arrangements (including the use of a liquidating trust) may be made
to assure that adequate funds are available to pay any contingent debts or
obligations.
5.07 SUBSTANTIAL ECONOMIC EFFECT. It is the intent of the Partners that
the allocations of Profit and Loss under the Agreement have substantial economic
effect (or be consistent with the Partners' interests in the Partnership in the
case of the allocation of losses attributable to nonrecourse debt) within the
meaning of Section 704(b) of the Code as interpreted by the Regulations
promulgated pursuant thereto. Article V and other relevant provisions of this
Agreement shall be interpreted in a manner consistent with such intent.
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ARTICLE VI
RIGHTS, OBLIGATIONS AND
POWERS OF THE GENERAL PARTNER
6.01 MANAGEMENT OF THE PARTNERSHIP.
(a) Except as otherwise expressly provided in this Agreement, the
General Partner shall have full, complete and exclusive discretion to manage and
control the business of the Partnership for the purposes herein stated, and
shall make all decisions affecting the business and assets of the Partnership.
Subject to the restrictions specifically contained in this Agreement, the powers
of the General Partner shall include, without limitation, the authority to take
the following actions on behalf of the Partnership:
(i) to acquire, purchase, own, operate, lease and dispose of any
real property and any other property or assets including, but not
limited to notes and mortgages, that the General Partner determines
are necessary or appropriate or in the best interests of the
business of the Partnership;
(ii) to construct buildings and make other improvements on the
properties owned or leased by the Partnership;
(iii) to authorize, issue, sell, redeem or otherwise purchase
any Partnership Interests or any securities (including secured and
unsecured debt obligations of the Partnership, debt obligations of
the Partnership convertible into any class or series of Partnership
Interests, or options, rights, warrants or appreciation rights
relating to any Partnership Interests) of the Partnership;
(iv) to borrow or lend money for the Partnership, issue or
receive evidences of indebtedness in connection therewith,
refinance, increase the amount of, modify, amend or change the
terms of, or extend the time for the payment of, any such
indebtedness, and secure such indebtedness by mortgage, deed of
trust, pledge or other lien on the Partnership's assets;
(v) to pay, either directly or by reimbursement, for all
operating costs and general administrative expenses of the
Partnership to third parties or to the General Partner or its
Affiliates as set forth in this Agreement,
(vi) to guarantee or become a comaker of indebtedness of the
General Partner or any Subsidiary thereof, refinance, increase the
amount of, modify, amend or change the terms of, or extend the time
for the payment of, any such guarantee or indebtedness, and secure
such guarantee or indebtedness by mortgage, deed of trust, pledge
or other lien on the Partnership's assets;
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(vii) to use assets of the Partnership (including, without
limitation, cash on hand) for any purpose consistent with this
Agreement, including, without limitation, payment, either directly
or by reimbursement, of all operating costs and general
administrative expenses of the General Partner, the Partnership or
any Subsidiary of either, to third parties or to the General
Partner as set forth in this Agreement;
(viii) to lease all or any portion of any of the Partnership's
assets, whether or not the terms of such leases extend beyond the
termination date of the Partnership and whether or not any portion
of the Partnership's assets so leased are to be occupied by the
lessee, or, in turn, subleased in whole or in part to others, for
such consideration and on such terms as the General Partner may
determine;
(ix) to prosecute, defend, arbitrate, or compromise any and all
claims or liabilities in favor of or against the Partnership, on
such terms and in such manner as the General Partner may reasonably
determine, and similarly to prosecute, settle or defend litigation
with respect to the Partners, the Partnership, or the Partnership's
assets; PROVIDED, HOWEVER, that the General Partner may not,
without the consent of all of the Partners, confess a judgment
against the Partnership that is in excess of $20,000 or is not
covered by insurance;
(x) to file applications, communicate, and otherwise deal with
any and all governmental agencies having jurisdiction over, or in
any way affecting, the Partnership's assets or any other aspect of
the Partnership business;
(xi) to make or revoke any election permitted or required of the
Partnership by any taxing authority;
(xii) to maintain such insurance coverage for public liability,
fire and casualty, and any and all other insurance for the
protection of the Partnership, for the conservation of Partnership
assets, or for any other purpose convenient or beneficial to the
Partnership, in such amounts and such types, as it shall determine
from time to time;
(xiii) to determine whether or not to apply any insurance
proceeds for any property to the restoration of such property or to
distribute the same;
(xiv) to establish one or more divisions of the Partnership, to
hire and dismiss employees of the Partnership or any division of
the Partnership, and to retain legal counsel, accountants,
consultants, real estate brokers, and such other persons, as the
General Partner may deem necessary or appropriate in
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connection with the Partnership business and to pay therefor such
reasonable remuneration as the General Partner may deem reasonable
and proper;
(xv) to retain other services of any kind or nature in
connection with the Partnership business, and to pay therefor such
remuneration as the General Partner may deem reasonable and proper;
(xvi) to negotiate and conclude agreements on behalf of the
Partnership with respect to any of the rights, powers and authority
conferred upon the General Partner;
(xvii) to maintain accurate accounting records and to file
promptly all federal, state and local income tax returns on behalf
of the Partnership;
(xviii) to distribute Partnership cash or other Partnership
assets in accordance with this Agreement;
(xix) to form or acquire an interest in, and contribute property
to, any further limited or general partnerships, joint ventures or
other relationships that it deems desirable (including, without
limitation, the acquisition of interests in, and the contributions
of property to, its Subsidiaries and any other Person in which it
has an equity interest from time to time);
(xx) to establish Partnership reserves for working capital,
capital expenditures, contingent liabilities, or any other valid
Partnership purpose; and
(xxi) to merge, consolidate or combine the Partnership with
or into another person (to the extent permitted by applicable law);
(xxii) to do any and all acts and things necessary or prudent
to ensure that the Partnership will not be classified as a
"publicly traded partnership" for purposes of Section 7704 of the
Code; and
(xxiii) to take such other action, execute, acknowledge, swear
to or deliver such other documents and instruments, and perform any
and all other acts that the General Partner deems necessary or
appropriate for the formation, continuation and conduct of the
business and affairs of the Partnership (including, without
limitation, all actions consistent with allowing the General
Partner at all times to qualify as a REIT unless the General
Partner voluntarily terminates its REIT status) and to possess and
enjoy all of the rights and powers of a general partner as provided
by the Act.
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(b) Except as otherwise provided herein, to the extent the duties
of the General Partner require expenditures of funds to be paid to third
parties, the General Partner shall not have any obligations hereunder except to
the extent that partnership funds are reasonably available to it for the
performance of such duties, and nothing herein contained shall be deemed to
authorize or require the General Partner, in its capacity as such, to expend its
individual funds for payment to third parties or to undertake any individual
liability or obligation on behalf of the Partnership.
6.02 DELEGATION OF AUTHORITY. The General Partner may delegate any or
all of its powers, rights and obligations hereunder, and may appoint, employ,
contract or otherwise deal with any Person for the transaction of the business
of the Partnership, which Person may, under supervision of the General Partner,
perform any acts or services for the Partnership as the General Partner may
approve.
6.03 INDEMNIFICATION AND EXCULPATION OF INDEMNITEES.
(a) The Partnership shall indemnify an Indemnitee from and against
any and all losses, claims, damages, liabilities, joint or several, expenses
(including reasonable legal fees and expenses), judgments, fines, settlements,
and other amounts arising from any and all claims, demands, actions, suits or
proceedings, civil, criminal, administrative or investigative, that relate to
the operations of the Partnership as set forth in this Agreement in which any
Indemnitee may be involved, or is threatened to be involved, as a party or
otherwise, unless it is established that: (i) the act or omission of the
Indemnitee was material to the matter giving rise to the proceeding and either
was committed in bad faith or was the result of active and deliberate
dishonesty; (ii) the Indemnitee actually received an improper personal benefit
in money, property or services; or (iii) in the case of any criminal proceeding,
the Indemnitee had reasonable cause to believe that the act or omission was
unlawful. The termination of any proceeding by judgment, order or settlement
does not create a presumption that the Indemnitee did not meet the requisite
standard of conduct set forth in this Section 6.03(a). The termination of any
proceeding by conviction or upon a plea of nolo contendere or its equivalent, or
an entry of an order of probation prior to judgment, creates a rebuttable
presumption that the Indemnitee acted in a manner contrary to that specified in
this Section 6.03(a). Any indemnification pursuant to this Section 6.03 shall
be made only out of the assets of the Partnership.
(b) The Partnership shall reimburse an Indemnitee for reasonable
expenses incurred by an Indemnitee who is a party to a proceeding in advance of
the final disposition of the proceeding upon receipt by the Partnership of (i) a
written affirmation by the Indemnitee of the Indemnitee's good faith belief that
the standard of conduct necessary for indemnification by the Partnership as
authorized in this Section 6.03 has been met, and (ii) a written undertaking by
or on behalf of the Indemnitee to repay the amount if it shall ultimately be
determined that the standard of conduct has not been met.
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(c) The indemnification provided by this Section 6.03 shall be in
addition to any other rights to which an Indemnitee or any other Person may be
entitled under any agreement, pursuant to any vote of the Partners, as a matter
of law or otherwise, and shall continue as to an Indemnitee who has ceased to
serve in such capacity.
(d) The Partnership may purchase and maintain insurance, on behalf
of the Indemnitees and such other Persons as the General Partner shall
determine, against any liability that may be asserted against or expenses that
may be incurred by such Person in connection with the Partnership's activities,
regardless of whether the Partnership would have the power to indemnify such
Person against such liability under the provisions of this Agreement.
(e) For purposes of this Section 6.03, the Partnership shall be
deemed to have requested an Indemnitee to serve as fiduciary of an employee
benefit plan whenever the performance by it of its duties to the Partnership
also imposes duties on, or otherwise involves services by, it to the plan or
participants or beneficiaries of the plan; excise taxes assessed on an
Indemnitee with respect to an employee benefit plan pursuant to applicable law
shall constitute fines within the meaning of this Section 6.03; and actions
taken or omitted by the Indemnitee with respect to an employee benefit plan in
the performance of its duties for a purpose reasonably believed by it to be in
the interest of the participants and beneficiaries of the plan shall be deemed
to be for a purpose which is not opposed to the best interests of the
Partnership.
(f) In no event may an Indemnitee subject the Limited Partners to
personal liability by reason of the indemnification provisions set forth in this
Agreement.
(g) An Indemnitee shall not be denied indemnification in whole or
in part under this Section 6.03 because the Indemnitee had an interest in the
transaction with respect to which the indemnification applies if the transaction
was otherwise permitted by the terms of this Agreement.
(h) The provisions of this Section 6.03 are for the benefit of the
Indemnitees, their heirs, successors, assigns and administrators and shall not
be deemed to create any rights for the benefit of any other Persons.
6.04 LIABILITY OF THE GENERAL PARTNER.
(a) Notwithstanding anything to the contrary set forth in this
Agreement, the General Partner shall not be liable for monetary damages to the
Partnership or any Partners for losses sustained or liabilities incurred as a
result of errors in judgment or of any act or omission if the General Partner
acted in good faith. The General Partner shall not be in breach of any duty
that the General Partner may owe to the Limited Partners or the Partnership or
any other Persons under this Agreement or of any duty stated or implied by law
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or equity provided the General Partner, acting in good faith, abides by the
terms of this Agreement.
(b) The Limited Partners expressly acknowledge that the General
Partner is acting on behalf of the Partnership, the General Partner and the
General Partner's shareholders collectively, that the General Partner is under
no obligation to consider the separate interests of the Limited Partners
(including, without limitation, the tax consequences to Limited Partners or the
tax consequences of same, but not all, of the Limited Partners) in deciding
whether to cause the Partnership to take (or decline to take) any actions. In
the event of a conflict between the interests of the shareholders of the General
Partner on one hand and the Limited Partners on the other, the General Partner
shall endeavor in good faith to resolve the conflict in a manner not adverse to
either the shareholders of the General Partner or the Limited Partners;
PROVIDED, HOWEVER, that for so long as the General Partner owns a controlling
interest in the Partnership, any such conflict that the General Partner, in its
sole and absolute discretion, determines cannot be resolved in a manner not
adverse to either the shareholders of the General Partner or the Limited
Partners shall be resolved in favor of the shareholders. The General Partner
shall not be liable for monetary damages for losses sustained, liabilities
incurred, or benefits not derived by Limited Partners in connection with such
decisions, PROVIDED that the General Partner has acted in good faith.
(c) Subject to its obligations and duties as General Partner set
forth in Section 6.01 hereof, the General Partner may exercise any of the powers
granted to it under this Agreement and perform any of the duties imposed upon it
hereunder either directly or by or through its agents. The General Partner
shall not be responsible for any misconduct or negligence on the part of any
such agent appointed by it in good faith.
(d) Notwithstanding any other provisions of this Agreement or the
Act, any action of the General Partner on behalf of the Partnership or any
decision of the General Partner to refrain from acting on behalf of the
Partnership, undertaken in the good faith belief that such action or omission is
necessary or advisable in order (i) to protect the ability of the General
Partner to continue to qualify as a REIT or (ii) to prevent the General Partner
from incurring any taxes under Section 857, Section 4981, or any other provision
of the Code, is expressly authorized under this Agreement and is deemed approved
by all of the Limited Partners.
(e) Any amendment, modification or repeal of this Section 6.04 or
any provision hereof shall be prospective only and shall not in any way affect
the limitations on the General Partner's liability to the Partnership and the
Limited Partners under this Section 6.04 as in effect immediately prior to such
amendment, modification or repeal with respect to matters occurring, in whole or
in part, prior to such amendment, modification or repeal, regardless of when
claims relating to such matters may arise or be asserted.
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6.05 REIMBURSEMENT OF GENERAL PARTNER.
(a) Except as provided in this Section 6.05 and elsewhere in this
Agreement (including the provisions of Articles 5 and 6 regarding distributions,
payments, and allocations to which it may be entitled), the General Partner
shall not be compensated for its services as general partner of the Partnership.
(b) In addition to the expenses that are directly attributable to
the Partnership, the REIT Expenses and Administrative Expenses shall be
obligations of the Partnership, and the Partnership shall pay the REIT Expenses
and Administrative Expenses. If any REIT Expenses or Administrative Expenses
are paid by the General Partner, the General Partner shall be reimbursed by the
Partnership therefor.
6.06 OUTSIDE ACTIVITIES. The Partners and any officer, director,
employee, agent, trustee, Affiliate, Subsidiary, or shareholder of any Partner
shall be entitled to and may have business interests and engage in business
activities in addition to those relating to the Partnership, including business
interests and activities substantially similar or identical to those of the
Partnership. Neither the Partnership nor any of the Limited Partners shall have
any rights by virtue of this Agreement in any such business ventures, interest
or activities. None of the Limited Partners nor any other Person shall have any
rights by virtue of this Agreement or the partnership relationship established
hereby in any such business ventures, interests or activities, and the General
Partner shall have no obligation pursuant to this Agreement to offer any
interest in any such business ventures, interests and activities to the
Partnership or any Limited Partner, even if such opportunity is of a character
which, if presented to the Partnership or any Limited Partner, could be taken by
such Person.
6.07 EMPLOYMENT OR RETENTION OF AFFILIATES.
(a) Any Affiliate of the General Partner may be employed or
retained by the Partnership and may otherwise deal with the Partnership (whether
as a buyer, lessor, lessee, manager, furnisher of goods or services, broker,
agent, lender or otherwise) and may receive from the Partnership any
compensation, price, or other payment therefor which the General Partner
determines to be fair and reasonable.
(b) The Partnership may lend or contribute to its Subsidiaries or
other Persons in which it has an equity investment, and such Persons may borrow
funds from the Partnership, on terms and conditions established in the sole and
absolute discretion of the General Partner. The foregoing authority shall not
create any right or benefit in favor of any Subsidiary or any other Person.
(c) The Partnership may transfer assets to joint ventures, other
partnerships, corporations or other business entities in which it is or thereby
becomes a participant upon
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such terms and subject to such conditions as the General Partner deems are
consistent with this Agreement and applicable law.
(d) Except as expressly permitted by this Agreement, neither the
General Partner nor any of its Affiliates shall sell, transfer or convey any
property to, or purchase any property from, the Partnership, directly or
indirectly, except pursuant to transactions that are on terms that are fair and
reasonable to the Partnership.
6.08 GENERAL PARTNER PARTICIPATION. The General Partner agrees that all
business activities of the General Partner shall generally be conducted through
the Partnership or one or more Subsidiary Partnerships, unless otherwise
determined by the Independent Trustees.
6.09 TITLE TO PARTNERSHIP ASSETS. Title to Partnership assets, whether
real, personal or mixed and whether tangible or intangible, shall be deemed to
be owned by the Partnership as an entity, and no Partner, individually or
collectively, shall have any ownership interest in such Partnership assets or
any portion thereof. Title to any or all of the Partnership assets may be held
in the name of the Partnership, the General Partner or one or more nominees, as
the General Partner may determine, including Affiliates of the General Partner.
The General Partner hereby declares and warrants that any Partnership assets for
which legal title is held in the name of the General Partner or any nominee or
Affiliate of the General Partner shall be held by the General Partner for the
use and benefit of the Partnership in accordance with the provisions of this
Agreement; PROVIDED, HOWEVER, that the General Partner shall use its best
efforts to cause beneficial and record title to such assets to be vested in the
Partnership as soon as reasonably practicable. All Partnership assets shall be
recorded as the property of the Partnership in its books and records,
irrespective of the name in which legal title to such Partnership assets is
held.
6.10 MISCELLANEOUS. In the event the General Partner redeems any REIT
Shares, then the General Partner shall cause the Partnership to purchase from
the General Partner a number of Partnership Units as determined based on the
application of the Conversion Factor on the same terms that the General Partner
exchanged such REIT Shares. Moreover, if the General Partner makes a cash
tender offer or other offer to acquire REIT Shares, then the General Partner
shall cause the Partnership to make a corresponding offer to the General Partner
to acquire an equal number of Partnership Units held by the General Partner. In
the event any REIT Shares are exchanged by the General Partner pursuant to such
offer, the Partnership shall redeem an equivalent number of the General
Partner's Partnership Units for an equivalent purchase price based on the
application of the Conversion Factor.
ARTICLE VII
CHANGES IN GENERAL PARTNER
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7.01 TRANSFER OF THE GENERAL PARTNER'S PARTNERSHIP INTEREST.
(a) The General Partner shall not transfer all or any portion of
its General Partnership Interest or withdraw as General Partner except as
provided in or in connection with a transaction contemplated by Section 7.01(c),
(d) or (e).
(b) The General Partner agrees that its Percentage Interest will
at all times be at least 1%.
(c) Except as otherwise provided in Section 6.04(b) or Section
7.01(d) or (e) hereof, the General Partner shall not engage in any merger,
consolidation or other combination with or into another Person or sale of all or
substantially all of its assets, (other than in connection with a change in the
General Partner's state of incorporation or organizational form) in each case
which results in a change of control of the General Partner (a "Transaction"),
unless:
(i) the consent of Limited Partners (other than the General
Partner or any Subsidiary) holding more than 50% of the Percentage
Interests of the Limited Partners (other than those held by the
General Partner or any Subsidiary) is obtained;
(ii) as a result of such Transaction all Limited Partners will
receive for each Partnership Unit an amount of cash, securities, or
other property equal to the product of the Conversion Factor and
the greatest amount of cash, securities or other property paid in
the Transaction to a holder of one REIT Share in consideration of
one REIT Share, PROVIDED THAT if, in connection with the
Transaction, a purchase, tender or exchange offer ("Offer") shall
have been made to and accepted by the holders of more than 50% of
the outstanding REIT Shares, each holder of Partnership Units shall
be given the option to exchange its Partnership Units for the
greatest amount of cash, securities, or other property which a
Limited Partner would have received had it (A) exercised its
Redemption Right and (B) sold, tendered or exchanged pursuant to
the Offer the REIT Shares received upon exercise of the Redemption
Right immediately prior to the expiration of the Offer; or
(iii) the General Partner is the surviving entity in the
Transaction and either (A) the holders of REIT Shares do not
receive cash, securities, or other property in the Transaction or
(B) all Limited Partners (other than the General Partner or any
Subsidiary) receive an amount of cash, securities, or other
property (expressed as an amount per REIT Share) that is no less
than the product of the Conversion Factor and the greatest amount
of cash, securities, or other property (expressed as an amount per
REIT Share) received in the Transaction by any holder of REIT
Shares.
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(d) Notwithstanding Section 7.01(c), the General Partner may merge
with or into or consolidate with another entity if immediately after such merger
or consolidation (i) substantially all of the assets of the successor or
surviving entity (the "Survivor"), other than Partnership Units held by the
General Partner, are contributed, directly or indirectly, to the Partnership as
a Capital Contribution in exchange for Partnership Units with a fair market
value equal to the value of the assets so contributed as determined by the
Survivor in good faith and (ii) the Survivor expressly agrees to assume all
obligations of the General Partner hereunder. Upon such contribution and
assumption, the Survivor shall have the right and duty to amend this Agreement
as set forth in this Section 7.01(d). The Survivor shall in good faith arrive
at a new method for the calculation of the Cash Amount, the REIT Shares Amount
and Conversion Factor for a Partnership Unit after any such merger or
consolidation so as to approximate the existing method for such calculation as
closely as reasonably possible. Such calculation shall take into account, among
other things, the kind and amount of securities, cash and other property that
was receivable upon such merger or consolidation by a holder of REIT Shares or
options, warrants or other rights relating thereto, and to which a holder of
Partnership Units could have acquired had such Partnership Units been exchanged
immediately prior to such merger or consolidation. Such amendment to this
Agreement shall provide for adjustment to such method of calculation, which
shall be as nearly equivalent as may be practicable to the adjustments provided
for with respect to the Conversion Factor. The Survivor also shall in good
faith modify the definition of REIT Shares and make such amendments to Section
8.05 hereof so as to approximate the existing rights and obligations set forth
in Section 8.05 as closely as reasonably possible. The above provisions of this
Section 7.01(d) shall similarly apply to successive mergers or consolidations
permitted hereunder.
In respect of any transaction described in the preceding Paragraph,
the General Partner is required to use its commercially reasonable efforts to
structure such transaction to avoid causing the Limited Partners to recognize a
gain for federal income tax purposes by virtue of the occurrence of or their
participation in such transaction, PROVIDED such efforts are consistent with the
exercise of the Board of Trustees' fiduciary duties to the shareholders of the
General Partner under applicable law.
(e) Notwithstanding Section 7.01(c),
(i) a General Partner may transfer all or any portion of its
General Partnership Interest to (A) a wholly-owned Subsidiary of
such General Partner or (B) the owner of all of the ownership
interests of such General Partner, and following a transfer of all
of its General Partnership Interest, may withdraw as General
Partner; and
(ii) the General Partner may engage in a transaction not
required by law or by the rules of any national securities exchange
on which the REIT Shares are listed to be submitted to the vote of
the holders of the REIT Shares.
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7.02 ADMISSION OF A SUBSTITUTE OR ADDITIONAL GENERAL PARTNER. A Person
shall be admitted as a substitute or additional General Partner of the
Partnership only if the following terms and conditions are satisfied:
(a) the Person to be admitted as a substitute or additional
General Partner shall have accepted and agreed to be bound by all the terms and
provisions of this Agreement by executing a counterpart thereof and such other
documents or instruments as may be required or appropriate in order to effect
the admission of such Person as a General Partner, and a certificate evidencing
the admission of such Person as a General Partner shall have been filed for
recordation and all other actions required by Section 2.05 hereof in connection
with such admission shall have been performed;
(b) if the Person to be admitted as a substitute or additional
General Partner is a corporation or a partnership it shall have provided the
Partnership with evidence satisfactory to counsel for the Partnership of such
Person's authority to become a General Partner and to be bound by the terms and
provisions of this Agreement; and
(c) counsel for the Partnership shall have rendered an opinion
(relying on such opinions from other counsel and the state or any other
jurisdiction as may be necessary) that the admission of the person to be
admitted as a substitute or additional General Partner is in conformity with the
Act, that none of the actions taken in connection with the admission of such
Person as a substitute or additional General Partner will cause (i) the
Partnership to be classified other than as a partnership for federal income tax
purposes, or (ii) the loss of any Limited Partner's limited liability.
7.03 EFFECT OF BANKRUPTCY, WITHDRAWAL, DEATH OR DISSOLUTION OF A
GENERAL PARTNER.
(a) Upon the occurrence of an Event of Bankruptcy as to a General
Partner (and its removal pursuant to Section 7.04(a) hereof) or the death,
withdrawal, removal or dissolution of a General Partner (except that, if a
General Partner is on the date of such occurrence a partnership, the withdrawal,
death, dissolution, Event of Bankruptcy as to, or removal of a partner in, such
partnership shall be deemed not to be a dissolution of such General Partner if
the business of such General Partner is continued by the remaining partner or
partners), the Partnership shall be dissolved and terminated unless the
Partnership is continued pursuant to Section 7.03(b) hereof. The merger of the
General Partner with or into any entity that is admitted as a substitute or
successor General Partner pursuant to Section 7.02 hereof shall not be deemed to
be the withdrawal, dissolution or removal of the General Partner.
(b) Following the occurrence of an Event of Bankruptcy as to a
General Partner (and its removal pursuant to Section 7.04(a) hereof) or the
death, withdrawal, removal or dissolution of a General Partner (except that, if
a General Partner is on the date of such
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occurrence a partnership, the withdrawal, death, dissolution, Event of
Bankruptcy as to, or removal of a partner in, such partnership shall be deemed
not to be a dissolution of such General Partner if the business of such General
Partner is continued by the remaining partner or partners), the Limited
Partners, within 90 days after such occurrence, may elect to continue the
business of the Partnership for the balance of the term specified in Section
2.04 hereof by selecting, subject to Section 7.02 hereof and any other
provisions of this Agreement, a substitute General Partner by consent of a
majority in interest of the Limited Partners. If the Limited Partners elect to
continue the business of the Partnership and admit a substitute General Partner,
the relationship with the Partners and of any Person who has acquired an
interest of a Partner in the Partnership shall be governed by this Agreement.
7.04 REMOVAL OF A GENERAL PARTNER.
(a) Upon the occurrence of an Event of Bankruptcy as to, or the
dissolution of, a General Partner, such General Partner shall be deemed to be
removed automatically; PROVIDED, HOWEVER, that if a General Partner is on the
date of such occurrence a partnership, the withdrawal, death, dissolution, Event
of Bankruptcy as to or removal of a partner in such partnership shall be deemed
not to be a dissolution of the General Partner if the business of such General
Partner is continued by the remaining partner or partners. The Limited Partners
may not remove the General Partner, with or without cause.
(b) If a General Partner has been removed pursuant to this Section
7.04 and the Partnership is continued pursuant to Section 7.03 hereof, such
General Partner shall promptly transfer and assign its General Partnership
Interest in the Partnership to the substitute General Partner approved by a
majority in interest of the Limited Partners in accordance with Section 7.03(b)
hereof and otherwise admitted to the Partnership in accordance with Section 7.02
hereof. At the time of assignment, the removed General Partner shall be
entitled to receive from the substitute General Partner the fair market value of
the General Partnership Interest of such removed General Partner as reduced by
any damages caused to the Partnership by such General Partner. Such fair market
value shall be determined by an appraiser mutually agreed upon by the General
Partner and a majority in interest of the Limited Partners within 10 days
following the removal of the General Partner. In the event that the parties are
unable to agree upon an appraiser, the removed General Partner and a majority in
interest of the Limited Partners each shall select an appraiser. Each such
appraiser shall complete an appraisal of the fair market value of the removed
General Partner's General Partnership Interest within 30 days of the General
Partner's removal, and the fair market value of the removed General Partner's
General Partnership Interest shall be the average of the two appraisals;
PROVIDED, HOWEVER, that if the higher appraisal exceeds the lower appraisal by
more than 20% of the amount of the lower appraisal, the two appraisers, no later
than 40 days after the removal of the General Partner, shall select a third
appraiser who shall complete an appraisal of the fair market value of the
removed General Partner's General Partnership Interest no later than 60 days
after the removal of the General Partner. In such case, the fair market value
of the removed General
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Partner's General Partnership Interest shall be the average of the two
appraisals closest in value.
(c) The General Partnership Interest of a removed General Partner,
during the time after default until transfer under Section 7.04(b), shall be
converted to that of a special Limited Partner; PROVIDED, HOWEVER, such removed
General Partner shall not have any rights to participate in the management and
affairs of the Partnership, and shall not be entitled to any portion of the
income, expense, profit, gain or loss allocations or cash distributions
allocable or payable, as the case may be, to the Limited Partners. Instead,
such removed General Partner shall receive and be entitled only to retain
distributions or allocations of such items that it would have been entitled to
receive in its capacity as General Partner, until the transfer is effective
pursuant to Section 7.04(b).
(d) All Partners shall have given and hereby do give such
consents, shall take such actions and shall execute such documents as shall be
legally necessary and sufficient to effect all the foregoing provisions of this
Section.
ARTICLE VIII
RIGHTS AND OBLIGATIONS
OF THE LIMITED PARTNERS
8.01 MANAGEMENT OF THE PARTNERSHIP. The Limited Partners shall not
participate in the management or control of Partnership business nor shall they
transact any business for the Partnership, nor shall they have the power to sign
for or bind the Partnership, such powers being vested solely and exclusively in
the General Partner.
8.02 POWER OF ATTORNEY. Each Limited Partner hereby irrevocably appoints
the General Partner its true and lawful attorney-in-fact, who may act for each
Limited Partner and in its name, place and stead, and for its use and benefit,
to sign, acknowledge, swear to, deliver, file or record, at the appropriate
public offices, any and all documents, certificates, and instruments as may be
deemed necessary or desirable by the General Partner to carry out fully the
provisions of this Agreement and the Act in accordance with their terms, which
power of attorney is coupled with an interest and shall survive the death,
dissolution or legal incapacity of the Limited Partner, or the transfer by the
Limited Partner of any part or all of its Partnership Interest.
8.03 LIMITATION ON LIABILITY OF LIMITED PARTNERS. No Limited Partner
shall be liable for any debts, liabilities, contracts or obligations of the
Partnership. A Limited Partner shall be liable to the Partnership only to make
payments of its Capital Contribution, if any, as and when due hereunder. After
its Capital Contribution is fully paid, no Limited Partner
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shall, except as otherwise required by the Act, be required to make any further
Capital Contributions or other payments or lend any funds to the Partnership.
8.04 OWNERSHIP BY LIMITED PARTNER OF CORPORATE GENERAL PARTNER OR
AFFILIATE. No Limited Partner shall at any time, either directly or indirectly,
own any stock or other interest in the General Partner or in any Affiliate
thereof, if such ownership by itself or in conjunction with other stock or other
interests owned by other Limited Partners would, in the opinion of counsel for
the Partnership, jeopardize the classification of the Partnership as a
partnership for federal income tax purposes. The General Partner shall be
entitled to make such reasonable inquiry of the Limited Partners as is required
to establish compliance by the Limited Partners with the provisions of this
Section.
8.05 REDEMPTION RIGHT.
(a) Subject to Sections 8.05(b), 8.05(c), 8.05(d) and 8.05(e) and
the provisions of any agreements between the Partnership and one or more Limited
Partners with respect to Partnership Units held by them, on or after the date
which is one year after the closing of the Offering, each Limited Partner, other
than the General Partner, shall have the right (the "Redemption Right") to
require the Partnership to redeem on a Specified Redemption Date all or a
portion of the Partnership Units held by such Limited Partner at a redemption
price equal to and in the form of the Cash Amount to be paid by the Partnership.
The Redemption Right shall be exercised pursuant to a Notice of Redemption
delivered to the Partnership (with a copy to the General Partner) by the Limited
Partner who is exercising the Redemption Right (the "Redeeming Partner");
PROVIDED, HOWEVER, that the Partnership shall not be obligated to satisfy such
Redemption Right if the Company and/or the General Partner elects to purchase,
and does purchase, the Partnership Units subject to the Notice of Redemption
pursuant to Section 8.05(b); and PROVIDED, FURTHER, that no Limited Partner may
deliver more than two Notices of Redemption during each calendar year. A
Limited Partner may not exercise the Redemption Right for less than 1,000
Partnership Units or, if such Limited Partner holds less than 1,000 Partnership
Units, all of the Partnership Units held by such Partner. The Redeeming Partner
shall have no right, with respect to any Partnership Units so redeemed, to
receive any distribution paid with respect to Partnership Units if the record
date for such distribution is on or after the Specified Redemption Date.
(b) Notwithstanding the provisions of Section 8.05(a), a Limited
Partner that exercises the Redemption Right shall be deemed to have offered to
sell the Partnership Units described in the Notice of Redemption to the General
Partner, and the General Partner may, in its sole and absolute discretion, elect
to purchase directly and acquire such Partnership Units by paying to the
Redeeming Partner either the Cash Amount or the REIT Shares Amount, as elected
by the General Partner (in its sole and absolute discretion), on the Specified
Redemption Date, whereupon the General Partner shall acquire for the Cash Amount
or the REIT Shares Amount, as determined by the General Partner (as set forth
above), the Partnership Units offered for redemption by the Redeeming Partner
and shall be treated for all
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purposes of this Agreement as the owner of such Partnership Units. If the
General Partner shall elect to exercise its right to purchase Partnership Units
under this Section 8.05(b) with respect to a Notice of Redemption, it shall so
notify the Redeeming Partner within five business days after the receipt by the
General Partner of such Notice of Redemption. Unless the General Partner (in
its sole and absolute discretion) shall exercise its right to purchase
Partnership Units from the Redeeming Partner pursuant to this Section 8.05(b),
the General Partner shall have no obligation to the Redeeming Partner or the
Partnership with respect to the Redeeming Partner's exercise of the Redemption
Right. In the event the General Partner shall exercise its right to purchase,
and does purchase, Partnership Units with respect to the exercise of a
Redemption Right in the manner described in the first sentence of this
Section 8.05(b), the Partnership shall have no obligation to pay any amount to
the Redeeming Partner with respect to such Redeeming Partner's exercise of such
Redemption Right, and each of the Redeeming Partner, the Partnership, and the
General Partner shall treat the transaction between the General Partner and the
Redeeming Partner for federal income tax purposes as a sale of the Redeeming
Partner's Partnership Units to the General Partner. Each Redeeming Partner
agrees to execute such documents as the General Partner may reasonably require
in connection with the issuance of REIT Shares upon exercise of the Redemption
Right.
(c) Notwithstanding the provisions of Section 8.05(a) and 8.05(b),
a Redeeming Partner shall be paid the Cash Amount if the delivery of REIT Shares
to such Partner on the Specified Redemption Date by the General Partner pursuant
to Section 8.05(b) (regardless of whether or not the General Partner would in
fact exercise its rights under Section 8.05(b)) would (i) result in such Partner
or any other person owning, directly or indirectly, REIT Shares in excess of the
Ownership Limitation (as defined in the Declaration of Trust) and calculated in
accordance therewith, except as provided in the Amended and Restated Articles of
Incorporation, (ii) result in REIT Shares being owned by fewer than 100 persons
(determined without reference to any rules of attribution), except as provided
in the Declaration of Trust, (iii) result in the General Partner being "closely
held" within the meaning of Section 856(h) of the Code, (iv) cause the General
Partner to own, directly or constructively, 10% or more of the ownership
interests in a tenant of the General Partner's, the Partnership's, or a
Subsidiary Partnership's, real property, within the meaning of Section
856(d)(2)(B) of the Code, or (v) cause the acquisition of REIT Shares by such
Partner to be "integrated" with any other distribution of REIT Shares for
purposes of complying with the registration provisions of the Securities Act of
1933, as amended (the "Securities Act").
(d) Any REIT Shares Amounts to be paid to a Redeeming Partner
pursuant to this Section 8.05 shall be paid on the Specified Redemption Date.
Any Cash Amount to be paid to a Redeeming Partner pursuant to this Section 8.05
shall be paid on the Specified Redemption Date; PROVIDED, HOWEVER, that, if the
Notice of Redemption is received by the General Partner after 13 months
following the closing of the Offering and if the Cash Amount is to be paid, the
General Partner may elect to cause the Specified Redemption Date to be delayed
for up to an additional 30 calendar days by providing notice to the Redeeming
Partner. If the General Partner elects to cause the Specified Redemption Date
to be delayed, the
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General Partner shall pay the Redeeming Partner interest for the period of the
delay at a rate equal to (i) 3-month LIBOR plus (ii) 250 basis points. For this
purpose, LIBOR shall mean "ISD-LIBOR-ISDA" as that term is defined in the 1991
ISDA Definitions published by the International Swap Dealers Association, Inc.
Notwithstanding the foregoing, the General Partner agrees to use its best
efforts to cause the closing of the acquisition of redeemed Partnership Units
hereunder to occur as quickly as reasonably possible.
(e) Notwithstanding any other provision of this Agreement, after
13 months following the closing of the Offering, the General Partner shall place
appropriate restrictions on the ability of the Limited Partners to exercise
their Redemption Rights as and if deemed necessary to ensure that the
Partnership does not constitute a "publicly traded partnership" under section
7704 of the Code. If and when the General Partner determines that imposing such
restrictions is necessary, the General Partner shall give prompt written notice
thereof (a "Restriction Notice") to each of the Limited Partners, which notice
shall be accompanied by a copy of an opinion of counsel to the Partnership which
states that, in the opinion of such counsel, restrictions are necessary in order
to avoid the Partnership being treated as a "publicly traded partnership" under
section 7704 of the Code.
8.06 REGISTRATION. Subject to the terms of any agreement between the
General Partner and one or more Limited Partners with respect to Partnership
Units held by them:
(a) REGISTRATION OF THE COMMON STOCK. If the General Partner
elects to pay the REIT Shares Amount to a Redeeming Partner, the General Partner
shall register such REIT Shares (the "Redemption Shares") under the Securities
Act before such Redemption Shares are issued to the Redeeming Partner so that,
upon receipt of such Redemption Shares, the Redeeming Partner may sell, exchange
or otherwise transfer such Redemption Shares without restriction whether by law,
agreement or otherwise (except for restrictions to which all shareholders of the
General Partner are subject, such as the transfer restrictions contained in the
Declaration of Trust); provided that such Redemption Shares must be delivered no
later than the Specified Redemption Date.
(b) LISTING ON SECURITIES EXCHANGE. If the General Partner
shall list or maintain the listing of any shares of Common Stock on any
securities exchange or national market system, it will at its expense and as
necessary to permit the registration and sale of the Redemption Shares
hereunder, use its best efforts to list thereon, to maintain and, when
necessary, to increase such listing to include such Redemption Shares.
(c) REGISTRATION NOT REQUIRED. Notwithstanding the foregoing,
the General Partner shall not be required to file or maintain the effectiveness
of a registration statement relating to Redemption Shares after the first date
upon which, in the opinion of counsel to the General Partner, all of the
Redemption Shares covered thereby could be sold by the holders thereof in any
period of three months pursuant to Rule 144 under the Securities Act, or any
successor rule thereto.
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ARTICLE IX
TRANSFERS OF LIMITED PARTNERSHIP INTERESTS
9.01 PURCHASE FOR INVESTMENT.
(a) Each Limited Partner hereby represents and warrants to the
General Partner and to the Partnership that the acquisition of his Partnership
Interests is made as a principal for his account for investment purposes only
and not with a view to the resale or distribution of such Partnership Interest.
(b) Each Limited Partner agrees that he will not sell, assign or
otherwise transfer his Partnership Interest or any fraction thereof, whether
voluntarily or by operation of law or at judicial sale or otherwise, to any
Person who does not make the representations and warranties to the General
Partner set forth in Section 9.01(a) above and similarly agree not to sell,
assign or transfer such Partnership Interest or fraction thereof to any Person
who does not similarly represent, warrant and agree.
9.02 RESTRICTIONS ON TRANSFER OF LIMITED PARTNERSHIP INTERESTS.
(a) Subject to the provisions of 9.02(b), (c) and (d), no Limited
Partner may offer, sell, assign, or otherwise transfer all or any portion of his
Limited Partnership Interest, or any of such Limited Partner's economic rights
as a Limited Partner, whether voluntarily or by operation of law or at judicial
sale or otherwise (collectively, a "Transfer") without the consent of the
General Partner, which consent may be granted or withheld in its sole and
absolute discretion. Any such purported transfer undertaken without such
consent shall be considered to be null and void AB INITIO and shall not be given
effect. The General Partner may require, as a condition of any Transfer to
which it consents, that the transferor assume all costs incurred by the
Partnership in connection therewith. A Transfer shall not include any pledge,
grant of a security interest in, or other hypothecation of all or any portion of
a Limited Partnership Interest.
(b) No Limited Partner may withdraw from the Partnership other
than as a result of a permitted Transfer (I.E., a Transfer consented to as
contemplated by clause (a) above or clause (c) below or a Transfer pursuant to
9.05 below) of all of his Partnership Units pursuant to this Article IX or
pursuant to a redemption of all of his Partnership Units pursuant to 8.05. Upon
the permitted Transfer or redemption of all of a Limited Partner's Partnership
Units, such Limited Partner shall cease to be a Limited Partner.
(c) Subject to 9.02(d), (e) and (f) below, a Limited Partner may
Transfer, with the consent of the General Partner, all or a portion of his
Partnership Units to (i) a spouse, a parent or parent's spouse, natural or
adopted descendant or descendants, spouse of such
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descendant, or brother or sister, or a trust created by such Limited Partner for
the benefit of such Limited Partner and/or any such person(s), of which trust
such Limited Partner or any such person(s) is a trustee, (ii) a corporation, a
general partnership, a limited partnership, or a limited liability company
controlled by a Person or Persons named in (i) above, or (iii) if the Limited
Partner is an entity, its beneficial owners.
(d) No Limited Partner may effect a Transfer of its Limited
Partnership Interest, in whole or in part, if, in the opinion of legal counsel
for the Partnership, such proposed Transfer would require the registration of
the Limited Partnership Interest under the Securities Act of 1933, as amended,
or would otherwise violate any applicable federal or state securities or blue
sky law (including investment suitability standards).
(e) No Transfer by a Limited Partner of its Partnership Units, in
whole or in part, may be made to any Person if (i) in the opinion of legal
counsel for the Partnership, the transfer would result in the Partnership's
being treated as an association taxable as a corporation (other than a qualified
REIT subsidiary within the meaning of Section 856(i) of the Code), (ii) in the
opinion of legal counsel for the Partnership, it would adversely affect the
ability of the General Partner to continue to qualify as a REIT or subject the
General Partner to any additional taxes under Section 857 or Section 4981 of the
Code, or (iii) such transfer is effectuated through an "established securities
market" or a "secondary market (or the substantial equivalent thereof)" within
the meaning of Section 7704 of the Code.
(f) No transfer of any Partnership Units may be made to a lender
to the Partnership or any Person who is related (within the meaning of
Regulations Section 1.752-4(b)) to any lender to the Partnership whose loan
constitutes a nonrecourse liability (within the meaning of Regulations
Section 1.752-1(a)(2)), without the consent of the General Partner, which may be
withheld in its sole and absolute discretion, PROVIDED THAT as a condition to
such consent the lender will be required to enter into an arrangement with the
Partnership and the General Partner to exchange or redeem for the Cash Amount
any Partnership Units in which a security interest is held simultaneously with
the time at which such lender would be deemed to be a partner in the Partnership
for purposes of allocating liabilities to such lender under Section 752 of the
Code.
(g) Any Transfer in contravention of any of the provisions of this
Article IX shall be void and ineffectual and shall not be binding upon, or
recognized by, the Partnership.
(h) Prior to the consummation of any Transfer under this
Article IX, the transferor and/or the transferee shall deliver to the General
Partner such opinions, certificates and other documents as the General Partner
shall request in connection with such Transfer.
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9.03 ADMISSION OF SUBSTITUTE LIMITED PARTNER.
(a) Subject to the other provisions of this Article IX, an
assignee of the Limited Partnership Interest of a Limited Partner (which shall
be understood to include any purchaser, transferee, donee, or other recipient of
any disposition of such Limited Partnership Interest) shall be deemed admitted
as a Limited Partner of the Partnership only with the consent of the General
Partner and upon the satisfactory completion of the following:
(i) The assignee shall have accepted and agreed to be bound by
the terms and provisions of this Agreement by executing a
counterpart or an amendment thereof, including a revised EXHIBIT A,
and such other documents or instruments as the General Partner may
require in order to effect the admission of such Person as a
Limited Partner.
(ii) To the extent required, an amended Certificate evidencing
the admission of such Person as a Limited Partner shall have been
signed, acknowledged and filed for record in accordance with the
Act.
(iii) The assignee shall have delivered a letter containing the
representation set forth in Section 9.01(a) hereof and the
agreement set forth in Section 9.01(b) hereof.
(iv) If the assignee is a corporation, partnership or trust, the
assignee shall have provided the General Partner with evidence
satisfactory to counsel for the Partnership of the assignee's
authority to become a Limited Partner under the terms and
provisions of this Agreement.
(v) The assignee shall have executed a power of attorney
containing the terms and provisions set forth in Section 8.02
hereof.
(vi) The assignee shall have paid all legal fees and other
expenses of the Partnership and the General Partner and filing and
publication costs in connection with its substitution as a Limited
Partner.
(vii) The assignee has obtained the prior written consent of the
General Partner to its admission as a Substitute Limited Partner,
which consent may be given or denied in the exercise of the General
Partner's sole and absolute discretion.
(b) For the purpose of allocating Profits and Losses and
distributing cash received by the Partnership, a Substitute Limited Partner
shall be treated as having become, and appearing in the records of the
Partnership as, a Partner upon the filing of the Certificate described in
Section 9.03(a)(ii) hereof or, if no such filing is required, the later of the
date
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specified in the transfer documents or the date on which the General Partner has
received all necessary instruments of transfer and substitution.
(c) The General Partner shall cooperate with the Person seeking to
become a Substitute Limited Partner by preparing the documentation required by
this Section and making all official filings and publications. The Partnership
shall take all such action as promptly as practicable after the satisfaction of
the conditions in this Article IX to the admission of such Person as a Limited
Partner of the Partnership.
9.04 RIGHTS OF ASSIGNEES OF PARTNERSHIP INTERESTS.
(a) Subject to the provisions of Sections 9.01 and 9.02 hereof,
except as required by operation of law, the Partnership shall not be obligated
for any purposes whatsoever to recognize the assignment by any Limited Partner
of its Partnership Interest until the Partnership has received notice thereof.
(b) Any Person who is the assignee of all or any portion of a
Limited Partner's Limited Partnership Interest, but does not become a Substitute
Limited Partner and desires to make a further assignment of such Limited
Partnership Interest, shall be subject to all the provisions of this Article IX
to the same extent and in the same manner as any Limited Partner desiring to
make an assignment of its Limited Partnership Interest.
9.05 EFFECT OF BANKRUPTCY, DEATH, INCOMPETENCE OR TERMINATION OF A
LIMITED PARTNER. The occurrence of an Event of Bankruptcy as to a Limited
Partner, the death of a Limited Partner or a final adjudication that a Limited
Partner is incompetent (which term shall include, but not be limited to,
insanity) shall not cause the termination or dissolution of the Partnership, and
the business of the Partnership shall continue if an order for relief in a
bankruptcy proceeding is entered against a Limited Partner, the trustee or
receiver of his estate or, if he dies, his executor, administrator or trustee,
or, if he is finally adjudicated incompetent, his committee, guardian or
conservator, shall have the rights of such Limited Partner for the purpose of
settling or managing his estate property and such power as the bankrupt,
deceased or incompetent Limited Partner possessed to assign all or any part of
his Partnership Interest and to join with the assignee in satisfying conditions
precedent to the admission of the assignee as a Substitute Limited Partner.
9.06 JOINT OWNERSHIP OF INTERESTS. A Partnership Interest may be
acquired by two individuals as joint tenants with right of survivorship,
PROVIDED that such individuals either are married or are related and share the
same home as tenants in common. The written consent or vote of both owners of
any such jointly held Partnership Interest shall be required to constitute the
action of the owners of such Partnership Interest; PROVIDED, HOWEVER, that the
written consent of only one joint owner will be required if the Partnership has
been provided with evidence satisfactory to the counsel for the Partnership that
the actions of a single joint owner can bind both owners under the applicable
laws of the state of residence of such joint owners.
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Upon the death of one owner of a Partnership Interest held in a joint tenancy
with a right of survivorship, the Partnership Interest shall become owned solely
by the survivor as a Limited Partner and not as an assignee. The Partnership
need not recognize the death of one of the owners of a jointly-held Partnership
Interest until it shall have received notice of such death. Upon notice to the
General Partner from either owner, the General Partner shall cause the
Partnership Interest to be divided into two equal Partnership Interests, which
shall thereafter be owned separately by each of the former owners.
ARTICLE X
BOOKS AND RECORDS; ACCOUNTING; TAX MATTERS
10.01 BOOKS AND RECORDS. At all times during the continuance of the
Partnership, the Partners shall keep or cause to be kept at the Partnership's
specified office true and complete books of account in accordance with generally
accepted accounting principles, including: (a) a current list of the full name
and last known business address of each Partner, (b) a copy of the Certificate
of Limited Partnership and all certificates of amendment thereto, (c) copies of
the Partnership's federal, state and local income tax returns and reports,
(d) copies of the Agreement and any financial statements of the Partnership for
the three most recent years and (e) all documents and information required under
the Act. Any Partner or its duly authorized representative, upon paying the
costs of collection, duplication and mailing, shall be entitled to inspect or
copy such records during ordinary business hours.
10.02 CUSTODY OF PARTNERSHIP FUNDS; BANK ACCOUNTS.
(a) All funds of the Partnership not otherwise invested shall be
deposited in one or more accounts maintained in such banking or brokerage
institutions as the General Partner shall determine, and withdrawals shall be
made only on such signature or signatures as the General Partner may, from time
to time, determine.
(b) All deposits and other funds not needed in the operation of
the business of the Partnership may be invested by the General Partner in
investment grade instruments (or investment companies whose portfolio consists
primarily thereof), government obligations, certificates of deposit, bankers'
acceptances and municipal notes and bonds. The funds of the Partnership shall
not be commingled with the funds of any other Person except for such commingling
as may necessarily result from an investment in those investment companies
permitted by this Section 10.02(b).
10.03 FISCAL AND TAXABLE YEAR. The fiscal and taxable year of the
Partnership shall be the calendar year.
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10.04 ANNUAL TAX INFORMATION AND REPORT. Within 75 days after the end of
each fiscal year of the Partnership, the General Partner shall furnish to each
person who was a Limited Partner at any time during such year the tax
information necessary to file such Limited Partner's individual tax returns as
shall be reasonably required by law.
10.05 TAX MATTERS PARTNER; TAX ELECTIONS; SPECIAL BASIS ADJUSTMENTS.
(a) The General Partner shall be the Tax Matters Partner of the
Partnership within the meaning of Section 6231(a)(7) of the Code. As Tax
Matters Partner, the General Partner shall have the right and obligation to take
all actions authorized and required, respectively, by the Code for the Tax
Matters Partner. The General Partner shall have the right to retain
professional assistance in respect of any audit of the Partnership by the
Service and all out-of-pocket expenses and fees incurred by the General Partner
on behalf of the Partnership as Tax Matters Partner shall constitute Partnership
expenses. In the event the General Partner receives notice of a final
Partnership adjustment under Section 6223(a)(2) of the Code, the General Partner
shall either (i) file a court petition for judicial review of such final
adjustment within the period provided under Section 6226(a) of the Code, a copy
of which petition shall be mailed to all Limited Partners on the date such
petition is filed, or (ii) mail a written notice to all Limited Partners, within
such period, that describes the General Partner's reasons for determining not to
file such a petition.
(b) All elections required or permitted to be made by the
Partnership under the Code or any applicable state or local tax law shall be
made by the General Partner in its sole and absolute discretion.
(c) In the event of a transfer of all or any part of the
Partnership Interest of any Partner, the Partnership, at the option of the
General Partner, may elect pursuant to Section 754 of the Code to adjust the
basis of the Properties. Notwithstanding anything contained in Article V of
this Agreement, any adjustments made pursuant to Section 754 shall affect only
the successor in interest to the transferring Partner and in no event shall be
taken into account in establishing, maintaining or computing Capital Accounts
for the other Partners for any purpose under this Agreement. Each Partner will
furnish the Partnership with all information necessary to give effect to such
election.
10.06 REPORTS TO LIMITED PARTNERS.
(a) As soon as practicable after the close of each fiscal quarter
(other than the last quarter of the fiscal year), the General Partner shall
cause to be mailed to each Limited Partner a quarterly report containing
financial statements of the Partnership, or of the General Partner if such
statements are prepared solely on a consolidated basis with the General Partner,
for such fiscal quarter, presented in accordance with generally accepted
accounting principles. As soon as practicable after the close of each fiscal
year, the General Partner shall cause to be mailed to each Limited Partner an
annual report containing financial statements of the
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Partnership, or of the General Partner if such statements are prepared solely on
a consolidated basis with the General Partner, for such fiscal year, presented
in accordance with generally accepted accounting principles. The annual
financial statements shall be audited by accountants selected by the General
Partner.
(b) Any Partner shall further have the right to a private audit of
the books and records of the Partnership, provided such audit is made for
Partnership purposes, at the expense of the Partner desiring it and is made
during normal business hours.
ARTICLE XI
AMENDMENT OF AGREEMENT; MERGER
The General Partner's consent shall be required for any amendment to this
Agreement. The General Partner, without the consent of the Limited Partners,
may amend this Agreement in any respect or merge or consolidate the Partnership
with or into any other partnership or business entity (as defined in Section
17-211 of the Act) in a transaction pursuant to Section 7.01(c), (d) or (e)
hereof; PROVIDED, HOWEVER, that the following amendments shall require the
unanimous consent of Limited Partners (other than the General Partner):
(a) any amendment affecting the operation of the Conversion
Factor or the Redemption Right (except as provided in Section 8.05(e) or
7.01(d), as in effect on the date hereof) in a manner adverse to the Limited
Partners;
(b) any amendment that would adversely affect the rights of the
Limited Partners to receive the distributions payable to them hereunder, other
than with respect to the issuance of additional Partnership Units pursuant to
Section 4.02 hereof;
(c) any amendment that would alter the Partnership's allocations
of Profit and Loss to the Limited Partners, other than with respect to the
issuance of additional Partnership Units pursuant to Section 4.02 hereof;
(d) any amendment that would impose on the Limited Partners any
obligation to make additional Capital Contributions to the Partnership; or
(e) any amendment to Section 2.03(a)(iii), 8.06, 9.02, or Article
XI hereof.
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ARTICLE XII
GENERAL PROVISIONS
12.01 NOTICES. All communications required or permitted under this
Agreement shall be in writing and shall be deemed to have been given when
delivered personally or upon deposit in the United States mail, registered,
postage prepaid return receipt requested, to the Partners at the addresses set
forth in EXHIBIT A attached hereto; PROVIDED, HOWEVER, that any Partner may
specify a different address by notifying the General Partner in writing of such
different address. Notices to the Partnership shall be delivered at or mailed
to its specified office.
12.02 SURVIVAL OF RIGHTS. Subject to the provisions hereof limiting
transfers, this Agreement shall be binding upon and inure to the benefit of the
Partners and the Partnership and their respective legal representatives,
successors, transferees and assigns.
12.03 ADDITIONAL DOCUMENTS. Each Partner agrees to perform all further
acts and execute, swear to, acknowledge and deliver all further documents which
may be reasonable, necessary, appropriate or desirable to carry out the
provisions of this Agreement or the Act.
12.04 SEVERABILITY. If any provision of this Agreement shall be declared
illegal, invalid, or unenforceable in any jurisdiction, then such provision
shall be deemed to be severable from this Agreement (to the extent permitted by
law) and in any event such illegality, invalidity or unenforceability shall not
affect the remainder hereof.
12.05 ENTIRE AGREEMENT. This Agreement and exhibits attached hereto
constitute the entire Agreement of the Partners and supersede all prior written
agreements and prior and contemporaneous oral agreements, understandings and
negotiations with respect to the subject matter hereof.
12.06 PRONOUNS AND PLURALS. When the context in which words are used in
the Agreement indicates that such is the intent, words in the singular number
shall include the plural and the masculine gender shall include the neuter or
female gender as the context may require.
12.07 HEADINGS. The Article headings or sections in this Agreement are
for convenience only and shall not be used in construing the scope of this
Agreement or any particular Article.
12.08 COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original copy and all of
which together shall constitute one and the same instrument binding on all
parties hereto, notwithstanding that all parties shall not have signed the same
counterpart.
- 43 -
<PAGE>
12.09 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware.
- 44 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have hereunder affixed their
signatures to this Amended and Restated Agreement of Limited Partnership, all as
of the ___ day of ________ 1997.
AEGIS INVESTMENT TRUST
By:
-------------------------------------------
Name:
Title:
- 45 -
<PAGE>
EXHIBIT A
Agreed
Value of
Cash Capital Partnership Percentage
Partner Contribution Contribution Units Interest
- ------- ------------ ------------ ----- --------
GENERAL PARTNER:
AEGIS Investment Trust
2500 CityWest Boulevard
Suite 1200
Houston, Texas 77042
<PAGE>
Agreed
Value of
Cash Capital Partnership Percentage
Partner Contribution Contribution Units Interest
- ------- ------------ ------------ ----- --------
LIMITED PARTNERS:
<PAGE>
EXHIBIT B
NOTICE OF EXERCISE OF REDEMPTION RIGHT
In accordance with Section 8.05 of the Amended and Restated Agreement of
Limited Partnership (the "Agreement") of AEGIS Operating Partnership, L.P., the
undersigned hereby irrevocably (i) presents for redemption ________ Partnership
Units in AEGIS Operating Partnership, L.P. in accordance with the terms of the
Agreement and the Redemption Right referred to in Section 8.05 thereof, (ii)
surrenders such Partnership Units and all right, title and interest therein, and
(iii) directs that the Cash Amount or REIT Shares Amount (as defined in the
Agreement) as determined by the General Partner deliverable upon exercise of the
Redemption Right be delivered to the address specified below, and if REIT Shares
(as defined in the Agreement) are to be delivered, such REIT Shares be
registered or placed in the name(s) and at the address(es) specified below.
Dated: ,
-------- -- -----
Name of Limited Partner:
------------------------------
(Signature of Limited Partner)
------------------------------
(Mailing Address)
------------------------------
(City) (State) (Zip Code)
Signature Guaranteed by:
------------------------------
<PAGE>
If REIT Shares are to be issued, issue to:
Please insert social security or identifying number:
Name:
<PAGE>
AEGIS INVESTMENT TRUST
1997 INCENTIVE PLAN
<PAGE>
TABLE OF CONTENTS
Section Page
- ------- ----
ARTICLE I DEFINITIONS
1.01. Acceleration Date. . . . . . . . . . . . . . . . . . . . 1
1.02. Acquiring Person . . . . . . . . . . . . . . . . . . . . 1
1.03. Administrator. . . . . . . . . . . . . . . . . . . . . . 1
1.04. Affiliate. . . . . . . . . . . . . . . . . . . . . . . . 1
1.05. Agreement. . . . . . . . . . . . . . . . . . . . . . . . 1
1.06. Associate. . . . . . . . . . . . . . . . . . . . . . . . 2
1.07. Board. . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.08. Change in Control. . . . . . . . . . . . . . . . . . . . 2
1.09. Code . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.10. Committee. . . . . . . . . . . . . . . . . . . . . . . . 2
1.11. Common Shares. . . . . . . . . . . . . . . . . . . . . . 2
1.12. Company. . . . . . . . . . . . . . . . . . . . . . . . . 2
1.13. Continuing Trustee . . . . . . . . . . . . . . . . . . . 3
1.14. Control Affiliate. . . . . . . . . . . . . . . . . . . . 3
1.15. Control Change Date. . . . . . . . . . . . . . . . . . . 3
1.16. Corresponding SAR. . . . . . . . . . . . . . . . . . . . 3
1.17. Exchange Act . . . . . . . . . . . . . . . . . . . . . . 3
1.18 Fair Market Value. . . . . . . . . . . . . . . . . . . . 3
1.19. Initial Value. . . . . . . . . . . . . . . . . . . . . . 4
1.20. Incentive Award. . . . . . . . . . . . . . . . . . . . . 5
1.21. Option . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.22. Participant. . . . . . . . . . . . . . . . . . . . . . . 5
1.23. Performance Based Dividend Equivalent Right. . . . . . . 5
1.24. Performance Shares . . . . . . . . . . . . . . . . . . . 6
1.25. Person . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.26. Plan . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.27. Related Entity . . . . . . . . . . . . . . . . . . . . . 6
1.28. SAR. . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.29. Share Award. . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE II PURPOSES . . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE III ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE IV ELIGIBILITY. . . . . . . . . . . . . . . . . . . . . . . 10
i
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TABLE OF CONTENTS
Section Page
- ------- ----
ARTICLE V SHARES SUBJECT TO PLAN
5.01. Shares Issued. . . . . . . . . . . . . . . . . . . . . . 10
5.02. Aggregate Limit. . . . . . . . . . . . . . . . . . . . . 11
5.03. Reallocation of Shares . . . . . . . . . . . . . . . . . 11
ARTICLE VI OPTIONS
6.01. Award. . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.02. Option Price . . . . . . . . . . . . . . . . . . . . . . 12
6.03. Maximum Option Period. . . . . . . . . . . . . . . . . . 13
6.04. Nontransferability . . . . . . . . . . . . . . . . . . . 13
6.05. Transferable Options . . . . . . . . . . . . . . . . . . 13
6.06. Employee Status. . . . . . . . . . . . . . . . . . . . . 14
6.07. Exercise . . . . . . . . . . . . . . . . . . . . . . . . 14
6.08. Performance Based Dividend Equivalent Rights . . . . . . 15
6.09. Payment. . . . . . . . . . . . . . . . . . . . . . . . . 15
6.10. Shareholder Rights.. . . . . . . . . . . . . . . . . . . 16
6.11. Disposition of Shares. . . . . . . . . . . . . . . . . . 16
ARTICLE VII SARS
7.01. Award. . . . . . . . . . . . . . . . . . . . . . . . . . 16
7.02. Maximum SAR Period . . . . . . . . . . . . . . . . . . . 17
7.03. Nontransferability . . . . . . . . . . . . . . . . . . . 17
7.04. Transferable SARs. . . . . . . . . . . . . . . . . . . . 18
7.05. Exercise . . . . . . . . . . . . . . . . . . . . . . . . 18
7.06. Employee Status. . . . . . . . . . . . . . . . . . . . . 19
7.07. Settlement.. . . . . . . . . . . . . . . . . . . . . . . 19
7.08. Shareholder Rights . . . . . . . . . . . . . . . . . . . 19
ARTICLE VIII SHARE AWARDS
8.01. Award. . . . . . . . . . . . . . . . . . . . . . . . . . 20
8.02. Vesting. . . . . . . . . . . . . . . . . . . . . . . . . 20
8.03. Performance Objectives . . . . . . . . . . . . . . . . . 20
8.04. Employee Status. . . . . . . . . . . . . . . . . . . . . 21
8.05. Change in Control. . . . . . . . . . . . . . . . . . . . 21
ii
<PAGE>
TABLE OF CONTENTS
Section Page
- ------- ----
8.06. Shareholder Rights . . . . . . . . . . . . . . . . . . . 21
ARTICLE IX PERFORMANCE SHARE AWARDS
9.01. Award. . . . . . . . . . . . . . . . . . . . . . . . . . 22
9.02. Earning the Award. . . . . . . . . . . . . . . . . . . . 22
9.03. Payment. . . . . . . . . . . . . . . . . . . . . . . . . 23
9.04. Shareholder Rights . . . . . . . . . . . . . . . . . . . 23
9.05. Nontransferability . . . . . . . . . . . . . . . . . . . 23
9.06. Transferable Performance Shares. . . . . . . . . . . . . 24
9.07. Employee Status. . . . . . . . . . . . . . . . . . . . . 24
9.08. Change In Control. . . . . . . . . . . . . . . . . . . . 24
ARTICLE X INCENTIVE AWARDS
10.01. Award. . . . . . . . . . . . . . . . . . . . . . . . . . 25
10.02. Terms and Conditions.. . . . . . . . . . . . . . . . . . 25
10.03. Nontransferability . . . . . . . . . . . . . . . . . . . 26
10.04. Transferable Incentive Awards. . . . . . . . . . . . . . 26
10.05. Employee Status. . . . . . . . . . . . . . . . . . . . . 26
10.06. Change in Control. . . . . . . . . . . . . . . . . . . . 27
10.07. Shareholder Rights . . . . . . . . . . . . . . . . . . . 27
ARTICLE XI ADJUSTMENT UPON CHANGE IN COMMON SHARES. . . . . . . . . 27
ARTICLE XII COMPLIANCE WITH LAW AND APPROVAL OF REGULATORY BODIES. . 29
ARTICLE XIII GENERAL PROVISIONS
13.01. Effect on Employment and Service . . . . . . . . . . . . 30
13.02. Unfunded Plan. . . . . . . . . . . . . . . . . . . . . . 30
13.03. Rules of Construction. . . . . . . . . . . . . . . . . . 30
ARTICLE XIV AMENDMENT. . . . . . . . . . . . . . . . . . . . . . . . 31
ARTICLE XV DURATION OF PLAN . . . . . . . . . . . . . . . . . . . . . . . . 31
iii
<PAGE>
TABLE OF CONTENTS
Section Page
- ------- ----
ARTICLE XVI EFFECTIVE DATE OF PLAN . . . . . . . . . . . . . . . . . 32
iv
<PAGE>
AEGIS INVESTMENT TRUST
1997 INCENTIVE PLAN
ARTICLE I
DEFINITIONS
1.01. ACCELERATION DATE means the earlier of (i) the date that the Board
approves a transaction or series of transactions which, if consummated, would
result in a Change in Control or (ii) the date that an agreement is entered into
with respect to a transaction or series of transactions which, if consummated,
would result in a Change in Control.
1.02. ACQUIRING PERSON means that a Person, considered alone or together
with all Control Affiliates and Associates of that Person, is or becomes
directly or indirectly the beneficial owner of securities representing at least
thirty percent (30%) of the Company's then outstanding securities entitled to
vote generally in the election of the Board.
1.03. ADMINISTRATOR means the Committee and any delegate of the Committee
that is appointed in accordance with Article III.
1.04. AFFILIATE means any "subsidiary" or "parent" corporation (within the
meaning of Section 424 of the Code) of the Company.
1.05. AGREEMENT means a written agreement (including any amendment or
supplement thereto) between the Company and a Participant specifying the terms
and conditions of a Share Award, an award of Performance Shares, an Incentive
Award or an Option or SAR granted to such Participant.
1
<PAGE>
1.06. ASSOCIATE, with respect to any Person, is defined in Rule 12b-2 of the
General Rules and Regulations under the Exchange Act, as amended as of
January 1, 1990. An Associate does not include the Company or a majority-owned
subsidiary of the Company.
1.07. BOARD means the Board of Trustees of the Company.
1.08. CHANGE IN CONTROL means (i) a Person is or becomes an Acquiring
Person; (ii) a Person enters into an agreement that would result in that
Person's becoming an Acquiring Person; (iii) at least fifty percent (50%) of the
Company's total assets on a consolidated basis, as reported in the Company's
consolidated financial statements filed with the Securities and Exchange
Commission, is sold or transferred (in a single transaction or series of
transactions) to one or more Persons; (iv) the Company is merged, consolidated
or reorganized into or with, or effects a statutory share exchange with, another
Person, regardless of whether the Company is the surviving or resulting entity
after the merger, consolidation, or statutory share exchange; or (v) the
Continuing Trustees cease for any reason to constitute a majority of the Board.
1.09. CODE means the Internal Revenue Code of 1986, and any amendments
thereto.
1.10. COMMITTEE means the Compensation Committee of the Board.
1.11. COMMON SHARES means the common shares of the Company.
1.12. COMPANY means AEGIS Investment Trust.
1.13. CONTINUING TRUSTEE means any member of the Board, while a member of
the Board and (i) who was a member of the Board immediately following the
Company's initial public offering of Common Shares, or (ii) whose nomination for
<PAGE>
or election to the Board was recommended or approved by a majority of the
Continuing Trustees.
1.14. CONTROL AFFILIATE, with respect to any Person, means an affiliate as
defined in Rule 12b-2 of the General Rules and Regulations under the Exchange
Act, as amended as of January 1, 1990.
1.15. CONTROL CHANGE DATE means the date on which a Change in Control
occurs. If a Change in Control occurs on account of a series of transactions,
the "Control Change Date" is the date of the last of such transactions.
1.16. CORRESPONDING SAR means an SAR that is granted in relation to a
particular Option and that can be exercised only upon the surrender to the
Company, unexercised, of that portion of the Option to which the SAR relates.
1.17. EXCHANGE ACT means the Securities Exchange Act of 1934, as amended.
1.18. FAIR MARKET VALUE means, on any given date, the current fair market
value of a Common Share as determined pursuant to subsection (a), (b) or (c)
below.
(a) While the Company is a Non-Public Company, Fair Market Value shall be
determined by the Committee using any reasonable method in good faith.
(b) While the Company is a Public Company, Fair Market Value shall be
determined as follows: if the Common Shares are not listed on an established
stock exchange, Fair Market Value shall be the average of the final bid and
asked quotations on the over-the-counter market in which the Common Shares are
traded or, if applicable, the reported "closing" price of a Common Share in the
New York over-the-counter market as reported by the National Association of
Securities Dealers, Inc.
3
<PAGE>
If the Common Shares are listed on an established stock exchange or exchanges,
Fair Market Value shall be deemed to be the highest closing price of a Common
Share reported on that stock exchange or exchanges. In any case, if no sale of
Common Shares is made on any stock exchange or over-the-counter market on that
date, then Fair Market Value shall be determined as of the next preceding day on
which there was a sale. For purposes of this definition, the term "Public
Company" means an entity that has sold securities pursuant to an effective
registration statement on Form S-11 filed pursuant to the Securities Act of
1933, as amended, and the term "Non-Public Company" means an entity that has
never sold securities pursuant to an effective registration statement on Form
S-11 filed pursuant to the Securities Act of 1933, as amended.
(c) Notwithstanding the foregoing, Fair Market Value on the effective date
of the registration statement relating to the initial public offering of the
Company shall be the initial public offering price of the Common Shares.
1.19. INITIAL VALUE means, with respect to an SAR, the Fair Market Value of
one Common Share on the date of grant.
1.20. INCENTIVE AWARD means an award which, subject to such terms and
conditions as may be prescribed by the Administrator, entitles the Participant
to receive a cash payment from the Company or an Affiliate.
1.21. OPTION means a share option that entitles the holder to purchase from
the Company a stated number of Common Shares at the price set forth in an
Agreement. In the discretion of the Administrator and if provided in an
Agreement, an Option
4
<PAGE>
may include a Performance Based Dividend Equivalent Right.
1.22. PARTICIPANT means an employee of the Company or an Affiliate,
including an employee who is a member of the Board, who satisfies the
requirements of Article IV and is selected by the Administrator to receive a
Share Award, an award of Performance Shares, an Option, an SAR, an Incentive
Award or a combination thereof.
1.23. PERFORMANCE BASED DIVIDEND EQUIVALENT RIGHT means the right, awarded
in tandem with a newly granted or outstanding Option, to receive a cash payment
for all dividends that would have been paid on each Share for which the related
Option is exercised, without interest or compounding, during the period from the
date of grant of the Option (or, if later, that date of grant of the Performance
Based Dividend Equivalent Right) through the date that the Option is exercised
for such Share, had such Share been outstanding throughout that period. A
Performance Based Dividend Equivalent Right will be earned only if the
performance objectives and other conditions specified by the Administrator in an
Agreement have been satisfied.
1.24. PERFORMANCE SHARES means an award, in the amount determined by the
Administrator and specified in an Agreement, stated with reference to a
specified number of Common Shares, that in accordance with the terms of an
Agreement entitles the holder to receive a payment for each specified share
equal to the Fair Market Value of a Common Share on the date of payment.
1.25. PERSON means any human being, firm, corporation, partnership, or other
entity. Person also includes any human being, firm, corporation, partnership,
or
5
<PAGE>
other entity as defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act,
as amended as of January 1, 1990. The term Person does not include the Company
or any Related Entity, and the term Person does not include any employee-benefit
plan maintained by the Company or by any Related Entity, and any person or
entity organized, appointed, or established by the Company or by any subsidiary
for or pursuant to the terms of any such employee-benefit plan, unless the Board
determines that such an employee-benefit plan or such person or entity is a
Person.
1.26. PLAN means the AEGIS Investment Trust 1997 Incentive Plan.
1.27. RELATED ENTITY means any entity that is part of a controlled group of
corporations or is under common control with the Company within the meaning of
Code Section 1563(a), 414(b) or 414(c).
1.28. SAR means a share appreciation right that in accordance with the terms
of an Agreement entitles the holder to receive, with respect to each Common
Share encompassed by the exercise of such SAR, the amount determined by the
Administrator and specified in an Agreement. In the absence of such a
determination, the holder shall be entitled to receive, with respect to each
Common Share encompassed by the exercise of such SAR, the excess of the Fair
Market Value on the date of exercise over the Initial Value. References to
"SARs" include both Corresponding SARs and SARs granted independently of
Options, unless the context requires otherwise.
1.29. SHARE AWARD means Common Shares awarded to a Participant under
Article VIII.
6
<PAGE>
ARTICLE II
PURPOSES
The Plan is intended to assist the Company and its Affiliates in recruiting
and retaining individuals with ability and initiative by enabling such persons
to participate in the future success of the Company and its Affiliates and to
associate their interests with those of the Company and its shareholders. The
Plan is intended to permit the grant of both Options qualifying under
Section 422 of the Code ("incentive share options") and Options not so
qualifying (either type of which may include Performance Based Dividend
Equivalent Rights), and the grant of SARs, Share Awards, Performance Shares and
Incentive Awards. No Option that is intended to be an incentive share option
shall be invalid for failure to qualify as an incentive share option. The
proceeds received by the Company from the sale of Common Shares pursuant to this
Plan shall be used for general corporate purposes.
ARTICLE III
ADMINISTRATION
The Plan shall be administered by the Administrator. The Administrator
shall have authority to grant Share Awards, Performance Shares, Incentive
Awards, Options (including associated Performance Based Dividend Rights), and
SARs upon such terms (not inconsistent with the provisions of this Plan), as the
Administrator may consider appropriate. Such terms may include conditions (in
addition to those contained in this Plan), on the exercisability of all or any
part of an Option or SAR
7
<PAGE>
or on the transferability or forfeitability of a Share Award, an award of
Performance Shares or an Incentive Award. Notwithstanding any such conditions,
the Administrator may, in its discretion, accelerate the time at which any
Option or SAR may be exercised, or the time at which a Share Award may become
transferable or nonforfeitable or the time at which an Incentive Award, award of
Performance Shares or Performance Based Dividend Equivalent Right may be settled
or earned. In addition, the Administrator shall have complete authority to
interpret all provisions of this Plan; to prescribe the form of Agreements; to
adopt, amend, and rescind rules and regulations pertaining to the administration
of the Plan; and to make all other determinations necessary or advisable for the
administration of this Plan. The express grant in the Plan of any specific
power to the Administrator shall not be construed as limiting any power or
authority of the Administrator. Any decision made, or action taken, by the
Administrator or in connection with the administration of this Plan shall be
final and conclusive. Neither the Administrator nor any member of the Committee
shall be liable for any act done in good faith with respect to this Plan or any
Agreement, Option, SAR, Share Award or Incentive Award or award of Performance
Shares. All expenses of administering this Plan shall be borne by the Company.
The Committee, in its discretion, may delegate to one or more officers of
the Company all or part of the Committee's authority and duties with respect to
grants and awards to individuals who are not subject to the reporting and other
provisions of Section 16 of the Exchange Act. The Committee may revoke or amend
the terms of a delegation at any time but such action shall not invalidate any
prior actions of the
8
<PAGE>
Committee's delegate or delegates that were consistent with the terms of the
Plan.
ARTICLE IV
ELIGIBILITY
Any employee of the Company or an Affiliate (including a corporation that
becomes an Affiliate after the adoption of this Plan), is eligible to
participate in this Plan if the Administrator, in its sole discretion,
determines that such person has contributed significantly or can be expected to
contribute significantly to the profits or growth of the Company or an
Affiliate. Trustees of the Company who are employees of the Company or an
Affiliate may be selected to participate in this Plan.
ARTICLE V
SHARES SUBJECT TO PLAN
5.0
1. SHARES ISSUED. Upon the award of Common Shares pursuant to a Share Award
or in settlement of an award of Performance Shares, the Company may issue Common
Shares from its authorized but unissued Common Shares. Upon the exercise of any
Option or SAR, the Company may deliver to the Participant (or the Participant's
broker if the Participant so directs) Common Shares from its authorized but
unissued Common Shares.
9
<PAGE>
5.02. AGGREGATE LIMIT. The maximum aggregate number of Common Shares that
may be issued under this Plan pursuant to the exercise of SARs and Options and
the grant of Share Awards and the settlement of Performance Shares is 1,000,000
shares. The maximum aggregate number of Common Shares that may be issued under
this Plan as Share Awards and in settlement of Performance Shares is 250,000
shares. The maximum aggregate number of Common Shares that may be issued under
this Plan and the maximum number of Common Shares that may be issued as Share
Awards and in settlement of Performance Shares shall be subject to adjustment as
provided in Article XI.
5.03. REALLOCATION OF SHARES. If an Option is terminated, in whole or in
part, for any reason other than its exercise or the exercise of a Corresponding
SAR that is settled with Common Shares, the number of Common Shares allocated to
the Option or portion thereof may be reallocated to other Options, SARs,
Performance Shares and Share Awards to be granted under this Plan. If an SAR is
terminated, in whole or in part, for any reason other than its exercise that is
settled with Common Shares or the exercise of a related Option, the number of
Common Shares allocated to the SAR or portion thereof may be reallocated to
other Options, SARs, Performance Shares and Share Awards to be granted under
this Plan. If an award of Performance Shares is terminated, in whole or in
part, for any reason other than its settlement with Common Shares, the number of
Common Shares allocated to the Performance Shares or portion thereof may be
reallocated to other Options, SARs, Performance Shares and Share Awards to be
granted under this Plan. If a Share Award is forfeited, in
10
<PAGE>
whole or in part, for any reason, the number of Common Shares allocated to the
Share Award or portion thereof may be reallocated to other Options, SARs,
Performance Shares and Share Awards to be granted under this Plan.
ARTICLE VI
OPTIONS
6.01. AWARD. In accordance with the provisions of Article IV, the
Administrator will designate each individual to whom an Option is to be granted
and will specify the number of Common Shares covered by such awards; provided,
however, that no individual may be granted Options in any calendar year covering
more than 200,000 Common Shares. For purposes of the preceding sentence, an
Option and Corresponding SAR shall be treated as a single award.
6.02. OPTION PRICE. The price per share for Common Shares purchased on the
exercise of an Option shall be determined by the Administrator on the date of
grant, but shall not be less than the Fair Market Value on the date the Option
is granted.
6.03. MAXIMUM OPTION PERIOD. The maximum period in which an Option may be
exercised shall be determined by the Administrator on the date of grant, except
that no Option that is an incentive share option shall be exercisable after the
expiration of ten years from the date such Option was granted. The terms of any
Option that is an incentive share option may provide that it is exercisable for
a period less than such maximum period.
11
<PAGE>
6.04. NONTRANSFERABILITY. Except as provided in Section 6.05, each Option
granted under this Plan shall be nontransferable except by will or by the laws
of descent and distribution. In the event of any transfer of an Option (by the
Participant or his transferee), the Option and any Corresponding SAR that
relates to such Option must be transferred to the same person or persons or
entity or entities. During the lifetime of the Participant to whom the Option
is granted, the Option may be exercised only by the Participant. No right or
interest of a Participant in any Option shall be liable for, or subject to, any
lien, obligation, or liability of such Participant.
6.05. TRANSFERABLE OPTIONS. Section 6.04 to the contrary notwithstanding,
if the Agreement provides, an Option that is not an incentive share option may
be transferred by a Participant to the Participant's children, grandchildren,
spouse, one or more trusts for the benefit of such family members or a
partnership in which such family members are the only partners, on such terms
and conditions as may be permitted under Securities and Exchange Commission Rule
16b-3 as in effect from time to time. The holder of an Option transferred
pursuant to this section shall be bound by the same terms and conditions that
governed the Option during the period that it was held by the Participant;
provided, however, that such transferee may not transfer the Option except by
will or the laws of descent and distribution. In the event of any transfer of
an Option (by the Participant or his transferee), the Option and any
Corresponding SAR that relates to such Option must be transferred to the same
person or persons or entity or entities.
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6.06. EMPLOYEE STATUS. For purposes of determining the applicability of
Section 422 of the Code (relating to incentive share options), or in the event
that the terms of any Option provide that it may be exercised only during
employment or within a specified period of time after termination of employment,
the Administrator may decide to what extent leaves of absence for governmental
or military service, illness, temporary disability, or other reasons shall not
be deemed interruptions of continuous employment.
6.07. EXERCISE. All outstanding Options previously granted under the Plan
shall be exercisable, in whole or in part, on an Acceleration Date and shall
remain exercisable thereafter in accordance with the terms of this Plan and the
applicable Agreement. Subject to the preceding sentence and the other
provisions of this Plan and the applicable Agreement, an Option may be exercised
in whole at any time or in part from time to time at such times and in
compliance with such requirements as the Administrator shall determine;
provided, however, that incentive share options (granted under the Plan and all
plans of the Company and its Affiliates) may not be first exercisable in a
calendar year for shares having a Fair Market Value (determined as of the date
an Option is granted) exceeding the amount prescribed by the Code (currently
$100,000). An Option granted under this Plan may be exercised with respect to
any number of whole shares less than the full number for which the Option could
be exercised. A partial exercise of an Option shall not affect the right to
exercise the Option from time to time in accordance with this Plan and the
applicable Agreement with respect to the remaining shares subject to the
Option. The
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exercise of an Option shall result in the termination of any Corresponding SAR
to the extent of the number of shares with respect to which the Option is
exercised.
6.08. PERFORMANCE BASED DIVIDEND EQUIVALENT RIGHTS. If an Option Agreement
includes a Performance Based Dividend Equivalent Right, the Participant shall be
entitled to the payment (if any) that is due thereunder at the time or times
specified in the Agreement.
6.09. PAYMENT. Unless otherwise provided by the Agreement, payment of the
Option price shall be made in cash or a cash equivalent acceptable to the
Administrator, or by the surrender to the Company or attestation of ownership of
Common Shares. If Common Shares are used to pay all or part of the Option
price, the sum of the cash and cash equivalent and the Fair Market Value
(determined as of the day preceding the date of exercise) of the shares that are
surrendered or that are the subject of attestation must not be less than the
Option price of the shares for which the Option is being exercised.
6.10. SHAREHOLDER RIGHTS. No Participant shall have any rights as a
shareholder with respect to shares subject to his Option until the date of
exercise of such Option.
6.11. DISPOSITION OF SHARES. A Participant shall notify the Company of any
sale or other disposition of Common Shares acquired pursuant to an Option that
was an incentive share option if such sale or disposition occurs (i) within two
years of the grant of an Option or (ii) within one year of the issuance of the
Common Shares to the Participant. Such notice shall be in writing and directed
to the Secretary of the Company.
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ARTICLE VII
SARS
7.0
1. AWARD. In accordance with the provisions of Article IV, the Administrator
will designate each individual to whom SARs are to be granted and will specify
the number of shares covered by such awards; provided, however, that no
individual may be granted SARs in any calendar year covering more than 200,000
shares. For purposes of the preceding sentence, an Option and Corresponding SAR
shall be treated as a single award. In addition no Participant may be granted
Corresponding SARs (under all incentive share option plans of the Company and
its Affiliates) that are related to incentive share options which are first
exercisable in any calendar year for shares having an aggregate Fair Market
Value (determined as of the date the related Option is granted) that exceeds the
amount prescribed by the Code (currently $100,000).
7.02. MAXIMUM SAR PERIOD. The term of each SAR shall be determined by the
Administrator on the date of grant, except that no Corresponding SAR that is
related to an incentive share option shall have a term of more than ten years
from the date such related Option was granted. The terms of any Corresponding
SAR that is related to an incentive share option may provide that it has a term
that is less than such maximum period.
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7.03. NONTRANSFERABILITY. Except as provided in Section 7.04, each SAR
granted under this Plan shall be nontransferable except by will or by the laws
of descent and distribution. In the event of any such transfer, a Corresponding
SAR and the related Option must be transferred to the same person or persons or
entity or entities. During the lifetime of the Participant to whom the SAR is
granted, the SAR may be exercised only by the Participant. No right or interest
of a Participant in any SAR shall be liable for, or subject to, any lien,
obligation, or liability of such Participant.
7.04. TRANSFERABLE SARS. Section 7.03 to the contrary notwithstanding, if
the Agreement provides, an SAR, other than a Corresponding SAR that is related
to an incentive share option, may be transferred by a Participant to the
Participant's children, grandchildren, spouse, one or more trusts for the
benefit of such family members or a partnership in which such family members are
the only partners, on such terms and conditions as may be permitted under
Securities and Exchange Commission Rule 16b-3 as in effect from time to time.
The holder of an SAR transferred pursuant to this section shall be bound by the
same terms and conditions that governed the SAR during the period that it was
held by the Participant; provided, however, that such transferee may not
transfer the SAR except by will or the laws of descent and distribution. In the
event of any transfer of a Corresponding SAR (by the Participant or his
transferee), the Corresponding SAR and the related Option must be transferred to
the same person or person or entity or entities.
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7.05. EXERCISE. All outstanding SARs previously granted under the Plan
shall be exercisable, in whole or in part, on an Acceleration Date and shall
remain exercisable thereafter in accordance with the terms of the Plan and the
applicable Agreement. Subject to the preceding sentence and the other
provisions of this Plan and the applicable Agreement, an SAR may be exercised in
whole at any time or in part from time to time at such times and in compliance
with such requirements as the Administrator shall determine; provided, however,
that a Corresponding SAR that is related to an incentive share option may be
exercised only to the extent that the related Option is exercisable and only
when the Fair Market Value exceeds the option price of the related Option. An
SAR granted under this Plan may be exercised with respect to any number of whole
shares less than the full number for which the SAR could be exercised. A
partial exercise of an SAR shall not affect the right to exercise the SAR from
time to time in accordance with this Plan and the applicable Agreement with
respect to the remaining shares subject to the SAR. The exercise of a
Corresponding SAR shall result in the termination of the related Option to the
extent of the number of shares with respect to which the SAR is exercised.
7.06. EMPLOYEE STATUS. If the terms of any SAR provide that it may be
exercised only during employment or within a specified period of time after
termination of employment, the Administrator may decide to what extent leaves of
absence for governmental or military service, illness, temporary disability or
other reasons shall not be deemed interruptions of continuous employment.
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7.07. SETTLEMENT. At the Administrator's discretion, the amount payable as
a result of the exercise of an SAR may be settled in cash, Common Shares, or a
combination of cash and Common Shares. No fractional share will be deliverable
upon the exercise of an SAR but a cash payment will be made in lieu thereof.
7.08. SHAREHOLDER RIGHTS. No Participant shall, as a result of receiving an
SAR award, have any rights as a shareholder of the Company or any Affiliate
until the date that the SAR is exercised and then only to the extent that the
SAR is settled by the issuance of Common Shares.
ARTICLE VIII
SHARE AWARDS
8.0
1. AWARD. In accordance with the provisions of Article IV, the Administrator
will designate each individual to whom a Share Award is to be made and will
specify the number of Common Shares covered by such awards; provided, however,
that no Participant may receive Share Awards in any calendar year for more than
50,000 Common Shares.
8.02. VESTING. A Participant's rights in a Share Award shall be forfeitable
or otherwise restricted for a period of time or subject to such conditions as
may be set forth in the Agreement; provided, however, that the period of
restriction shall be at least one year.
8.03. PERFORMANCE OBJECTIVES. In accordance with Section 8.02, the
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Administrator may prescribe that Share Awards will become vested or transferable
or both based on objectives stated with respect to the Company's, an Affiliate's
or an operating unit's return on equity, earnings per share, total earnings,
earnings growth, return on capital, or return on assets, Fair Market Value, or
such other measures as may be selected by the Administrator. If the
Administrator, on the date of award, prescribes that a Share Award shall become
nonforfeitable and transferable only upon the attainment of performance
objectives stated with respect to one or more of the criteria set forth above,
the shares subject to such Share Award shall become nonforfeitable and
transferable only to the extent that the Administrator certifies that such
objectives have been achieved.
8.04. EMPLOYEE STATUS. In the event that the terms of any Share Award
provide that shares may become transferable and nonforfeitable thereunder only
after completion of a specified period of employment, the Administrator may
decide in each case to what extent leaves of absence for governmental or
military service, illness, temporary disability, or other reasons shall not be
deemed interruptions of continuous employment.
8.05. CHANGE IN CONTROL. Sections 8.02 and 8.03 to the contrary
notwithstanding, each outstanding Share Award shall be transferable and
nonforfeitable as of a Control Change Date.
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8.06. SHAREHOLDER RIGHTS. Prior to their forfeiture (in accordance with the
applicable Agreement and while the Common Shares granted pursuant to the Share
Award may be forfeited or are nontransferable), a Participant will have all
rights of a shareholder with respect to a Share Award, including the right to
receive dividends and vote the shares; provided, however, that during such
period (i) a Participant may not sell, transfer, pledge, exchange, hypothecate,
or otherwise dispose of Common Shares granted pursuant to a Share Award, (ii)
the Company shall retain custody of the certificates evidencing Common Shares
granted pursuant to a Share Award, and (iii) the Participant will deliver to the
Company a share power, endorsed in blank, with respect to each Share Award. The
limitations set forth in the preceding sentence shall not apply after the Common
Shares granted under the Share Award are transferable and are no longer
forfeitable.
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ARTICLE IX
PERFORMANCE SHARE AWARDS
9.01. AWARD. In accordance with the provisions of Article IV, the
Administrator will designate each individual to whom an award of Performance
Shares is to be made and will specify the number of Common Shares covered by
such awards; provided, however, that no Participant may receive an award of
Performance Shares in any calendar year for more than 50,000 Common Shares.
9.02. EARNING THE AWARD. The Administrator, on the date of the grant of an
award, shall prescribe that the Performance Shares, or portion thereof, will be
earned, and the Participant will be entitled to receive payment pursuant to the
award of Performance Shares, only upon the satisfaction of performance
objectives and such other criteria as may be prescribed by the Administrator
during a performance measurement period of at least one year. The performance
objectives may be stated with respect to the Company's, an Affiliate's, or an
operating unit's return on equity, earnings per share, total earnings, earnings
growth, return on capital, or return on assets, Fair Market Value, or such other
measures as may be selected by the Administrator. No payments will be made with
respect to Performance Shares unless, and then only to the extent that, the
Administrator certifies that such objectives have been achieved.
9.03. PAYMENT. In the discretion of the Administrator, the amount payable
when an award of Performance Shares is earned may be settled in cash, by the
issuance of Common Shares or a combination of cash and Common Shares. A
fractional share
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shall not be deliverable when an award of Performance Shares is earned, but a
cash payment will be made in lieu thereof.
9.04. SHAREHOLDER RIGHTS. No Participant shall, as a result of receiving an
award of Performance Shares, have any rights as a shareholder until and to the
extent that the award of Performance Shares is earned and settled by the
issuance of Common Shares. After an award of Performance Shares is earned, if
settled completely or partially in Common Shares, a Participant will have all
the rights of a shareholder with respect to such Common Shares.
9.05. NONTRANSFERABILITY. Except as provided in Section 9.06, Performance
Shares granted under this Plan shall be nontransferable except by will or by the
laws of descent and distribution. No right or interest of a Participant in any
Performance Shares shall be liable for, or subject to, any lien, obligation, or
liability of such Participant.
9.06. TRANSFERABLE PERFORMANCE SHARES. Section 9.05 to the contrary
notwithstanding, if the Agreement provides, an award of Performance Shares may
be transferred by a Participant to the Participant's children, grandchildren,
spouse, one or more trusts for the benefit of such family members or a
partnership in which such family members are the only partners, on such terms
and conditions as may be permitted under Securities and Exchange Commission Rule
16b-3 as in effect from time to time. The holder of Performance Shares
transferred pursuant to this section shall be bound by the same terms and
conditions that governed the Performance Shares during the period that they were
held by the Participant; provided, however
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that such transferee may not transfer Performance Shares except by will or the
laws of descent and distribution.
9.07. EMPLOYEE STATUS. In the event that the terms of any Performance Share
award provide that no payment will be made unless the Participant completes a
stated period of employment, the Administrator may decide to what extent leaves
of absence for government or military service, illness, temporary disability, or
other reasons shall not be deemed interruptions of continuous employment.
9.08. CHANGE IN CONTROL. Section 9.02 to the contrary notwithstanding, each
outstanding Performance Share shall be earned in its entirety as of a Control
Change Date.
ARTICLE X
INCENTIVE AWARDS
10.0
1. AWARD. The Administrator shall designate Participants to whom Incentive
Awards are made. All Incentive Awards shall be finally determined exclusively
by the Administrator under the procedures established by the Administrator;
provided, however, that no Participant may receive an Incentive Award payment in
any calendar year that exceeds $2,000,000.
10.02. TERMS AND CONDITIONS. The Administrator, at the time an Incentive
Award is made, shall specify the terms and conditions which govern the award.
Such terms and conditions shall prescribe that the Incentive Award shall be
earned only upon, and to the extent that, performance objectives are satisfied.
The performance objectives
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may be stated with respect to the Company's, an Affiliate's or an operating
unit's return on equity, earnings per share, total earnings, earnings growth,
return on capital, or return on assets, Fair Market Value or such other measures
as may be selected by the Administrator. Such terms and conditions also may
include other limitations on the payment of Incentive Awards including, by way
of example and not of limitation, requirements that the Participant complete a
specified period of employment with the Company or an Affiliate. The
Administrator, at the time an Incentive Award is made, shall also specify when
amounts shall be payable under the Incentive Award and whether amounts shall be
payable in the event of the Participant's death, disability, or retirement.
10.03. NONTRANSFERABILITY. Except as provided in Section 10.04, Incentive
Awards granted under this Plan shall be nontransferable except by will or by the
laws of descent and distribution. No right or interest of a Participant in an
Incentive Award shall be liable for, or subject to, any lien, obligation, or
liability of such Participant.
10.04. TRANSFERABLE INCENTIVE AWARDS. Section 10.03 to the contrary
notwithstanding, if the Agreement provides, an Incentive Award may be
transferred by a Participant to the Participant's children, grandchildren,
spouse, one or more trusts for the benefit of such family members or to a
partnership in which such family members are the only partners, on such terms
and conditions as may be permitted by Securities and Exchange Commission Rule
16b-3 as in effect from time to time. The holder of an Incentive Award
transferred pursuant to this section shall be bound by the same terms and
conditions that governed the Incentive Award during the period
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that it was held by the Participant; provided, however, that such transferee may
not transfer the Incentive Award except by will or the laws of descent and
distribution.
10.05. EMPLOYEE STATUS. If the terms of an Incentive Award provide that a
payment will be made thereunder only if the Participant completes a stated
period of employment, the Administrator may decide to what extent leaves of
absence for governmental or military service, illness, temporary disability or
other reasons shall not be deemed interruptions of continuous employment.
10.06. CHANGE IN CONTROL. Section 10.02 to the contrary notwithstanding,
each Incentive Award shall be earned in its entirety as of a Control Change
Date.
10.07. SHAREHOLDER RIGHTS. No Participant shall, as a result of receiving an
Incentive Award, have any rights as a shareholder of the Company or any
Affiliate on account of such award.
ARTICLE XI
ADJUSTMENT UPON CHANGE IN COMMON SHARES
The maximum number of shares as to which Options, SARs, Performance Shares
and Share Awards may be granted under this Plan, the terms of outstanding Share
Awards, Options (including associated Performance Based Dividend Equivalent
Rights), Performance Shares, Incentive Awards, and SARs, and the per individual
limitations on the number of shares or for which Options, SARs, Performance
Shares, and Share Awards may be granted shall be adjusted as the Committee shall
determine to be equitably required in the event that (i) the Company (a) effects
one or more
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share dividends, share split-ups, subdivisions or consolidations of shares or
(b) engages in a transaction to which Section 424 of the Code applies or (ii)
there occurs any other event which, in the judgment of the Committee
necessitates such action. Any determination made under this Article XII by the
Committee shall be final and conclusive.
The issuance by the Company of shares of any class, or securities
convertible into shares of any class, for cash or property, or for labor or
services, either upon direct sale or upon the exercise of rights or warrants to
subscribe therefor, or upon conversion of shares or obligations of the Company
convertible into such shares or other securities, shall not affect, and no
adjustment by reason thereof shall be made with respect to, the maximum number
of shares as to which Options, SARs, Performance Shares and Share Awards may be
granted, the per individual limitations on the number of shares for which
Options, SARs, Performance Shares and Share Awards may be granted or the terms
of outstanding Share Awards, Options, Performance Shares, Incentive Awards or
SARs.
The Committee may make Share Awards and may grant Options, SARs,
Performance Shares, and Incentive Awards in substitution for performance shares,
phantom shares, stock awards, stock options, stock appreciation rights, or
similar awards held by an individual who becomes an employee of the Company or
an Affiliate in connection with a transaction described in the first paragraph
of this Article XII. Notwithstanding any provision of the Plan (other than the
limitation of Section 5.02), the terms of such substituted Share Awards or
Option, SAR,
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Performance Shares or Incentive Award grants shall be as the Committee, in its
discretion, determines is appropriate.
ARTICLE XII
COMPLIANCE WITH LAW AND
APPROVAL OF REGULATORY BODIES
No Option or SAR shall be exercisable, no Common Shares shall be issued, no
certificates for Common Shares shall be delivered, and no payment shall be made
under this Plan except in compliance with all applicable federal and state laws
and regulations (including, without limitation, withholding tax requirements),
any listing agreement to which the Company is a party, and the rules of all
domestic stock exchanges on which the Company's shares may be listed. The
Company shall have the right to rely on an opinion of its counsel as to such
compliance. Any share certificate issued to evidence Common Shares when a Share
Award is granted, a Performance Share is settled or for which an Option or SAR
is exercised may bear such legends and statements as the Administrator may deem
advisable to assure compliance with federal and state laws and regulations. No
Option or SAR shall be exercisable, no Share Award or Performance Share shall be
granted, no Common Share shall be issued, no certificate for shares shall be
delivered, and no payment shall be made under this Plan until the Company has
obtained such consent or approval as the Administrator may deem advisable from
regulatory bodies having jurisdiction over such matters.
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ARTICLE XIII
GENERAL PROVISIONS
13.0
1. EFFECT ON EMPLOYMENT AND SERVICE. Neither the adoption of this Plan, its
operation, nor any documents describing or referring to this Plan (or any part
thereof), shall confer upon any individual any right to continue in the employ
or service of the Company or an Affiliate or in any way affect any right and
power of the Company or an Affiliate to terminate the employment or service of
any individual at any time with or without assigning a reason therefor.
13.02. UNFUNDED PLAN. The Plan, insofar as it provides for grants, shall be
unfunded, and the Company shall not be required to segregate any assets that may
at any time be represented by grants under this Plan. Any liability of the
Company to any person with respect to any grant under this Plan shall be based
solely upon any contractual obligations that may be created pursuant to this
Plan. No such obligation of the Company shall be deemed to be secured by any
pledge of, or other encumbrance on, any property of the Company.
13.03. RULES OF CONSTRUCTION. Headings are given to the articles and
sections of this Plan solely as a convenience to facilitate reference. The
reference to any statute, regulation, or other provision of law shall be
construed to refer to any amendment to or successor of such provision of law.
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ARTICLE XIV
AMENDMENT
The Board may amend or terminate this Plan from time to time; provided,
however, that no amendment may become effective until shareholder approval is
obtained if the amendment increases the aggregate number of Common Shares that
may be issued under the Plan. No amendment shall, without a Participant's
consent, adversely affect any rights of such Participant under any outstanding
Share Award, Performance Share award, Option, SAR or Incentive Award outstanding
at the time such amendment is made.
ARTICLE XV
DURATION OF PLAN
No Share Award, Performance Share award, Option, SAR or Incentive Award may
be granted under this Plan more than ten years after the earlier of the date
that the Plan is adopted by the Board or is approved by the Company's
shareholders as provided in Article XVII. Share Awards, Performance Shares,
Options, SARs and Incentive Awards granted before that date shall remain valid
in accordance with their terms.
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ARTICLE XVI
EFFECTIVE DATE OF PLAN
Options (including associates Performance Based Dividend Equivalent
Rights), SARs, Performance Shares and Incentive Awards may be granted under this
Plan upon its adoption by the Board, provided that no Option, SAR, Performance
Shares or Incentive Award shall be effective or exercisable unless this Plan is
approved by a majority of the votes cast by the Company's shareholders, voting
either in person or by proxy, at a duly held shareholders' meeting at which a
quorum is present. Share Awards may be granted under this Plan upon the later
of its adoption by the Board or its approval by shareholders in accordance with
the preceding sentence.
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AEGIS INVESTMENT TRUST
TRUSTEES' SHARE INCENTIVE PLAN
<PAGE>
ARTICLE I
DEFINITIONS
1.01. ACCELERATION DATE means the earlier of (i) the date that the Board
approves a transaction or series of transactions which, if consummated, would
result in a Change in Control or (ii) the date that an agreement is entered into
with respect to a transaction or series of transactions which, if consummated,
would result in a Change in Control.
1.02. ACQUIRING PERSON means that a Person, considered alone or together
with all Control Affiliates and Associates of that Person, is or becomes
directly or indirectly the beneficial owner of securities representing at least
thirty percent (30%) of the Company's then outstanding securities entitled to
vote generally in the election of the Board.
1.03. ADMINISTRATOR means the Trustee or Trustees who are appointed by the
Board to administer the Plan, none of whom may be Participants.
1.04. AFFILIATE means any "subsidiary" or "parent" corporation (within the
meaning of Section 424 of the Code) of the Company, including an entity that
becomes an Affiliate after the adoption of this Plan.
1.05. ASSOCIATE, with respect to any Person, is defined in Rule 12b-2 of the
General Rules and Regulations under the Exchange Act, as amended as of January
1, 1990. An Associate does not include the Company or a majority-owned
subsidiary of the Company.
1.06. AWARD DATE means the date of the first Board meeting after each annual
meeting of the Company's shareholders during the term of the Plan.
1.07. BOARD means the Board of Trustees of the Company.
<PAGE>
1.08. CHANGE IN CONTROL means (i) a Person is or becomes an Acquiring
Person; (ii) a Person enters into an agreement that would result in that
Person's becoming an Acquiring Person; (iii) at least fifty percent (50%) of the
Company's total assets on a consolidated basis, as reported in the Company's
consolidated financial statements filed with the Securities and Exchange
Commission, is sold or transferred (in a single transaction or series of related
transactions) to one or more Persons; (iv) the Company is merged, consolidated
or reorganized into or with, or effects a statutory share exchange with, another
Person, regardless of whether the Company is the surviving or resulting entity
after the merger, consolidation, reorganization or statutory share exchange; or
(v) the Continuing Trustees cease for any reason to constitute a majority of the
Board.
1.09. CODE means the Internal Revenue Code of 1986, as amended.
1.10. COMMON SHARES means the common shares of the Company.
1.11. COMPANY means AEGIS Investment Trust.
1.12. CONTINUING TRUSTEE means any member of the Board, while a member of
the Board and (i) who was a member of the Board immediately following the
Company's initial public offering of Common Shares, or (ii) whose nomination for
or election to the Board was recommended or approved by a majority of the
Continuing Trustees.
1.13. CONTROL AFFILIATE, with respect to any Person, means an affiliate as
defined in Rule 12b-2 of the General Rules and Regulations under the Exchange
Act, as amended as of January 1, 1990.
1.14. DISABLED means permanently and totally disabled within the meaning of
Code Section 22(e)(3).
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1.15. EXCHANGE ACT means the Securities Exchange Act of 1934, as amended and
as in effect from time to time.
1.16. FAIR MARKET VALUE means, on any given date, the current fair market
value of a Common Share as determined pursuant to subsection (a), (b) or (c)
below.
(a) While the Company is a Non-Public Company, Fair Market Value
shall be determined by the Administrator using any reasonable method in good
faith.
(b) While the Company is a Public Company, Fair Market Value shall be
determined as follows: if the Common Shares are not listed on an established
stock exchange, the Fair Market Value shall be the reported "closing" price of a
Common Share in the New York over-the-counter market as reported by the National
Association of Securities Dealers, Inc. If the Common Shares are listed on an
established stock exchange or exchanges, Fair Market Value shall be deemed to be
the highest closing price of a Common Share reported on that stock exchange or
exchanges or, if no sale of Common Shares shall be made on any stock exchange on
that day, then the next preceding day on which there was a sale. For purposes
of this definition, the term "Public Company" means an entity that has sold
securities pursuant to an effective registration statement on Form S-11 filed
pursuant to the Securities Act of 1933, as amended and the term "Non-Public
Company" means an entity that has never sold securities pursuant to an effective
registration statement on Form S-11 filed pursuant to the Securities Act of
1933, as amended.
(c) Notwithstanding the foregoing, Fair Market Value on the First
Award Date shall be the initial public offering price of the Common Shares.
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1.17. FIRST AWARD DATE means the date that the registration statement
relating to the Company's initial public offering of Common Shares is declared
effective by the Securities and Exchange Commission.
1.18. FOUNDING TRUSTEE means a Participant who is a member of the Board on
the First Award Date.
1.19. OPTION means an option that entitles the holder to purchase Common
Shares from the Company on the terms set forth in Article IV of this Plan.
1.20. PARTICIPANT means a member of the Board who is not an employee of the
Company or an Affiliate.
1.21. PERSON means any human being, firm, corporation, partnership, or other
entity. Person also includes any human being, firm, corporation, partnership,
or other entity as defined in Sections 13(d)(3) and 14(d)(2) of the Exchange
Act, as amended as of January 1, 1990. The term Person does not include the
Company or any Related Entity, and the term Person does not include any
employee-benefit plan maintained by the Company or by any Related Entity, and
any person or entity organized, appointed, or established by the Company or by
any subsidiary for or pursuant to the terms of any such employee-benefit plan,
unless the Board determines that such an employee-benefit plan or such person or
entity is a Person.
1.22. PLAN means the AEGIS Investment Trust Trustees' Share Incentive Plan.
1.23. RELATED ENTITY means any entity that is part of a controlled group of
corporations or is under common control with the Company within the meaning of
Code Section 1563(a), 414(b) or 414(c).
1.24. TRUSTEE means a member of the Board of Trustees of the Company.
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ARTICLE II
PURPOSES
The Plan is intended (i) to assist the Company in recruiting and retaining
non-employee Trustees and (ii) to promote a greater identity of interest between
Participants and shareholders by enabling Participants to participate in the
Company's future success.
ARTICLE III
ADMINISTRATION
The Plan shall be administered by the Administrator. The Administrator
shall have authority to grant Options upon such terms (not inconsistent with the
provisions of the Plan) as the Administrator may consider appropriate. In
addition, the Administrator shall have complete authority to interpret all
provisions of the Plan; to adopt, amend, and rescind rules and regulations
pertaining to the administration of the Plan; and to make all other
determinations necessary or advisable for the administration of the Plan. The
express grant in the Plan of any specific power to the Administrator shall not
be construed as limiting any power or authority of the Administrator. Any
decision made, or action taken, by the Administrator or in connection with the
administration of the Plan shall be final and conclusive. No Trustee serving as
Administrator shall be liable for any act done in good faith with respect to the
Plan. All expenses of administering the Plan shall be borne by the Company.
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ARTICLE IV
OPTIONS
4.01. GRANTS. Each Founding Trustee shall be granted an Option for 5,000
Common Shares on the First Award Date. Each other Participant shall be granted,
on the earlier of (i) the first Award Date on which he or she is a member of the
Board or (ii) the date that he or she is first elected or appointed to the
Board, an Option for 5,000 Common Shares.
4.02. OPTION PRICE AND PAYMENT. The price per share for Common Shares
purchased on the exercise of an Option shall be the Fair Market Value on the
date that the Option is granted. Payment of the Option price shall be made in
cash, cash equivalent acceptable to the Administrator, by the surrender to the
Company or attestation of ownership of Common Shares or a combination thereof.
If Common Shares are used in payment of the Option price, the Common Shares that
are surrendered or that are the subject of attestation must have an aggregate
Fair Market Value (determined as of the day preceding the exercise date) that,
together with any cash or cash equivalent paid, is not less than the Option
price for the number of Common Shares for which the Option is being exercised.
4.03. EXERCISE.
(a) Subject to the provisions of Article V and Section 4.03(b),
an Option granted under Section 4.01 shall be exercisable with respect to 1,250
Common Shares on the first anniversary of the date on which such Option was
granted, provided that the Participant is then a member of the Board, and with
respect to an additional 1,250 Common Shares subject to such Option on each of
the next three successive anniversaries of the date such Option was granted,
provided that the Participant is a member of the Board on the applicable
anniversary.
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Except as provided in Section 4.03(b), a Participant shall forfeit his or her
Option to the extent it is not exercisable under the preceding sentence when he
or she ceases to serve on the Board.
(b) Notwithstanding Section 4.03(a), all outstanding Options
previously granted under the Plan shall be exercisable, in whole or in part, on
an Acceleration Date and shall remain exercisable thereafter in accordance with
the terms of this Plan and the applicable Agreement; and an Option held by a
Participant who ceases to serve on the Board on account of his or her death or
becoming Disabled will become exercisable, in whole or in part, as of the date
Participant ceases to serve on the Board. To the extent that an Option has
become exercisable in accordance with this Section 4.03(b) or Section 4.03(a),
as applicable, it may be exercised whether or not the Participant is a member of
the Board on the date or dates of exercise. An Option may be exercised with
respect to any number of whole Common Shares less than the full number for which
the Option could be exercised. A partial exercise of an Option shall not affect
the right to exercise the Option from time to time in accordance with this Plan
with respect to the remaining Common Shares subject to the Option. All Options
shall be evidenced by agreements that shall be subject to the applicable
provisions of this Plan and to such other provisions as the Administrator may
adopt.
4.04. MAXIMUM OPTION PERIOD. The period during which an Option may be
exercised shall be ten years from the date of grant. In the event of the
Participant's death, the Option may be exercised by the Participant's estate, or
by such person or persons who succeed to the Participant's rights by will or the
laws of descent and distribution or to whom the Option is transferred pursuant
to Section 4.05, following the Participant's death until the expiration of the
Option period. Participant's estate or such person or persons may exercise the
Option with
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respect to all or part of the number of Common Shares for which Participant
could have exercised the Option on the date of his or her death.
4.05. LIMITED TRANSFERABILITY. If requested by a Participant and agreed to
by the Administrator, an Option granted under this Plan may be transferred by a
Participant to the Participant's children, grandchildren, spouse, one or more
trusts for the benefit of such family members or partnerships in which such
family members are the only partners (each person or entity, a "Permitted
Transferee"), on such terms and conditions as may be permitted under Securities
and Exchange Commission Rule 16b-3 as in effect from time to time. The holder
of an Option transferred pursuant to this Section shall be bound by the same
terms and conditions that governed the Option during the period that it was held
by the Participant; provided, however, that a Permitted Transferee may not
transfer the Option except by will or the laws of descent and distribution.
Except for other transfers expressly permitted under this Section 4.05, an
Option granted under this Plan may be transferred only by will or by the laws of
descent and distribution. No right or interest of a Participant in any Option
shall be liable for, or subject to, any lien, obligation, or liability of such
Participant.
4.06. SHAREHOLDER RIGHTS. No Participant shall have any rights as a
shareholder with respect to Common Shares subject to his or her Option until the
date of exercise of such Option.
4.07. SHARES SUBJECT TO OPTIONS. Upon the exercise of any Option, the
Company may deliver to the Participant (or the Participant's broker if the
Participant so directs), Common Shares from its previously authorized but
unissued Common Shares.
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ARTICLE V
ADJUSTMENT IN AGGREGATE OUTSTANDING OPTIONS
UPON CHANGE IN COMMON SHARES AND
ADJUSTMENT IN OPTIONS GRANTED THEREAFTER
The provisions of this Plan shall be revised as the Administrator shall
determine to be equitably required in the event that (a) the Company (i) effects
one or more share dividends, share split-ups, subdivisions or consolidation of
shares or (ii) engages in a transaction to which Section 424 of the Code applies
or (b) there occurs any other event which, in the judgment of the Administrator,
necessitates such action. Any determination made under this Article V by the
Administrator shall be final and conclusive.
The issuance by the Company of shares of any class, or securities
convertible into shares of any class, for cash or property, or for labor or
services, either upon direct sale or upon the exercise of rights or warrants to
subscribe therefor, or upon conversion of shares or obligations of the Company
convertible into such shares or other securities, shall not affect, and no
adjustment by reason thereof shall be made with respect to, the number of shares
that will be issued as of any applicable Award Date or other date of grant
specified in this Plan.
ARTICLE VI
COMPLIANCE WITH LAW AND APPROVAL OF REGULATORY BODIES
No Common Shares shall be issued and no certificates for Common Shares
shall be delivered under the Plan except in compliance with all applicable
federal and state laws and regulations (including, without limitation,
withholding tax requirements), any listing agreement to which the Company is a
party, and the rules of all domestic stock exchanges on which the
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Company's Common Shares may be listed. The Company shall have the right to rely
on an opinion of its counsel as to such compliance. Any certificate issued to
evidence Common Shares issued under the Plan may bear such legends and
statements as the Administrator may deem advisable to assure compliance with
federal and state laws and regulations. No Common Shares shall be issued and no
certificate for Common Shares shall be delivered under the Plan until the
Company has obtained such consent or approval as the Administrator may deem
advisable from regulatory bodies having jurisdiction over such matters.
ARTICLE VII
GENERAL PROVISIONS
7.01. UNFUNDED PLAN. The Plan, insofar as it provides for awards, shall be
unfunded, and the Company shall not be required to segregate any assets that may
at any time be represented by awards under the Plan. Any liability of the
Company to any person with respect to any award to be made under the Plan shall
be based solely upon any contractual obligations that may be created pursuant to
the Plan. No such obligation of the Company shall be deemed to be secured by
any pledge of, or other encumbrance on, any property of the Company.
7.02. RULES OF CONSTRUCTION. Headings are given to the articles and
sections of the Plan solely as a convenience to facilitate reference. The
reference to any statute, regulation, or other provision of law shall be
construed to refer to any amendment to or successor of such provision of law.
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7.03. NOTICE. Unless specifically required by the terms of this Plan,
notice to the Company's shareholders, the Participants, or any other person or
entity of an action by the Board or the Administrator with respect to the Plan
is not required before or after such action occurs.
ARTICLE VIII
AMENDMENT
The Board may amend from time to time or terminate the Plan at any time;
provided, however, that no amendment may become effective until shareholder
approval is obtained if the amendment materially changes the class of
individuals eligible to become Participants. No amendment shall, without a
Participant's consent, adversely affect any rights of such Participant under any
Options granted under this Plan outstanding at the time such amendment is made.
ARTICLE IX
DURATION OF PLAN
No Options may be granted under the Plan after December 31, 2007. Options
granted and Common Shares awarded during the term of the Plan shall remain in
effect in accordance with its terms notwithstanding the expiration or earlier
termination of the Plan.
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ARTICLE X
EFFECTIVE DATE OF PLAN
Common Shares may be issued under the Plan on the First Award Date,
provided that the Plan has been approved (at a duly held shareholders' meeting
at which a quorum is present) by a majority of the votes cast by the Company's
shareholders, voting either in person or by proxy, or by unanimous consent of
the Company's shareholders. Options may be granted under this Plan upon its
adoption by the Board, but no Option will be effective or exercisable unless
this Plan is approved by shareholders in accordance with the preceding sentence.
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EXHIBIT 21
LIST OF SUBSIDIARIES OF AEGIS INVESTMENT TRUST
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1. AEGIS Operating Partnership, L.P., a Delaware limited partnership.
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EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use of our report dated August 28, 1997, included
herein related to the balance sheet of the Company as of August 28, 1997, and
our report dated March 6, 1997, included herein related to the balance sheets
of AEGIS Mortgage Corporation as of December 31, 1995 and 1996, and the
related statements of earnings, stockholders' equity, and cash flows for each
of the years in the three year period ended December 31, 1996. We also
consent to the references to us under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Houston, Texas
October 24, 1997
